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/060915f.jpg" width="353">
Earlier this week, Louise Curley highlighted the fragility of recent gains in the Japanese economy. She described new weakness in manufacturing orders and some deterioration in consumer confidence. Today, data on flow of funds in the financial system for Q2 2006 add more to the ambiguity about the outlook. For instance, the move by the Bank of Japan away from its zero-interest-rate monetary policy in mid-July was based partly on renewed growth in bank lending. This continues, but other liabilities in the domestic economy have started to weaken again.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915g.jpg" width="353">
The Japanese flow of funds data are not seasonally adjusted, and Q2 is a generally a period of contraction in credit as an old fiscal year has just been closed out and a new one begun. So negative reports for this period are unremarkable in and of themselves. In fact, a striking aspect of these new flow-of-funds data is a quarterly increase in lending to private corporations; at +&yen;1.89 trillion, it&#39;s not large, but it&#39;s the first Q2 increase in the nine years history of this style of Flow of Funds accounts. Q3 and Q4 often see sizable increases in credit transactions. So a 4-quarter total might give us a good idea of the overall strength of lending; indeed, there has been a dramatic upturn in financial institution lending to business on this basis, which reached +&yen;11.35 trillion through Q2, compared to a contraction of &yen;6.02 trillion in Q2 2005 and progressively larger declines going back to early 2003.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915h.jpg" width="353">
But other private-sector uses of credit remain sluggish or erratic. Total liabilities of the domestic nonfinancial sector excluding government fell &yen;32.52 trillion in Q2, yielding a 4-quarter total of -&yen;35.82 trillion -- that is, net paydowns -- actually much worse than the -&yen;5.97 trillion of a year ago. Even total private corporation borrowing was weaker in Q2 2006, -&yen;21.81 trillion, than in Q2 2005, -&yen;18.05 trillion, although the 4-quarter total was positive.
Households have the same pattern, a drop in Q2 2006 that is larger than Q2 2005, but an outright increase in the more recent 4-quarter total contrasting with the liquidation in the year-ago period.
So credit data, as well as real-sector business and consumer indicators, suggest that the economic gains we were all so pleased about earlier this year in Japan are hardly on sure footing.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/JAPAN/@J1/@J109/@J109.HTM">Japan: Flow of Funds, Tril.&yen;</a></th>
<th scope="col">2Q 2006</th>
<th scope="col">1Q 2006</th>
<th scope="col">2Q 2005</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">Total Liabilities, Domestic Nonfin Sector ex Govt</td>
<td>-32.52</td>
<td>+37.12</td>
<td>-25.57</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">&nbsp; 4-Qtr Total</td>
<td>-35.82</td>
<td>-28.87</td>
<td>-5.97</td>
<td>+46.83</td>
<td>+53.10</td>
<td>+25.59</td>
</tr>
<tr class="odd">
<td class="firstcol">Private Nonfin Corporations</td>
<td>-21.81</td>
<td>-1.17</td>
<td>-18.05</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">&nbsp; 4-Qtr Total</td>
<td>+7.37</td>
<td>+11.14</td>
<td>-6.07</td>
<td>+6.17</td>
<td>+2.04</td>
<td>-23.14</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Loans</td>
<td>+1.89</td>
<td>-0.48</td>
<td>-7.00</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; 4-Qtr Total</td>
<td>+11.35</td>
<td>+2.45</td>
<td>-6.02</td>
<td>+2.70</td>
<td>-10.14</td>
<td>-21.84</td>
</tr>
<tr class="odd">
<td class="firstcol">Households</td>
<td>-11.43</td>
<td>+7.45</td>
<td>-7.56</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">&nbsp; 4-Qtr Total</td>
<td>+4.09</td>
<td>+7.96</td>
<td>-1.30</td>
<td>+4.74</td>
<td>-4.36</td>
<td>-1.24</td>
</tr>
</tbody>
</table>
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Earlier this week, Louise Curley highlighted the fragility of recent gains in the Japanese economy. She described new weakness in manufacturing orders and some deterioration in consumer confidence. Today, data on flow of funds in the [...]

Japan's Flow-of-Funds Data for Q2 Add to Questions about Economic Progress

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915i.jpg" width="353">
Consumer sentiment in early September added to the gains of late August, according to the University of Michigan. The mid-month reading rose 2.9% to 84.4 on top of the late-August rise which limited that month&#39;s decline to 3.2%. Consensus expectations for an increase to 84.0.
During the last ten years there has been a 77% correlation between the level of consumer sentiment and the y/y change in real consumer spending and during those ten years sentiment has a 68% correlation with the change in nonfarm payrolls.
Expectations for the economy surged 13.4% m/m to the highest level since January. Expected business conditions next year and over the next five years improved sharply. The expected change in personal finances, however, improved just moderately. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915j.jpg" width="353">
The reading of current economic conditions fell sharply m/m to the lowest level since last October. The current read of personal finances and perceived buying conditions for large household goods both fell.
Consumers&#39; opinion about gov&#39;t economic policy was unchanged for the third month (0.0% y/y). Expected inflation during the next year fell sharply to 3.6%, its lowest level since February. The five to ten year expected rate of inflation also fell to 3.2%, reversing all of the rise during August.
The University of Michigan survey is not seasonally adjusted.The mid-month survey is based on telephone interviews with 250 households nationwide on personal finances and business and buying conditions. The survey is expanded to a total of 500 interviews at month end.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM">University of Michigan</a></th>
<th scope="col">Sept. (Prelim.)</th>
<th scope="col">August</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">Consumer Sentiment</td>
<td>84.4</td>
<td>82.0</td>
<td>9.8%</td>
<td>88.6</td>
<td>95.2</td>
<td>87.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>95.7</td>
<td>103.8</td>
<td>-2.4%</td>
<td>105.9</td>
<td>105.6</td>
<td>97.2</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Expectations</td>
<td>77.1</td>
<td>68.0</td>
<td>21.8%</td>
<td>77.4</td>
<td>88.5</td>
<td>81.4</td>
</tr>
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Consumer sentiment in early September added to the gains of late August, according to the University of Michigan. The mid-month reading rose 2.9% to 84.4 on top of the late-August rise which limited that month's decline to 3.2%. [...]

