Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060808c.jpg" width="353">
Small business optimism last month recovered most of the June decline with a 1.4% rise, according to the National Federation of Independent Business (NFIB). Nevertheless, the average level of the NFIB index this year remained 2.5% below the 2005 average.
During the last ten years there has been a 70% correlation between the level of the NFIB index and the two quarter change in real GDP.
Respondents expecting the economy to improve rose modestly m/m but remained near the lowest level since early 2001.
The percentage of firms planning to increase employment improved markedly m/m but the number of firms currently with one or more job openings slipped. During the last ten years there has been a 72% correlation between the NFIB percentage and the y/y change in nonfarm payrolls.
The percent planning to raise capital expenditures rose to 31%, about the same as last year..The percentage of firms planning to raise average selling prices rose back to 30% and the percentage of firms actually raising prices was stable m/m at 23%. During the last ten years there has been a 60% correlation between the change in the producer price index and the level of the NFIB price index.
About 24 million businesses exist in the United States. Small business creates 80% of all new jobs in America.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S7/@S7.HTM">Nat&#39;l Federation of Independent Business</a></th>
<th scope="col">July</th>
<th scope="col">June</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Small Business Optimism Index (1986=100)</td>
<td>98.1</td>
<td>96.7</td>
<td>-3.0%</td>
<td>101.6</td>
<td>104.6</td>
<td>101.3</td>
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Small business optimism last month recovered most of the June decline with a 1.4% rise, according to the National Federation of Independent Business (NFIB). Nevertheless, the average level of the NFIB index this year remained 2.5% [...]

Small Business Optimism Recovered

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060808a.jpg" width="353">
Non-farm labor productivity growth last quarter slowed to 1.1% from the heady, upwardly revised 4.3% growth rate during 1Q. The gain was slightly ahead of Consensus expectations for 0.8% growth.
Revisions extended back to 2003. Due to less output growth, as highlighted by the downward revision to GDP reported in July, productivity also was lowered to 2.3% in 2005 from 2.7% estimated initially, to 3.0% in 2004 from 3.4% and to 3.7% in 2003 from 3.9%.
Upward pressure on unit labor costs intensified due to slower productivity growth and faster growth in compensation per hour. Unit labor costs grew 4.2% last quarter, up from a 2.5% increase during 1Q. The 3.3% average rate of advance so far this year rose from 2.0% growth last year. Revisions actually lowered slightly the annual growth in costs from 2004 to 2005.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060808b.jpg" width="353">
Compensation jumped 5.4% after a 6.4% 1Q gain and the 6.1% two-quarter average rate of increase is the fastest in three years. Part of the acceleration is due to downward revisions to compensation growth during 2005 and 2004.
Factory sector productivity grew 3.0% (3.8% y/y) after a 3.7% 1Q increase. Revisions to factory sector productivity also were downward. Compensation growth also was strong last quarter after downward revision to prior years&#39; growth. Factory sector compensation per hour rose 1.7% (3.6% y/y) after a 5.2% 1Q increase that was more than double last month&#39;s estimate.
Unit labor costs in the factory sector nevertheless remained under control. Costs fell 1.2% (-0.2% y/y) after a 1.4% 1Q rise. The stability of recent labor cost pressures compares with a 0.5% gain during 2005 revised from 1.7%, and a 0.1% gain during 2004 revised from -3.1%.
Colleges Need To Learn about Productivity a speech by Fed Bank President William Poole is available <a href="http://stlouisfed.org/publications/re/2006/a/pages/pres_message.html"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EC/@EC02/@EC02.HTM">Non-farm Business Sector</a> (SAAR)</th>
<th scope="col">2Q&#39; 06</th>
<th scope="col">1Q &#39;06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Output per Hour</td>
<td>1.1%</td>
<td>4.3%</td>
<td>2.4%</td>
<td>2.3%</td>
<td>3.0%</td>
<td>3.7%</td>
</tr>
<tr>
<td class="firstcol">Compensation per Hour</td>
<td>5.4%</td>
<td>6.4%</td>
<td>5.7%</td>
<td>4.4%</td>
<td>3.6%</td>
<td>4.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unit Labor Costs</td>
<td>4.2%</td>
<td>2.5%</td>
<td>3.2%</td>
<td>2.0%</td>
<td>0.7%</td>
<td>0.3%</td>
</tr>
</tbody>
</table>


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Non-farm labor productivity growth last quarter slowed to 1.1% from the heady, upwardly revised 4.3% growth rate during 1Q. The gain was slightly ahead of Consensus expectations for 0.8% growth. Revisions extended back to 2003. Due to [...]

2Q U.S. Productivity Up 1.1%, Costs Accelerated

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060808a.jpg" width="353">
Non-farm labor productivity growth last quarter slowed to 1.1% from the heady, upwardly revised 4.3% growth rate during 1Q. The gain was slightly ahead of Consensus expectations for 0.8% growth.
Revisions extended back to 2003. Due to less output growth, as highlighted by the downward revision to GDP reported in July, productivity also was lowered to 2.3% in 2005 from 2.7% estimated initially, to 3.0% in 2004 from 3.4% and to 3.7% in 2003 from 3.9%.
Upward pressure on unit labor costs intensified due to slower productivity growth and faster growth in compensation per hour. Unit labor costs grew 4.2% last quarter, up from a 2.5% increase during 1Q. The 3.3% average rate of advance so far this year rose from 2.0% growth last year. Revisions actually lowered slightly the annual growth in costs from 2004 to 2005.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060808b.jpg" width="353">
Compensation jumped 5.4% after a 6.4% 1Q gain and the 6.1% two-quarter average rate of increase is the fastest in three years. Part of the acceleration is due to downward revisions to compensation growth during 2005 and 2004.
Factory sector productivity grew 3.0% (3.8% y/y) after a 3.7% 1Q increase. Revisions to factory sector productivity also were downward. Compensation growth also was strong last quarter after downward revision to prior years&#39; growth. Factory sector compensation per hour rose 1.7% (3.6% y/y) after a 5.2% 1Q increase that was more than double last month&#39;s estimate.
Unit labor costs in the factory sector nevertheless remained under control. Costs fell 1.2% (-0.2% y/y) after a 1.4% 1Q rise. The stability of recent labor cost pressures compares with a 0.5% gain during 2005 revised from 1.7%, and a 0.1% gain during 2004 revised from -3.1%.
Colleges Need To Learn about Productivity a speech by Fed Bank President William Poole is available <a href="http://stlouisfed.org/publications/re/2006/a/pages/pres_message.html"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EC/@EC02/@EC02.HTM">Non-farm Business Sector</a> (SAAR)</th>
<th scope="col">2Q&#39; 06</th>
<th scope="col">1Q &#39;06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Output per Hour</td>
<td>1.1%</td>
<td>4.3%</td>
<td>2.4%</td>
<td>2.3%</td>
<td>3.0%</td>
<td>3.7%</td>
</tr>
<tr>
<td class="firstcol">Compensation per Hour</td>
<td>5.4%</td>
<td>6.4%</td>
<td>5.7%</td>
<td>4.4%</td>
<td>3.6%</td>
<td>4.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unit Labor Costs</td>
<td>4.2%</td>
<td>2.5%</td>
<td>3.2%</td>
<td>2.0%</td>
<td>0.7%</td>
<td>0.3%</td>
</tr>
</tbody>
</table>
Small Business Optimism Recovered 
by <a href="/comment/Moeller.html">Tom Moeller</a> August 8, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060808c.jpg" width="353">
Small business optimism last month recovered most of the June decline with a 1.4% rise, according to the National Federation of Independent Business (NFIB). Nevertheless, the average level of the NFIB index this year remained 2.5% below the 2005 average.
During the last ten years there has been a 70% correlation between the level of the NFIB index and the two quarter change in real GDP.
Respondents expecting the economy to improve rose modestly m/m but remained near the lowest level since early 2001.
The percentage of firms planning to increase employment improved markedly m/m but the number of firms currently with one or more job openings slipped. During the last ten years there has been a 72% correlation between the NFIB percentage and the y/y change in nonfarm payrolls.
The percent planning to raise capital expenditures rose to 31%, about the same as last year..The percentage of firms planning to raise average selling prices rose back to 30% and the percentage of firms actually raising prices was stable m/m at 23%. During the last ten years there has been a 60% correlation between the change in the producer price index and the level of the NFIB price index.
About 24 million businesses exist in the United States. Small business creates 80% of all new jobs in America.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S7/@S7.HTM">Nat&#39;l Federation of Independent Business</a></th>
<th scope="col">July</th>
<th scope="col">June</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
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<td class="firstcol">Small Business Optimism Index (1986=100)</td>
<td>98.1</td>
<td>96.7</td>
<td>-3.0%</td>
<td>101.6</td>
<td>104.6</td>
<td>101.3</td>
</tr>
</tbody>
</table>
Weekly Chain Store Sales Slipped As Gasoline Prices Rose 
by <a href="/comment/Moeller.html">Tom Moeller</a> August 8, 2006


