Tom Moeller

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Total retail sales increased 0.4% (1.7% y/y) during September after an unrevised 0.1% August increase and a minimally revised 1.2% gain in July, according to the U.S. Census Bureau. A 0.3% rise had been expected in the Action Economics Forecast Survey. Excluding motor vehicles & parts, retail sales rose 0.5% (2.2% y/y) after increasing 0.2% in August, revised from 0.1%, and 0.5% in July, revised from 0.4%. A 0.2% gain had been expected.

Sales of motor vehicles & parts held steady (-0.3% y/y) last month after falling 0.4% in August. This compares to a 5.7% rise (2.2% y/y) in unit light vehicle sales which followed a 5.1% August increase.

Sales in the retail control group, which excludes autos, building materials, gasoline stations, and food services, rose 0.7% (4.0% y/y) in September, the fifth straight rise. These sales are used in the construction of personal consumption expenditures in NIPA accounts.

Elsewhere, sales performance was mixed in September. Miscellaneous store sales, which account for 2.2% of the total, surged 4.0% (7.9% y/y) in September after improving 0.3% in August. Clothing & accessory store sales increased 1.5% (3.5% y/y) after weakening 0.8% in August. General merchandise store sales gained 0.5% (2.6% y/y) following a 0.4% decline. Within that category, sales at department stores rose 0.4% in September (-1.2% y/y) after a 1.0% decline. Nonstore retail sales improved 0.4% (7.1% y/y) following a 1.6% rise. Sporting goods, hobby shop, book & music store sales rose 0.3% (-3.5% y/y) after they edged 0.1% higher in August. Building materials & garden equipment store sales rose 0.2% (0.5% y/y) after holding roughly steady in August.

To the downside, electronics & appliance store sales weakened 3.3% in September (-4.6% y/y) after falling 1.7% in August. Furniture & home furnishing store sales declined 1.4% (-2.3% y/y) after they eased 0.4% in August. Gasoline station sales dropped 1.6% (-10.7% y/y) last month, the fourth decline in five months.

In the nondiscretionary sales categories, health & personal care store sales rose 1.1% (4.6% y/y) in last month after a 0.6% August rise. It was the fifth consecutive monthly increase. Food & beverage store sales also were strong last month and rose 1.0% (2.5% y/y) after falling 0.5% in August.

Consumers’ penchant to dine out continued last month. Restaurant & drinking place sales increased 1.0% (3.7% y/y) in September, the sixth consecutive monthly rise.

Retail sales data can be found in Haver's **USECON** database. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- Core sales post strong increase.
- Miscellaneous store sales surge.
- Motor vehicle sales steady while gasoline purchases fall sharply.

U.S. Retail Sales Pick Up in September as Nonauto Sales Firm

Winnie Tapasanun

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Total industrial production declined 0.3% m/m (-0.6% y/y) in September following a downwardly revised 0.3% increase in August (+0.8% initially) and an upwardly revised 0.6% drop in July (-0.9% previously), according to the Federal Reserve Board. The September IP index at 102.6, the same as in July, was 7.4% above a low of 95.5 in February 2021. A 0.1% m/m August easing had been expected in the Action Economics Forecast Survey. The Federal Reserve estimated that the Boeing strike reduced September IP growth by 0.3% and the effects of two hurricanes subtracted another 0.3%. In Q3 2024, IP fell 0.2% q/q after a 0.6% q/q rebound in Q2 2024, falling at a 0.6% annualized rate following a 2.5% Q2 annualized rate of increase. IP rose 0.2% in 2023, 3.4% in 2022, and 4.4% in 2021.

By **industry groups**, manufacturing production fell 0.4% (-0.5% y/y) in September, the third m/m fall in four months, after a downwardly revised 0.5% increase in August (+0.9% initially). Durable goods production declined 1.0% (-1.3% y/y), down for the third month in four, following a 1.2% August rebound. This reflected m/m output drops of 8.3% (-5.8% y/y) in aerospace & miscellaneous transportation equipment, 1.5% (-0.6% y/y) in motor vehicles & parts, 1.5% (-5.2% y/y) in furniture & related products, 1.4% (+3.7% y/y) in electrical equipment, appliances & components, 0.5% (-3.8% y/y) in nonmetallic mineral products, 0.1% (-2.1% y/y) in machinery, and 0.1% (-1.3% y/y) in fabricated metal products. Notably, aircraft & parts production plunged 11.9% (-9.7% y/y), the first m/m drop since May, following a 2.5% August gain. The following durable goods categories, however, increased m/m in September, including output rises of 1.4% (-2.2% y/y) in wood products, 0.7% (-5.5% y/y) in miscellaneous durables goods, 0.5% (-2.8% y/y) in primary metals, and 0.3% (5.2% y/y) in computer & electronic products.

Nondurable goods production rose 0.2% (0.5% y/y) in September, the fourth m/m rise in five months, after a 0.2% decline in August. The September rise reflected m/m output increases of 1.8% (+2.3% y/y) in petroleum & coal products, 1.0% (+6.7% y/y) in printing & related support activities, and 0.3% (3.0% y/y) in chemicals. To the downside, the following nondurable goods categories fell m/m in September, including output drops of 4.2% (-4.5% y/y) in textiles & product mills, 2.6% (-8.5% y/y) in apparel & leather goods, 0.6% (+1.0% y/y) in paper, 0.1% (-3.1% y/y) in plastics & rubber products, and 0.1% (-1.6% y/y) in food, beverages & tobacco.

Mining activity fell 0.6% (-2.2% y/y) in September, as the effects of two hurricanes on oil & gas extraction more than offset increases elsewhere. The m/m fall was the second in three months following a downwardly revised 0.7% August gain (+0.8% initially). In contrast, utilities output rose 0.7% (0.6% y/y), as electric & natural gas utilities increased, following declines of 1.3% (-0.04% initially) in August and 1.1% (-3.0% previously) in July.