U.S. Consumer Sentiment Improved Further, Expectations Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915c.jpg" width="353">
Total U.S. industrial output slipped 0.2% last month and that disappointed Consensus expectations for a 0.2% gain. The decline followed an unrevised 0.4% rise during July.
As hot summer temperatures moderated, utility output reversed nearly all of the July spike with a 0.8% (+0.7% y/y) decline.
Factory sector output also cooled and was unchanged after an upwardly revised 0.3% July increase. So far in 3Q factory output is up at a 3.5% rate versus 2Q which rose 5.1% (AR).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915e.jpg" width="353">
Production of durable consumer goods recovered a piece of the July drop and rose 1.2% (-0.3% y/y) as output of automotive products increased 2.0% (-2.8% y/y) and output of appliances &amp; furniture increased 1.2% (-1.7% y/y) after four straight months of decline. Nondurable consumer goods output fell 0.3% (+2.7% y/y).
Business equipment production slipped 0.2% as output of information processing &amp; equipment fell 0.4% (+17.3% y/y).Factory output overall less the hi-tech industries was unchanged (4.5% y/y).
Overall capacity utilization slipped to 82.4% from an upwardly revised 82.7% in August.

<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/output.htm">Production &amp; Capacity</a></th>
<th scope="col">August</th>
<th scope="col">July</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">Industrial Production</td>
<td>-0.2%</td>
<td>0.4%</td>
<td>4.7%</td>
<td>3.2%</td>
<td>4.1%</td>
<td>0.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Manufacturing (NAICS)</td>
<td>0.0%</td>
<td>0.3%</td>
<td>5.6%</td>
<td>3.9%</td>
<td>4.8%</td>
<td>0.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Consumer Goods</td>
<td>0.1%</td>
<td>-0.4%</td>
<td>1.9%</td>
<td>2.1%</td>
<td>2.1%</td>
<td>1.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Business Equipment</td>
<td>-0.2%</td>
<td>2.3%</td>
<td>13.5%</td>
<td>9.1%</td>
<td>9.3%</td>
<td>0.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Capacity Utilization</td>
<td>82.4%</td>
<td>82.7%</td>
<td>80.3% (8/05)</td>
<td>80.1%</td>
<td>78.6%</td>
<td>75.7%</td>
</tr>
</tbody>
</table>
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Total U.S. industrial output slipped 0.2% last month and that disappointed Consensus expectations for a 0.2% gain. The decline followed an unrevised 0.4% rise during July. As hot summer temperatures moderated, utility output reversed [...]

Industrial Production Stalled in August

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915b.jpg" width="353">
In August, the consumer price index (CPI-U) rose an expected 0.2%, half the prior month&#39;s gain. Less food &amp; energy, prices also rose an expected 0.2% for the second month and the gain equaled the average rate of increase during 2006.
Increases in energy prices took a breather last month and rose just 0.2% after the 2.9% July spike. Gasoline prices ticked up just 0.2% (19.6% y/y) to an average $2.95 per gallon but have since declined in September. Last week&#39;s read was $2.62 and spot market trading this week suggests further declines in gasoline prices. Natural gas &amp; electricity prices in August rose 0.2% (9.6% y/y) and the spot price for natural gas in September is down roughly 20% m/m.
Core goods prices rose 0.2% after a 0.1% July decline. On average core goods prices have risen 0.1% in 2006. Apparel prices surged 0.9% (0.3% y/y) after declining in July while furniture &amp; bedding prices rose 0.2% (2.0% y/y). Appliance prices declined 0.1% (+0.9% y/y) and new &amp; used motor vehicle prices were unchanged (0.6% y/y). Tobacco prices fell 0.1% (+2.9% y/y) and medical care commodity prices rose 0.3% (3.9% y/y).
Core services prices rose 0.2%, half the gains of the prior three months. Shelter prices rose a diminished 0.2% (3.8% y/y) as the rental equivalence measure of owners&#39; primary residences rose 0.3% (3.9% y/y) and rents rose 0.4% (3.7% y/y) for the third straight month. Public transportation costs increased 0.3% (5.0% y/y) while education costs surged 0.7% (6.4% y/y). Medical care services prices doubled the prior month&#39;s rate of increase and rose 0.4% (4.4% y/y).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915a.jpg" width="353">
Food &amp; beverage prices rose 0.3% as meat, fish &amp; poultry prices recovered 1.0% (1.5% y/y). Fruit &amp; vegetable prices also surged 1.0% (5.3% y/y) though dairy prices fell 0.8% (-1.6% y/y).
The chained CPI, which adjusts for shifts in the mix of consumer purchases, rose 0.3% while less food &amp; energy prices also rose 0.3%.
U.S. Wage and Price Dynamics: A Limited Information Approach from the Federal Reserve Bank of New York is available <a href="http://www.newyorkfed.org/research/staff_reports/sr256.pdf"> here</a>.
Inflation Targets and Inflation Expectations: Some Evidence from the Recent Oil Shocks from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-22.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/@E8/@E801/@E80101/@E80101.HTM">Consumer Price Index</a> </th>
<th scope="col">August</th>
<th scope="col">July</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">Total&nbsp;</td>
<td>0.2%</td>
<td>0.4%</td>
<td>3.8%</td>
<td>3.4%</td>
<td>2.7%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.8%</td>
<td>2.2%</td>
<td>1.8%</td>
<td>1.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Goods less Food &amp; Energy</td>
<td>0.2%</td>
<td>-0.1%</td>
<td>0.6%</td>
<td>0.5%</td>
<td>-0.9%</td>
<td>-2.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Services less Energy</td>
<td>0.2%</td>
<td>0.4%</td>
<td>3.7%</td>
<td>2.8%</td>
<td>2.8%</td>
<td>2.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Energy</td>
<td>0.3%</td>
<td>2.9%</td>
<td>15.0%</td>
<td>16.9%</td>
<td>10.8%</td>
<td>12.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Food &amp; Beverages</td>
<td>0.3%</td>
<td>0.2%</td>
<td>2.5%</td>
<td>2.4%</td>
<td>3.4%</td>
<td>2.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80113/@E80113.HTM">Chained CPI: Total (NSA)</a> </td>
<td>0.3%</td>
<td>0.1%</td>
<td>3.4%</td>
<td>2.9%</td>
<td>2.5%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.3%</td>
<td>0.0%</td>
<td>2.7%</td>
<td>1.9%</td>
<td>1.7%</td>
<td>1.1%</td>
</tr>
</tbody>
</table>
</body>
</html>

In August, the consumer price index (CPI-U) rose an expected 0.2%, half the prior month's gain. Less food & energy, prices also rose an expected 0.2% for the second month and the gain equaled the average rate of increase during 2006. [...]