<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060808e.jpg" width="353">
Weekly chain store sales slipped 0.2% last week after two weeks of moderate increase, according to the International Council of Shopping Centers (ICSC)-UBS survey.
Sales in early August started the month 0.4% above the July average which fell 0.6% from June.
During the last ten years there has been a 47% correlation between the y/y change in chain store sales and the change in nonauto retail sales less gasoline.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.
The leading indicator of chain store sales from ICSC-UBS fell another 0.4% (-2.2% y/y) in the latest week. It was the third decline in the last four weeks.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060808d.jpg" width="353">
Retail gasoline prices opened the month with a three cent rise to $3.04 (28.3% y/y) for regular unleaded gas compared to a July average of $2.98. In spot market trading yesterday, gasoline prices fell moderately but the shutdown of supplies from Prudhoe Bay lifted Alaskan North Slope prices $2.22 to $75.68 per barrel (22.4% y/y).
The new Short-Term Energy Outlook from the U.S. Energy Information Administration is available <a href="http://www.eia.doe.gov/emeu/steo/pub/contents.html"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">08/05/06</th>
<th scope="col">07/29/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>470.2</td>
<td>471.2</td>
<td>2.5%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>
  Industrial Production Falters in Germany: Forges Ahead in Turkey, Hungary and Slovakia  
by <a href="/comment/Curley.html">Louise Curley</a> August 8, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060808j.jpg" width="353">
Contrary to expectations, industrial production in Germany fell 0.4% to 108.2 (2000=100) in June from 108.6 in May. While there is reason to believe that high oil prices and the strength of the euro will eventually, slow world demand for German goods and hence, production, the decline in production in June has not been large enough to change the underlying positive trend. The trend in production computed and published by the German Statistical Office is shown in the first chart together with the seasonally and working day adjusted data. The trend value for June is 108.3, compared with 107.9 for May.
In the emerging countries, Hungary, Slovakia and Turkey, industrial production continues to forge ahead. Production in Slovakia was up 0.21% in June from May, in Hungary, 1.78% and in Turkey, 2.20%. In all three countries, industrial production in June averaged 10-12% above June, 2005 in contrast with Germany&#39;s whose year over year growth in production was 4.5%. The contrast between the growth in industrial production in Turkey and in Germany is shown in the second chart and the similarity between the growth in production in Slovakia and Hungary is shown in the third chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060808f.jpg" width="353">
Indexes only tell us how a particular level of a series varies from a base value. Thus, the 108.2 of industrial production in Germany in June only tells us that production is 8.2% above whatever the average level of production in 2000 was. If we want absolute values that are comparable, we have to look elsewhere. To compare the sizes of these four countries we have chosen to use the GDP expressed in constant prices and constant exchange rates.. For the three emerging countries this value is listed in the National Account Section of each country in terms of 1995 prices and 1995 exchange rate. In the case of Germany, this value is given in the G10 Data Base and is in terms of 2000 prices and exchange rate.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060808g.jpg" width="353">
In 2005, the dollar value at constant exchange rates of real GDP in Germany was $1,972 billion; for Turkey, $259 billion; Hungary, $67 billion; and Slovakia, $26 billion. In 2000, the comparable dollar values were $1,904 billion for Germany; Turkey, $210 billion; Hungary, $55 billion; and Slovakia, $20 billion. The percentage changes between 2000 and 2005 were 3.6% for Germany, 23.5% for Turkey, 22.7% for Hungary and 23.2% for Slovakia. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Industrial Production (2000=100)</th>
<th scope="col">Jun&nbsp; 06</th>
<th scope="col">May 06</th>
<th scope="col">Jun 05</th>
<th scope="col">M/M %</th>
<th scope="col">Y/Y %</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Germany&nbsp;</td>
<td>108.2</td>
<td>108.6</td>
<td>103.5</td>
<td>-0.37</td>
<td>4.54</td>
<td>103.7</td>
<td>100.8</td>
<td>98.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Trend</td>
<td>108.3</td>
<td>107.9</td>
<td>102.3</td>
<td>0.37</td>
<td>4.84</td>
<td>103.6</td>
<td>100.9</td>
<td>98.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Slovakia</td>
<td>142.6</td>
<td>142.3</td>
<td>127.4</td>
<td>0.21</td>
<td>11.93</td>
<td>129.1</td>
<td>124.6</td>
<td>119.6</td>
</tr>
<tr>
<td class="firstcol">Hungary</td>
<td>143.1</td>
<td>140.6</td>
<td>129.5</td>
<td>1.78</td>
<td>10.50</td>
<td>129.9</td>
<td>120.9</td>
<td>113.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Turkey *</td>
<td>139.1</td>
<td>136.1</td>
<td>125.0</td>
<td>2.20</td>
<td>11.29</td>
<td>125.7</td>
<td>119.3</td>
<td>108.7</td>
</tr>
</tbody>
</table>
Federal Funds Rate Steady at 5.25% 
by <a href="/comment/Moeller.html">Tom Moeller</a> August 8, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060808i.jpg" width="353">
The Federal Open Market Committee held steady the target interest rate for Federal funds at 5.25% at today&#39;s meeting. Voting against the decision, after seventeen 25 basis point increases since June 2004, was Jeffrey M. Lacker who preferred an increase of 25 basis points in the federal funds rate target.
The discount rate also held steady at 6.25%.
Today&#39;s decision was widely expected by analysts.
The Fed&#39;s rationale for leaving rates unchanged was that &quot;Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.&quot;<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060808h.jpg" width="353">
Moreover, &quot;... inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.&quot;
For the complete text of the Fed&#39;s latest press release please follow this <a href="http://www.federalreserve.gov/boarddocs/press/monetary/2006/20060808/default.htm">link</a>.
The accompanying chart plots the U.S. economy&#39;s actual rate of growth versus its so called &quot;potential&quot;, i.e., growth in the labor force plus the growth in labor&#39;s productivity. The figures are updated for this morning&#39;s downward revisions to recent productivity and indicate that GDP growth of 3.5% trailed its potential of 4.0%.
The Taylor Rule: A Guidepost for Monetary Policy? from the Federal Reserve Bank of Cleveland can be found <a href="http://www.clevelandfed.org/Research/Com2003/0703.pdf">here</a>.
Monetary Policy in a Global Environment from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-12-13.html">here</a>.



