Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060620a.jpg" width="353">
Housing starts rebounded 5.0% last month to 1.957M units and recovered about all of the April decline that was revised slightly shallower. The rise by far exceeded Consensus expectations for stability at 1.869M starts.
Total housing starts nevertheless remained 13.6% below the peak this past January.
Most of the surprise last month was due to a 19.7% m/m jump in multi family starts which reversed a sharp April decline. For the first five months of this year multi family starts averaged 362M units, equal to the first five months of 2005.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060620b.jpg" width="353">
Single-family starts recovered just a piece of the prior months&#39; weakness and rose 2.1% to 1.586M units after three months of decline. During the first five months of this year single family starts were 1.5% below the first five months of 2005 and in May were 12.6% below the January peak.
By region, single family housing starts were weakest in the Midwest and posted a 15.6% (-25.4% y/y) decline. In the Northeast starts also slipped by 0.7% (-1.5% y/y) but in the South single family starts rose 8.2% (1.3% y/y). Out West starts rose 4.6% (-12.1% y/y).
Building permits fell for the fourth consecutive month. The 2.1% decline lowered permits 13.8% below the peak last September and reflected a 2.1% (-12.2% y/y) drop in permits to build single family homes. Single family permits in May were down 17.5% from the peak last September.
A Supervisor&#39;s Perspective on Mortgage Markets and Mortgage Lending Practices from Federal Reserve Governor Susan Schmidt Bies is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2006/20060614/default.htm"> here</a>.

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</table>
<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/@E9/@E901/@E90101/@E90101.HTM">Housing Starts (000s, AR)</a> </th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>1,957</td>
<td>1,863</td>
<td>-3.8%</td>
<td>2,073</td>
<td>1,950</td>
<td>1,854</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Single-family</td>
<td>1,586</td>
<td>1,553</td>
<td>-7.6%</td>
<td>1,719</td>
<td>1,604</td>
<td>1,505</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Multi-family</td>
<td>371</td>
<td>310</td>
<td>17.0%</td>
<td>354</td>
<td>345</td>
<td>349</td>
</tr>
<tr>
<td class="firstcol">Building Permits</td>
<td>1,932</td>
<td>1,973</td>
<td>-8.5%</td>
<td>2,144</td>
<td>2,057</td>
<td>1,8 88</td>
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</tbody>
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Housing starts rebounded 5.0% last month to 1.957M units and recovered about all of the April decline that was revised slightly shallower. The rise by far exceeded Consensus expectations for stability at 1.869M starts. Total housing [...]

Housing Starts Rebound

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060620a.jpg" width="353">
Housing starts rebounded 5.0% last month to 1.957M units and recovered about all of the April decline that was revised slightly shallower. The rise by far exceeded Consensus expectations for stability at 1.869M starts.
Total housing starts nevertheless remained 13.6% below the peak this past January.
Most of the surprise last month was due to a 19.7% m/m jump in multi family starts which reversed a sharp April decline. For the first five months of this year multi family starts averaged 362M units, equal to the first five months of 2005.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060620b.jpg" width="353">
Single-family starts recovered just a piece of the prior months&#39; weakness and rose 2.1% to 1.586M units after three months of decline. During the first five months of this year single family starts were 1.5% below the first five months of 2005 and in May were 12.6% below the January peak.
By region, single family housing starts were weakest in the Midwest and posted a 15.6% (-25.4% y/y) decline. In the Northeast starts also slipped by 0.7% (-1.5% y/y) but in the South single family starts rose 8.2% (1.3% y/y). Out West starts rose 4.6% (-12.1% y/y).
Building permits fell for the fourth consecutive month. The 2.1% decline lowered permits 13.8% below the peak last September and reflected a 2.1% (-12.2% y/y) drop in permits to build single family homes. Single family permits in May were down 17.5% from the peak last September.
A Supervisor&#39;s Perspective on Mortgage Markets and Mortgage Lending Practices from Federal Reserve Governor Susan Schmidt Bies is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2006/20060614/default.htm"> here</a>.