By **market groups**, business equipment output slid 3.5% (-4.2% y/y) in September, the third m/m slide in four months, reversing a 0.2% increase in August. Materials production fell 0.2% (-0.9% y/y), down for the third month in four, after a 0.4% August increase. Construction supplies production dipped 0.1% (-0.2% y/y) following a 0.4% August rebound. To the upside, consumer goods output grew 0.2% (0.2% y/y) in September, the fifth m/m gain in six months, after a 0.6% rise in August, reflecting a 0.7% drop (-1.9% y/y) in durable consumer goods and a 0.5% rebound (0.8% y/y) in nondurable consumer goods.

In **special classifications**, factory output of selected high-tech industries advanced 1.5% (10.0% y/y) in September, the sixth m/m gain in seven months, on top of a 1.3% rise in August (+1.7% initially). Manufacturing production excluding selected high-tech industries fell 0.4% (-0.8% y/y) following a 0.5% August rebound and manufacturing production excluding selected high-tech and motor vehicles & parts fell 0.3% (-0.8% y/y) after a 0.2% August decline; both posted the third m/m fall in four months.

Capacity utilization fell to 77.5% in September, the lowest since January, after rising to 77.8% in August (78.0% initially). The Action Economics Forecast Survey forecasted 77.8%. The September reading was 2.2 percentage points below its long-run (1972–2023) average. Manufacturing capacity utilization fell to 76.7% in September from 77.1% in August (77.2% initially); the September rate was 1.6 percentage points below its long-run average.

Industrial production and capacity data are in Haver’s **USECON** database. Additional detail on production and capacity utilization can be found in the **IP** database. The expectations figures come from the **AS1REPNA** database.

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- September IP -0.3% m/m (-0.6% y/y); August gain revised down.
- Mfg. IP declines 0.4% m/m, w/ durable goods down 1.0% and nondurable goods up 0.2%.
- Mining activity drops 0.6% m/m, but utilities output rebounds 0.7% vs. two straight m/m falls.
- Key categories in market groups mostly decrease.
- Capacity utilization down 0.3%-pts. to 77.5%.

U.S. Industrial Production Drops in September, w/ Boeing Strike and Hurricanes Affecting Output

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The Housing Market Index compiled by the National Association of Home Builders/Wells Fargo rose 4.9% (7.5% y/y) in October to 43 after rising 5.1% in September. It remained below the break-even point of 50 where it’s been for the last six months. The index stands below a July 2023 high of 56 and a November 2020 peak of 90.

The average rate on a 30-year fixed rate mortgage rose to 6.44% last week compared to 6.32% in the prior week. It has averaged 6.29% this month, down from a high of 7.79% in the last week of October 2023, according to Freddie Mac.

The single-family sales measure rose 4.4% (2.2% y/y) to 47 this month from 45 in September. It was the highest reading since June. The prospective sales index in six months rose 7.5% (29.5% y/y) to 57 from 53 in September. It was the highest level in six months. The traffic of prospective buyers’ index rose 7.4% (11.5% y/y) to 29 in October. It was the highest level since May.

Housing performance across the country was mixed in October. The Northeast index fell 5.5% (+13.0% y/y) to 52 from 55. The index for the Midwest improved 4.9% (16.2% y/y) to 43 from 41 in September. In the South, the index improved 7.5% (unchanged y/y) to 43, but remained below the recent high of high of 52 in March. The index in the West increased 7.3% (22.2% y/y) to 44 from 41 in September. The index hit a low of 28 in November of last year.

The NAHB has compiled the Housing Market Index since 1985. It reflects survey questions which ask builders to rate sales and sales expectations as "good," "fair" or "poor" and traffic as "very high," "average" or "very low." The figures are diffusion indexes with values over 50 indicating a predominance of "good"/"very high" readings. In constructing the composite index, the weights assigned to the individual index components are: 0.5920 for single-family detached sales, present time, 0.1358 for single-family detached sales, next six months, and 0.2722 for traffic of prospective buyers. The regional indexes run back to December 2004.

These data are included in Haver's **SURVEYS** database.

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- Overall index stands at highest level in four months.
- Component performance is mixed.
- Regional indexes largely improve.

U.S. Home Builders Index Increases in October

Sandy Batten

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The Current General Activity Diffusion Index rose to 10.3 in October from 1.7 in September, according to the Manufacturing Business Outlook Survey (MBOS) from the Federal Reserve Bank of Philadelphia, indicating further improvement in activity in the third Federal Reserve District this month. A reading of 3.0 had been expected in the Action Economics Forecast Survey. Twenty-four percent of the firms reported increases in general activity in October (up from 21.9% in September) while 14.0% reported decreases (down from 20.2% in September). Responses to this month's survey were collected from October 7 to October 14.

The headline index reflects the answer to a single question about business conditions. Haver Analytics calculates an ISM-adjusted current activity diffusion index from five key components using the methodology along the lines of the national ISM index. The index rebounded to 52.7 in October from 49.3 in September, indicated that the rise in activity was relatively broad based.

The new orders index rebounded to 14.2 in October after having fallen to -1.5 in September with 30.5% of respondents reporting an increase in orders while only 16.3% reported a decline, the lowest since August 2023. Similarly, the shipments index bounced back to 7.4 in October from -14.3 in September. Twenty-seven percent of respondents reported an increase in shipments while 19.8% reported a decline. Unfilled orders rose but remained negative for the second consecutive month at -1.5. Delivery times lengthened to 10.2 in October from -0.7 in September. Inventory investment continued but the pace slowed with the index falling to 0.5 in October from 5.0 in September.

Employment conditions weakened in October with the number of employees’ index falling to -2.2 from 10.7 in September. Eleven percent of respondents reported an increase in employment, the same as last month, while 12.9% reported a decline versus 0% last month. The average workweek index rose slightly but remained decidedly negative at -11.8.