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Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060807c.jpg" width="353">
The Japanese indexes of business conditions--the Diffusion Indexes and the Composite Indexes--are designed to facilitate the analysis of business cycles. The diffusion indexes aggregate the direction of changes of selected series to detect a business cycle phase, while the composite indexes aggregate the percentage changes of selected series to detect the volume of output as an indication of the strength or weakness of the cycle.
Both the Diffusion and the Composite indexes are classified as Leading, Coincident and Lagging. The leading indicators are generally used as predictors. They usually precede the coincident indicators by a few months. The lagging indicators are used to confirm turning points.
As reported, the diffusion indexes are extremely volatile. For instance, the latest report for the leading diffusion index is 50% for June, down from 77.3% in May. If we take, instead, a three month moving average, the June figures is 60.6% or the same as May. (See the first chart which shows the monthly values of the leading diffusion index and the three months moving averages.) A value of a diffusion index above 50% indicates expansion while a value below indicates a contraction. The President of the ESRI (Economic and Social Research Institute) has determined that the current cycle is dated from the trough of the last cycle--January, 2002. Thus the current expansion has been in progress for 43 months. With the leading indicator steady and the coincident and lagging diffusion indexes still showing strength, the expansion is likely to continue, for a few months, at least. The longest expansion on record is that from October, 1965 to July, 1970 a total of 57 months.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060807d.jpg" width="353">
The composite leading indicator also declined in June from 108.2 (2000=100) in May to 106.2. but the three month moving average for June was 107.3, compared with 106.5 in May. The coincident composite index is also an indicator of the phase of the cycle. If it is rising (falling), the economic cycle is considered to be in the expansion (contraction) phase. In addition, the quarterly average of the composite coincident index is a good indicator of real gross domestic product as shown in the second chart. (The correlation between the two is .85.) Thus rise in the composite coincident index suggests a continued rise in real GDP for the second quarter. The first estimate of the second quarter GDP is expected on August 11.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Japan</th>
<th scope="col">Jun&nbsp; 06</th>
<th scope="col">May 06</th>
<th scope="col">Jun 05</th>
<th scope="col">M/M</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Diffusion Indexes&nbsp;(%)</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp; Leading Indicators&nbsp;</td>
<td>50.0</td>
<td>77.3</td>
<td>58.3</td>
<td>-27.3</td>
<td>-8.3*</td>
<td>55.2</td>
<td>59.4</td>
<td>59.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Coincident Indicators</td>
<td>88.9</td>
<td>80.0</td>
<td>100.0</td>
<td>8.9</td>
<td>-11.1*</td>
<td>71.6</td>
<td>61.4</td>
<td>74.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Lagging Indicators</td>
<td>75.0</td>
<td>80.0</td>
<td>83.3</td>
<td>-5.0</td>
<td>-8.2*</td>
<td>72.2</td>
<td>77.8</td>
<td>68.8</td>
</tr>
<tr class="odd">
<td class="firstcol">Composite Indicators (2000=100)</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp; Leading Indicators&nbsp;</td>
<td>106.2</td>
<td>108.2</td>
<td>102.5</td>
<td>-1.94</td>
<td>3.71</td>
<td>102.8</td>
<td>103.1</td>
<td>96.9</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Coincident Indicators</td>
<td>111.2</td>
<td>110.3</td>
<td>107.6</td>
<td>0.82</td>
<td>3.35</td>
<td>107.7</td>
<td>105.2</td>
<td>98.5</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Lagging Indicators</td>
<td>124.0</td>
<td>125.3</td>
<td>120.7</td>
<td>-1.04</td>
<td>2.73</td>
<td>119.8.</td>
<td>114.2</td>
<td>103.3</td>
</tr>
</tbody>
</table>
</body>
</html>

The Japanese indexes of business conditions--the Diffusion Indexes and the Composite Indexes--are designed to facilitate the analysis of business cycles. The diffusion indexes aggregate the direction of changes of selected series to [...]

Japan's Business Cycle Indicators

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060807a.jpg" width="353">
U.S. real GDP growth of 2.5% last quarter disappointed due to subtractions from the investment side of the ledger. A 0.1 percentage point subtraction due to lower business spending on equipment &amp; software (-1.0% AR, +6.9% y/y) was the first q/q subtraction exerted since early 2003 while a 0.4 point subtraction from residential investment (-6.3% AR, -0.2% y/y) was the third in a row.
The economy&#39;s mainstay, consumer spending, also slowed somewhat to a 2.5% growth rate in 2Q from 3.4% growth during the prior four quarters, but a recent recovery in consumer sentiment, roughly 2% growth in real disposable income, and a possible end to the hikes in interest rates combine to suggest positive growth.
It&#39;s the sizzle that has been removed from the U.S. economy&#39;s growth potential. Since late 2003, business spending on equipment &amp; software has been adding more than 0.5 percentage to GDP growth as residential investment added about the same amount.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060807b.jpg" width="353">
Unbridled expansion? Bubbles waiting to burst? Perhaps, but additions of this magnitude have been seen before in the case of housing, and actually have been quite moderate in the case of business investment.
During the last five years real housing investment grew at an annual rate of 6.2%. A comparable, and even stronger, period of growth in the 1980s indeed was followed by bust. The robust expansion during the 1990s, however, was followed merely by slower growth. As for business fixed investment, it&#39;s up only an average 3.5% during the last five years. Indeed, growth during the four quarters ending in 1Q was revised lower to 7.4% from 8.9% reported in June. While improved, that growth probably was restrained by a moderate, but continuing, expansion of business&#39; profit margins (which also were revised down). Arguing against a pending bust is that during the period, business net cash flow surged.
It&#39;s been said that forecasting is very difficult, especially when it&#39;s about the future. And now is certainly not the time to minimize the difficulties given higher oil prices, geopolitical risks and recent increases in interest rates. The current wisdom is that U.S. economic growth will continue at roughly a 3% pace next year despite somewhat slower growth in personal consumption, a halving of the growth in business investment and a further decline in housing. An improved foreign trade account is expected to be a modest offset to these diminutions. Stay tuned.
Forecasting Professional Forecasters from the Federal Reserve Board is available <a href="http://www.federalreserve.gov/pubs/feds/2006/200610/200610abs.html">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM">Chained 2000$, % AR</a></th>
<th scope="col">2Q &#39;06</th>
<th scope="col">1Q &#39;06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">GDP</td>
<td>2.5%</td>
<td>5.6%</td>
<td>3.5%</td>
<td>3.2%</td>
<td>3.9%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Inventory Effect</td>
<td>0.4%</td>
<td>-0.0%</td>
<td>0.6%</td>
<td>-0.3%</td>
<td>0.4%</td>
<td>0.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Final Sales</td>
<td>2.1%</td>
<td>5.6%</td>
<td>2.9%</td>
<td>3.5%</td>
<td>3.5%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Foreign Trade Effect</td>
<td>&nbsp;0.3%</td>
<td>-0.0%</td>
<td>-0.1%</td>
<td>-0.1%</td>
<td>-0.5%</td>
<td>-0.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic Final Demand</td>
<td>1.6%</td>
<td>5.4%</td>
<td>3.0%</td>
<td>3.6%</td>
<td>4.0%</td>
<td>2.8%</td>
</tr>
<tr>
<td class="firstcol">Chained GDP Price Index</td>
<td>3.3%</td>
<td>3.3%</td>
<td>3.3%</td>
<td>3.0%</td>
<td>2.8%</td>
<td>2.1%</td>
</tr>
</tbody>
</table>