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<colgroup><col><col><col><col><col><col></colgroup>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E901/@E90101/@E90101.HTM">Housing Starts (000s, AR)</a> </th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>1,957</td>
<td>1,863</td>
<td>-3.8%</td>
<td>2,073</td>
<td>1,950</td>
<td>1,854</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Single-family</td>
<td>1,586</td>
<td>1,553</td>
<td>-7.6%</td>
<td>1,719</td>
<td>1,604</td>
<td>1,505</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Multi-family</td>
<td>371</td>
<td>310</td>
<td>17.0%</td>
<td>354</td>
<td>345</td>
<td>349</td>
</tr>
<tr>
<td class="firstcol">Building Permits</td>
<td>1,932</td>
<td>1,973</td>
<td>-8.5%</td>
<td>2,144</td>
<td>2,057</td>
<td>1,8 88</td>
</tr>
</tbody>
</table>
NAHB Housing Market Index Down Again 
by <a href="/comment/Moeller.html">Tom Moeller</a> June 20, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060620d.jpg" width="353">
The National Association of Home Builders&#39; (NAHB) reported that the June Composite Housing Market Index at 45 fell another 8.7% from May to the lowest level since April 1995. The figure matched Consensus expectations.
During the last twenty years there has been a 75% correlation between the y/y change in the Composite Index and the change in single family housing starts.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060620c.jpg" width="353">
The sub indexes covering current sales of single family homes (-39.0% y/y) and sales in the next six months (-37.5% y/y) were both down sharply m/m.
An index of the traffic of prospective home buyers dried up and fell 12.1% m/m (-47.3% y/y).
Housing markets around the country again were weak in June with the index for the Northeast off 14.9% (-43.7% y/y), in the Midwest off 13.8% (-51.9% y/y), out West down 1.6% (-31.5% y/y) and in the South off 3.9% (-36.4% y/y).
The NAHB index is a diffusion index based on a survey of builders. Readings above 50 signal that more builders view conditions as good than poor.
Visit the <a href="http://www.nahb.org">National Association of Home Builders</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S4/@S4.HTM">Nat&#39;l Association of Home Builders</a> </th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">June &#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">Composite Housing Market Index</td>
<td>45</td>
<td>51</td>
<td>70</td>
<td>67</td>
<td>68</td>
<td>64</td>
</tr>
</tbody>
</table>
Chain Store Sales Stable As Gas Prices Fell 
by <a href="/comment/Moeller.html">Tom Moeller</a> June 20, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060620e.jpg" width="353">
The International Council of Shopping Centers (ICSC)-UBS reported that chain store sales were stable last week following a 1.2% surge during the prior week.
Sales so far in June are 0.2% below the May average which fell 0.4% from April. 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 recovered another 1.0% (-2.2% y/y), up for the third week after several consecutive weeks of decline.
Retail gasoline prices fell four cents last week to an average $2.87 per gallon and reversed most of the increase during the prior two weeks. In spot market trading gasoline prices fell a nickel yesterday to $1.93 per gallon and were down a bit more than that from last week&#39;s average $1.99.
The just-released 2006 International Energy Outlook from the U.S. Energy Information Administration is available <a href="http://www.eia.doe.gov/oiaf/ieo/index.html"> here</a>.

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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">06/17/06</th>
<th scope="col">06/10/06</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>473.6</td>
<td>473.6</td>
<td>3.9%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>
 Employment Situation in Italy Improves: Foreign New Orders up Sharply  
by <a href="/comment/Curley.html">Louise Curley</a> June 20, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060620f.jpg" width="353">
Italy&#39;s labor force survey for the first quarter shows commendable improvement in the employment situation throughout the country. Total employment rose almost 1% to 22.8 million in the first quarter from the last quarter of 2005 and was 1.2% above the first quarter or 2005. Employment in the North, where more than half the work force is employed, increased 1.2% over a year ago, while employment in the Central Region, where about 20% of the work force is employed, increased 1.9% over a year ago. Even in the depressed South, where almost 30% of the work force is employed, employment increased 0.6% above a year ago. Employment in the North and Central Regions has grown virtually steadily over the past five years while employment in the south has, more or less, stagnated. The first chart contrasts the trends in employment in the North and the South.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060620g.jpg" width="353">
The unemployment rate for the country as a whole was 7.4%, the lowest rate during the period for which data are available (Fourth quarter of 1992 to date). In the North the unemployment rate was 4.1%, in the central region, 6.1% and in the depressed south region, 13.6%. This last figure is also the lowest rate during the period for which data are available and is down from a peak of 19.7% in the second quarter of 1988.
Industrial orders for April rose 6.8% in the month and were 15.5% above a year ago. The big rise took place in export orders which rose 15.6% in the month and were 29.0% above a year ago. The increases in domestic orders were more subdued, 2.2% and 8.7%, respectively. The second chart shows the indexes (2000=100) for domestic and export orders.
Industrial sales declined in April from March, but were 5.7% above April, 2005. Domestic sales were 4.6% and foreign sales, 8.2% above their respective April, 2005 values. 