Both price indexes declined in October but remained positive. The prices paid index declined from 34.0 to 29.7. Nearly 35% of the firms reported increases in input prices, while 5.0% reported decreases; 60.0% of the firms reported no change. The current prices received index decreased 7 points to 17.9. Almost 22 of the firms reported increases in prices received for their own goods, 3.8% reported decreases, and 71.9% reported no change.

The future activity index jumped up to 36.7 this month, its highest reading in three months, from 15.8 in September. Apart from inventories, all other components posted solid increases, led by new orders and shipment.

In this month’s special question, manufacturers were asked about their plans for different categories of capital expenditures next year. Almost 52% of the firms expect to increase total capital spending, compared with 21% that expect to decrease total spending; 27% expect total spending to stay the same. When this question was asked last year, the share of firms expecting to decrease spending slightly exceeded the share of firms expecting to increase spending (30% versus 24%). On balance, the firms expect higher capital expenditures next year for computer and related hardware, software, noncomputer equipment, and energy-saving investments, and lower expenditures on structure and other investments.

The Manufacturing Business Outlook Survey (MBOS), conducted by the Federal Reserve Bank of Philadelphia, is a monthly survey of manufacturers in the Third Federal Reserve District. Participants indicate the direction of change in overall business activity and in the various measures of activity at their plants. The diffusion indexes in the MBOS represent the percentage of respondents indicating an increase minus the percentage indicating a decrease. The series from the survey dating back to May 1968 can be found in Haver’s **SURVEYS** database. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- The headline index rose more than expected to 10.3 from 1.7.
- The increase was rather widespread with the ISM-adjusted index rising to 52.7.
- New orders and shipments components indexes rebound from negative readings in September to positive in October.
- The employment component index fell back into negative territory in October after a solid increase in September.
- Capital spending expectations rise markedly.

Philly Fed Manufacturing Index Rises Further in October

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Total business inventories rose 0.3% m/m (2.4% y/y) in August, the same monthly increase as in June and July. A 0.3% increase had been expected in the Informa Global Markets Survey.

Retail inventories rose 0.6% m/m (6.4% y/y) in August, slightly slower than the 0.8% monthly gain in July. Increased auto inventories continued to be the major contributor to the rise in overall inventories in August. While the 0.8% m/m increase in auto inventories was the lowest monthly increase in six months, it accounted for 44% of the monthly increase in total inventories. General merchandise inventories were up 1.3% m/m, their largest monthly gain since December 2023. Food and beverage store inventories rose 1.2% m/m in August, their largest monthly gain since October 2022. By contrast, furniture inventories fell 0.5% m/m, their fourth consecutive monthly decline.

Manufacturing inventories edged up 0.1% m/m (0.6% y/y) in August after having been unchanged in July. Wholesale inventories also increased 0.1% m/m (0.6% y/y) in August versus a 0.2% monthly gain in July.

Total business sales fell 0.2% m/m (+1.3% y/y) in August after a 1.1% m/m jump in July. Factory sales fell 0.5% (+1.0% y/y); wholesale sales slipped 0.1% m/m (+1.1% y/y). Retail sales were essentially unchanged (+1.9% y/y) with weakness widespread across major sectors.

With sales falling and inventories rising in August, the inventory/sales (I/S) ratio edged up to 1.38 from 1.37 in July, It has been either 1.37 or 1.38 in each of the past nine months. The manufacturing I/S ratio inched up to 1.46 in August from 1.45. The wholesale I/S was unchanged at 1.35. And the retail I/S increased to 1.33 from 1.32 in July.

The manufacturing and trade data are in Haver’s **USECON** database. The Informa Global Markets forecast is in the **MMSAMER** database.

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- Inventories increased 0.3%, led by retailers.
- Sales declined, led by factory sales.
- Inventory/sales ratio stuck in a range.

U.S. Business Inventories Rose While Sales Fell in August

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance dropped by 19,000 to 241,000 seasonally adjusted in the week ended October 12, from 260,000 in the previous week, revised up 2,000 from the initially reported 258,000 level. The Action Economics Forecast Survey had expected 245,000 in the October 12 week. Press reports indicate that the jump in the October 5 week was related to the impact of Hurricane Helene. The effects of both Hurricane Helene and Milton will likely keep weekly claims data volatile in the coming weeks. The four-week moving average of initial claims was 236,250 in the week ended October 12, up from 231,500 the week before.

In the week ended October 5, the total number unemployment benefit recipients – also known as insured unemployment – was 1.867 million, up 9,000 from 1.858 million in the week of September 28, revised down from 1.861 million. The four-week moving average of insured unemployment was 1.843 million, up from 1.831 million in the prior week.

Also, in the week ended October 5, the insured unemployment rate was still 1.2%. This is the number of beneficiaries as a percent of covered employment; the rate has been at 1.2% continuously since March 11, 2023.

Economic conditions vary widely across states and territories. In the week ended September 28, the highest unemployment rates were in New Jersey (2.18%), California (2.01%), Puerto Rico (1.81%), Rhode Island (1.78%) and Washington (1.76%). The lowest rates were in South Dakota (0.23%), North Dakota (0.34%), Florida, Virginia and North Carolina (each 0.40%), and Alabama, Kansas and Nebraska (each 0.43%). Rates in other notable states include New York (1.47%), Illinois (1.42%), Pennsylvania (1.34%) and Texas (1.05%). These state rates are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986. The expectations figure is from the Action Economics Forecast Survey in the **AS1REPNA** database.

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- Continuing claims up 9,000 in the October 5 week, after the 39,000 jump in September 28 week.
- Insured unemployment rate holds at 1.2%.

