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/060818e.jpg" width="353">
A surge in merchandise exports pushed Brazil&#39;s current account to a record surplus in July, $3043 million, as reported late August 17 by the Central Bank of Brazil. With seasonal adjustment by Haver Analytics, the balance is $2203 million, as seen in the table below, the second largest monthly amount after $2715 million in November.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060818f.jpg" width="353">
Brazil sells oil, coffee and copper, among numerous other items. Obviously, two of these items have seen major price increases that have raised the value of Brazil&#39;s exports. They are up more than 23% from a year ago. This good gain, $2.6 billion, has more than offset a larger percentage increase in imports, nearly 32% on the year, or $1.9 billion.
Frequently, economists and other analysts assess a nation&#39;s trade and current account conditions over against the capital and financial accounts. But for Brazil, the more relevant comparison involves the trade balance versus the service and income flows. It is the large trade surplus that &quot;finances&quot; a modest deficit in services and a more significant deficit in income. Brazil has a sizable negative international investment position, -$340 billion at the end of last year, and it sends out considerable amounts of profits, dividends and interest payments. As noted below, the deficit on income exceeds $2.1 billion in most months.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060818g.jpg" width="353">
Flows on the financial side are very erratic, but generally direct investment remains positive. So there are consistent flows of foreign equity funds into Brazil, suggesting that companies want increasingly to be represented in that sizable market. Portfolio and &quot;other&quot; investments swing widely from month to month, making it hard to characterize other investors&#39; attitudes toward the country.

<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/EMERGELA/@E2/@E208/@E208.HTM">Brazil</a> Mil. US$, Seas Adj.</th>
<th scope="col">July 2006</th>
<th scope="col">June 2006</th>
<th scope="col">May 2006</th>
<th scope="col">July 2005</th>
Monthly Averages*
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">Current Account</td>
<td>2203</td>
<td>578</td>
<td>524</td>
<td>1851</td>
<td>1183</td>
<td>973</td>
<td>348</td>
</tr>
<tr class="odd">
<td class="firstcol">Trade Balance</td>
<td>4945</td>
<td>3714</td>
<td>2908</td>
<td>4454</td>
<td>3729</td>
<td>2803</td>
<td>2066</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Exports</td>
<td>12651</td>
<td>11007</td>
<td>10058</td>
<td>10304</td>
<td>9859</td>
<td>8040</td>
<td>6090</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Imports</td>
<td>7705</td>
<td>7292</td>
<td>7150</td>
<td>5850</td>
<td>6130</td>
<td>5236</td>
<td>4020</td>
</tr>
<tr>
<td class="firstcol">Services</td>
<td>-952</td>
<td>-747</td>
<td>-663</td>
<td>-632</td>
<td>-679</td>
<td>-390</td>
<td>-411</td>
</tr>
<tr class="odd">
<td class="firstcol">Income</td>
<td>-2102</td>
<td>-2764</td>
<td>-2113</td>
<td>-2253</td>
<td>-2164</td>
<td>-1710</td>
<td>-1546</td>
</tr>
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A surge in merchandise exports pushed Brazil's current account to a record surplus in July, $3043 million, as reported late August 17 by the Central Bank of Brazil. With seasonal adjustment by Haver Analytics, the balance is $2203 [...]

Brazil's Large Exports Yield Record Current Account Surplus in July

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060818c.jpg" width="353">
Consumer sentiment in early August dropped sharply to the lowest level since last October, according to the University of Michigan. The 7.1% m/m decline in the sentiment index to 78.7 compared to consensus expectations for stability at 84.0.
During the last ten years there has been a 76% 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 posted a notable 11.0% m/m drop to the lowest level last October. The decline was led by a sharp decline in expected 12 month business conditions to the lowest level since September and a more moderate drop in expected conditions during the next five years. The expected change in personal finances also fell sharply to the lowest level since May. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060818d.jpg" width="353">
The reading of current economic conditions fell moderately for the second straight month. Details indicate that the index of current personal finances dropped to the lowest level since May but perceived buying conditions for large household goods slipped just modestly m/m (-4.3% y/y).
Consumers&#39; opinion about gov&#39;t economic policy slipped a modest 2.4% m/m (-5.9% y/y) after sharp improvement during July. Expected inflation during the next year surged m/m to 4.9%, its highest level in nearly a year. The five to ten year expected rate of inflation also rose to 3.5%, its highest since May.
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%">
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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">August (Prelim)</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">Consumer Sentiment</td>
<td>78.7</td>
<td>84.7</td>
<td>-11.7%</td>
<td>88.6</td>
<td>95.2</td>
<td>87.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>100.8</td>
<td>103.5</td>
<td>-6.8%</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>64.5</td>
<td>72.5</td>
<td>-16.1%</td>
<td>77.4</td>
<td>88.5</td>
<td>81.4</td>
</tr>
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Consumer sentiment in early August dropped sharply to the lowest level since last October, according to the University of Michigan. The 7.1% m/m decline in the sentiment index to 78.7 compared to consensus expectations for stability [...]

U.S. Consumer Sentiment Sagged

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060818a.jpg" width="353">
For August, the Philadelphia Federal Reserve Bank&#39;s Index of General Business Conditions in the manufacturing sector improved to 18.5 from an unrevised 6.0 during July. The rebound by far outpaced Consensus expectations for an uptick to 8.0 and was to the highest level since April of last year.
During the last ten years there has been a 65% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 49% correlation with q/q growth in real GDP.
A higher level of shipments drove much of the improvement as the index rose twelve points to 22.3, its highest since March. The new orders sub-index also recovered most of the prior month&#39;s sharp decline. Moving in the other direction, the employment index reversed most of its July rebound but still indicated positive growth in factory payrolls. During the last ten years there has been a 75% correlation between the employment index and the three month growth in factory payrolls.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060818b.jpg" width="353">
The business conditions index reflects a separate survey question, not the sub indexes.
The prices paid index fell sharply to the lowest level since April. During the last ten years there has been a 76% correlation between the prices paid index and the three month growth in the intermediate goods PPI. There has been an 85% correlation with the change in core intermediate goods prices.
The separate index of expected business conditions in six months reversed about all of its July improvement and during the third quarter the average monthly level (11.4) is down sharply from 2Q (19.2). Notably, expectations for orders and employment were either stable or improved during 3Q versus the 2Q average.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos0806.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/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">Aug</th>
<th scope="col">July</th>
<th scope="col">Aug &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>18.5</td>
<td>6.0</td>
<td>15.5</td>
<td>12.4</td>
<td>28.0</td>
<td>10.5</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>45.3</td>
<td>50.3</td>
<td>26.9</td>
<td>43.5</td>
<td>51.2</td>
<td>16.8</td>
</tr>
</tbody>
</table>
</body>
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For August, the Philadelphia Federal Reserve Bank's Index of General Business Conditions in the manufacturing sector improved to 18.5 from an unrevised 6.0 during July. The rebound by far outpaced Consensus expectations for an uptick [...]