CPI Rose An Expected 0.2%

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915b.jpg" width="353">
In August, the consumer price index (CPI-U) rose an expected 0.2%, half the prior month&#39;s gain. Less food &amp; energy, prices also rose an expected 0.2% for the second month and the gain equaled the average rate of increase during 2006.
Increases in energy prices took a breather last month and rose just 0.2% after the 2.9% July spike. Gasoline prices ticked up just 0.2% (19.6% y/y) to an average $2.95 per gallon but have since declined in September. Last week&#39;s read was $2.62 and spot market trading this week suggests further declines in gasoline prices. Natural gas &amp; electricity prices in August rose 0.2% (9.6% y/y) and the spot price for natural gas in September is down roughly 20% m/m.
Core goods prices rose 0.2% after a 0.1% July decline. On average core goods prices have risen 0.1% in 2006. Apparel prices surged 0.9% (0.3% y/y) after declining in July while furniture &amp; bedding prices rose 0.2% (2.0% y/y). Appliance prices declined 0.1% (+0.9% y/y) and new &amp; used motor vehicle prices were unchanged (0.6% y/y). Tobacco prices fell 0.1% (+2.9% y/y) and medical care commodity prices rose 0.3% (3.9% y/y).
Core services prices rose 0.2%, half the gains of the prior three months. Shelter prices rose a diminished 0.2% (3.8% y/y) as the rental equivalence measure of owners&#39; primary residences rose 0.3% (3.9% y/y) and rents rose 0.4% (3.7% y/y) for the third straight month. Public transportation costs increased 0.3% (5.0% y/y) while education costs surged 0.7% (6.4% y/y). Medical care services prices doubled the prior month&#39;s rate of increase and rose 0.4% (4.4% y/y).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915a.jpg" width="353">
Food &amp; beverage prices rose 0.3% as meat, fish &amp; poultry prices recovered 1.0% (1.5% y/y). Fruit &amp; vegetable prices also surged 1.0% (5.3% y/y) though dairy prices fell 0.8% (-1.6% y/y).
The chained CPI, which adjusts for shifts in the mix of consumer purchases, rose 0.3% while less food &amp; energy prices also rose 0.3%.
U.S. Wage and Price Dynamics: A Limited Information Approach from the Federal Reserve Bank of New York is available <a href="http://www.newyorkfed.org/research/staff_reports/sr256.pdf"> here</a>.
Inflation Targets and Inflation Expectations: Some Evidence from the Recent Oil Shocks from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-22.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/@E8/@E801/@E80101/@E80101.HTM">Consumer Price Index</a> </th>
<th scope="col">August</th>
<th scope="col">July</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">Total&nbsp;</td>
<td>0.2%</td>
<td>0.4%</td>
<td>3.8%</td>
<td>3.4%</td>
<td>2.7%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.8%</td>
<td>2.2%</td>
<td>1.8%</td>
<td>1.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Goods less Food &amp; Energy</td>
<td>0.2%</td>
<td>-0.1%</td>
<td>0.6%</td>
<td>0.5%</td>
<td>-0.9%</td>
<td>-2.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Services less Energy</td>
<td>0.2%</td>
<td>0.4%</td>
<td>3.7%</td>
<td>2.8%</td>
<td>2.8%</td>
<td>2.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Energy</td>
<td>0.3%</td>
<td>2.9%</td>
<td>15.0%</td>
<td>16.9%</td>
<td>10.8%</td>
<td>12.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Food &amp; Beverages</td>
<td>0.3%</td>
<td>0.2%</td>
<td>2.5%</td>
<td>2.4%</td>
<td>3.4%</td>
<td>2.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80113/@E80113.HTM">Chained CPI: Total (NSA)</a> </td>
<td>0.3%</td>
<td>0.1%</td>
<td>3.4%</td>
<td>2.9%</td>
<td>2.5%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.3%</td>
<td>0.0%</td>
<td>2.7%</td>
<td>1.9%</td>
<td>1.7%</td>
<td>1.1%</td>
</tr>
</tbody>
</table>
Industrial Production Stalled in August 
by <a href="/comment/Moeller.html">Tom Moeller</a> September 15, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915c.jpg" width="353">
Total U.S. industrial output slipped 0.2% last month and that disappointed Consensus expectations for a 0.2% gain. The decline followed an unrevised 0.4% rise during July.
As hot summer temperatures moderated, utility output reversed nearly all of the July spike with a 0.8% (+0.7% y/y) decline.
Factory sector output also cooled and was unchanged after an upwardly revised 0.3% July increase. So far in 3Q factory output is up at a 3.5% rate versus 2Q which rose 5.1% (AR).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915e.jpg" width="353">
Production of durable consumer goods recovered a piece of the July drop and rose 1.2% (-0.3% y/y) as output of automotive products increased 2.0% (-2.8% y/y) and output of appliances &amp; furniture increased 1.2% (-1.7% y/y) after four straight months of decline. Nondurable consumer goods output fell 0.3% (+2.7% y/y).
Business equipment production slipped 0.2% as output of information processing &amp; equipment fell 0.4% (+17.3% y/y).Factory output overall less the hi-tech industries was unchanged (4.5% y/y).
Overall capacity utilization slipped to 82.4% from an upwardly revised 82.7% in August.

<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/output.htm">Production &amp; Capacity</a></th>
<th scope="col">August</th>
<th scope="col">July</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">Industrial Production</td>
<td>-0.2%</td>
<td>0.4%</td>
<td>4.7%</td>
<td>3.2%</td>
<td>4.1%</td>
<td>0.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Manufacturing (NAICS)</td>
<td>0.0%</td>
<td>0.3%</td>
<td>5.6%</td>
<td>3.9%</td>
<td>4.8%</td>
<td>0.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Consumer Goods</td>
<td>0.1%</td>
<td>-0.4%</td>
<td>1.9%</td>
<td>2.1%</td>
<td>2.1%</td>
<td>1.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Business Equipment</td>
<td>-0.2%</td>
<td>2.3%</td>
<td>13.5%</td>
<td>9.1%</td>
<td>9.3%</td>
<td>0.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Capacity Utilization</td>
<td>82.4%</td>
<td>82.7%</td>
<td>80.3% (8/05)</td>
<td>80.1%</td>
<td>78.6%</td>
<td>75.7%</td>
</tr>
</tbody>
</table>
U.S. Consumer Sentiment Improved Further, Expectations Up 
by <a href="/comment/Moeller.html">Tom Moeller</a> September 15, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915i.jpg" width="353">
Consumer sentiment in early September added to the gains of late August, according to the University of Michigan. The mid-month reading rose 2.9% to 84.4 on top of the late-August rise which limited that month&#39;s decline to 3.2%. Consensus expectations for an increase to 84.0.
During the last ten years there has been a 77% correlation between the level of consumer sentiment and the y/y change in real consumer spending and during those ten years sentiment has a 68% correlation with the change in nonfarm payrolls.
Expectations for the economy surged 13.4% m/m to the highest level since January. Expected business conditions next year and over the next five years improved sharply. The expected change in personal finances, however, improved just moderately. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915j.jpg" width="353">
The reading of current economic conditions fell sharply m/m to the lowest level since last October. The current read of personal finances and perceived buying conditions for large household goods both fell.
Consumers&#39; opinion about gov&#39;t economic policy was unchanged for the third month (0.0% y/y). Expected inflation during the next year fell sharply to 3.6%, its lowest level since February. The five to ten year expected rate of inflation also fell to 3.2%, reversing all of the rise during August.
The University of Michigan survey is not seasonally adjusted.The mid-month survey is based on telephone interviews with 250 households nationwide on personal finances and business and buying conditions. The survey is expanded to a total of 500 interviews at month end.