</html>

U.S. real GDP growth of 2.5% last quarter disappointed due to subtractions from the investment side of the ledger. A 0.1 percentage point subtraction due to lower business spending on equipment & software (-1.0% AR, +6.9% y/y) was the [...]

Forecast: Investment Spending on the Wane

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060807a.jpg" width="353">
U.S. real GDP growth of 2.5% last quarter disappointed due to subtractions from the investment side of the ledger. A 0.1 percentage point subtraction due to lower business spending on equipment &amp; software (-1.0% AR, +6.9% y/y) was the first q/q subtraction exerted since early 2003 while a 0.4 point subtraction from residential investment (-6.3% AR, -0.2% y/y) was the third in a row.
The economy&#39;s mainstay, consumer spending, also slowed somewhat to a 2.5% growth rate in 2Q from 3.4% growth during the prior four quarters, but a recent recovery in consumer sentiment, roughly 2% growth in real disposable income, and a possible end to the hikes in interest rates combine to suggest positive growth.
It&#39;s the sizzle that has been removed from the U.S. economy&#39;s growth potential. Since late 2003, business spending on equipment &amp; software has been adding more than 0.5 percentage to GDP growth as residential investment added about the same amount.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060807b.jpg" width="353">
Unbridled expansion? Bubbles waiting to burst? Perhaps, but additions of this magnitude have been seen before in the case of housing, and actually have been quite moderate in the case of business investment.
During the last five years real housing investment grew at an annual rate of 6.2%. A comparable, and even stronger, period of growth in the 1980s indeed was followed by bust. The robust expansion during the 1990s, however, was followed merely by slower growth. As for business fixed investment, it&#39;s up only an average 3.5% during the last five years. Indeed, growth during the four quarters ending in 1Q was revised lower to 7.4% from 8.9% reported in June. While improved, that growth probably was restrained by a moderate, but continuing, expansion of business&#39; profit margins (which also were revised down). Arguing against a pending bust is that during the period, business net cash flow surged.
It&#39;s been said that forecasting is very difficult, especially when it&#39;s about the future. And now is certainly not the time to minimize the difficulties given higher oil prices, geopolitical risks and recent increases in interest rates. The current wisdom is that U.S. economic growth will continue at roughly a 3% pace next year despite somewhat slower growth in personal consumption, a halving of the growth in business investment and a further decline in housing. An improved foreign trade account is expected to be a modest offset to these diminutions. Stay tuned.
Forecasting Professional Forecasters from the Federal Reserve Board is available <a href="http://www.federalreserve.gov/pubs/feds/2006/200610/200610abs.html"> here</a>. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM">Chained 2000$, % AR</a></th>
<th scope="col">2Q &#39;06</th>
<th scope="col">1Q &#39;06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">GDP</td>
<td>2.5%</td>
<td>5.6%</td>
<td>3.5%</td>
<td>3.2%</td>
<td>3.9%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Inventory Effect</td>
<td>0.4%</td>
<td>-0.0%</td>
<td>0.6%</td>
<td>-0.3%</td>
<td>0.4%</td>
<td>0.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Final Sales</td>
<td>2.1%</td>
<td>5.6%</td>
<td>2.9%</td>
<td>3.5%</td>
<td>3.5%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Foreign Trade Effect</td>
<td>&nbsp;0.3%</td>
<td>-0.0%</td>
<td>-0.1%</td>
<td>-0.1%</td>
<td>-0.5%</td>
<td>-0.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic Final Demand</td>
<td>1.6%</td>
<td>5.4%</td>
<td>3.0%</td>
<td>3.6%</td>
<td>4.0%</td>
<td>2.8%</td>
</tr>
<tr>
<td class="firstcol">Chained GDP Price Index</td>
<td>3.3%</td>
<td>3.3%</td>
<td>3.3%</td>
<td>3.0%</td>
<td>2.8%</td>
<td>2.1%</td>
</tr>
</tbody>
</table>
 Japan's Business Cycle Indicators  
by <a href="/comment/Curley.html">Louise Curley</a> August 7, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060807c.jpg" width="353">
The Japanese indexes of business conditions--the Diffusion Indexes and the Composite Indexes--are designed to facilitate the analysis of business cycles. The diffusion indexes aggregate the direction of changes of selected series to detect a business cycle phase, while the composite indexes aggregate the percentage changes of selected series to detect the volume of output as an indication of the strength or weakness of the cycle.
Both the Diffusion and the Composite indexes are classified as Leading, Coincident and Lagging. The leading indicators are generally used as predictors. They usually precede the coincident indicators by a few months. The lagging indicators are used to confirm turning points.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060807d.jpg" width="353">
As reported, the diffusion indexes are extremely volatile. For instance, the latest report for the leading diffusion index is 50% for June, down from 77.3% in May. If we take, instead, a three month moving average, the June figures is 60.6% or the same as May. (See the first chart which shows the monthly values of the leading diffusion index and the three months moving averages.) A value of a diffusion index above 50% indicates expansion while a value below indicates a contraction. The President of the ESRI (Economic and Social Research Institute) has determined that the current cycle is dated from the trough of the last cycle--January, 2002. Thus the current expansion has been in progress for 43 months. With the leading indicator steady and the coincident and lagging diffusion indexes still showing strength, the expansion is likely to continue, for a few months, at least. The longest expansion on record is that from October, 1965 to July, 1970 a total of 57 months.
The composite leading indicator also declined in June from 108.2 (2000=100) in May to 106.2. but the three month moving average for June was 107.3, compared with 106.5 in May. The coincident composite index is also an indicator of the phase of the cycle. If it is rising (falling), the economic cycle is considered to be in the expansion (contraction) phase. In addition, the quarterly average of the composite coincident index is a good indicator of real gross domestic product as shown in the second chart. (The correlation between the two is .85.) Thus rise in the composite coincident index suggests a continued rise in real GDP for the second quarter. The first estimate of the second quarter GDP is expected on August 11.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Japan</th>
<th scope="col">Jun&nbsp; 06</th>
<th scope="col">May 06</th>
<th scope="col">Jun 05</th>
<th scope="col">M/M</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Diffusion Indexes&nbsp;(%)</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp; Leading Indicators&nbsp;</td>
<td>50.0</td>
<td>77.3</td>
<td>58.3</td>
<td>-27.3</td>
<td>-8.3*</td>
<td>55.2</td>
<td>59.4</td>
<td>59.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Coincident Indicators</td>
<td>88.9</td>
<td>80.0</td>
<td>100.0</td>
<td>8.9</td>
<td>-11.1*</td>
<td>71.6</td>
<td>61.4</td>
<td>74.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Lagging Indicators</td>
<td>75.0</td>
<td>80.0</td>
<td>83.3</td>
<td>-5.0</td>
<td>-8.2*</td>
<td>72.2</td>
<td>77.8</td>
<td>68.8</td>
</tr>
<tr class="odd">
<td class="firstcol">Composite Indicators (2000=100)</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp; Leading Indicators&nbsp;</td>
<td>106.2</td>
<td>108.2</td>
<td>102.5</td>
<td>-1.94</td>
<td>3.71</td>
<td>102.8</td>
<td>103.1</td>
<td>96.9</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Coincident Indicators</td>
<td>111.2</td>
<td>110.3</td>
<td>107.6</td>
<td>0.82</td>
<td>3.35</td>
<td>107.7</td>
<td>105.2</td>
<td>98.5</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Lagging Indicators</td>
<td>124.0</td>
<td>125.3</td>
<td>120.7</td>
<td>-1.04</td>
<td>2.73</td>
<td>119.8.</td>
<td>114.2</td>
<td>103.3</td>
</tr>
</tbody>
</table>