Philadelphia Fed Index Highest Since 2005

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060818c.jpg" width="353">
Consumer sentiment in early August dropped sharply to the lowest level since last October, according to the University of Michigan. The 7.1% m/m decline in the sentiment index to 78.7 compared to consensus expectations for stability at 84.0.
During the last ten years there has been a 76% 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 posted a notable 11.0% m/m drop to the lowest level last October. The decline was led by a sharp decline in expected 12 month business conditions to the lowest level since September and a more moderate drop in expected conditions during the next five years. The expected change in personal finances also fell sharply to the lowest level since May. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060818d.jpg" width="353">
The reading of current economic conditions fell moderately for the second straight month. Details indicate that the index of current personal finances dropped to the lowest level since May but perceived buying conditions for large household goods slipped just modestly m/m (-4.3% y/y).
Consumers&#39; opinion about gov&#39;t economic policy slipped a modest 2.4% m/m (-5.9% y/y) after sharp improvement during July. Expected inflation during the next year surged m/m to 4.9%, its highest level in nearly a year. The five to ten year expected rate of inflation also rose to 3.5%, its highest since May.
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>
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<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">August (Prelim)</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">Consumer Sentiment</td>
<td>78.7</td>
<td>84.7</td>
<td>-11.7%</td>
<td>88.6</td>
<td>95.2</td>
<td>87.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>100.8</td>
<td>103.5</td>
<td>-6.8%</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>64.5</td>
<td>72.5</td>
<td>-16.1%</td>
<td>77.4</td>
<td>88.5</td>
<td>81.4</td>
</tr>
</tbody>
</table>
Philadelphia Fed Index Highest Since 2005 
by <a href="/comment/Moeller.html">Tom Moeller</a> August 18, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060818a.jpg" width="353">
For August, the Philadelphia Federal Reserve Bank&#39;s Index of General Business Conditions in the manufacturing sector improved to 18.5 from an unrevised 6.0 during July. The rebound by far outpaced Consensus expectations for an uptick to 8.0 and was to the highest level since April of last year.
During the last ten years there has been a 65% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 49% correlation with q/q growth in real GDP.
A higher level of shipments drove much of the improvement as the index rose twelve points to 22.3, its highest since March. The new orders sub-index also recovered most of the prior month&#39;s sharp decline. Moving in the other direction, the employment index reversed most of its July rebound but still indicated positive growth in factory payrolls. During the last ten years there has been a 75% correlation between the employment index and the three month growth in factory payrolls.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060818b.jpg" width="353">
The business conditions index reflects a separate survey question, not the sub indexes.
The prices paid index fell sharply to the lowest level since April. During the last ten years there has been a 76% correlation between the prices paid index and the three month growth in the intermediate goods PPI. There has been an 85% correlation with the change in core intermediate goods prices.
The separate index of expected business conditions in six months reversed about all of its July improvement and during the third quarter the average monthly level (11.4) is down sharply from 2Q (19.2). Notably, expectations for orders and employment were either stable or improved during 3Q versus the 2Q average.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos0806.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/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">Aug</th>
<th scope="col">July</th>
<th scope="col">Aug &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>18.5</td>
<td>6.0</td>
<td>15.5</td>
<td>12.4</td>
<td>28.0</td>
<td>10.5</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>45.3</td>
<td>50.3</td>
<td>26.9</td>
<td>43.5</td>
<td>51.2</td>
<td>16.8</td>
</tr>
</tbody>
</table>
Brazil's Large Exports Yield Record Current Account Surplus in July 
by <a href="/comment/Stone.html">Carol Stone</a> August 18, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060818e.jpg" width="353">
A surge in merchandise exports pushed Brazil&#39;s current account to a record surplus in July, $3043 million, as reported late August 17 by the Central Bank of Brazil. With seasonal adjustment by Haver Analytics, the balance is $2203 million, as seen in the table below, the second largest monthly amount after $2715 million in November.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060818f.jpg" width="353">
Brazil sells oil, coffee and copper, among numerous other items. Obviously, two of these items have seen major price increases that have raised the value of Brazil&#39;s exports. They are up more than 23% from a year ago. This good gain, $2.6 billion, has more than offset a larger percentage increase in imports, nearly 32% on the year, or $1.9 billion.
Frequently, economists and other analysts assess a nation&#39;s trade and current account conditions over against the capital and financial accounts. But for Brazil, the more relevant comparison involves the trade balance versus the service and income flows. It is the large trade surplus that &quot;finances&quot; a modest deficit in services and a more significant deficit in income. Brazil has a sizable negative international investment position, -$340 billion at the end of last year, and it sends out considerable amounts of profits, dividends and interest payments. As noted below, the deficit on income exceeds $2.1 billion in most months.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060818g.jpg" width="353">
Flows on the financial side are very erratic, but generally direct investment remains positive. So there are consistent flows of foreign equity funds into Brazil, suggesting that companies want increasingly to be represented in that sizable market. Portfolio and &quot;other&quot; investments swing widely from month to month, making it hard to characterize other investors&#39; attitudes toward the country.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/EMERGELA/@E2/@E208/@E208.HTM">Brazil</a> Mil. US$, Seas Adj.</th>
<th scope="col">July 2006</th>
<th scope="col">June 2006</th>
<th scope="col">May 2006</th>
<th scope="col">July 2005</th>
Monthly Averages*
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">Current Account</td>
<td>2203</td>
<td>578</td>
<td>524</td>
<td>1851</td>
<td>1183</td>
<td>973</td>
<td>348</td>
</tr>
<tr class="odd">
<td class="firstcol">Trade Balance</td>
<td>4945</td>
<td>3714</td>
<td>2908</td>
<td>4454</td>
<td>3729</td>
<td>2803</td>
<td>2066</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Exports</td>
<td>12651</td>
<td>11007</td>
<td>10058</td>
<td>10304</td>
<td>9859</td>
<td>8040</td>
<td>6090</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Imports</td>
<td>7705</td>
<td>7292</td>
<td>7150</td>
<td>5850</td>
<td>6130</td>
<td>5236</td>
<td>4020</td>
</tr>
<tr>
<td class="firstcol">Services</td>
<td>-952</td>
<td>-747</td>
<td>-663</td>
<td>-632</td>
<td>-679</td>
<td>-390</td>
<td>-411</td>
</tr>
<tr class="odd">
<td class="firstcol">Income</td>
<td>-2102</td>
<td>-2764</td>
<td>-2113</td>
<td>-2253</td>
<td>-2164</td>
<td>-1710</td>
<td>-1546</td>
</tr>
</tbody>
</table>
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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060817d.jpg" width="353">
The German Federal Statistics Office today published the employment data that are inputs to the national accounts. So we can compare changes in GDP to changes in employment, yielding a rough measure of productivity in the German economy.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060817e.jpg" width="353">
As reported Monday, GDP expanded 0.9% in Q2, an annual rate of 3.6%. Total domestic employment in Germany rose 1.1%, annualized, producing a gain in GDP/employee of 2.5%; this followed 3.0% in Q1. Thus, the first half-year saw this proxy for productivity increase at a 2.77% annual rate, which is the strongest two quarters since early 1998, eight years ago.
Employment is now also available by industry for Q2, and as seen in the table below, it continues to decline in the goods-producing sectors. This has been almost continuous since the combined data for East and West Germany begin in 1991. During that time, &quot;industry&quot; has declined from 30% of employment to right at 20% in Q1 and Q2 this year. To give this some context, in the US, the goods-producing sector (which also includes construction) has declined from 21% of nonfarm payrolls in early 1991 to 16.6% in the first half of 2006. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060817f.jpg" width="353">
Among individual German industries, finance and other business services have shown the greatest growth, with Q2 up 2.7% from a year ago, while total employment gained just 0.5%. The second ranking growth has been in government, health and other community services, which are up 0.9% in Q2 over Q2 2005.