<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/@EF/@EF14/@EF1402/@EF1402.HTM">University of Michigan</a></th>
<th scope="col">Sept. (Prelim.)</th>
<th scope="col">August</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">Consumer Sentiment</td>
<td>84.4</td>
<td>82.0</td>
<td>9.8%</td>
<td>88.6</td>
<td>95.2</td>
<td>87.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>95.7</td>
<td>103.8</td>
<td>-2.4%</td>
<td>105.9</td>
<td>105.6</td>
<td>97.2</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Expectations</td>
<td>77.1</td>
<td>68.0</td>
<td>21.8%</td>
<td>77.4</td>
<td>88.5</td>
<td>81.4</td>
</tr>
</tbody>
</table>
Japan's Flow-of-Funds Data for Q2 Add to Questions about Economic Progress 
by <a href="/comment/Stone.html">Carol Stone</a> September 15, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915f.jpg" width="353">
Earlier this week, Louise Curley highlighted the fragility of recent gains in the Japanese economy. She described new weakness in manufacturing orders and some deterioration in consumer confidence. Today, data on flow of funds in the financial system for Q2 2006 add more to the ambiguity about the outlook. For instance, the move by the Bank of Japan away from its zero-interest-rate monetary policy in mid-July was based partly on renewed growth in bank lending. This continues, but other liabilities in the domestic economy have started to weaken again.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915g.jpg" width="353">
The Japanese flow of funds data are not seasonally adjusted, and Q2 is a generally a period of contraction in credit as an old fiscal year has just been closed out and a new one begun. So negative reports for this period are unremarkable in and of themselves. In fact, a striking aspect of these new flow-of-funds data is a quarterly increase in lending to private corporations; at +&yen;1.89 trillion, it&#39;s not large, but it&#39;s the first Q2 increase in the nine years history of this style of Flow of Funds accounts. Q3 and Q4 often see sizable increases in credit transactions. So a 4-quarter total might give us a good idea of the overall strength of lending; indeed, there has been a dramatic upturn in financial institution lending to business on this basis, which reached +&yen;11.35 trillion through Q2, compared to a contraction of &yen;6.02 trillion in Q2 2005 and progressively larger declines going back to early 2003.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060915h.jpg" width="353">
But other private-sector uses of credit remain sluggish or erratic. Total liabilities of the domestic nonfinancial sector excluding government fell &yen;32.52 trillion in Q2, yielding a 4-quarter total of -&yen;35.82 trillion -- that is, net paydowns -- actually much worse than the -&yen;5.97 trillion of a year ago. Even total private corporation borrowing was weaker in Q2 2006, -&yen;21.81 trillion, than in Q2 2005, -&yen;18.05 trillion, although the 4-quarter total was positive.
Households have the same pattern, a drop in Q2 2006 that is larger than Q2 2005, but an outright increase in the more recent 4-quarter total contrasting with the liquidation in the year-ago period.
So credit data, as well as real-sector business and consumer indicators, suggest that the economic gains we were all so pleased about earlier this year in Japan are hardly on sure footing.

<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/JAPAN/@J1/@J109/@J109.HTM">Japan: Flow of Funds, Tril.&yen;</a></th>
<th scope="col">2Q 2006</th>
<th scope="col">1Q 2006</th>
<th scope="col">2Q 2005</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">Total Liabilities, Domestic Nonfin Sector ex Govt</td>
<td>-32.52</td>
<td>+37.12</td>
<td>-25.57</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">&nbsp; 4-Qtr Total</td>
<td>-35.82</td>
<td>-28.87</td>
<td>-5.97</td>
<td>+46.83</td>
<td>+53.10</td>
<td>+25.59</td>
</tr>
<tr class="odd">
<td class="firstcol">Private Nonfin Corporations</td>
<td>-21.81</td>
<td>-1.17</td>
<td>-18.05</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">&nbsp; 4-Qtr Total</td>
<td>+7.37</td>
<td>+11.14</td>
<td>-6.07</td>
<td>+6.17</td>
<td>+2.04</td>
<td>-23.14</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Loans</td>
<td>+1.89</td>
<td>-0.48</td>
<td>-7.00</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; 4-Qtr Total</td>
<td>+11.35</td>
<td>+2.45</td>
<td>-6.02</td>
<td>+2.70</td>
<td>-10.14</td>
<td>-21.84</td>
</tr>
<tr class="odd">
<td class="firstcol">Households</td>
<td>-11.43</td>
<td>+7.45</td>
<td>-7.56</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">&nbsp; 4-Qtr Total</td>
<td>+4.09</td>
<td>+7.96</td>
<td>-1.30</td>
<td>+4.74</td>
<td>-4.36</td>
<td>-1.24</td>
</tr>
</tbody>
</table>
</body>
</html>

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070914j.jpg" width="353">
The US current account deficit shrank a bit in Q2 to $190.8 billion from $197.1 billion in Q1. The figure was very close to consensus expectations for Q2 of $190.5 billion. Q1&#39;s deficit was revised larger by $4.5 billion.
The latest deficit equaled 5.5% of GDP, down from 5.8% in Q1 and 6.2% for all of 2006.
The deficit in merchandise trade deteriorated slightly to $204.2B from Q1&#39;s deficit of $200.9B. Exports grew $9.2B in the quarter, equal to 3.4% (10.6% y/y). Imports increased 2.7% (4.3% y/y), but since imports are far larger, that is a $12.6B increase.
The surplus in services trade improved by $3.2B in the quarter to $26.5B, a new record. The previous high was $25.0B in Q4 1996. All major service sector categories contributed: more foreign tourists, less American use of foreign airlines, an increase in net private services, a gain in net royalties and fees and so on.
The U.S. capital account widened marginally in Q2 to $589 million, although this is noticeably smaller than the year-earlier $1.0 billion. Among the financial accounts, the net inflow of direct investment funds was $2.1B, a sharp turnaround from Q1&#39;s outsized outflow, $69.5B. Other private financial assets saw a net inflow of $79.2B, slightly less than $84.0B in Q1. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070914k.jpg" width="353"><img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070914l.jpg" width="353">