U.S. Unemployment Insurance Claims Dropped 19,000 in Week Ended October 12

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Pricing pressure from the foreign trade sector eased last month. Import prices weakened 0.4% (-0.1% y/y) in September following a 0.2% August decline, revised from -0.3%. The Action Economics Forecast Survey expected a 0.3% decline. Export prices declined 0.7% (-2.1% y/y) last month after falling 0.9% in August, revised from -0.7%. The Action Economic Forecast Survey expected a 0.6% drop.

The monthly decline in import prices reflected a 7.0% drop (-17.3% y/y) in fuels & lubricants prices which came after a 2.9% decline in August. Nonfuel prices, however, edged 0.1% higher for the third straight month. Their y/y increase has risen to 1.8%, up from -1.9% in April of 2023. Auto import prices improved 0.2% (2.7% y/y), the same as in August. Nonauto consumer goods prices increased 0.2% (0.8% y/y). The gain followed three straight monthly declines. Capital goods prices held steady (+0.4% y/y) after a 0.2% increase. Weakening, however, were foods, feeds & beverage prices which declined 1.5% (+3.8% y/y) after rising 0.2% in August.

The weakening in export prices in September reflected a 0.9% drop (-1.8% y/y) in nonagricultural export prices which was the fourth decline in the last five months. A 0.6% rise (-5.3% y/y) in agricultural product prices offset some of this weakness. Leading the decline, industrial supplies & materials prices fell 2.4% (-6.3% y/y) after a 1.6% August drop. Motor vehicle & parts prices edged 0.1% lower (+2.9% y/y) and reversed the 0.1% rise in August. Offsetting these declines, nonauto consumer goods prices increased 0.3% (0.9% y/y) following a 0.1% improvement in August. Capital goods prices rose 0.2% (1.6% y/y) after a 0.2% dip.

Each of these monthly trade price numbers are not seasonally adjusted. The import and export price series can be found in Haver’s **USECON** database. Detailed figures are available in the **USINT** database. The expectations figure from the Action Economics Forecast Survey is in the **AS1REPN**A database.

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- Import price decline led by oil; elsewhere most prices firm.
- Export price weakness led by costs of industrial supplies.

U.S. Import and Export Prices Decline in September

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Retail gasoline prices for all grades rose to $3.29 per gallon (-11.1% y/y) in the week ended October 14 after falling to $3.26 per gallon in the prior week. Prices remain below the late-April high of $3.79 per gallon, well under their all-time high of $5.11 in the week ended June 13, 2022. Retail prices for on-highway diesel fuel increased to $3.63 per gallon (-18.3% y/y) from $3.58 per gallon. These prices reached a high of $4.63 per gallon in the third week of September of last year.	

The average price of West Texas Intermediate crude oil strengthened to $75.07 per barrel (-12.0% y/y) in the week ended October 11 after rising to $71.47 per barrel in the prior week. It was the highest price in six weeks but they remained lower than the $91.45 high in the last week of September 2023. Yesterday, the price of West Texas Intermediate crude oil fell to $70.58 per barrel. The price of European Brent crude oil increased to $78.51 per barrel (-10.5% y/y) in the week ended October 11 after rising to $75.16 in the prior week. The price of Brent has recently ranged from a low of $74.31 in the week ended June 30, 2023 to a high of $121.57 in the week ended June 10, 2022. Yesterday, the price weakened to $73.75 per barrel.

Natural gas prices fell to an average $2.40 /mmbtu (-25.0% y/y) in the week ended October 11 from $2.67 in the prior week. Prices recently touched a high of $2.73/ mmbtu in the second week of June and they remained well above their low of $1.40/mmbtu in the second week of March. Prices reached a high of $9.56/mmbtu averaged in the last week of August 2022. Yesterday, the price of natural gas moved lower to $2.37/mmbtu.

These data are reported by the Energy Information Administration of the U. S. Department of Energy. The price and supply/demand data can be found in Haver’s **WEEKLY** and **USENERGY** databases.

- Gasoline prices edge up, reversing earlier decline.
- Crude oil costs move higher.
- Natural gas prices decline.

U.S. Energy Prices Are Mixed in Latest Week

Even with expected tariff-induced increases in inflation, BCFF forecasters look for a more aggressive round of monetary easing

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

Wage growth slowing in the US and Euro area; elevated and sticky in the UK

Stagflation-lite: Blue Chip forecasts below-trend growth and elevated inflation

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

US and Japan ended 2024 on solid ground in contrast to Europe

US economy expected to outperform other major economies in 2025

Only modest evidence of AI-related surge in US productivity growth

Previous Trump tariffs fading. A boost from new tariffs ahead?

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

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The Consumer Price Index rose 0.2% in April after easing 0.1% in March and rising 0.2% in February. A 0.3% rise had been expected in the Action Economics Forecast Survey. The y/y increase in the headline CPI dropped to 2.3% from 2.4% in March, the weakest y/y gain since February 2021. It stood below the 9.1% peak in June 2022. The CPI excluding food & energy rose 0.2% in April following increases of 0.1% in March and 0.2% in February. A 0.3% rise had been expected. The 2.8% y/y gain remained the weakest rise in core prices in four years and below the 6.6% peak in September 2022.

Energy prices rose 0.7% (-3.7% y/y) last month after falling 2.4% in March. Gasoline prices slipped 0.1% (-11.7% y/y) after falling 6.3% in March. Fuel oil prices weakened 1.3% (-9.6% y/y) after falling 4.2% in March. Natural gas prices jumped 3.7% (15.7% y/y) following a 3.6% gain, and electricity prices gained 0.8% (3.6% y/y) after rising 0.9% in March.

