Tom Moeller

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<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>


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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 [...]

Weekly Chain Store Sales Slipped As Gasoline Prices Rose

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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>
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</thead>
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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>
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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>
</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>


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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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<thead>
<tr>
<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%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<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>
</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%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
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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

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.

260423Z1.jpg

**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.

260423Z2.jpg

**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.

260423Z3.jpg

**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.

260423Z4.jpg

**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

Sandy Batten

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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

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- 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

Robert Brusca

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.

S&P PMIs Show Mixed Fortunes

Winnie Tapasanun

260422A17.jpg

260422B17.jpg

Mortgage applications rose 7.9% w/w (29.9% y/y) in the week ending April 17 following a 1.8% rebound in the week ending April 10, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. The latest reading was the second successive w/w gain and the largest since the February 27 week, lifting the index to 303.3, its highest level since the March 20 week. Applications for loans to purchase a house jumped 10.1% (14.5% y/y) in the April 17 week, the biggest w/w increase since the January 9 week, after a 1.0% decline in the previous week. Applications for loan refinancing rose 5.8% (51.9% y/y) in the April 17 week following a 5.1% rebound in the April 10 week.

The effective interest rate on a 30-year fixed-rate loan fell 7bps to 6.53% in the week ending April 17 from 6.60% in the week ending April 10; it was above a low of 6.29% in the week of September 20, 2024 but below a peak of 8.12% in the week of October 20, 2023. The rate on 15-year fixed-rate mortgages dropped 12bps to 5.92% in the April 17 week from 6.04% in the previous week; it was up from a low of 5.60% in the week of September 20, 2024 but down from a high of 7.44% in the week of October 27, 2023. The rate on 30-year jumbo loans declined 5bps to 6.56% in the April 17 week from 6.61% in the prior week; it was above its most recent low of 6.25% in the February 27 week but below a high of 7.99% in the week of October 27, 2023. These three rates hit their lowest levels since the March 13 week. Meanwhile, the rate on a 5-year ARM edged up to 5.81% in the April 17 week, the first w/w increase in four weeks, from 5.80% in the previous week (the lowest since the March 6 week); it was above its most recent low of 5.38% in the February 20 week but below a high of 7.31% in the week of October 27, 2023.

The share of applications for refinancing an existing loan fell to 44.2% of total applications in the week ending April 17—the sixth w/w fall in seven weeks and the lowest level since the week of August 1, 2025—after rising to 45.5% in the week ending April 10; those numbers remained below a peak of 61.9% in the January 16 week. The adjustable-rate mortgage (ARM) share of activity declined to a three-week-low 8.0% in the April 17 week from 8.4% in the prior week; it was below a peak of 12.9% in the week of September 12, 2025 but above a low of 4.7% in the week of January 3, 2025.

The average size of a mortgage loan, up for the third consecutive week, rose 1.2% w/w (3.4% y/y) to $399,900 in the April 17 week, the highest level since the March 13 week, after a 1.3% increase to $395,000 in the April 10 week. The average size of a purchase loan eased 0.1% (+3.6% y/y) to $455,600 in the April 17 week, the fourth w/w decline in five weeks, following a 1.8% rebound to $456,100 in the prior week. The average size of a loan to refinance a mortgage climbed 2.4% (10.7% y/y) to $329,500 in the April 17 week after a 1.5% rise to $321,800 in the previous week, marking the third successive w/w increase and the highest level since the March 20 week.

The Mortgage Bankers Association Survey covers 75% of all U.S. retail residential mortgage applications and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. The base period and value for all indexes is March 16, 1990=100. The figures for weekly mortgage applications and interest rates are available in Haver’s **SURVEYS** database.

- Purchase applications +10.1% w/w, biggest increase since the Jan. 9 week; refinancing loan applications +5.8% w/w, second consecutive rise.
- Effective interest rate on 30-year fixed loans down 7bps to 6.53%, a five-week low.
- Average loan size up for the third straight week, highest level since the March 13 week.

Economy in Brief

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