<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/USECON/@EE/@EE01/@EE01.HTM">US Balance of Payments</a>, &nbsp;Bil.$, SA</th>
<th scope="col">Q2 2007</th>
<th scope="col">Q1 2007</th>
<th scope="col">Q4 2006</th>
<th scope="col">Year Ago</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Current Account Deficit</td>
<td>-190.8</td>
<td>-197.1</td>
<td>-187.9</td>
<td>-205.6</td>
<td>-811.5</td>
<td>-754.8</td>
<td>-640.2</td>
</tr>
<tr>
<td class="firstcol">Goods &amp; Services</td>
<td>-177.7</td>
<td>-177.6</td>
<td>-176.9</td>
<td>-192.6</td>
<td>-758.5</td>
<td>-714.4</td>
<td>-612.2</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Exports % change</td>
<td>3.5%</td>
<td>1.2%</td>
<td>3.2%</td>
<td>11.0%</td>
<td>12.7%</td>
<td>10.9%</td>
<td>13.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Imports % change</td>
<td>2.4%</td>
<td>0.9%</td>
<td>-1.9%</td>
<td>4.4%</td>
<td>10.4%</td>
<td>12.9%</td>
<td>16.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">Income (Bil.$)</td>
<td>+9.4</td>
<td>+7.5</td>
<td>+9.7</td>
<td>+10.7</td>
<td>+36.6</td>
<td>+48.1</td>
<td>+56.4</td>
</tr>
<tr>
<td class="firstcol">Unilateral Transfers </td>
<td>-22.5</td>
<td>27.0</td>
<td>20.7</td>
<td>23.7</td>
<td>89.6</td>
<td>88.5</td>
<td>88.4</td>
</tr>
</tbody>
</table>
</body>
</html>

The US current account deficit shrank a bit in Q2 to $190.8 billion from $197.1 billion in Q1. The figure was very close to consensus expectations for Q2 of $190.5 billion. Q1's deficit was revised larger by $4.5 billion. The latest [...]

U.S. Current Account Deficit Eases in Q2

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060914g.jpg" width="353">
Employment in Australia rose 23,400 in August from July and has increased every month for the last ten. The year-on-year growth is just 2%, but the 10-month advance has occurred at a 3.2% annualized pace, similar to the 2005 performance.
This employment growth is strong enough to absorb sizable increases in labor force participation and still set record low unemployment rates. Unemployment stood at 4.9% of the labor force in August after touching 4.8% in July; until last August, it had never been as low as 5.0%. The rise in the participation rate includes an upturn among male workers since August 2004 after a secular decline that extends back almost continuously to the beginning of the data series in 1978. The participation rate for women continues to trend gradually higher.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060914h.jpg" width="353">
These broad labor force aggregates for Australia were published a week ago. Today, September 14, the Australian Bureau of Statistics published greater detail, including &quot;quarterly&quot; industry data. These industry data depart from the common use of the term quarterly; they are not averages or totals but figures that are simply collected only once a quarter, in the mid-month. Thus are &quot;third quarter&quot; readings already available before the actual end of the period. And in our table below, we show the whole array of data with their mid-month of quarter values to facilitate comparison.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060914i.jpg" width="353">
As in many &quot;industrial&quot; countries, Australia&#39;s manufacturing sector employment is lagging. However, the latest value, 1,054 persons, is ahead of the year-ago level by 13,000, marking the first year-on-year increase in six quarters. The mining sector seems small with only 139,000 employed in August, but it has been a source of growth particularly in metal ores. We mentioned this general characteristic of the Australian economy a couple of weeks ago (September 1) regarding movements in commodity prices there. Construction is growing vigorously, along with several service industries, especially property &amp; business services and health &amp; community services. Not shown in our table is a spurt in government employment, up 35,700 in the latest quarter, but this reflects temporary hiring for the 2006 Australian census. It will be important to check on Australian labor market conditions after the census has been taken and those temporary employees finish their assignments. ABS suggests that they have not inflated employment totals because many have other jobs already. Stay tuned to see how that plays out.

<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/ANZ/@A1/@A106/@A106.HTM">Australia Labor Force*</a></th>
<th scope="col">Q3 2006 (Aug)</th>
<th scope="col">Q2 2006 (May)</th>
<th scope="col">Q3 2005 (Aug)</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">Total Employment (000s)</td>
<td>10,265</td>
<td>10,143</td>
<td>10,067</td>
<td>9,987</td>
<td>9,677</td>
<td>9,481</td>
</tr>
<tr>
<td class="firstcol">Unemployment (000s)</td>
<td>524</td>
<td>523</td>
<td>532</td>
<td>537</td>
<td>567</td>
<td>611</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment Rate (%)</td>
<td>4.9</td>
<td>4.9</td>
<td>5.0</td>
<td>5.1</td>
<td>5.5</td>
<td>6.1</td>
</tr>
<tr>
<td class="firstcol">Participation Rate (%)</td>
<td>65.1</td>
<td>64.5</td>
<td>64.8</td>
<td>64.4</td>
<td>63.6</td>
<td>63.6</td>
</tr>
<tr class="odd">
<td class="firstcol">Select Industries (000s)</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Mining</td>
<td>139</td>
<td>133</td>
<td>130</td>
<td>121</td>
<td>103</td>
<td>90</td>
</tr>
<tr class="odd">
<td class="firstcol">Manufacturing</td>
<td>1,054</td>
<td>1,060</td>
<td>1,041</td>
<td>1,070</td>
<td>1,089</td>
<td>1,082</td>
</tr>
<tr>
<td class="firstcol">Construction</td>
<td>899</td>
<td>888</td>
<td>870</td>
<td>867</td>
<td>802</td>
<td>755</td>
</tr>
<tr class="odd">
<td class="firstcol">Property &amp; Business Services</td>
<td>1,233</td>
<td>1,196</td>
<td>1,197</td>
<td>1,171</td>
<td>1,108</td>
<td>1,112</td>
</tr>
<tr>
<td class="firstcol">Health &amp; Community Services</td>
<td>1,072</td>
<td>1,089</td>
<td>1,023</td>
<td>1,013</td>
<td>981</td>
<td>932</td>
</tr>
</tbody>
</table>
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</html>

Employment in Australia rose 23,400 in August from July and has increased every month for the last ten. The year-on-year growth is just 2%, but the 10-month advance has occurred at a 3.2% annualized pace, similar to the 2005 [...]