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<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/GERMANY/GERMANY.HTM">Germany</a> Millions, Seas Adj</th>
<th scope="col">Q2 2006</th>
<th scope="col">Q1 2006</th>
<th scope="col">Q4 2005</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">Total Domestic Employment</td>
<td>38.96</td>
<td>38.85</td>
<td>38.88</td>
<td>38.77</td>
<td>38.82</td>
<td>38.85</td>
<td>38.72</td>
</tr>
<tr>
<td class="firstcol">Manufacturing</td>
<td>7.42</td>
<td>7.43</td>
<td>7.46</td>
<td>7.52</td>
<td>7.51</td>
<td>7.63</td>
<td>7.75</td>
</tr>
<tr class="odd">
<td class="firstcol">Construction</td>
<td>2.12</td>
<td>2.13</td>
<td>2.15</td>
<td>2.17</td>
<td>2.16</td>
<td>2.25</td>
<td>2.32</td>
</tr>
<tr>
<td class="firstcol">Trade, Hotels, Transportation, Etc.</td>
<td>9.80</td>
<td>9.75</td>
<td>9.77</td>
<td>9.75</td>
<td>9.76</td>
<td>9.80</td>
<td>9.72</td>
</tr>
<tr class="odd">
<td class="firstcol">Finance, Business Services</td>
<td>6.55</td>
<td>6.49</td>
<td>6.46</td>
<td>6.37</td>
<td>6.40</td>
<td>6.30</td>
<td>6.13</td>
</tr>
<tr>
<td class="firstcol">Gov&#39;t, Community Services</td>
<td>11.85</td>
<td>11.83</td>
<td>11.81</td>
<td>11.74</td>
<td>11.76</td>
<td>11.63</td>
<td>11.54</td>
</tr>
<tr class="odd">
<td class="firstcol">GDP Growth (%, SWDAAR)</td>
<td>3.6</td>
<td>2.7</td>
<td>1.1</td>
<td>2.4</td>
<td>1.1</td>
<td>0.8</td>
<td>-0.2</td>
</tr>
<tr>
<td class="firstcol">Employment Growth (%, SWDAAR)</td>
<td>1.1</td>
<td>-0.3</td>
<td>0.6</td>
<td>0.5</td>
<td>-0.1</td>
<td>0.4</td>
<td>-0.9</td>
</tr>
<tr class="odd">
<td class="firstcol">GDP/Employee (%, SWDAAR)</td>
<td>2.5</td>
<td>3.0</td>
<td>0.5</td>
<td>1.9</td>
<td>1.2</td>
<td>0.4</td>
<td>0.8</td>
</tr>
</tbody>
</table>
</body>
</html>

The German Federal Statistics Office today published the employment data that are inputs to the national accounts. So we can compare changes in GDP to changes in employment, yielding a rough measure of productivity in the German [...]

German Employment Grows in Q2 -- and So Does Productivity

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060817b.jpg" width="353">
The composite index of leading economic indicators dipped 0.1% during July and reversed the June uptick. The figure reported by the Conference Board was the fourth m/m decline this year and compared to Consensus expectations for a 0.1% increase.
During the last ten years there has been a 59% correlation between the y/y change in the leading indicators and the lagged change in real GDP.
The breadth of one month gain amongst the 10 components of the leading index slipped to 55% from 60% in June.
The method of calculating the contribution to the leading index from the spread between 10 year Treasury securities and the Fed funds rate has been revised. A negative contribution will now occur only when the spread inverts rather than when declining as in the past. More details can be found <a href="http://www.conference-board.org/pdf_free/economics/bci/lei0705.pdf">here</a>.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060817c.jpg" width="353">
The leading index is based on eight previously reported economic data series. Two series, orders for consumer goods and orders for capital goods, are estimated.
The coincident indicators rose 0.2% for the sixth month this year. During the last one &amp; six months all of the coincident series rose and over the last ten years there has been a 91% correlation between the y/y change in the coincident indicators and real GDP growth.
The lagging indicators reversed 0.1% of the prior month&#39;s revised 0.5% jump. The ratio of coincident to lagging indicators, a measure of actual economic performance versus excess, rose slightly for only the second month this year.
Visit the Conference Board&#39;s <a href="http://www.conference-board.org">site</a> for coverage of leading indicator series from around the world.
The Taylor Principle and Recent FOMC Policy from the Federal Reserve Bank of St. Louis can be found <a href="http://research.stlouisfed.org/publications/mt/20060901/cover.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM">Business Cycle Indicators</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">Leading</td>
<td>-0.1%</td>
<td>0.1%</td>
<td>0.9%</td>
<td>2.3%</td>
<td>7.4%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.2%</td>
<td>2.2%</td>
<td>2.5%</td>
<td>0.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>-0.1%</td>
<td>0.5%</td>
<td>2.6%</td>
<td>3.5%</td>
<td>0.0%</td>
<td>-0.0%</td>
</tr>
</tbody>
</table>
</body>
</html>

The composite index of leading economic indicators dipped 0.1% during July and reversed the June uptick. The figure reported by the Conference Board was the fourth m/m decline this year and compared to Consensus expectations for a [...]