Food prices eased 0.1% (+2.8% y/y) in April after a 0.4% March increase as egg prices fell 12.7% (+49.3% y/y) following a 5.9% gain. Meat, poultry & fish prices held steady (+3.4% y/y) after a 0.6% rise, while dairy product prices slipped 0.2% (+1.6% y/y) after a 1.0% March strengthening. Cereal & bakery product costs weakened 0.5% (unchanged y/y) after a 0.1% easing while fruit & vegetable prices dropped 0.4% (-0.9% y/y), the fifth decline in six months. Nonalcoholic beverage prices rose 0.7% (3.2% y/y) in April after rising 0.6% in March.

Goods prices less food and energy rose 0.1% both m/m and y/y in April after easing 0.1% in March. Prices of used cars and trucks fell 0.5% (+1.5% y/y) last month after falling 0.7% in March while new vehicle costs held steady (0.3% y/y) after edging up 0.1% in March. Apparel prices eased 0.2% (-0.7% y/y) following a 0.4% gain. Appliance prices increased 0.8% (-1.2% y/y) after a 0.1% easing. Home furnishings prices increased 0.2% (0.3% y/y) after holding steady in March. Recreation product costs rose 0.4% (-1.8% y/y) in April after falling 0.3%. Education & communication product costs rose 0.3% last month (-5.3% y/y) after rising 0.5% in March.

Services prices less energy moved up 0.3% (3.6% y/y) last month following a 0.1% March gain. Shelter prices rose 0.3% (4.0% y/y) last month after a 0.2% rise as owners’ equivalent rent of primary residences increased 0.4% (4.3% y/y), the same as in March. The cost of lodging away from home eased 0.1% (-1.4% y/y) after falling 3.5% in March. Rents of primary residences gained 0.3% (4.0% y/y) for the fifth consecutive month. Transportation service prices edged 0.1% higher (2.5% y/y) after falling 1.4% in March reflecting a 0.6% rise (6.4% y/y) in the cost of motor vehicle insurance. Public transportation costs declined 1.8% (-5.6% y/y) after falling 4.2% during March. The cost of medical services increased 0.5% (3.1% y/y), the same as in March, but the cost of recreation services fell 0.3% (3.6% y/y) after increasing 0.1% in March. Education & communication services prices fell 0.2% (+1.2% y/y) after rising 0.2%.

The Consumer Price figures can be found in Haver's **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

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- Annual total & core gains are the weakest in four-years.
- Energy costs move up but food prices slip.
- Core goods prices edge higher & service price gain picks up.

U.S. Consumer Price Index & Core Prices Rise Modestly in April

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The NFIB Small Business Optimism Index fell to 95.8 in April, the lowest level since October, after a 3.3-point decline to 97.4 in March, according to the Small Business Economic Trends survey conducted by the National Federation of Independent Business. This was the second successive month that the index was below the 51-year average of 98. The index was down from its recent peak of 105.1 in December but up from 89.7 in April 2024 and a low of 88.5 in March 2024. Six of the 10 index components fell, three rose, and one was unchanged. The NFIB Small Business Uncertainty Index declined to 92 in April, the lowest level since December, after an eight-point drop to 96 in March. The index, while down from its record high of 110 in October, was well above a low of 65 in November 2023 and its historical average of 68.

The outlook for business conditions in the next six months remained positive for the sixth consecutive month in the latest survey. The net balance of respondents expecting the economy to improve decreased to 15% in April, the lowest level since October, on top of a 16-point plunge to 21% in March; however, having remained significantly above a record low of -61% in June 2022. Expected real sales dropped to a net -1% in April after an 11-point slide to 3% in March, posting the first negative reading and the lowest since October. The latest figure was up from its recent low of -18% in August. A net -8% of respondents reported higher nominal sales in the past three months, up from -11% in March and registering the highest reading since September 2023. The latest result, however, was below the most recent positive reading of 1% in May 2022 and a peak of 9% in June 2021.

Plans to make capital outlays slid to 18% in April, the lowest level since April 2020, following a two-point increase to 21% in March. These numbers were down from their recent high of 28% in November and a high of 31% in October 2021. Plans to expand the business registered at 9% in April and March, the lowest reading since October, following 12% in February; the latest figure was down from its most recent high of 20% in December but up from a low of 2% in March 2023. Meanwhile, expected credit conditions declined to -7% in April, the lowest reading since September, from -4% in March; these readings were above a low of -11% in November 2023.

On the labor front, forty-seven percent of respondents reported that qualified workers to fill job openings were hard to find in April, unchanged from 47% in March. These numbers were below their recent high of 56% in August, a high of 57% in September 2023, and a peak of 62% in September 2021. A net 13% planned to increase employment in April, slightly up from 12% in March; it was below a high of 26% in May 2022 and a peak of 32% in August 2021. Notably, 34% reported positions not able to be filled in April, down from 40% in March and the lowest reading since September; these figures remained below a high of 51% in May 2022.

Overall earnings trends had remained in negative territory since December 2019. The figure improved to -21% in April, still a poor reading, following a four-point drop to -28% in March. These readings were up from a low of -37% in August; nevertheless, having remained below a high of -18% in March 2023 and a high of -5% in June 2021.

On the pricing front, inflation pressures, while trending down, remained at an inflationary level. The net percent of firms raising their average selling prices slipped to 25% in April, the lowest reading since January, after a six-point decline to 26% in March. These numbers were virtually unchanged from 25% in April 2024 but well below a high of 66% in March 2022. The percentage planning to raise prices eased to a three-month-low 28% in April following a one-point increase to 30% in March; these figures were above 26% in April 2024 but below a high of 33% in March 2024 and a high of 52% in March 2022.

Wage inflation, while relatively high, eased somewhat in the April survey. A net 33% of respondents raised compensation during the last three months, down from 38% reported in the March survey and the same reading as in February and January. It was down from a high of 46% in February 2023 and a peak of 50% in January 2022. A net 17% of firms planned to raise worker compensation in the next three months, down from 19% reported in March and the lowest reading since March 2021; these numbers were below a high of 28% in November, a high of 30% in November 2023, and a high of 32% in October 2022.