Labor Force and Employment Gains Strong in Australia; Unemployment Hovers Near Record Low

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060914l.jpg" width="353">
In July, total business inventories rose 0.6% following an upwardly revised 0.9% June gain. Consensus expectations had been for a 0.5% increase. That combination left the inventory to sales ratio stable m/m at 1.26, up from its low in May of 1.25. 
Retail inventories rose 0.4% led by a 0.5% (15.3% y/y) surge in motor vehicles &amp; parts. Excluding autos, retail inventories rose 0.3% (4.5% y/y). Furniture inventories moved up 4.9% y/y, while building materials inventories grew 8.7%. Clothing store inventories rose 5.5% y/y but inventories of general merchandise grew just 1.2%.
Wholesale inventories increased another 0.8% (8.8% Y/Y) in July led by a 1.2% (25.0% y/y) gain in petroleum inventories. Durables rose 9.2% y/y. 
Factory inventories rose 0.6% (5.7% y/y), the fastest y/y rate of accumulation in a year.

<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/@ED/@ED06/@ED0601/@ED0601.HTM">Business Inventories</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">Total</td>
<td>0.6%</td>
<td>0.9%</td>
<td>7.4%</td>
<td>4.4%</td>
<td>7.6%</td>
<td>-1.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail</td>
<td>0.4%</td>
<td>0.9%</td>
<td>7.8%</td>
<td>2.7%</td>
<td>6.7%</td>
<td>3.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Retail excl. Autos</td>
<td>0.3%</td>
<td>0.5%</td>
<td>4.5%</td>
<td>4.5%</td>
<td>7.1%</td>
<td>1.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale</td>
<td>0.8%</td>
<td>0.8%</td>
<td>8.8%</td>
<td>7.1%</td>
<td>9.8%</td>
<td>1.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>0.6%</td>
<td>0.9%</td>
<td>5.7%</td>
<td>4.0%</td>
<td>6.9%</td>
<td>-7.4%</td>
</tr>
</tbody>
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In July, total business inventories rose 0.6% following an upwardly revised 0.9% June gain. Consensus expectations had been for a 0.5% increase. That combination left the inventory to sales ratio stable m/m at 1.26, up from its low in [...]

U.S. Business Inventory Accumulation Up

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

Recent pickup in US defense orders could help support overall growth ahead

Cost of transporting crude oil has soared to series high

Market-based inflation expectations have not yet reflected recent surge in oil prices

Global equity markets are fearing a major economic disruption from soaring oil prices

Is recent drop in sentiment signaling softer growth ahead?

With the Iran conflict, geopolitical risk has soared to alarming levels

Soaring AI-related investment in US underpinning strong contribution of business spending to overall growth

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

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

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Andrew Cates

**Energy shock lifts inflation, trims growth**
The IMF’s latest WEO revisions for 2026 broadly reflect the classic stagflationary impact of the recent Middle East energy shock, with growth downgraded and inflation revised higher across most major economies. Higher energy prices act as a tax on real incomes while simultaneously pushing up costs. That said, the picture is not uniform: a number of economies—notably the US, China and India—have seen growth upgrades, reflecting stronger-than-expected momentum so far in 2026. By contrast, the UK stands out at the stagflationary extreme, combining one of the largest growth downgrades with a relatively strong inflation uplift—consistent with its weaker underlying momentum, greater energy sensitivity and more persistent domestic inflation dynamics. More broadly, while the global revisions remain modest—pointing to resilience in activity—the message is that disinflation is no longer a smooth glide back to target but increasingly contingent on energy prices and geopolitical developments.

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**Markets largely shrug off rising economic pessimism**
Notwithstanding a more downbeat assessment from economists—including the IMF’s stagflationary tilt to the outlook—there has been remarkably little follow-through into financial markets. Measures of systemic stress in both the US and UK remain low by historical standards, suggesting that investors are, for now, largely looking through the Middle East conflict. There are several possible explanations: corporate profits remain resilient, the AI-driven investment narrative continues to dominate market thinking, and markets may be assuming that any energy shock will be temporary and contained. In effect, investors appear to be pricing a benign baseline in which geopolitical risks do not materially disrupt growth, inflation expectations or policy. The UK is a partial exception, with a somewhat more visible uptick in stress, which aligns more closely with the IMF’s more challenging growth-inflation trade-off and the economy’s greater sensitivity to energy prices.

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**Volatility falls despite deteriorating growth surprises**
Market optimism is also increasingly at odds with the incoming data flow. Typically, equity volatility declines when growth surprises are positive and inflation surprises are benign. However, the recent pattern has broken that relationship. Growth surprises across the G10 have turned increasingly negative (our series is inverted in the chart below), yet volatility has continued to fall. In other words, markets are becoming less sensitive to weakening macro data, continuing to price a benign outlook even as the data deteriorate. This divergence reinforces the broader theme: investors are, for now, looking through both geopolitical risks and softer economic momentum, placing greater weight on resilience in earnings, the AI-driven narrative and the assumption that policy will remain supportive.

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**Inflation Nowcasts Have Jumped**
Incoming data suggest that headline inflation has moved higher in recent weeks, broadly in line with expectations given the rise in energy prices following the Middle East shock. Nowcasts for CPI across the major economies show a clear rebound in March and April from the lows seen at the start of 2026, with the move occurring in a relatively synchronised fashion. This reinforces the view that the recent pickup in inflation is being driven primarily by a common external factor—energy.

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**Energy shock not yet feeding into underlying inflation**
However, the detailed breakdown of March inflation outcomes suggests that this remains, for now, a largely headline-driven phenomenon. While headline CPI prints were firm across most economies, core inflation—stripping out energy and food—was more subdued and in some cases weaker. This indicates that there has been very limited pass-through from higher energy prices into broader goods and services inflation at this early stage. In other words, the shock is still being absorbed rather than propagated. That distinction is critical for policy and markets alike: as long as second-round effects remain contained, central banks may be able to look through the near-term rise in inflation, even as headline rates move higher.

260423Z5.jpg

**Inflation Expectations Rising as Growth Sentiment Falters**
It remains early days, and much will hinge on how inflation expectations evolve from here. The latest ZEW survey for Germany already conveys the hallmarks of a classic stagflationary shock, with macroeconomic expectations weakening even as inflation expectations have ratcheted sharply higher. This shift is important: while the recent rise in headline inflation has so far shown limited pass-through into core, a sustained increase in expectations would raise the risk of second-round effects and make the inflation process more persistent. In that sense, the ZEW data highlight the key fault line in the current environment—whether the energy-driven shock remains contained, or begins to embed itself more broadly through expectations and pricing behaviour.