Leading Economic Indicators Dipped, Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060817a.jpg" width="353">
Initial claims for jobless insurance last week reversed all of the upwardly revised increase the prior period and fell 10,000 to 312,000. Consensus expectations had been for 317,000 claims.
During July, claims averaged 314,000.A portion of the decline from that level reflects a fall from levels that spiked higher during the automobile industry&#39;s annual summer shutdown.
The latest figure covers the survey period for August nonfarm payrolls and initial claims rose 7,000 (2.3%) from the July period.
During the last ten years there has been a (negative) 78% correlation between the level of initial claims and the m/m change in nonfarm payroll employment.
The less volatile four-week moving average of initial claims increased to 311,250 (-1.5% y/y).
Continuing claims for unemployment insurance rose 34,000 following a slightly revised 41,000 increase during the previous week.
The insured rate of unemployment remained unchanged at 1.9% where it has been since February.
An Update on the Status of the Economy and Its Implications for Monetary Policy is yesterday&#39;s speech by Dallas Federal Reserve Bank President Fisher and it is available <a href="http://dallasfed.org/news/speeches/fisher/2006/fs060816.cfm"> here</a>.
Labor Markets and the Macroeconomy: Conference Summary from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-17.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/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">8/12/06</th>
<th scope="col">8/05/06</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">Initial Claims</td>
<td>312</td>
<td>322</td>
<td>-2.5%</td>
<td>332</td>
<td>343</td>
<td>403</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Continuing Claims</td>
<td>--</td>
<td>2,507</td>
<td>-3.5%</td>
<td>2,662</td>
<td>2,924</td>
<td>3,532</td>
</tr>
</tbody>
</table>
</body>
</html>

Initial claims for jobless insurance last week reversed all of the upwardly revised increase the prior period and fell 10,000 to 312,000. Consensus expectations had been for 317,000 claims. During July, claims averaged 314,000.A [...]

Initial Claims for Unemployment Insurance Reverse Increase

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060817a.jpg" width="353">
Initial claims for jobless insurance last week reversed all of the upwardly revised increase the prior period and fell 10,000 to 312,000. Consensus expectations had been for 317,000 claims.
During July, claims averaged 314,000.A portion of the decline from that level reflects a fall from levels that spiked higher during the automobile industry&#39;s annual summer shutdown.
The latest figure covers the survey period for August nonfarm payrolls and initial claims rose 7,000 (2.3%) from the July period.
During the last ten years there has been a (negative) 78% correlation between the level of initial claims and the m/m change in nonfarm payroll employment.
The less volatile four-week moving average of initial claims increased to 311,250 (-1.5% y/y).
Continuing claims for unemployment insurance rose 34,000 following a slightly revised 41,000 increase during the previous week.
The insured rate of unemployment remained unchanged at 1.9% where it has been since February.
An Update on the Status of the Economy and Its Implications for Monetary Policy is yesterday&#39;s speech by Dallas Federal Reserve Bank President Fisher and it is available <a href="http://dallasfed.org/news/speeches/fisher/2006/fs060816.cfm"> here</a>.
Labor Markets and the Macroeconomy: Conference Summary from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-17.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/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">8/12/06</th>
<th scope="col">8/05/06</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">Initial Claims</td>
<td>312</td>
<td>322</td>
<td>-2.5%</td>
<td>332</td>
<td>343</td>
<td>403</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Continuing Claims</td>
<td>--</td>
<td>2,507</td>
<td>-3.5%</td>
<td>2,662</td>
<td>2,924</td>
<td>3,532</td>
</tr>
</tbody>
</table>
Leading Economic Indicators Dipped, Again 
by <a href="/comment/Moeller.html">Tom Moeller</a> August 17, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060817b.jpg" width="353">
The composite index of leading economic indicators dipped 0.1% during July and reversed the June uptick. The figure reported by the Conference Board was the fourth m/m decline this year and compared to Consensus expectations for a 0.1% increase.
During the last ten years there has been a 59% correlation between the y/y change in the leading indicators and the lagged change in real GDP.
The breadth of one month gain amongst the 10 components of the leading index slipped to 55% from 60% in June.
The method of calculating the contribution to the leading index from the spread between 10 year Treasury securities and the Fed funds rate has been revised. A negative contribution will now occur only when the spread inverts rather than when declining as in the past. More details can be found <a href="http://www.conference-board.org/pdf_free/economics/bci/lei0705.pdf">here</a>.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060817c.jpg" width="353">
The leading index is based on eight previously reported economic data series. Two series, orders for consumer goods and orders for capital goods, are estimated.
The coincident indicators rose 0.2% for the sixth month this year. During the last one &amp; six months all of the coincident series rose and over the last ten years there has been a 91% correlation between the y/y change in the coincident indicators and real GDP growth.
The lagging indicators reversed 0.1% of the prior month&#39;s revised 0.5% jump. The ratio of coincident to lagging indicators, a measure of actual economic performance versus excess, rose slightly for only the second month this year.
Visit the Conference Board&#39;s <a href="http://www.conference-board.org">site</a> for coverage of leading indicator series from around the world.
The Taylor Principle and Recent FOMC Policy from the Federal Reserve Bank of St. Louis can be found <a href="http://research.stlouisfed.org/publications/mt/20060901/cover.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM">Business Cycle Indicators</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">Leading</td>
<td>-0.1%</td>
<td>0.1%</td>
<td>0.9%</td>
<td>2.3%</td>
<td>7.4%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.2%</td>
<td>2.2%</td>
<td>2.5%</td>
<td>0.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>-0.1%</td>
<td>0.5%</td>
<td>2.6%</td>
<td>3.5%</td>
<td>0.0%</td>
<td>-0.0%</td>
</tr>
</tbody>
</table>
German Employment Grows in Q2 -- and So Does Productivity 
by <a href="/comment/Stone.html">Carol Stone</a> August 17, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060817d.jpg" width="353">
The German Federal Statistics Office today published the employment data that are inputs to the national accounts. So we can compare changes in GDP to changes in employment, yielding a rough measure of productivity in the German economy.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060817e.jpg" width="353">
As reported Monday, GDP expanded 0.9% in Q2, an annual rate of 3.6%. Total domestic employment in Germany rose 1.1%, annualized, producing a gain in GDP/employee of 2.5%; this followed 3.0% in Q1. Thus, the first half-year saw this proxy for productivity increase at a 2.77% annual rate, which is the strongest two quarters since early 1998, eight years ago.
Employment is now also available by industry for Q2, and as seen in the table below, it continues to decline in the goods-producing sectors. This has been almost continuous since the combined data for East and West Germany begin in 1991. During that time, &quot;industry&quot; has declined from 30% of employment to right at 20% in Q1 and Q2 this year. To give this some context, in the US, the goods-producing sector (which also includes construction) has declined from 21% of nonfarm payrolls in early 1991 to 16.6% in the first half of 2006. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060817f.jpg" width="353">
Among individual German industries, finance and other business services have shown the greatest growth, with Q2 up 2.7% from a year ago, while total employment gained just 0.5%. The second ranking growth has been in government, health and other community services, which are up 0.9% in Q2 over Q2 2005.