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<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Italy</th>
<th scope="col">Apr&nbsp; 06</th>
<th scope="col">Mar 05</th>
<th scope="col">Apr 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">Industrial Orders (2000=100)&nbsp;</td>
<td>115.0</td>
<td>107.7</td>
<td>99.6</td>
<td>6.78</td>
<td>15.46</td>
<td>102.0</td>
<td>98.9</td>
<td>95.4</td>
</tr>
<tr>
<td class="firstcol">Domestic</td>
<td>105.</td>
<td>102.7</td>
<td>96.6</td>
<td>2.24</td>
<td>8.70</td>
<td>98.9</td>
<td>96.8</td>
<td>93.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Foreign</td>
<td>137.5</td>
<td>119.0</td>
<td>106.6</td>
<td>15.55</td>
<td>25.99</td>
<td>111.6</td>
<td>103.6</td>
<td>98.7</td>
</tr>
<tr>
<td class="firstcol">Industrial Sales (2000=100)&nbsp;</td>
<td>112.8</td>
<td>115.0</td>
<td>106.7</td>
<td>-1.91</td>
<td>5.72</td>
<td>107.6</td>
<td>104.1</td>
<td>101.8</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic</td>
<td>110.9</td>
<td>112.8</td>
<td>106.0</td>
<td>-1.68</td>
<td>4.62</td>
<td>106.4</td>
<td>104.1</td>
<td>101.9</td>
</tr>
<tr>
<td class="firstcol">Foreign</td>
<td>117.7</td>
<td>120.8</td>
<td>108.8</td>
<td>-2.57</td>
<td>8.18</td>
<td>110.8</td>
<td>104.1</td>
<td>101.4&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol"></td>
<td>Q1 06</td>
<td>Q4 05</td>
<td>Q1 05</td>
<td>Q/Q</td>
<td>Y/Y</td>
<td>20 05</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">Employment (thousands)</td>
<td>22,814</td>
<td>22,598</td>
<td>22,549</td>
<td>0.96</td>
<td>1.18</td>
<td>22,571</td>
<td>22,404</td>
<td>22,240</td>
</tr>
<tr class="odd">
<td class="firstcol">North</td>
<td>11,687</td>
<td>11,601</td>
<td>11,546</td>
<td>0.74</td>
<td>1.22</td>
<td>11,591</td>
<td>11,433</td>
<td>11,364</td>
</tr>
<tr>
<td class="firstcol">Central</td>
<td>4,655</td>
<td>45-,594</td>
<td>4,567</td>
<td>1.32</td>
<td>1.93</td>
<td>4,577</td>
<td>4,539</td>
<td>4,424</td>
</tr>
<tr class="odd">
<td class="firstcol">South</td>
<td>6,472</td>
<td>6,403</td>
<td>6,436</td>
<td>1.08</td>
<td>0.56</td>
<td>6,414</td>
<td>6,431</td>
<td>6,452</td>
</tr>
<tr>
<td class="firstcol">Unemployment Rate</td>
<td>7.4</td>
<td>7.7</td>
<td>7.8</td>
<td>-0.3</td>
<td>-0.4</td>
<td>7.7</td>
<td>8.8</td>
<td>8.4</td>
</tr>
<tr class="odd">
<td class="firstcol">North</td>
<td>4.1</td>
<td>4.3</td>
<td>4.3</td>
<td>-0.2</td>
<td>-0.2</td>
<td>4.2</td>
<td>4.3</td>
<td>4.1</td>
</tr>
<tr>
<td class="firstcol">Central</td>
<td>6.1</td>
<td>6.6</td>
<td>6.3</td>
<td>-0.5</td>
<td>-0.2</td>
<td>6.4</td>
<td>6.5</td>
<td>6.9</td>
</tr>
<tr class="odd">
<td class="firstcol">South</td>
<td>13.6</td>
<td>14.0</td>
<td>14.5</td>
<td>-0.4</td>
<td>-0.9</td>
<td>14.3</td>
<td>14.9</td>
<td>16.1</td>
</tr>
</tbody>
</table>