260423Z6.jpg

Financial markets have remained notably calm in recent weeks despite rising geopolitical tensions in the Middle East, a more downbeat macroeconomic narrative and elevated uncertainty. Measures of financial stress and volatility remain low, and equity markets continue to look through both the conflict and softer data. That resilience sits alongside a more nuanced macro backdrop. The IMF’s latest WEO revisions point to a classic stagflationary energy shock—growth downgraded and inflation revised higher—although the global impact remains modest and uneven, with some economies still benefiting from stronger momentum (chart 1). At the same time, market pricing appears increasingly detached from the data flow, with volatility declining even as growth surprises have turned more negative relative to inflation (charts 2 and 3). Incoming inflation data reinforce the idea of a largely headline-driven shock, with nowcasts rising in line with higher energy prices but only limited pass-through into core inflation so far (charts 4 and 5). However, it remains early days. Survey evidence, such as the latest ZEW release, suggests that inflation expectations may already be responding in a more concerning way, with a marked rise alongside weakening growth sentiment (chart 6). Taken together, the key question for markets is whether this remains a contained, energy-driven shock that can be looked through—or whether it begins to embed more persistently via expectations, forcing a reassessment of the currently benign outlook.

<iframe data-testid="embed-iframe" style="border-radius:12px" src="https://open.spotify.com/embed/episode/44A12ktUaoJGHZG7pEVcul?utm_source=generator" width="100%" height="152" frameBorder="0" allowfullscreen="" allow="autoplay; clipboard-write; encrypted-media; fullscreen; picture-in-picture" loading="lazy"></iframe>

Charts of the Week: Risks Build, Markets Shrug

Robert Brusca

260424E.jpg

The onset of the war in Iran appears to have hit the German economy extremely hard as the Ifo survey shows very substantial and broad-based decline across its survey in April. The Ifo survey features readings for five sectors as well as an aggregate reading, and it surveys them for climate, current conditions, and expectations. The decline in the Ifo survey is present for all three concepts and across all five sectors, marking the weakening in April as a highly significant and extremely disturbing development. Only manufacturing in the current conditions survey escapes a month-to-month decline.

**The Ifo sequences**: The **climate** reading fell both overall and across each of the five sectors. **Current conditions** declined for the overall and for four of the five sectors, with manufacturing the sole exception. **Expectations** declined for the overall and for all sectors. Several of the sector declines were for a very substantial magnitude, especially when compared to historic changes in these indexes.

**Monthly changes in readings—severe broad deterioration**
The month-to-month change in the climate reading has weakened more month-to-month 19% of the time. That overall result, however, is boosted by manufacturing where the monthly change has been weaker 35% of the time (on data back to 2011). However, all other sectors have seen climate weaker m/m only 2.3% to 6.3% of the time! The current situation readings weakened, with the headline weakening more m/m 11% of the time. This was boosted by manufacturing, the only sector that improved on the month; its ranking on change was in its 85th percentile—quite good and truly stand-alone good news. The other current changes by sector ranged from construction being weaker 1.7% of the time, to retailing that has been weaker about 30% of the time in terms of m/m changes. Expectation changes were uniformly terrible, with the headline drop weaker only 6.3% of the time and sector change month-to-month weaker between 9% and 1.7% of the time. The monthly weakening was uniform and substantial. I document it with these calculations, but you can also see it on the chart above.

**Climate**: The bottom line is that the all-sector index for climate fell to -20.3 in April from -18 in March, placing it at a 10.5 percentile standing on data since 1993. The sector ranking is the highest for construction with a 42.2 percentile standing and the weakness for services at a 1.1 percentile standing—weaker than the table reading nearly 99% of the time. In terms of percentile standing levels or monthly changes, conditions are closing in on grim.

**Current conditions**: Current conditions saw the all-sector index slip to -5.3 in April from -2.4 in March. The headline ranking stands at a 9.8 percentile mark, making it—like the climate reading—weaker than its current reading only about 10% of the time. The strongest reading under current conditions is for construction which has a 60.6 percentile standing; it is the only ranking in the table above its historic median. Manufacturing, the only sector in the survey that improved month-to-month, has a 22.5 percentile standing, while services record the weakest percentile standing under current conditions, at an 8.4 percentile standing.

**Expectations:** The all-sector index for expectations fell to -25.3 in April from -19.9 in March, placing it at a 6.3 percentile standing. The percentile standings across sectors range from a high of 9.5% for manufacturing to a low of 1.5% for retailing. Up until earlier this year, the Ifo was showing signs of improvement; however, all of that has simply collapsed in the last month. Weakness is across economic concepts and sectors, as documented above. For reference, the table also gives a separate set of rankings on where the various indexes stand since the invasion of Ukraine, since that was another marked event that drove the index, that had been improving after Covid, down to lower levels.  Ranked even on this reduced scale looking at conditions only since the invasion of Ukraine, when conditions have generally been weaker, the current rankings across the Ifo survey remained extremely weak. This is a very disturbing survey for the German economy.

260424.jpg

Germany

German Ifo Plunges Everywhere

Sandy Batten

260423F8.jpg

260423G8.jpg

The National Activity Index published by the Federal Reserve Bank of Chicago (CFNAI) slipped to -0.20 in March from an upwardly revised +0.03 in February (previously (-0.11). This is the lowest monthly reading since last November. Smoothing out the monthly volatility, the index's three-month moving average (CFNAI-MA3) declined to -0.03 in March from an upwardly revised +0.03 in February (previously -0.01).

This index is expressed in standard deviation units from zero (with a value of zero defined as trend real GDP growth). Research at the FRB Chicago indicates that readings on the 3-month average of -0.70 or below are consistent with the economy being in a recession. Therefore, even though the March reading on the 3-month average was negative, it indicates that the US economy is still growing, just slightly slower than trend, and is well away from recessionary conditions. The 3-month average would be much deeper in negative territory if the economy was at risk of contracting.

The National Activity Index is a composite of 85 economic indicators, grouped into four major categories: production and income; employment, unemployment, and hours worked; personal consumption and housing; sales, orders, and inventories. Three of the four broad categories of indicators used to construct the index decreased from February, and three categories made negative contributions in March. Production-related indicators contributed –0.20 to the CFNAI in March, down from +0.13 in February. The sales, orders, and inventories category's contribution to the CFNAI was –0.01 in March, down from +0.05 in February. Employment-related indicators contributed +0.02 to the CFNAI in March, up from –0.15 in February. The personal consumption and housing category's contribution to the CFNAI was –0.01 in March, down from a neutral value in February.