<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/GERMANY/GERMANY.HTM">Germany</a> Millions, Seas Adj</th>
<th scope="col">Q2 2006</th>
<th scope="col">Q1 2006</th>
<th scope="col">Q4 2005</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">Total Domestic Employment</td>
<td>38.96</td>
<td>38.85</td>
<td>38.88</td>
<td>38.77</td>
<td>38.82</td>
<td>38.85</td>
<td>38.72</td>
</tr>
<tr>
<td class="firstcol">Manufacturing</td>
<td>7.42</td>
<td>7.43</td>
<td>7.46</td>
<td>7.52</td>
<td>7.51</td>
<td>7.63</td>
<td>7.75</td>
</tr>
<tr class="odd">
<td class="firstcol">Construction</td>
<td>2.12</td>
<td>2.13</td>
<td>2.15</td>
<td>2.17</td>
<td>2.16</td>
<td>2.25</td>
<td>2.32</td>
</tr>
<tr>
<td class="firstcol">Trade, Hotels, Transportation, Etc.</td>
<td>9.80</td>
<td>9.75</td>
<td>9.77</td>
<td>9.75</td>
<td>9.76</td>
<td>9.80</td>
<td>9.72</td>
</tr>
<tr class="odd">
<td class="firstcol">Finance, Business Services</td>
<td>6.55</td>
<td>6.49</td>
<td>6.46</td>
<td>6.37</td>
<td>6.40</td>
<td>6.30</td>
<td>6.13</td>
</tr>
<tr>
<td class="firstcol">Gov&#39;t, Community Services</td>
<td>11.85</td>
<td>11.83</td>
<td>11.81</td>
<td>11.74</td>
<td>11.76</td>
<td>11.63</td>
<td>11.54</td>
</tr>
<tr class="odd">
<td class="firstcol">GDP Growth (%, SWDAAR)</td>
<td>3.6</td>
<td>2.7</td>
<td>1.1</td>
<td>2.4</td>
<td>1.1</td>
<td>0.8</td>
<td>-0.2</td>
</tr>
<tr>
<td class="firstcol">Employment Growth (%, SWDAAR)</td>
<td>1.1</td>
<td>-0.3</td>
<td>0.6</td>
<td>0.5</td>
<td>-0.1</td>
<td>0.4</td>
<td>-0.9</td>
</tr>
<tr class="odd">
<td class="firstcol">GDP/Employee (%, SWDAAR)</td>
<td>2.5</td>
<td>3.0</td>
<td>0.5</td>
<td>1.9</td>
<td>1.2</td>
<td>0.4</td>
<td>0.8</td>
</tr>
</tbody>
</table>
</body>
</html>

Surging orders for computers and electronics propelling durable goods orders

Next year's inflation forecasts are on the rise and above target

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

Elevated energy prices putting intense upward pressure on input prices around the globe

US is big leader in global surge in private AI investment

Larger-than-usual income tax refunds this year are supporting consumer spending

Sharply rising share of AI-related jobs

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

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In this week's Letter, we explore the significant pullback in oil prices that followed the US-Iran memorandum of understanding and consider its broader economic implications. The agreement saw a fragile ceasefire ensue and a gradual resumption of shipping flows through the Strait of Hormuz (chart 1). We acknowledge that this major pullback will certainly be welcome to policymakers across the region and beyond. Previously elevated energy prices had added to the fiscal burdens of governments and sharpened the dilemma facing central banks (chart 2). That dilemma pits the need to rein in inflation against the risk of choking off economic growth. That said, while one source of inflationary pressure seems to be ebbing, another looks to be emerging on the horizon. It stems from a potential "Super El Niño" event, which meteorologists have been warning about for some time now. Asia sits at the centre of such risks, as past strong El Niño events have directly and adversely affected crop production (chart 3). The impact is not limited to potential surges in headline inflation via food supply shocks, especially in Asia. It extends directly to growth as well (chart 4), given the nontrivial share of GDP that agriculture still commands in many Asian economies (chart 5). Should price pressures simply rotate from energy to food, government subsidies may follow suit (chart 6). Central bankers, for their part, may find themselves unable to ease off the tightening pedal just yet. Some Asian economies, however, would still manage to offset such a growth shock through other engines. Electronics and semiconductors, buoyed by the current AI upcycle, offer one such cushion for the more fortunate. For others, lacking such offsets, the agricultural hit may simply have to be borne in full.

**The US-Iran conflict and oil prices**
The recent memorandum of understanding between the US and Iran, aimed at working towards a final deal, has already brought visible relief to crude oil markets (chart 1). This relief has held despite the renewed tensions that have followed the agreement, which markets seem to have largely looked past. The easing in prices should go a long way towards unwinding the inflation concerns that elevated oil prices had previously stoked. Much of the pullback reflects anticipation of the substantial supply now expected to return to global markets. Yet some shipping trackers, such as the IMF's, already point to a marked pickup in traffic through the Strait of Hormuz. Even so, those volumes still remain well below the levels seen before the conflict began in the region. 