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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/060619c.jpg" width="353">
The Euro Zone reported a deficit for April of 870 million euros in its trade in goods with the rest of the world. This was more than double the March figure of 350 million euros, and was in sharp contrast to the surplus of 3,167 million euros of April, 2005.
The deterioration in the Euro Zone&#39;s trade balance over the past year is largely the result of the increasing cost of fuel imports. The import category--mineral fuels and lubricants--is compared with the import category of manufactured products in the first chart. The data are plotted on a log scale so that the rates of change in the two series can be compared. It is apparent that imports of petroleum products have been rising at a much faster rate than those of manufactured products.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060619d.jpg" width="353">
The impact of rising oil prices is also reflected in the Euro Zone&#39;s trade balances with Russia and with OPEC, as can be seen in the second chart. The deterioration in trade with Russia from April of last year to April of this year was 1,408.2 million euros and that in trade with OPEC was 1,379.5 million euros. Together these two deficits accounted for about two thirds of the total deficit of 4,036.6 million euros.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060619e.jpg" width="353">
The final chart compares the prices of mineral fuels, lubricants and related products with the prices of all imports. Once again the data have been presented on a log scale to facilitate the comparison of rates of change. Over the past year, the prices of mineral fuels, lubricants and related product have risen 35.8% or more than three times as fast as the prices of all imports.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/EUROSTAT/EUROSTAT.htm">Euro Zone Trade in Goods</a> &nbsp;(SA &amp; WDA--Million Euros)</th>
<th scope="col">April&nbsp; 06</th>
<th scope="col">April 05</th>
<th scope="col">Y/Y Difference</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Exports&nbsp;</td>
<td>113,735.5</td>
<td>99,919.8</td>
<td>17,872.4</td>
</tr>
<tr>
<td class="firstcol">Imports</td>
<td>114,625.4</td>
<td>96,753.0</td>
<td>13,835.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance</td>
<td>-869.9</td>
<td>3,166.8</td>
<td>-4,036.6</td>
</tr>
<tr>
<td class="firstcol">Balance of Mineral Fuels and Lubricants</td>
<td>-20,037.5</td>
<td>-15,215.7</td>
<td>-4,821.8</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance on Manufactured Products</td>
<td>20,843.1</td>
<td>19,328.9</td>
<td>1,514.2</td>
</tr>
<tr>
<td class="firstcol">Balance with Russia</td>
<td>-3,747.6</td>
<td>-2,339.4</td>
<td>-1,408.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Import Price of Mineral Fuels, Lubricants &nbsp;and related Products (2000=100)</td>
<td>125.10</td>
<td>101.2</td>
<td>11.6*</td>
</tr>
<tr>
<td class="firstcol">Import Price of Total Imports</td>
<td>169.90</td>
<td>125.10</td>
<td>35.8*</td>
</tr>
</tbody>
</table>
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The Euro Zone reported a deficit for April of 870 million euros in its trade in goods with the rest of the world. This was more than double the March figure of 350 million euros, and was in sharp contrast to the surplus of 3,167 [...]

Euro Zone Trade Deficit Increases in April: Rising Cost of Petroleum Imports the Culprit

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060619b.jpg" width="353">
The June Empire State Mfg. Index of General Business Conditions, reported by the Federal Reserve Bank of New York, surged 16.07 points to 29.01 and recovered all of the declines during the prior two months. Consensus expectations had been for a slight m/m decline to 11.0.
Since the series&#39; inception in 2001 there has been a 75% correlation between the index level and the three month change in U.S. factory sector industrial production.
New orders &amp; shipments both surged to near the series&#39; recent highs while the index indicating the number of employees slipped to its lowest level of the year.
Pricing pressure rose to a level near the year&#39;s high. Since 2001 there has been an 88% correlation between the index of prices paid and the three month change in the core intermediate materials PPI.
Like the Philadelphia Fed Index of General Business Conditions, the Empire State Business Conditions Index reflects answers to an independent survey question; it is not a weighted combination of the components.
The Empire State index of expectations for business conditions in six months for June recovered just a piece of the prior month&#39;s sharp decline as expected new orders fell and pricing pressure surged to the highest level of this year.
The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. Participants from across the state in a variety of industries respond to a questionnaire and report the change in a variety of indicators from the previous month. Respondents also state the likely direction of these same indicators six months ahead. April 2002 is the first report, although survey data date back to July 2001. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060619a.jpg" width="353">
For more on the Empire State Manufacturing Survey, including methodologies and the latest report, click <a href="http://www.newyorkfed.org/research/regional_economy/empiresurvey_overview.html">here</a>.
The rise in the Empire State Manufacturing index ran somewhat counter to the decline in Philadelphia Fed&#39;s index reported Friday. The Federal Reserve Bank of Richmond will report its June Mfg. Survey index later this week. The reading will follow a sharp fall-off in the May figure, notably for orders, shipments and jobs The data will be available in the Haver SURVEYS database.
During the last ten years there has been a 39% correlation between the Richmond survey index level and the one month change in U.S. factory sector industrial production. The latest Richmond Fed Mfg. Survey is available <a href="http://www.richmondfed.org/research/regional_conditions/manufacturing_conditions/index.cfm">here</a>.
The Richmond Fed also publishes indexes of conditions in the Service Sector and the latest release is available <a href="http://www.richmondfed.org/research/regional_conditions/service_sector/index.cfm">here</a>.

<table border="0" cellspacing="0" width="100%">

</table>
<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/SURVEYS/@S5/@S511/@S511.HTM">Empire State Manufacturing Survey</a> </th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">June &#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 Business Conditions (diffusion index)</td>
<td>29.01</td>
<td>12.94</td>
<td>10.18</td>
<td>15.56</td>
<td>28.79</td>
<td>15.98</td>
</tr>
</tbody>
</table>
</body>
</html>

The June Empire State Mfg. Index of General Business Conditions, reported by the Federal Reserve Bank of New York, surged 16.07 points to 29.01 and recovered all of the declines during the prior two months. Consensus expectations had [...]