</html>

Carol Stone, CBE

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060804d.jpg" width="353">
We last wrote about the Canadian labor force four months ago and we extolled the 31-year low in unemployment, 6.3% in March. After an uptick in April, the rate dropped to another 31-year low of 6.1% in both May and June. But July saw it climb back to 6.4%. Part of the rise is explained by an increase in participation, particularly among women. This increase in the number of people willing to work met with a modest decrease in employment by 5,500 after a 4,600 loss in June. The resulting employment rate (employment as a % of population) fell to 63.0%, the lowest since April.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060804e.jpg" width="353">
The press reports note that the fall in employment and the rise in unemployment were not expected and are therefore very dramatic. But these developments come in the wake of an extraordinary employment gain of 96,700 in May. That was the second largest monthly increase since 1976, with the largest in this span just a bit more, 97,000, in January 2002. So it is hard not to expect some pause to follow that big move. And what we have in these two latest months is minuscule, 0.03% each time, so it&#39;s more that employment stabilized rather than &quot;falling&quot;.
In the big May rise, several industry groups participated, particularly finance and related services, health care and public administration. There were also notable gains in professional services, culture &amp; recreation and accommodations &amp; food services. In the subsequent months, only one, professional services, lost all of its May increase. Others grew in at least one of June or July; accommodation and food services increased in both. The total services sector grew 1.1% in the last three months and is up 2.9% over a year ago.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060804f.jpg" width="353">
Goods-producing industries are not so strong, as a brief flurry in manufacturing back in the spring faded quickly. Mining and construction have stronger trends, but mining is small -- roughly 325,000 employees all together -- so 7% growth there over a year ago doesn&#39;t add many total workers. Construction has more impact, though, and it too is up more than 7% year-on-year, adding almost 72,000 workers. So there is diverse growth in Canadian employment opportunities and a two-month pause hardly indicates that these gains have stopped in their tracks. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/CANSIM/@C6/@C601/@C601.HTM">Canada (Seasonally Adjusted)</a></th>
<th scope="col">Jul 2006</th>
<th scope="col">June 2006</th>
<th scope="col">May 2006</th>
<th scope="col">Year Ago</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Unemployment Rate (%)</td>
<td>6.4</td>
<td>6.1</td>
<td>6.1</td>
<td>6.8</td>
<td>6.8</td>
<td>7.2</td>
<td>7.6</td>
</tr>
<tr>
<td class="firstcol">Participation Rate (%)</td>
<td>67.3</td>
<td>67.2</td>
<td>67.3</td>
<td>67.2</td>
<td>67.2</td>
<td>67.5</td>
<td>67.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Employment (Change, 000s/%)</td>
<td>-5.5</td>
<td>-4.6</td>
<td>+96.7</td>
<td>2.0%</td>
<td>1.4%</td>
<td>1.8%</td>
<td>2.4%</td>
</tr>
<tr>
<td class="firstcol">Goods-Producing </td>
<td>-7.4</td>
<td>-34.7</td>
<td>-9.8</td>
<td>-0.6%</td>
<td>0.2%</td>
<td>1.7%</td>
<td>1.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Service-Producing</td>
<td>+1.8</td>
<td>+30.2</td>
<td>+106.4</td>
<td>2.9%</td>
<td>2.1%</td>
<td>1.8%</td>
<td>2.7%</td>
</tr>
</tbody>
</table>
</body>
</html>

We last wrote about the Canadian labor force four months ago and we extolled the 31-year low in unemployment, 6.3% in March. After an uptick in April, the rate dropped to another 31-year low of 6.1% in both May and June. But July saw [...]