The quality of labor was reported as the single most important problem facing small businesses, as reported by 19% of NFIB members in April, March, and February. Taxes were reported as the next most important problem, with 16% reported in April vs. 18% in March. Inflation continued to be a problem facing small businesses, as reported by 14% in April; the figure was down from 16% in March and a peak of 37% in July 2022. Other concerns (in April vs. March) included insurance cost/availability (10% vs. 8%), poor sales (9% vs. 9%), government requirements (9% vs. 8%), the cost of labor (8% vs. 11%), and competition from large businesses (7% vs. 6%).

According to the Small Business Administration, there are 33 million small businesses in the United States, which employ 62 million workers. The NFIB surveys anywhere from 500 to 2000 respondents each month and the typical firm employs 10 people and reports gross sales of about $500,000 a year. The NFIB figures can be found in Haver’s **SURVEYS** database.

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- Apr. NFIB Small Business Optimism Index down 1.6 pts. to 95.8; the fourth straight m/m fall.
- Uncertainty Index down 4 pts. to 92, the lowest since Dec.
- Expectations for economy down 6 pts. to 15%, the lowest since Oct.
- Expected real sales down 4 pts. to -1%, the first negative reading since Oct.
- Net percent of firms raising avg. selling prices down 1 pt. to a 3-month-low 25%.
- Quality of labor (19%), taxes (16%), and inflation (14%) are the top three business concerns.

U.S. NFIB Small Business Optimism Falls to a Six-month Low in April Amid Continued Uncertainty

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Retail gasoline prices for all grades fell to an average $3.25 per gallon (-12.9% y/y) in the week ended May 12 after rising to $3.27 in the previous week, but	 remained above their low of $3.13 in the week of December 9. An earlier high was $3.79 in the week ending April 22, 2024. The all-time high of $5.11 occurred in the week ending June 13, 2022. The retail price for on-highway diesel fuel declined to $3.48 per gallon (-9.7% y/y) in the week of May 12 from $3.50 in the prior week. The latest diesel price stood well below a high of $4.63 in the week ending September 18, 2023 and a peak of $5.81 in the week ending June 20, 2022.

The price of West Texas Intermediate crude oil at $59.04 per barrel (-25.9% y/y) in the week ended May 9 compared to $59.64 per barrel in the prior week. Prices remained below a high of $91.45 in the week of September 29, 2023. The cost of crude oil peaked at $120.46 in the week of June 10, 2022. Yesterday, the price was $61.95 per barrel. The price of European Brent crude oil declined to $62.29 per barrel (-24.9% y/y) in the week of May 9 from $63.50 in the previous week. Prices remained well below a recent high of $95.61 in the week of September 29, 2023 and compared to a peak of $127.40 in the week of June 10, 2022. Yesterday the price was $65.28 per barrel.

Natural gas prices edged up to an average $3.19 per mmbtu (59.5% y/y) in the week ended May 9, after improving to $3.09/mmbtu in the prior week. Prices have been well below earlier highs for four weeks but were well above a low of $1.40/mmbtu in the week of March 15, 2024. Prices peaked at $9.56/mmbtu in the week of August 26, 2022. Yesterday’s price was $3.19/mmbtu.

Gasoline demand rose 3.5% y/y in the four weeks ending May 2 following a 3.2% y/y rise in the prior four weeks. Demand for all petroleum products eased 0.6% y/y in the four weeks ending May 2 after a 0.3% y/y rise in the previous four-week period. Crude oil input to refineries rose 0.4% y/y in the four weeks ending May 2 after a 0.1% y/y slip in the prior four weeks.

Gasoline inventories fell 1.0% y/y in the week ending May 2 after a 0.7% y/y fall in the week ending April 25. Residual fuel oil inventories fell 10.9% y/y in the week of May 2, after an 18.7% y/y fall in the prior week. Crude oil inventories rose 1.3% y/y in the week of May 2 after a 1.4% y/y rise in the previous week.

Measured in days’ supply, gasoline inventories fell w/w to 25.3 days in the week of May 2 from 25.5 days in the prior. The recent low was 22.9 days in the week of November 8. The supply of crude oil eased w/w to 27.6 days in the week of May 2 from 27.9 days in the prior week, and remained below a high of 31.9 days in the week of March 3, 2023.

These data are reported by the Energy Information Administration of the U.S. Department of Energy. The price and supply/demand data can be found in Haver’s **WEEKLY** & **USENERGY** database.

- Gasoline prices decline.
- Crude oil prices ease.
- Natural gas costs rise.

Robert Brusca

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Forecasting is an ordinary part of economic analysis. And to a large extent, it gets taken for granted as we realize different people are making different forecasts and that there always are differences. We come to accept that, and we realize that there may be some economists who are more optimistic and some who are more pessimistic, some who favor growth more, some who fear inflation more. There are almost always some sorts of biases involved when people make forecasts simply because it's very hard to eliminate bias completely no matter how hard an economist tries to be objective. At the very least, economists usually feel somewhat bound by the previous forecast that they made in order to provide some stability in the guidance that they present.

**The ZEW Forecasts**
In this month’s ZEW survey, there is an example of this with what I consider to be somewhat quizzical forecasts being offered by the ZEW financial experts, who are largely European experts, at a time that the United States is threatening tariffs. Now this, of course, makes the U.S. the aggressor in this campaign and according to the ZEW experts the U.S. is going to suffer from this more than European economies. However, the U.S. is much less trade-dependent than Europe and certainly far less dependent than Germany which is one of the most trade-dependent large, advanced economies in the world. We measure trade dependency by looking at exports plus imports as a percentage of GDP. By this measure, trade-dependency is around 90% to 95% of for Germany; U.S. dependency is around 30% to 35%. The ZEW experts see the tariff situation making the U.S. economy much worse off than the European or the German economy- why?