Empire State Index Recovered in June

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060619b.jpg" width="353">
The June Empire State Mfg. Index of General Business Conditions, reported by the Federal Reserve Bank of New York, surged 16.07 points to 29.01 and recovered all of the declines during the prior two months. Consensus expectations had been for a slight m/m decline to 11.0.
Since the series&#39; inception in 2001 there has been a 75% correlation between the index level and the three month change in U.S. factory sector industrial production.
New orders &amp; shipments both surged to near the series&#39; recent highs while the index indicating the number of employees slipped to its lowest level of the year.
Pricing pressure rose to a level near the year&#39;s high. Since 2001 there has been an 88% correlation between the index of prices paid and the three month change in the core intermediate materials PPI.
Like the Philadelphia Fed Index of General Business Conditions, the Empire State Business Conditions Index reflects answers to an independent survey question; it is not a weighted combination of the components.
The Empire State index of expectations for business conditions in six months for June recovered just a piece of the prior month&#39;s sharp decline as expected new orders fell and pricing pressure surged to the highest level of this year.
The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. Participants from across the state in a variety of industries respond to a questionnaire and report the change in a variety of indicators from the previous month. Respondents also state the likely direction of these same indicators six months ahead. April 2002 is the first report, although survey data date back to July 2001. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060619a.jpg" width="353">
For more on the Empire State Manufacturing Survey, including methodologies and the latest report, click <a href="http://www.newyorkfed.org/research/regional_economy/empiresurvey_overview.html">here</a>.
The rise in the Empire State Manufacturing index ran somewhat counter to the decline in Philadelphia Fed&#39;s index reported Friday. The Federal Reserve Bank of Richmond will report its June Mfg. Survey index later this week. The reading will follow a sharp fall-off in the May figure, notably for orders, shipments and jobs The data will be available in the Haver SURVEYS database.
During the last ten years there has been a 39% correlation between the Richmond survey index level and the one month change in U.S. factory sector industrial production. The latest Richmond Fed Mfg. Survey is available <a href="http://www.richmondfed.org/research/regional_conditions/manufacturing_conditions/index.cfm">here</a>.
The Richmond Fed also publishes indexes of conditions in the Service Sector and the latest release is available <a href="http://www.richmondfed.org/research/regional_conditions/service_sector/index.cfm">here</a>.

<table border="0" cellspacing="0" width="100%">

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<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/@S511/@S511.HTM">Empire State Manufacturing Survey</a> </th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">June &#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 Business Conditions (diffusion index)</td>
<td>29.01</td>
<td>12.94</td>
<td>10.18</td>
<td>15.56</td>
<td>28.79</td>
<td>15.98</td>
</tr>
</tbody>
</table>
 Euro Zone Trade Deficit Increases in April: Rising Cost of Petroleum Imports the Culprit 
by <a href="/comment/Curley.html">Louise Curley</a> June 19, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060619c.jpg" width="353">
The Euro Zone reported a deficit for April of 870 million euros in its trade in goods with the rest of the world. This was more than double the March figure of 350 million euros, and was in sharp contrast to the surplus of 3,167 million euros of April, 2005.
The deterioration in the Euro Zone&#39;s trade balance over the past year is largely the result of the increasing cost of fuel imports. The import category--mineral fuels and lubricants--is compared with the import category of manufactured products in the first chart. The data are plotted on a log scale so that the rates of change in the two series can be compared. It is apparent that imports of petroleum products have been rising at a much faster rate than those of manufactured products.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060619d.jpg" width="353">
The impact of rising oil prices is also reflected in the Euro Zone&#39;s trade balances with Russia and with OPEC, as can be seen in the second chart. The deterioration in trade with Russia from April of last year to April of this year was 1,408.2 million euros and that in trade with OPEC was 1,379.5 million euros. Together these two deficits accounted for about two thirds of the total deficit of 4,036.6 million euros.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060619e.jpg" width="353">
The final chart compares the prices of mineral fuels, lubricants and related products with the prices of all imports. Once again the data have been presented on a log scale to facilitate the comparison of rates of change. Over the past year, the prices of mineral fuels, lubricants and related product have risen 35.8% or more than three times as fast as the prices of all imports.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/EUROSTAT/EUROSTAT.htm">Euro Zone Trade in Goods</a> &nbsp;(SA &amp; WDA--Million Euros)</th>
<th scope="col">April&nbsp; 06</th>
<th scope="col">April 05</th>
<th scope="col">Y/Y Difference</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Exports&nbsp;</td>
<td>113,735.5</td>
<td>99,919.8</td>
<td>17,872.4</td>
</tr>
<tr>
<td class="firstcol">Imports</td>
<td>114,625.4</td>
<td>96,753.0</td>
<td>13,835.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance</td>
<td>-869.9</td>
<td>3,166.8</td>
<td>-4,036.6</td>
</tr>
<tr>
<td class="firstcol">Balance of Mineral Fuels and Lubricants</td>
<td>-20,037.5</td>
<td>-15,215.7</td>
<td>-4,821.8</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance on Manufactured Products</td>
<td>20,843.1</td>
<td>19,328.9</td>
<td>1,514.2</td>
</tr>
<tr>
<td class="firstcol">Balance with Russia</td>
<td>-3,747.6</td>
<td>-2,339.4</td>
<td>-1,408.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Import Price of Mineral Fuels, Lubricants &nbsp;and related Products (2000=100)</td>
<td>125.10</td>
<td>101.2</td>
<td>11.6*</td>
</tr>
<tr>
<td class="firstcol">Import Price of Total Imports</td>
<td>169.90</td>
<td>125.10</td>
<td>35.8*</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/060616e.jpg" width="353">
The Index of General Business Conditions in the manufacturing sector during June from the Philadelphia Fed dipped to 13.1 from an unrevised 14.4 during May. The decline was less than the Consensus expectation for a drop to 11.5.
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.
The index reflected declines in the sub indexes of delivery time and inventories. New orders and shipments recovered all or most of the sharp declines in May while employment recovered moderately. 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/060616f.jpg" width="353">
The business conditions index reflects a separate survey question, not the sub indexes.
The prices paid index gave back a piece of the May surge but remained quite elevated . 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 fell sharply to its lowest level since January of 2001 although expectations for employment improved.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos0606.html">here</a>.
The Effects of Globalization on Inflation and Their Implications for Monetary Policy is yesterday&#39;s speech by Federal Reserve Board Governor Donald L. Kohn and it is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2006/20060616/default.htm">here</a>l