The CFNAI Diffusion Index, which measures the breadth of the change in the component series and is also a three-month moving average, increased to –0.04 in March from –0.08 in February. This is the highest reading since February 2025. A reading of zero indicates that all of the indicators are growing at their long-term average. If all of the underlying indicators in a given month are below their long-run averages, the diffusion index will equal -1. If all of the indicators are above their long-run averages, it will equal +1. Thirty-four of the 85 individual indicators made positive contributions to the CFNAI in March, while 51 made negative contributions. Forty-three indicators improved from February to March, while 40 indicators deteriorated and two were unchanged. Of the indicators that improved, 16 made negative contributions.

These figures are available in Haver's **SURVEYS** database.

- The monthly reading fell to -0.20 in March from an upwardly revised +0.03 in February.
- The three-month average slipped from +0.03 to -0.03.
- Despite the slip in March, the index points to near-trend economic growth and is well above recession territory.

Chicago Fed National Activity Index Slipped in March

Kathleen Stephansen, CBE

260423A1.jpg

260423B1.jpg

Initial claims for unemployment insurance rose by 6,000 to 214,000 in the week ending April 18, from 208,000 in the week ending April 11, revised from 207,000. The four-week average rose 750 to 210,750 in the week ending April 18, from 210,000 the April 11 week, revised from 209,750. The Action Economics/Haver Analytics Survey looked for 210,000 claims to have been filed.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—rose by 12,000 to 1.821 million in the week ending April 11, from 1.809 million in the week ending April 4. The four-week moving average rose to 1.812 million in the latest week from 1.811 million in the March 28 week. The insured unemployment rate remained at 1.2% in the week of April 11. It has remained at that level since the week of November 29, 2025.

The insured unemployment rate varied greatly across individual states and territories. In the week ending April 4, the highest unemployment rates were in New Jersey (2.51%), Massachusetts (2.37%), Rhode Island (2.31%), Washington (2.25%), Minnesota (2.11%), and California (2.02%). The lowest rates were in Florida (0.30%), Louisiana (0.31%), Arkansas (0.35%), Alabama (0.36%), North Carolina (0.39%), Tennessee (0.46%), South Dakota (0.47%), Kansas and Virginia (both 0.49%). Rates in other notable states include New York (1.92%), Illinois (1.82%), Pennsylvania (1.52%), and Texas (1.04%). 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.

260423C1.jpg

260423D1.jpg

- New claims rose by 6,000 to 214,000.
- Continuing claims rose by 12,000 to 1.821 million.
- The insured unemployment rate remained at 1.2%.


U.S. Initial Unemployment Claims Rose in the Week of April 18

260423E.jpg

**Manufacturing looks strong while service sectors weaken**
S&P's April flash PMI readings show some very mixed results. For the United States, India, Australia, and the United Kingdom, there is a strengthening in the readings month-to-month for services, manufacturing, and the composite.

For Japan, France, and the European Monetary Union as a whole, there is improvement in the manufacturing sector on the month but a weaker services reading and a weaker composite overall.

Germany is the only responding area in the table showing weakness all around—in all three sectors—a weaker composite, a weaker manufacturing sector, and a weaker services sector in April. For Germany, this follows a weaker composite and service sector in March as well.

Most reporters—France, the United Kingdom, Japan, Australia, and India—had weaker readings for all three metrics in March: the composite, services, and manufacturing. The March exceptions were the United States, Germany, and the European Monetary Union; in each case, the exception was that the manufacturing sector improved month-to-month, while the composite and services both weakened.

This has been a period of weakening—in March and April—since the war in Iran began. The 48 separate sector readings produced 30 readings that were weaker month-to-month in March and April. Among the 16 composite readings, 12 reported weaker conditions month-to-month. In March, the immediate aftermath of the outbreak of war brought instantaneous step backs across the PMI readings, while April, responding to at least a military success in the area, has shown a significant bounce back that is now more common than further weakness.

The sequential data over three months, six months, and 12 months are based only on completed data; therefore, they're up to date through March. On that basis, we have triple sector weakness in the U.S., India, and Australia, with only Japan and the United Kingdom showing triple-sector improvement over three months. However, if we look at six months compared to 12 months, we have triple sector strength in the Monetary Union, Germany, France, the United Kingdom, Japan, and Australia. India and the U.S. each show only one stronger sector over that comparison—services in India’s case and manufacturing in the U.S. case.

**Ranking Peculiarity**
The ranking data take the current flash data and compare them to the history of observations back to January 2022. What is quite surprising is that, on that timeline, the manufacturing sectors of all the countries in the table—except for Australia and India—show manufacturing standings in their respective 80th to 90th percentiles. Meanwhile, services standings are typically in the 30th percentile or lower.

**Odd Impact of War**
If the war in Iran has an impact on something, we would expect that to fall on the goods trade sector. We would expect this to have an impact on manufacturing although it's the opposite thing that's happening. Manufacturing is showing a revival, while services sectors are showing weaker performance across these countries generally. India is an interesting case, with manufacturing only in its 32nd percentile; however, India’s raw diffusion reading for manufacturing is the strongest raw diffusion reading in the table. What India's ranking is telling us is that India had been extremely strong over the period since 2022, and now compared to that past standard, it's relatively weaker. However, it's still strong in absolute terms, showing a great deal of strength based on its pure diffusion value, just not in comparison to historic performance.

260423.jpg

**Next?**
At this point, it's not clear to me at least what these PMI data are telling us since the strength in manufacturing is a curiosity as is the weakness in the services sector. You see these two phenomena displayed in the chart above, in the case of the European Monetary Union’s flash readings as well.

**War breeds negative effects**
It's not a surprise that war would take some toll on consumer confidence or that it would be reflected in the services sector. However, seeing the kind of weakness being portrayed now in services against the strength in manufacturing is simply a bit hard to rationalize and understand. So, I think we're going to have to keep an eye on these readings as well as other readings in the months ahead to try to discern how global events, the war, conditions in the Strait of Hormuz, inflation currency shifts, and central bank policy are playing out across these various countries. None of what is happening is obvious to me. Japan clearly continues to benefit from a weak yen as its manufacturing sector is flying high, at its best reading since January 2022.

Economy in Brief

Jump to:

Japan's Flow-of-Funds Data for Q2 Add to Questions about Economic Progress

U.S. Consumer Sentiment Improved Further, Expectations Up

Industrial Production Stalled in August

CPI Rose An Expected 0.2%

CPI Rose An Expected 0.2%

U.S. Current Account Deficit Eases in Q2

Labor Force and Employment Gains Strong in Australia; Unemployment Hovers Near Record Low

U.S. Business Inventory Accumulation Up