**Tariff impact**
To put this in perspective, in the U.S., high tariffs, if they are binding, will cause imported goods to be more expensive. U.S. firms and consumers will have the choice of deciding whether they want to pay the higher costs to consume those items or to replace them in consumption or their production process. In the case of consumers, it's probably easier because a consumer can switch from an expensive French champagne to a less expensive but still quite good California sparkling wine or Chardonnay- or pay the higher price and enjoy French champaign! However, if U.S. consumers shift, that is going to leave France with a lot of unsold champagne and they need to sell it someplace else and that's a problem since the U.S. is a huge high-income market; that’s the reason that it's sought after by so many countries who export to the United States. U.S. consumers may choose to be satisfied with a different product. In this example the French, or it could be the Germans, or anyone whose exports are distained because of higher prices, might find that they have goods piling up in the shelves that they are not selling. This could cause an unemployment problem that could really snowball- a more severe problem than drinking Chardonnay instead of French champaign! 

**The U.S. side**
On the U.S. side, if people continue to buy these goods, the U.S. will have more inflation that may cause the Fed to stop cutting rates. The Fed might even raise rates, and this could slow the economy down. However, as we know, tariffs are one-time increase in the price level and it's only if the Fed runs ‘bad monetary policy’ that the price bump caused by the tariffs would become inflation… inflation is a persisting increase in prices.

**The new ZEW in May**
In this new survey, we see the economic situation in May improving relatively substantially in the euro area, as well as worsening slightly in the U.S. and in Germany. We see macroeconomic expectations sharply higher in Germany in May and while they also improve substantially in the U.S., the U.S. is left with economic expectations that are weaker less than 5% of the time, while German macroeconomic expectations are above their historic median (above a ranking of 50%).

**Got inflation?**
Inflation expectations are falling in the euro area in May and in Germany and, while they edged slightly lower in the U.S., they rank very high - higher only 8% of the time in the U.S. Whereas inflation expectations are lower only about 20% of the time in the euro area and in Germany. What's interesting, is that we see a big decline in inflation expectations in the euro area and in Germany despite the fact that growth conditions either improve or hardly unchanged and macro-expectations for Germany get sharply higher and yet inflation is improving. This has to be viewed as a curiosity.

**Interest rates**
Short-term rate expectations in the euro area are more negative than they are in the U.S. with both the euro area and the U.S. having low rank standings for short-term interest rate expectations. Long-term rate expectations in Germany and the U.S. show a decline both in Germany and in the U.S., but the German rank-standing is at its 15th percentile and the U.S. standings in its 36th percentile. That, at least, matches with the inflation expectations outlook.

Through all this, stock markets are improving in May compared to April. The European stock market and the German market are doing better than they are than the U.S. on a queue standing basis. And the dollar is expected to get weaker.

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**Forecasts and contradictions**
It seems to me there are a lot of contradictions in these scenarios or forecasts and the Europeans are somewhat angry at the U.S. for having done what it did, and they are projecting that the U.S. will suffer a worse consequence basically because they don't like what the U.S. is doing. However, based on trade dependency, it would seem to me that Europe is far more at risk of an ugly outcome: its exports are at greater risk compared to U.S. imports being at greater risk. One mitigating factor, of course, is that many things have changed as the U.S. has made alterations on the geopolitical front by forcing Europe to accept a larger role in NATO, defending itself. This will increase military expenditure and will help to sustain economic growth in Europe in the face of whatever shock may come on the tariff side. However, at this time, there isn't that much of a defense industry in Europe to serve the build-up that they need, if they source goods out of the U.S. that's not going to stimulate European growth very much. However, it's likely that Europe will try to develop more of a domestic arms industry although it’s going to have to weigh that against the need to beef up armaments in the short-run.

**Lots of change afoot**
There's a lot of change afoot, and we see a lot of forecasts being made both by Europeans and by people in the U.S. that reflect the heavy dose of what they want to see rather than what they're probably going to see. A lot of that analysis swirls around the belief that free trade is something sacred that's being violated by tariffs and therefore these violations are going to create a lot of bad events. That viewpoint, of course, ignores the many ways in which free trade is already violated. And, of course, another set of pre-existing beliefs simply sees everything that Donald Trump does as wrong. Wishing or even hating is no way to run a forecasting exercise and so I've cautioned that people beware about the conclusions they draw especially in the wake of the tariff news which now has the U.S.-China animosity set aside and has some temporary abeyance of other tariffs in progress. The problem with being an economist is that you have to have a forecast, and you have to explain it, and make it public, and, of course, once you do that, if the facts suddenly change, you are left either having to keep your forecast (and hoping…) or having to embarrass yourself by shifting your forecast back to where it was before things changed. And this reflects where we are right now. There were a number of analyses that emerged about how we would have inflation, or we would have recession because these tariffs were huge and terrible and now it's the tariffs get peeled back and we see there's going to be a more reasoned approach. But there is still no permanence. Yet, economists with forecasts out there are gradually looking for a diplomatic way to soften some of the forecasts they have made without looking like a bobble-head doll on a cars dashboard as it encounters a bumping road. This also goes for some of the analysis of reports that we see as the Wall Street Journal's first take on today's CPI report in the U.S. was that there was evidence of tariff inflation although if you read the report the WSJ talks about how it was the best year-over-year inflation rate that we had seen in quite some time and up by only 0.2% month-to-month. So, which is it? When it's hard to make the headline of a report match the content of the story that it represents, you know there's something else going on. So be careful what you read and be more careful what you believe. There is a lot of bias and ideology out there. It is a lot just because we are human- but not all of it.