<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/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">June &#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>13.1</td>
<td>14.4</td>
<td>0.0</td>
<td>12.4</td>
<td>28.0</td>
<td>10.5</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>48.7</td>
<td>55.3</td>
<td>28.2</td>
<td>43.5</td>
<td>51.2</td>
<td>16.8</td>
</tr>
</tbody>
</table>
</body>
</html>

The Index of General Business Conditions in the manufacturing sector during June from the Philadelphia Fed dipped to 13.1 from an unrevised 14.4 during May. The decline was less than the Consensus expectation for a drop to 11.5. [...]

Philadelphia Fed Business Activity Dipped

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060616c.jpg" width="353">
Consumer sentiment early this month improved according to the University of Michigan. The preliminary June index rose to 82.4 from a low 79.1 during May but recovered less than half of that month&#39;s decline. Consensus expectations had been for a further slide to 78.5.
During the last ten years there has been a 77% correlation between the level of consumer sentiment and the y/y change in real consumer spending.
The reading of current economic conditions recovered more than half of the May decline with a 7.3% increase as the index of current personal finances rose 9.8% (-8.2% y/y). The reading of buying conditions for large household goods also recouped half of the May decline with a 5.4% (-9.9% y/y) increase.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060616d.jpg" width="353">
Expectations for the economy improved a modest 1.5% after the 7.1% slide during May, bolstered by slightly improved expectations for personal finances and buying conditions during the next year. But long term (5 year) expectations for buying conditions fell a sharp 7.5% (-28.2% y/y) as consumers&#39; opinion about gov&#39;t economic policy cratered another 6.5% m/m (-22.6% y/y) to the lowest level since 1993.
Expected inflation during the next year slipped modestly to 4.6% but the five to ten year expected rate of inflation rose to 3.8%, near the nine year high.
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.
Why Are Yield Curves So Flat and Long Rates So Low Globally? is a speech by Fed Governor Randall S. Kroszner and can be found <a href="http://www.federalreserve.gov/boarddocs/speeches/2006/20060615/default.htm">here</a>.
The latest Beige Book covering regional economic conditions from the Federal Reserve Board can be found at this <a href="http://www.federalreserve.gov/fomc/beigebook/2006/20060614/default.htm">link</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/@EF/@EF14/@EF1402/@EF1402.HTM">University of Michigan</a></th>
<th scope="col">June (Prelim.</th>
<th scope="col">May</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>82.4</td>
<td>79.1</td>
<td>-14.2%</td>
<td>88.6</td>
<td>95.2</td>
<td>87.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>103.1</td>
<td>96.1</td>
<td>-8.9%</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>69.2</td>
<td>68.2</td>
<td>-18.6%</td>
<td>77.4</td>
<td>88.5</td>
<td>81.4</td>
</tr>
</tbody>
</table>
</body>
</html>

Consumer sentiment early this month improved according to the University of Michigan. The preliminary June index rose to 82.4 from a low 79.1 during May but recovered less than half of that month's decline. Consensus expectations had [...]