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**Oil prices and inflation in Asia**
Should this normalisation of shipping flows through the Strait of Hormuz persist, it would support a corresponding easing in oil prices and energy inflation. That moderation in energy costs would, in turn, help bring down broader headline inflation across the economy. As chart 2 shows, energy has been a large contributor to headline inflation in recent years, though other important forces have been at play too. Such an outcome, in which restored oil supply cools energy inflation, would be a welcome development for central bankers. They face the delicate task of reining in price pressures without tightening policy so far that growth stalls or tips into contraction. That said, while one driver of price pressures now seems to be ebbing, albeit not without the risk of renewed tensions, another source of inflation is building on the horizon.

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**Risks of a “Super El Niño”**
As meteorological agencies have warned for some time, the world may be on the cusp of a Super El Niño. The probability of such an event has risen sharply in recent months. Were it to materialise, it would unleash a range of disruptions from the second half of this year, chief among them shifts in weather and climate patterns that can severely dent crop yields. Asian staples such as rice, wheat and palm oil are especially exposed, since strong El Niño events tend to bring drier conditions and reduced rainfall, in turn cutting output across affected economies in the region. Chart 3 illustrates just how tightly some crops are bound to these conditions: SOI readings correlate closely with certain economies' production, notably Thailand's rice harvest, underscoring how dependent such output remains on the weather. These supply shortfalls would then feed inflationary pressures through the food channel. So central bankers may not be able to rest entirely easy following the easing of tensions between the US and Iran, finding themselves wrestling with a fresh set of emerging inflation risks instead.

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Delving deeper, an examination of recent strong El Niño episodes against the growth of Asian economies' agricultural sectors shows that extreme weather weighs not just on food prices but on economic growth itself. As chart 4 shows, previous major El Niño episodes—notably in 2014–16 and 2023–24—were associated with weaker agricultural growth across parts of Asia, with India and Thailand appearing particularly vulnerable. This is understandable, since these episodes coincided with reduced crop production and, in turn, lower crop revenue. Should these past episodes serve as a gauge and given that the coming event is potentially the worst on record, these economies stand to suffer once more should it hit as hard as feared.

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Beyond the sensitivity of individual economies to extreme El Niño events, vulnerability also depends on the size of the agricultural sector itself. Economies where agriculture accounts for a larger share of output are naturally more exposed to weather-related disruptions. As chart 5 shows, economies such as India, Indonesia and, to a lesser extent, Vietnam carry a comparatively higher share of agriculture in their GDP, which presents a further source of risk. That said, this dimension should not be read in isolation, since the eventual impact would turn on a combination of factors: the degree of exposure, the intensity of El Niño's effect on each economy's agricultural output, and the actual weather conditions that come to pass.

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Bringing it all together, the recent de-escalation between the US and Iran and the early normalisation of flows through the Strait of Hormuz are certainly welcome news. Businesses, consumers and policymakers alike stand to benefit from the relief that lower energy prices would bring. Yet the formation of extreme El Niño conditions presents a looming inflation risk over the months ahead. It may displace energy as the dominant driver, shifting the pressure from the energy channel to the food channel. For Asia's central bankers, this could mean they are unable to ease off the tightening pedal just yet (chart 6). Food inflation may simply pick up where energy inflation leaves off, keeping price pressures elevated for longer. Regional governments, too, may have to redirect funds from energy subsidies to food subsidies should the supply shock play out. On growth, however, the picture may prove more uneven across the region than a single narrative suggests. Economies exposed to the current AI upcycle could keep leaning on those sectors for continued support. Those less exposed, by contrast, may simply have to absorb the hit to agriculture with little to offset it.

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Asia

Economic Letter from Asia: Oil Down, Emerging Risks

Winnie Tapasanun

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The U.S. international trade deficit in goods ballooned to a larger-than-expected $105.75 billion in May after narrowing to $83.01 billion in April, according to the advance estimate from the U.S. Census Bureau. The May reading marked the third widening in the goods trade deficit in four months, exceeding a $91.55 billion shortfall in May 2025. A deficit of $84.0 billion for May had been expected by the Action Economics Forecast Survey. The deficit reached a low of $61.44 billion in October 2025 (the smallest since February 2020) and a record high of $158.73 billion in March 2025. On a quarterly basis, the deficit averaged $94.38 billion so far in Q2'26 versus $81.96 billion in Q1'26.

Total goods exports fell 5.4% m/m (+14.7% y/y) to $207.67 billion in May, the first monthly fall since December and a three-month low, following a 3.8% rise to a record-high $219.52 billion in April. Exports were up 27.7% from a June 2023 low. The m/m fall in exports in May reflected declines of 9.2% (-5.0% y/y) in nonfood consumer goods excluding autos, 7.0% (+23.2% y/y) in industrial supplies & materials, 6.8% (+19.5% y/y) in other goods, and 5.0% (+14.8% y/y) in capital goods excluding autos. To the upside, exports of foods, feeds & beverages (+3.9%; +19.1% y/y) and automotive vehicles & parts (+0.5%; -3.6% y/y) rebounded m/m in May.

Total goods imports, up for the fourth consecutive month, rose 3.6% m/m (15.0% y/y) to $313.43 billion in May, after a 2.0% increase to $302.53 billion in April, marking the highest level since the March 2025 record high of $340.11 billion. Imports were up 25.0% from a March 2023 low. The m/m rise in imports in May was broad-based across all end-use categories, led by an 11.5% gain (22.0% y/y) in other goods, followed by increases of 6.3% (1.4% y/y) in automotive vehicles & parts, 5.7% (-9.1% y/y) in nonfood consumer goods excluding autos, 4.8% (11.7% y/y) in industrial supplies & materials, 4.3% (-0.2% y/y) in foods, feeds & beverages, and 0.4% (41.9% y/y) in capital goods excluding autos. 

The advance international trade data can be found in Haver's **USECON** database. The expectation figure is from the Action Economics Forecast Survey, which is in **AS1REPNA**.

- Deficit: $105.75 bil. in May, up $22.75 bil. (+27.4%) from April’s $83.01 bil.
- Exports -5.4%, first m/m decline since Dec., led by a 9.2% drop in nonauto consumer goods exports.
- Imports +3.6%, fourth straight m/m rise to highest level since Mar. ’25, driven by an 11.5% gain in imports of other goods.