Pause in Canada Labor Market Advance

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060804c.jpg" width="353">
July nonfarm payrolls rose 113,000 and the increase fell short of Consensus expectations for a 142,000 gain. Revisions increased slightly the rise in June payrolls to 124,000 and the rise in May payrolls to 100,000.
Year to date payrolls have risen an average 140,000 per month versus an average of 165,000 last year and an average 175,000 during 2004.
Average hourly earnings rose the same 0.4% as a downwardly revised 0.4% June gain but exceeded expectations for a 0.3% rise. The increase in factory sector earnings moderated to 0.1% (1.5% y/y) from the 0.2% increase in June.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060804b.jpg" width="353">
From the household survey the unemployment rate rose to 4.8% versus an expected 4.6%. It was the highest level since February and the increase reflected a 34,000 (+1.6% y/y) decline in employment which followed a 387,000 jump during June. The labor force rose 213,000 (1.3% y/y) as the labor force participation rate remained up at 66.2% though the rate for adult males stayed low at 75.7%. The participation rate for females over 20 rose to a three year high of 60.8%.
The breadth of one month gain in private payrolls fell sharply to 53.2% in July, the lowest since last September. In the factory sector the one month breadth of gain fell to a less-than break even 45.2%.
Factory sector payrolls reversed most of the prior month&#39;s gain with a 15,000 decline. Jobs in the computer &amp; electronic products industry fell 8,200 (+0.2% y/y) and the number of motor vehicle &amp; parts jobs fell 7,900 (+0.4% y/y). <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060804a.jpg" width="353">
Private service-producing jobs rose 115,000 (1.5% y/y), improved from an upwardly revised 86,000 June increase. Retail trade sector jobs continued weak and were unchanged (-0.6% y/y) after several months of decline. Financial sector jobs rose 6,000 (2.2% y/y) and professional &amp; business services employment rose 43,000 (2.7% y/y). Temporary help services jobs fell for the fifth month this year, by 2,400 (+3.1% y/y). Jobs in education &amp; health services rose 24,000 (2.1% y/y).
Construction employment rose 6,000 (3.0% y/y) following two months of moderate decline. Year to year growth in residential construction jobs moderated further to 2.9% from the peak of 6.0% last year and 7.0% during 2004. Growth in nonresidential construction jobs picked up to 5.5% from 1.7% last year and negative growth in 2004.
The workweek remained elevated at 33.9 hours in private industry versus the 2Q level of 33.9.
Click <a href="changes.pdf"> here</a> for The Unemployment Effects of Proposed Changes in Social Security&#39;s &quot;Normal Retirement Age.&quot; <span style="FONT-SIZE: 10pt; FONT-FAMILY: Verdana; mso-fareast-font-family: &#39;Times New Roman&#39;; mso-ansi-language: EN-US; mso-fareast-language: EN-US; mso-bidi-language: AR-SA; mso-bidi-font-family: &#39;Times New Roman&#39;">This paper was published by the National Association for Business Economics (<a href="http://www.nabe.com/">www.nabe.com</a>) in the April 2006 issue of the NABE journal Business Economics.
Participation Dynamics: The More, the Merrier is from the Federal Reserve Bank of St. Louis and it can be found <a href="http://research.stlouisfed.org/publications/iet/20060801/cover.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EB/@EB01/@EB01.HTM">Employment</a></th>
<th scope="col">July</th>
<th scope="col">June</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Payroll Employment</td>
<td>113,000</td>
<td>124,000</td>
<td>1.3%</td>
<td>1.5%</td>
<td>1.1%</td>
<td>-0.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Manufacturing</td>
<td>-15,000</td>
<td>22,000</td>
<td>0.1%</td>
<td>-0.6%</td>
<td>-1.3%</td>
<td>-4.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Average Weekly Hours</td>
<td>33.9</td>
<td>33.9</td>
<td>33.8 (July &#39;05)</td>
<td>33.8</td>
<td>33.7</td>
<td>33.7</td>
</tr>
<tr>
<td class="firstcol">Average Hourly Earnings</td>
<td>0.4%</td>
<td>0.4%</td>
<td>3.8%</td>
<td>2.8%</td>
<td>2.1%</td>
<td>2.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment Rate</td>
<td>4.8%</td>
<td>4.6%</td>
<td>5.0% (July &#39;05)</td>
<td>5.1%</td>
<td>5.5%</td>
<td>6.0%</td>
</tr>
</tbody>
</table>
</body>
</html>

July nonfarm payrolls rose 113,000 and the increase fell short of Consensus expectations for a 142,000 gain. Revisions increased slightly the rise in June payrolls to 124,000 and the rise in May payrolls to 100,000. Year to date [...]

U.S. Payrolls & Wages Moderate

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

Global freight costs are on the rise while supply chain pressures are contained

Accelerating positive economic surprises in the G10 are boosting the global economy

Considerably more monetary ease expected from US and UK as Japan tightens

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

AI boosting US investment in data centers

US productivity growth has been significantly faster than in other major economies

Consumers' short-term US inflation expectations still elevated while longer-term expectations of financial markets are steady

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

Job openings less than the number unemployed in July for first time since 2021

Reaccelerating goods price inflation along with sticky services inflation clouds the outlook

Falling oil prices aren't pulling down inflation expectations, pointing to a boost from increased tariffs

Equity market exuberance outpacing macroeconomic data

Apart from Japan, Blue Chip forecasters expect further sizable monetary easing

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Andrew Cates

**The Global Monetary Policy Consensus**
The latest Blue Chip Financial Forecasts survey points to a notably more balanced global monetary policy outlook over the coming year. In contrast to the pronounced easing bias that dominated much of the past two years, expectations are now more symmetric, with a similar number of central banks projected to raise rates as to ease policy. Japan is seen delivering further tightening, while Canada is expected to initiate an interest rate hike in coming months. In Australia’s case, this tightening guidance was reinforced this week, with the Reserve Bank lifting its policy rate by 25 basis points. Elsewhere, and in contrast, the euro area, UK and US are expected to move in the opposite direction.

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**US manufacturing activity**
The second chart underscores the recent improvement in US economic momentum, highlighted by an unexpected surge in the January ISM manufacturing PMI. After spending much of the past year hovering below the 50 threshold consistent with stagnation, the index jumped sharply back into expansionary territory, signalling a renewed pickup in industrial activity. This rebound has coincided with a broader run of stronger-than-anticipated US economic data, as reflected in the upswing in the Citigroup Economic Surprise Index. Together, these developments point to a US economy that continues to display notable resilience, complicating expectations of monetary easing in the near term.

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**US Bank Lending Standards and Financial Stress** 
The next chart turns to US financial conditions, highlighting the latest readings from the Senior Loan Officer Opinion Survey. The net proportion of banks tightening lending standards on corporate loans and mortgages is now more modest by historical standards, and well below the extremes seen during past episodes of financial stress. Some easing in credit headwinds has occurred alongside relatively subdued readings on the OFR Financial Stress Index, which continues to hover below its long-run average. Together, these indicators suggest that the US financial system has continued to avoid the kind of acute stress typically associated with sharp slowdowns in credit availability—helping to underpin the recent resilience in economic activity.

260205Z3.jpg

**Semiconductor Sales**
The fourth chart highlights the renewed surge in global semiconductor sales, with momentum strengthening sharply over recent months across the Americas, China and the broader Asia-Pacific region. After the cyclical downturn in 2022–23, sales have rebounded to fresh highs, reflecting a powerful revival in demand for advanced chips and related technologies. This upswing has taken place amid intense investor preoccupation with artificial intelligence, with expectations that AI adoption will drive a sustained wave of capital spending on data centres, cloud infrastructure and high-performance computing. In contrast, semiconductor sales in Europe remain comparatively subdued, reflecting the region’s smaller footprint in high-end chip manufacturing, weaker industrial demand, and the ongoing impact of slower economic growth. While semiconductors are inherently cyclical, markets have increasingly interpreted the current rebound elsewhere as structural rather than purely cyclical—underpinned by the belief that AI represents a transformative and durable source of demand growth.

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**Large-Scale AI Models**
The next chart illustrates the rapid proliferation of large-scale AI models globally, with newly updated data for 2025 pointing to a further sharp acceleration in development activity. The United States continues to lead by a wide margin, while China has also seen a steep rise in model deployment in recent years, underscoring the intensifying technological competition between the two economies. Growth in the UK and other regions has been more modest by comparison, highlighting the increasingly concentrated nature of AI innovation. Taken together with the surge in semiconductor sales, these trends help explain the market’s strong preoccupation with AI as a potential driver of future productivity and investment cycles—although the geographic concentration of activity also raises questions about the uneven distribution of any resulting economic gains.

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**An AI Bubble?** 
The final chart draws on the latest Blue Chip Financial Forecasts special questions, highlighting market participants’ perceptions of the economic gains likely to be delivered by artificial intelligence. While a sizeable share of respondents still believe that financial markets may be overestimating AI’s potential benefits, an increasing proportion now judge current expectations to be broadly accurate, with only a small minority viewing the gains as underestimated. Notably, this represents a softening in scepticism compared with the survey results from last month, when concerns about excessive market optimism were more pronounced. The shift suggests a growing acceptance that AI-related investment and innovation could translate into meaningful economic impacts—though uncertainty remains high around the scale, timing and distribution of these gains.