U.S. Consumers Felt a Little Better in Early June

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060616b.jpg" width="353">
The US current account deficit narrowed last quarter to $208.7B versus a revised record during 4Q &#39;05 of $223.1B. The deficit during 1Q &#39;06 equaled 6.4% of GDP, about stable with 6.3% for all of last year .
Consensus expectations had been for a 1Q deficit of $222.0B. Much of the surprise was narrowing of the unilateral transfers deficit to $19.9B from $26.2B during 4Q &#39;05.
The deficit in merchandise trade improved to $208B from the record $212.5B in 4Q which was little revised. Exports jumped another 5.0% (14.2% y/y) while imports grew just 1.6% (13.8% y/y).
The surplus in services trade fell slightly to $17.2B from an upwardly revised $17.7B surplus during 4Q. Exports of services grew 1.9% (8.4% y/y) while imports grew 3.0% (7.3% y/y), the strongest quarterly growth since 4Q &#39;04.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060616a.jpg" width="353">
From the capital account, net US foreign direct investment abroad fell sharply to $61.8B, its weakest since 4Q &#39;04. Foreign direct investment in the US, however, rose to $33.3B (9.0% y/y).
Energy and the Economy, yesterday&#39;s speech by Fed Chairman Ben S. Bernanke, is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2006/200606152/default.htm">here</a>.

<table border="0" cellspacing="0" width="100%">
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<thead>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EE/@EE01/@EE01.HTM">US Int&#39;l Balance of Payments</a></th>
<th scope="col">1Q 06</th>
<th scope="col">4Q &#39;05</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">Current Account Deficit</td>
<td>$208.7</td>
<td>$223.1B</td>
<td>$191.7B (1Q05)</td>
<td>$791.5B</td>
<td>$665.3B</td>
<td>$527.5B</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Goods/Services/Income Deficit</td>
<td>$188.8</td>
<td>$196.9B</td>
<td>$164.5B</td>
<td>$705.4B</td>
<td>$583.7B</td>
<td>$458.3B</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Exports</td>
<td>5.0%</td>
<td>4.4%</td>
<td>16.9%</td>
<td>14.6%</td>
<td>15.7%</td>
<td>5.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Imports</td>
<td>2.3%</td>
<td>6.9%</td>
<td>16.3%</td>
<td>16.3%</td>
<td>18.7%</td>
<td>7.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Unilateral Transfers Deficit</td>
<td>$19.9B</td>
<td>$26.2B</td>
<td>$27.2B</td>
<td>$86.1B</td>
<td>$81.6B</td>
<td>$69.2B</td>
</tr>
</tbody>
</table>
</body>
</html>

The US current account deficit narrowed last quarter to $208.7B versus a revised record during 4Q '05 of $223.1B. The deficit during 1Q '06 equaled 6.4% of GDP, about stable with 6.3% for all of last year . Consensus expectations had [...]

U.S. Current Account Deficit Narrowed Unexpectedly

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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Sandy Batten

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Total job openings edged up 0.1% m/m (+3.9% y/y) to 7.594 million in May from a downwardly revised 7.585 million in April (previously 7.618 million), according to the Job Openings and Labor Turnover Survey. Even with only a small rise, the level of openings in May was the highest since May 2024. Accordingly, the job openings rate (the ratio of openings to nonfarm employment plus openings) was unchanged at 4.6% in May. The April and May readings for the job openings rate were the highest since November 2024. In May, the number of unemployed fell while the number of openings edged up. Consequently, the number of openings rose further above the number of unemployed for the second consecutive month, another sign that previously observed softening in labor market conditions may be reversing.

Private sector openings were essentially unchanged in May from April, edging up 2,000 (+4.3% y/y) with the private job openings rate unchanged at 4.8%. The sluggishness in private openings in May was due entirely to a 119,000 decline in private education and health care openings. However, this followed a total increase of 298,000 in March and April. Openings increased in all other major sectors, led by a 95,000 increase in openings in leisure and hospitality. Openings were up 32,000 in construction, 33,000 in manufacturing, and 37,000 in trade and transportation. Total government openings rose 7,000 in May after an upwardly revised 63,000 jump in April (previously +47,000).

Total hiring slipped 0.9% m/m (-3.0% y/y) to 5.170 million in May from an upwardly revised 5.215 million in April (previously 5.116 million). This was the third monthly decline in hiring in the past four months. The hiring rate was unchanged in May at 3.3%. Private sector hiring fell 1.6% m/m (-3.5% y/y) in May, also the third monthly decline in the past four months. The weakness in hiring in May was concentrated in trade and transportation (-56,000) and in construction (-24,000). Manufacturing posted a small decline while professional and business services, and private education and health care posted small increases. Leisure and hospitality hiring rose 15,000, the second monthly increase in the past three months. Total government hiring increased 32,000 in May.