U.S. Goods Trade Deficit Balloons in May, Largest Since March ’25

Robert Brusca

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In June, there's a slight divergence in the performance of industry climate and service sector climate, although broadly the two sectors have seen their composite indexes moving in more or less the same direction. Since 2024, the industry survey has moved up slightly after falling faster than the services gauge. The services survey has been locked in a slow trend of deterioration, largely since it reached a peak in 2021 in the wake of COVID.

The industry climate gauge has a 30.8 percentile standing, but the recent production trend, while declining, logs a more substantial 42.8 percentile standing. Contributing survey members find their own industry ‘likely trend’ much weaker, at a 21.2 percentile standing. Demand overall, however, has standings above the 50th percentile, putting overall and foreign orders & demand each above their respective medians for this period of ranking back to 2001. Inventories have a strong 81-percentile ranking. Prices are extremely strong, with 87-percentile and 86-percentile standings for respondents for their personal industry trend for prices as well as for the overarching manufacturing sector estimate of prices. Higher prices seem to be the one thing that everyone can agree on by a large margin.

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As for services, the service climate index improved slightly to 93.4 in June from 92.6 in May. The three-month moving average was weaker in June than in May as well; the 12-month moving average has been stuck at its current level for a number of months. The outlook in June improved slightly to a reading of -12 from -15 in May, but the outlook ranking is still a weak 26.8 percentile standing. The three-month expectations and observations of past sales trends haven't changed much in the last two months, but there has been a slight improvement for sales expectations. However, both sales metrics have low 20th percentile standings. Sales prices have deteriorated slightly in June compared to May for both the observed and the expected trends, but prices have standings above their 50th percentiles, logging above-median performance. Employment over the last three months has weakened noticeably, and expected employment is weaker by a small amount.

In terms of rankings, all of the sector rankings are below the 50th percentile on all of these observations, including the climate headline except for sales prices where both the past three-month observed trend and the expected trend have readings above their respective 50th percentiles, indicating past and expected price pressures in excess of normal.

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**Assessment**
On balance, the readings for the French industry, manufacturing sector and services are not encouraging. In addition, concerns about prices linger. The services sector, those concerns seem moderate compared to the concerns in manufacturing.

The hot war continues between Ukraine and Russia, while in the Middle East there was talk of some improvement and a potential peace deal between the United States and Iran, but every time there is some talk of a breakthrough, there appears to be a breakdown. In the most recent development, Iran has asserted its right to control traffic through the Strait of Hormuz, and it's not clear how that demand would ever be consistent with the U.S. allowing a ceasefire. It appears that Iran may have traded its irreconcilable demand for nuclear weapons for a more pragmatic and real-world argument—that it will control the traffic through the Strait of Hormuz simply because it can—and it still is doing exactly that, even after all the destruction it suffered.

Stopping Iran from controlling the Strait would take a commitment to restart the war. All this makes me personally more pessimistic. I think Iran sees the need for Trump to cut a deal and stop the war before the U.S. mid-term elections, and it is pressing that need to its advantage. Trading its nuclear ambitions for real world control of the Strait would elevate Iran’s power from being dangerous but ethereal to a real world event with constant consequences.

France

French Industry and Services Confidence Diverge in June

Andrew Cates

**Equity Momentum and Global Surprises — Still Moving Together**
One of the more telling features of global equity markets in 2026 has been the persistence of the correlation between non-US equity momentum and global growth and inflation surprise indices. Equity markets outside the United States have generally prospered when economic data have beaten consensus expectations and when inflation surprises have been negative  — a combination that has historically been associated with stronger corporate earnings and a more benign policy backdrop in economies other than the US. That correlation has held reasonably well through the turbulence of the past few months, even as the Middle East conflict introduced significant noise into both the economic data and the financial market signal. What the chart reveals this week is a picture of moderate but not alarming deterioration: global growth surprises have softened at the margin, consistent with the energy cost headwinds that have weighed on European and Asian activity, but the relationship between equity momentum and the broader data pulse remains intact. It is a signal that market participants continue to track economic fundamentals rather than purely geopolitical newsflow — a modestly reassuring sign that the underlying framework for assessing the global cycle has not broken down.

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**The Fed Decouples: Why Oil and US Two-Year Yields Have Parted Ways**
For much of 2026, oil prices and US two-year Treasury yields moved in close alignment. The logic was straightforward: higher oil prices raised inflation expectations, which in turn pushed market participants to anticipate a more hawkish Federal Reserve, lifting short-dated yields in the process. That relationship held with notable consistency through the March escalation and the months that followed, as energy market shocks and monetary policy expectations fed off each other. What this week’s chart captures is a striking breakdown in that correlation. As oil prices have fallen on the back of the US-Iran memorandum of understanding and the associated unwinding of the geopolitical risk premium, US two-year yields have not followed them lower. The reason is last week’s Federal Reserve meeting. Under new chair Kevin Warsh, the Fed delivered a hawkish dot plot that shifted the median year-end projection to a hike, making clear that the easing cycle previously priced by some market participants is no longer the central scenario. The message is important: the deflationary impulse from lower oil prices is being offset — at least in the Fed’s framing — by persistent underlying inflation pressures and a commitment to keeping policy tight.

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**Flash PMIs Signal Easing Supply Chain Stress and Softer Price Pressures**
June’s flash PMI surveys, released this week across the major advanced economies, provide a timely read on how the global manufacturing and services sectors are absorbing the shifting macro backdrop. Two findings stand out. First, supplier delivery times have improved (or not lengthened as much as they had in the prior two months). This finding coheres naturally with the broader narrative: lower oil prices reduce transport and energy input costs, while the resumption of Strait of Hormuz shipping flows — examined in more detail in chart 4 — is beginning to reduce the freight disruption and re-routing costs that had been building since the conflict escalated. Second, output price inflation in manufacturing has softened, suggesting that some of the pipeline pressure from earlier energy cost spikes is beginning to fade.

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**Hormuz Traffic and Oil: A Coherent Story of Tentative Normalisation**
The recent US-Iran memorandum of understanding to work towards a final deal, though not without subsequent flare-ups, has already brought relief to markets, most visibly in crude oil prices. This should go a long way towards unwinding the inflation-related concerns that previously elevated oil prices had stoked. While the pullback has owed much to anticipation of the glut of pent-up supply expected to follow, certain trackers of shipping volume through the Strait of Hormuz, such as the IMF’s, already point to a marked pickup in traffic, even if it remains well below pre-conflict levels. Should this normalisation of shipping flows persist, it would lend continued justification to a corresponding easing in oil prices, energy-related inflation and, by extension, headline inflation — a welcome development for central banks grappling with the delicate balancing act of reining in price pressures without dampening growth too sharply.