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Financial markets have experienced renewed gyrations in recent weeks, as shifting geopolitical risks, questions around Federal Reserve independence, renewed talk of US dollar “debasement,” and ongoing enthusiasm surrounding artificial intelligence have combined to drive volatility across asset classes. These cross-currents have also contributed to a degree of rotation away from high-flying technology stocks, as investors reassess valuations and the timing of anticipated AI-driven gains. Against this backdrop, the charts in this week’s COTW highlight several important themes. Policy rate expectations now appear more balanced globally, marking a clear shift away from the one-sided easing bias of the past two years (chart 1), even as resilient US data—underscored by the unexpected jump in the January ISM index and a run of positive economic surprises—continues to complicate the outlook for monetary easing (chart 2). At the same time, US financial conditions remain relatively benign, with limited evidence of widespread credit stress or aggressive tightening in lending standards (chart 3). Meanwhile, the sharp rebound in semiconductor sales and the accelerating rollout of large-scale AI models underscore why investors remain so focused on the AI narrative, even as Europe lags behind due to weaker industrial momentum and a smaller footprint in advanced chip production (charts 4 and 5). Finally, while some scepticism about AI’s ultimate economic impact persists, the latest survey results suggest a moderation in concerns that markets are materially overestimating its gains (chart 6). Taken together, these developments paint a picture of a US economy that remains more resilient than many had anticipated, set against a financial landscape increasingly shaped by powerful—if sometimes competing—narratives around geopolitics, policy, and technological transformation.

Charts of the Week: Balanced Policy, Resilient Data and AI Narratives

Robert Brusca

260206E.jpg

With the December report, Germany’s production and some of the early European industrial production data reveal a good deal of chaos in terms of the embedded trends. On the month, German industrial production fell by 1.9%, with consumer goods output up by 0.5%, capital goods output falling by 5.3%, and intermediate goods output falling by 1.2%. Among the early reporters in the monetary union—France, Spain, and Portugal—only Spain showed an increase in manufacturing IP in December; however, Spanish industrial production is notoriously volatile.

**Broader IP trends in Germany and elsewhere in Europe**
As for other early industrial production reporters, both Sweden and Norway showed strong-to-solid gains in December and each of them showed two-months of gains in a row. Beyond that, sequential growth rates from 12-months to six-months to three-months show accelerating growth in German consumer goods output against decelerating growth for intermediate goods. Real manufacturing output and real sales show mixed results- no clear trends; however, real manufacturing orders in Germany are off the map strong. 

**German manufacturing/industrial Surveys**
German industrial surveys from the IFO for manufacturing shows persistent weakening as well as for IFO manufacturing expectations, and in the EU Commission industrial index in the last three months. More broadly, Germany shows some modest but ongoing step up all of these based on average levels from 12-months to six-months to three-months for IFO expectations and the EU Commission industrial readings with mixed results for other survey readings.

**IP trends in Europe**
For the early reporting EMU members France, Spain, and Portugal, who report industrial production trends, each show mixed monthly trends against ongoing decelerations for manufacturing output over the broader sequential periods (12-month, to 6-month, to 3-month). However, for other Europe, Sweden and Norway, manufacturing trends are steadily accelerating on this broader timeline.

**A feeling of ‘Deja- What?’**
These combinations of opposed trends mixed with a lack of trends leave us with this sense of confusion about what's going on in manufacturing. For Germany, the extreme strength in orders is reassuring since orders should be forward-looking rather than backward-looking or even contemporaneous. But orders can also be a fickle series and so we'll have to watch it to see if the trends for German orders hold up.

**Current quarter-What’s been happening now**
In addition, current quarter growth for Germany actually looks quite good with industrial production up 3.7% at an annual rate in the current quarter, led by output increases in manufacturing against a decline in the intermediate goods output. Real orders in the quarter are surging at a 44% growth rate, while real sales in manufacturing only had a 0.1% uptick at an annual rate. The industrial indicators for Germany in the quarter show weakness or flatness with the only exception being IFO manufacturing expectations that advanced by a small amount. The three EMU members who report industrial production data show positive growth in the just-completed quarter except for Portugal where industrial production is falling at a 2.9% rate in the fourth quarter. Sweden and Norway, European countries but not monetary union members, show a strong 22% annual rate gain in Sweden against the 3% annual rate decline in Norway.

260206.jpg

**Rankings**
**How growth rates stack up…**
Moving away from short-term trends, the rankings of growth rates of these various metrics using 12-month growth rates on data back to 2006, show below-median growth rates for German industrial production and all three of its major sectors. All of them have rankings below the 50% mark where the median resides. Germany’s manufacturing output growth rate is below its median as is the growth of real sales; and once again real manufacturing orders break out and show a stunning 90th percentile standing, extremely strong compared to other growth rates on this period.

**Indicator rankings are poor**
However, the survey based industrial indicators for Germany, ranked based on their index levels, are all extremely weak and much weaker than German sector or other German metrics. The strongest indicator reading is the 29th percentile standing for IFO manufacturing expectations while the current ZEW index, IFO manufacturing index, and the EU Commission industrial readings, all reside below their 15th percentile. The survey rankings suggest that industrial sentiment is in much worse shape than activity and growth.

**IP elsewhere in Europe**
However, the growth ranking of manufacturing industrial production for the reporting EMU members and other European members are all quite solid, with percentile standings ranging from the 66th up to the 93rd percentile.

**Summing up**
From these data, Germany emerges as the weak economy compared with historic norms based on industrial production growth and indicator readings. However, there's a glimpse of positivity from the growth of real orders, and at the same time, some concern about ongoing sentiment for manufacturing in Germany as distinct from actual performance.

Germany

German IP Reveals Chaotic Trends

Winnie Tapasanun

260205X15.jpg

260205Y15.jpg

**Total job openings** fell 5.6% m/m (-12.9% y/y) to 6.542 million in December after a downwardly revised 7.0% decline to 6.928 million in November (previously -4.1% m/m; 7.146 million), according to the Job Openings and Labor Turnover Survey. December marked the third consecutive m/m fall and the lowest level since September 2020. The job openings rate declined to 3.9% in December, the lowest since April 2020, from 4.2% in November, remaining below a record-high 7.4% in March 2022. This rate is calculated as the ratio of job openings to total nonfarm employment plus openings. Significantly, the drop in job openings also lowered the **ratio of job openings to unemployed individuals** to 0.872 in December—the lowest since March 2021—from 0.890 in November, down from 1.085 in December 2024 and a pre-pandemic 1.211 in February 2020. A reading of 0.872 implies there were about 0.87 open jobs per unemployed person—indicating fewer openings than unemployed workers. December was the fifth time in six months that this ratio remained below 1.0.

**Private sector job openings** fell 6.8% (-12.5% y/y) to 5.804 million in December after a 6.6% fall to 6.227 million in November, registering the third successive m/m decline and the lowest level since September 2020. The private sector job openings rate fell to 4.1% in December, the lowest since April 2020, from 4.4% in November. The December m/m decline in private sector openings reflected drops of 27.7% (-36.9% y/y) in financial activities, 20.2% (-25.5% y/y) in professional & business services, 14.4% (-5.1% y/y) in trade, transportation & utilities, and 5.2% (-12.4% y/y) in private educational & health services. To the upside, private sector openings in the following categories rose m/m in December: other services (21.1%; 11.0% y/y), mining & lodging (17.6%; 0.0% y/y), information (13.5%; -4.7% y/y), manufacturing (8.5%; 0.5% y/y), leisure & hospitality (7.5%; -17.2% y/y), and construction (2.8%; 42.4% y/y). Meanwhile, government job openings rose 5.3% (-15.6% y/y) in December, the first m/m rise in three months, after a 10.6% drop in November.