ZEW Experts Shift Forecasts Less Pessimistic on Europe

Tian Yong Woon

This week, we focus on US-China trade developments in light of the economies’ joint 90-day tariff pause announcement. The extent of the interim tariff cuts has surpassed investors’ expectations. As such, the cuts have understandably boosted sentiment in Chinese equity markets (chart 1), though sentiment had already been buoyed by the increasingly conciliatory tone in US-China communications leading up to the announcement. The tariff cuts are a significant reprieve for both economies. The US is likely to see reduced price pressures on producers and consumers in the near term, while China stands to gain from a temporary easing of growth drags amid ongoing domestic challenges (chart 2).

Turning to the hard numbers, China’s April trade readings were relatively resilient, partly due to significant front-loading ahead of the prior US-imposed 145% tariffs taking effect (chart 3). As shown in chart 4, sharp declines in shipments to the US were more than offset by rising exports to Asian partners, including ASEAN, India, and Taiwan. Looking ahead, with the tariff pause beginning around mid-May, we may not see a full month’s data capturing trade responses to the earlier steep tariffs.

Next, we turn to how investors and analysts are responding. In the May survey, our Blue Chip panellists continued to mark down growth forecasts across several economies relative to end-2024 expectations (chart 5). At the same time, they raised US inflation forecasts and lowered China inflation forecasts (chart 6). However, these forecasts are likely to see favourable revisions in future surveys—barring new adverse developments—especially in light of this week’s positive news.

**Latest US-China trade developments**
Financial market sentiment has remained fairly buoyant despite the flare-up in US-China trade tensions in April. Recent messaging from both sides has moved away from the fiery rhetoric of previous months, adopting a more conciliatory tone aimed at de-escalating rather than intensifying frictions. Encouragingly, developments earlier this week reinforced this shift: the US and China issued a joint statement agreeing to a 90-day cooling-off period as they pursue trade talks following a relationship “reset.” During this time, the US will reportedly reduce its 145% tariffs on Chinese imports to 30% by May 14, while China will lower its 125% tariffs on US imports to 10%. Markets have understandably reacted positively, as seen in chart 1, with this move representing a significant rollback of mutual tariffs and bringing rates much closer to their pre–“Liberation Day” baseline. As a result, the growth-dampening effects from elevated tariffs are now considerably more muted—though it is worth noting that these measures remain temporary.

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The latest developments are indeed cause for optimism, as neither the US nor China stood to benefit from maintaining steep, mutually applied tariffs. For China, this short-term reprieve will help ease what would have been another significant growth headwind, compounding an already challenging set of domestic issues. Among these, China continues to struggle with persistently low inflation—likely stemming from weak demand and a long-standing problem of excess supply, both of which have contributed to downward pressure on prices. This is particularly evident in producer prices, which have been falling for years now, as shown in chart 2. These underlying drivers likely explain why our Blue Chip survey panellists continue to expect weak price pressures in China this year—a topic discussed in more detail later. Also, the sustained price decline not only highlights China's oversupply problem but has also provoked frustration among trading partners who had to absorb the effects.

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**First round effects of US tariffs on China**
Moving next to initial hard numbers reflecting the effects of the US' 145% tariffs before the announced pause, China’s April trade data were released last week. Exports rose a strong 8.1% y/y, as shown in chart 3—well above expectations. This eased initial concerns that the US-imposed tariffs would severely hit trade. While the April export print beat forecasts, it was driven by several underlying factors. A key contributor was significant front-loading by importers ahead of the tariff implementation in mid-April, which likely offset the drop in shipments that followed. As a result, though April’s data capture the early impact of the steep US tariffs, they also reflect a surge in pre-tariff activity, making the figures somewhat noisy. On the import side, shipments to China declined modestly, extending the recent trend of weak import growth. Although the drop was less severe than expected, continued weakness in imports may reflect subdued domestic demand—a concerning signal.

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A closer look at the April data (chart 4) shows that China’s stronger-than-expected export performance was largely driven by shipments to ASEAN economies, India, and Taiwan, where exports posted double-digit y/y growth. This surge reflects several dynamics. First, it underscores the deep integration of regional supply chains and the critical role of Chinese inputs in broader manufacturing processes. Second, it points to these economies’ capacity to absorb some of China’s excess capacity—diverted from the US, which has become a less viable destination due to steep tariffs. However, it remains uncertain whether these markets can sustainably absorb such redirected trade flows. Exports to the EU and Japan also grew in April, though at a more modest pace. Overall, the surge in shipments to regional and European partners more than offset the sharp 21% y/y drop in exports to the US.

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**May Blue Chip survey outlook**
Next, we turn to investor and analyst expectations for global growth amid the seemingly unrelenting stream of trade developments between the US and its trading partners. The latest Blue Chip survey results continue to paint a bleak picture for global growth, with panellists having sharply downgraded their forecasts in the May survey compared to those expressed in December last year, as shown in chart 5. However, given the recent and substantial de-escalation in US-China trade tensions—and barring any new growth-negative developments—panellists may soon be compelled to revise their outlooks upward. Notably, the May survey did not capture this week’s positive trade breakthrough, and a significant portion of the tariff burden has now been temporarily lifted from both economies.

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Lastly, we examine investor and analyst expectations for inflation in light of US-China trade developments prior to this week’s positive news. Understandably, our Blue Chip panellists had significantly revised upward their inflation outlook for the US, given the potentially inflationary effects of the previously announced tariffs. In contrast, the inflation outlook for China has become increasingly pessimistic, largely due to the structural factors discussed in earlier sections. However, with the latest de-escalation in US-China trade tensions, expectations for US inflation—and even those for some other economies—now stand to be revised downward. Whether expectations for Chinese inflation can be meaningfully adjusted upward remains uncertain. Looking further ahead, attention will also turn to US President Trump’s other 90-day pause, specifically concerning his “reciprocal” tariffs on economies other than China. The outcome of these trade discussions will be critical in determining the trajectory of future inflation expectations.

Economy in Brief: 2024

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