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**South Korea’s Trade Data Flag a Modest Softening in Global Demand**
South Korea’s trade data serve as one of the global economy’s most useful early warning systems. As one of the world’s most open economies, with exports spanning semiconductors, petrochemicals, steel, automobiles and consumer electronics, South Korea’s monthly trade figures provide a timely and broad-based read on the state of global demand. This week’s data show a slightly softer picture than the strong prints that characterised much of the first quarter. Headline export growth has moderated at the margin, and crucially, semiconductor exports — which had been the most dynamic component of the trade data, propelled by AI-related chip demand — have also come in a touch below the exceptional run rates seen earlier in the year. This is not, in itself, alarming: some moderation from peak rates was always to be expected, and the semiconductor cycle remains structurally supported by the scale of AI infrastructure investment globally.

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**A Super El Niño on the Horizon — The Next Inflation Risk**
With that said, while one driver of price pressures seems to be ebbing for now — albeit not without the risk of future flare-ups — another potential inflationary risk looms on the horizon. The chart illustrates the transmission mechanism. It plots Thailand’s milled rice production (left axis) against Australia’s Southern Oscillation Index (right axis), a well-established barometer of El Niño and La Niña conditions. The convention is straightforward: SOI readings persistently above +8 indicate La Niña, associated with above-average rainfall across Southeast Asia and broadly supportive crop conditions; readings persistently below -8 signal El Niño, which brings drought stress and reduced water availability across the region. The historical relationship is striking. The sharp negative SOI troughs around 2002–03, 2009–10 and most dramatically around 2015 all coincide with visible falls in Thai milled rice output. The severe El Niño of 2014–16 produced both the deepest SOI trough in the series and the sharpest single drop in rice production, to below 24,000 thousand tonnes. As meteorological authorities have been warning for some time, the world appears to be facing an imminent Super El Niño event, with the SOI already drifting back towards negative territory in recent months. Were a significant El Niño to materialise in the second half of this year, the implications for Thai rice output — and by extension for Asian food price inflation — could be substantial. Central bankers, in other words, may find themselves having to wrestle with a new inflationary impulse just as they had begun to hope the worst was behind them.

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The mood in global financial markets this week is more settled, though “settled” should not be confused with resolved. The US-Iran memorandum of understanding, signed last week, has continued to do its work: oil prices have fallen further, Strait of Hormuz shipping traffic has picked up measurably, and the risk premium that had been embedded in energy markets since the conflict escalated in March is now visibly unwinding. That is a material development for the inflation outlook, and central bankers will be watching carefully. Yet the picture is not without its complications. Technology stocks — the most conspicuous beneficiary of the prevailing low-rate, high-growth narrative — have been subject to renewed jitters this week, as investors grow more attentive to stretched valuations and the implications of a Federal Reserve that, under new chair Kevin Warsh, is no longer signalling the easing cycle previously priced into markets. Against this backdrop, this week’s charts draw on the latest data to assess where the global economic cycle stands. Equity momentum outside the United States has tracked closely with global growth and inflation surprises, a correlation that tells us something important about how activity is being perceived (chart 1). Meanwhile, the breakdown of the previously tight relationship between oil prices and US two-year yields is arguably one of the more telling market signals of recent weeks (chart 2). June’s flash PMI surveys point to easing supply chain stress and softer output price inflation in manufacturing — a finding that chimes naturally with lower crude prices and the resumption of Hormuz flows (chart 3). The Strait of Hormuz itself deserves a closer look: traffic data and the mechanics of the oil price pullback are telling a coherent story that supports the PMI picture (chart 4). South Korea’s trade data, including semiconductors, offer a slightly softer read on global demand momentum at the margin (chart 5). And looming on the horizon, one new risk is drawing the attention of meteorological authorities: a Super El Niño event whose probability has been rising, with potentially significant implications for food commodity prices and Asian agriculture (chart 6).

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Charts of the Week: Calmer Waters, New Currents

Michael J. Moran

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The price index for personal consumption expenditures rose 0.4% in May, although the measure almost rounded up to 0.5% (0.4498%). May marked the sixth consecutive month with headline prices increasing 0.3% or more. This series of changes has pulled the year-over-year inflation rate to 4.1%, up from 2.3% just over one year ago (April 2025). Energy prices, of course, have been the most important factor behind the acceleration in inflation, and they remained an issue in May, increasing 4.0% after advances of 3.9% and 11.6% in the prior two months. Food prices have moved erratically in the past year, with jumps and lulls leaving an average monthly increase of 0.2%. The noise was evident in recent months, with food prices increasing only 0.1% in May after a jump of 0.5% in April.

Core prices also have contributed to the pickup in inflation. After averaging monthly increases of 0.24% during 2025, core prices have increased at an average rate of 0.34% so far this year. The year-over-year increase in core inflation totaled 3.4% in May, up from a recent low of 2.6% in April of last year. Both the headline and core inflation rates are uncomfortably above the Federal Reserve’s target of 2.0%.

Total personal income rose briskly in May (0.7%). A surge in farm income played an important role (up 125% month-to-month, most likely reflecting government support payments), but nominal results also were firm elsewhere (up 0.5% ex farm income). Inflation reduced the purchasing power of this income gain, but aggregate income still advanced slightly in real terms (0.2%).

Given the recent surge in energy-driven inflation, May marked only the second monthly increase in real income so far this year. Tight budgets have dampened consumer spending, but individuals have not pulled to the sidelines. Real consumption expenditures rose 0.5% (annual rate) in the first quarter, and results for April and May suggest that real PCE is on track to increase 1.5% to 2.0% in the second quarter.

Households have managed to remain moderately active in their spending by limiting their saving. The saving rate has drifted lower since early 2024 moving to 3.0% in May (chart, below right). The erosion in saving perhaps seems reckless, but some of the reduction could be a response to the strength in the equity market, where wealth gains have possibly limited the incentive to save. Also, larger-than-normal tax refunds this year because of tax cuts in the One Big Beautiful Budget Act have allowed many households to spend actively despite modest increases in real income.

The personal income and consumption figures are available in Haver’s **USECON** database with detail in the **USNA** database. The Action Economics forecasts are in **AS1REPNA**.

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- Energy prices rose sharply for the third consecutive month; core prices were unsettling as well.
- A jump in nominal income translated to a modest advance in real terms, allowing consumers to remain reasonably active.

Economy in Brief

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