**Total hiring** rebounded 3.4% (-1.5% y/y) to 5.293 million in December, the first m/m increase since September, following a 4.6% decrease to 5.121 million in November. The hiring rate edged up to 3.3% in December from 3.2% in November, though it remained below pre-pandemic levels. **Private sector hiring** rose 3.1% (-0.4% y/y) to 4.978 million in December, the third m/m rise in four months, after a 4.0% decline to 4.826 million in November. The private sector hiring rate rose to 3.7% in December from 3.5% in November, the same as in October and September. The December m/m increase in private sector hiring was led by a 32.1% jump (42.3% y/y) in information, followed by gains of 24.0% (-4.6% y/y) in financial activities, 23.5% (0.0% y/y) in mining & lodging, 6.5% (-4.8% y/y) in private educational & health services, 4.2% (-4.9% y/y) in trade, transportation & utilities, 3.6% (6.1% y/y) in construction, 3.4% (7.9% y/y) in leisure & hospitality, and 1.8% (-4.3% y/y) in manufacturing. To the downside, private sector hiring in professional & business services (-5.2%; +0.5% y/y) and other services (-4.3%; -16.5% y/y) declined m/m in December. Meanwhile, government hiring rebounded 6.4% (-16.3% y/y) in December, the first m/m rise since September, following a 13.5% drop in November.

**Total separations** rose 2.1% (3.3% y/y) to 5.251 million in December after a 1.5% rise to 5.144 million in November, marking the third m/m increase in four months and the highest level since September. The total separations rate edged up to 3.3% after holding at 3.2% in November and October. Private sector separations rose 1.6% (4.2% y/y) to 4.932 million in December, the highest level since June, while government sector separations jumped 10.4% (-9.1% y/y) to 319,000 following two consecutive m/m declines. **Total quits** (voluntary separations initiated by the employee) increased 0.3% (3.5% y/y) to 3.204 million in December, the third m/m rise in four months and the highest level since June, after a 7.4% rebound in November. The quits rate (a measure of workers’ willingness or ability to leave jobs) held at 2.0% in December and November, slightly below 2.3% in February 2020. Private sector quits eased 0.2% (+4.5% y/y) following an 8.4% November rebound. **Layoffs and discharges** (involuntary separations initiated by the employer) increased 3.6% (5.6% y/y) to 1.762 million in December, up for the third time in four months, after an 8.1% drop in November. The layoffs & discharges rate remained at 1.1% in December and November, marginally below 1.3% in February 2020. Private sector layoffs grew 4.3% (7.8% y/y) following a 7.3% November decrease.

The Job Openings and Labor Turnover Survey (JOLTS) data are available in Haver’s **USECON** database.

260205C15.jpg

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- Job openings down 5.6% (-12.9% y/y) to 6.542 mil., third straight m/m decline.
- Hiring up 3.4% (-1.5% y/y) to 5.293 mil., first m/m increase since September.
- Separations rise to a three-month high; quits reach a six-month high; layoffs rebound.

U.S. JOLTS: Openings Drop to Lowest Level Since Sept. ’20; Hiring Rebounds in December

Sandy Batten

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Initial claims for unemployment insurance jumped 22,000 to 231,000 in the week ended January 31 following an unrevised 209,000 in the prior week. The four-week average rose to 212,250 from 206,250. The Action Economics Forecast Survey looked for 213,000 claims to have been filed. Winter Storm Fern and the accompanying very cold temperatures could have provided a temporary boost. Historically speaking, claims remain at low levels.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—increased by 25,000 to 1.844 million in the week ending January 24, from a downwardly revised 1.819 million in the prior week (previously 1.827 million). The insured unemployment rate remained at 1.2% in the week of January 24, unchanged from the previous eight weeks.

The insured unemployment rate varied greatly across individual states and territories. In the week ending January 17, the highest unemployment rates were in Rhode Island (2.83%), New Jersey (2.77%), Massachusetts (2.67%), Washington (2.54%), and Minnesota (2.45%). The lowest rates were in Florida (0.30%), North Carolina (0.42%), Louisiana (0.43%), Alabama (0.46%), and Arkansas (0.47). Rates in other notable states include Illinois (2.15%), California, (2.08%), New York (2.02%), Pennsylvania (1.91%), and Texas (1.09%). These state data 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.

260205C2.jpg

260205D2.jpg

- New claims jumped 22,000 to 231,000, the highest level since December 6.
- Continuing claims rose to 1.844 million from 1.819 million.

U.S. Initial Unemployment Claims Surged in Latest Week

260205E.jpg

German real orders in December adjusted for inflation rose strongly again, gaining 7.8% month-to-month after rising 5.7% month-to-month in November. Foreign orders were up by 5.6% in December compared to 5.2% in November. Domestic orders surged by 10.7% in December after rising 6.4% in November and 10% in October.

**Real sales**
Real sales were mixed in December with overall sales falling 1.4% month-to-month mostly on weakness in capital goods sales.

**Broad categorical acceleration**
Many flows are accelerating this month. Sequential growth rates show acceleration. Total real orders accelerate from a year ago, to the current year, to six-months, and to three-months. Sales growth rates for consumer goods, consumer nondurables, and intermediate goods all show accelerations in gear. The exceptions are foreign orders that are not as strong over six months compared to their 12-month growth. And on the sales side, consumer durables sales and capital goods sales are weak.

**Quarter-to-quarter**
Quarterly annualized growth is complete for Q4 with this report. Foreign orders are the ‘weak flow’ expanding at a 13.6% annual rate – certainly not a weak growth rate. But domestic real orders are up at an astounding 101.9% annual rate. The net impact on the total real orders growth is to lift it to a pace of 44.1%. 

**Order ranking is very strong**
The table provides two rankings: one based on the level of variables and the other based on its year-on-year growth. The rankings this month for real orders overall, foreign, and domestic orders all reside in their top 80th to 90th percentiles- extremely strong based on level or growth. Sales do not follow suit. This gives us some reason to suspect that there is some lumpiness involved in the manufacturing data as distinct from strength. That will be something to watch. Overall mining and manufacturing sales growth is essentially at its historic median at a rank of 49.8. However, capital goods, intermediate goods and manufacturing sales all have rankings at or above their medians - as high as a 61-percentile standing for capital goods.

**Industrial confidence**
Industrial confidence for Germany, France, Italy and Spain (the EU’s big-four economies) show rankings based on these survey levels that are much lower at the 11th percentile for Germany, the 42nd and 36th percentiles, for France and Italy, respectively. Spain scores better with a 61.8 percentile standing on its industrial confidence measure. 

On balance, there is now an accelerating profile that is broad in sales trends and especially strong order trends. Perhaps Europe, under the pressure to stimulate its miliary capabilities, has a core of demand to help drive output ahead more consistently. This is something to watch in the coming months.

Economy in Brief

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