Total separations increased 1.3% (-3.5% y/y) to 5.101 million in May from an upwardly revised 5.038 million in April (previously 4.978 million). Both quits (+22,000) and layoffs (+41,000) increased in May with no change in other separations. The separation rate in May was unchanged at 3.2%. Private separations also rose 1.3% m/m (+62,000, -2.9% y/y) in May. Private quits increased 37,000, private layoffs rose 27,000, while other private separations declined 2,000. The rise in private layoffs was concentrated in construction (+47,000), trade and transportation (+52,000), and private education and healthcare (+52,000). Layoffs declined 18,000 in manufacturing, fell 37,000 in professional and business services, and decreased 50,000 in leisure and hospitality. Even with the rise in private quits in May, they have been trending down in 2026, implying that workers are feeling less comfortable with their employment prospects and hence are choosing to remain in their current jobs.

On the whole, employers remain cautious in hiring. Furthermore, workers are sufficiently unsure of their alternative employment prospects that they are refraining from leaving their current position. Still, openings have gradually risen since the end of last year after having gradually fallen throughout 202 and once again exceed the number of unemployed.

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

- Openings edged up 9,000 but to the highest level since May 2024.
- However, hiring fell 45,000 for the third monthly decline in the past four months.
- Separations rose 63,000 with increases in both quits and layoffs.

U.S. JOLTS: Openings and Hiring Little Changed in May

Robert Brusca

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Headline indexes for the European Monetary Union improved in June to a reading of 95.0 from 93.7 in May. The index had been stronger at 96.4 in March; however, it fell to 93.3 in April, recovered slightly to 93.7 in May, and has now reached 95.0. While still below its March high, the index has made progress in the wake of the outbreak of war-like conditions and the closure of the Strait of Hormuz.

**Sector performance**
The industrial reading for the sector, at -8, has a 36.3 percentile standing, which better than the headline index for the Monetary Union with a 25.4 percentile standing. The EMU-wide sector index, consumer confidence, improved to a net diffusion reading of -17.7 in June from -19 in May, but that still leaves it with a very weak 8.1 percentile standing, the lowest among sector readings. Retailing improved to a net diffusion reading of -10 in June from -11 in May and posted a 38.1 percentile standing. The construction sector deteriorated, falling back to -5 from -4 in May; it has been undergoing steady degradation since at least March, but it still has a 68.4 percentile standing. It is the only sector with a percentile standing above 50, placing it above its historic median. The services sector had a net diffusion reading of +3, identical to its May reading and has a 24-percentile standing.

**Sector index ranking**
The sector readings clearly show that the monetary union is exhibiting a number of sectors with subpar growth; beyond ‘subpar,’ many are quite weak. The exception is—and has been for some time—the construction sector, which continues to perform above average and post an above-median metric. It is, perhaps surprising that we often think of consumer confidence as being relatively forward-looking, but in this schematic, consumer confidence is the weakest of the sectors; in fact, like statistics from the U.S., we find the same prevailing situation with consumer readings exceptionally weak. These weak consumer readings coexist with much stronger retailing readings and stronger industrial readings, although both of those are below their historic medians in Europe. This report is a sort of gut check for what consumer confidence means; it may not be as important as we used to think it was. Although the business cycle at this juncture seems to be concentrated more on the supply side and on recovery in the business community, that effect compounded by the influence of AI is much stronger in the U.S. than in Europe.

**Country detail – Large economies**
The country detail shows 16 of 20 early reporting countries with only one of the top four countries showing a decline month-to-month, and that's France. France recorded a 0.2% decline in June, while Germany posted a 1.9% increase, Italy gained 1.3%, and Spain rose 0.7%. Spain had the lone small decrease in May, while in April all of the large countries showed significant monthly declines in their overall indexes in the wake of the onset of the war with Iran.

**Smaller economies in EMU**
Apart from the Big Four economies, 12 other EMU members report in June; of those, 5 showed month-to-month declines in their country level indexes. This was up from three showing declines in May, although it was a vast improvement from April, when all of the country indexes turned negative and generated substantial month-to-month declines, except for Slovakia and Lithuania.

**Big Four economy rankings**
Among the Big Four economies, the strongest ranking reading in June is Spain at a 52.3 percentile standing, followed by Italy at a 41.6 percentile standing, France at a 22.7 percentile standing, and Germany at an 18.7 percentile standing.

**Other economy rankings**
Among the other 12 countries, the percentile standing readings range from a high of 76.1% for Greece to a low of 9.3% for Austria. Five of 12 of the smaller EMU members have percentile standings of 50% or greater, putting them above their historic medians, while the other 7 have rankings that range from a high of 44.6% in Portugal to a low of 9.3% in Austria.

**Summing up**
Conditions in the monetary union have improved over the last two months after a substantial stumble in the wake of the war in the Middle East with Iran and the closure of the Strait of Hormuz. However, the rebound in the European recovery is in gear; it is slow and measured. Conditions are still weak on balance.

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Europe

EU Indexes Show European Improvement in June

Tian Yong Woon

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

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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.

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