Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203e.jpg" width="353">
The Institute for Supply Management (ISM) reported that the Business Activity Index for the non-manufacturing sector fell last month to 56.8 from an upwardly revised 61.0 in December. A reading above 50 indicates expansion. The latest reading was weaker than Consensus expectations for a decline to 59.5.
Since the series&#39; inception in 1997 there has been a 53% correlation between the level of the Business Activity Index and the q/q change in real GDP for services plus construction.
The new orders component slipped sharply to its lowest level since May 2003 and the employment index, though still indicating growth at 51.1, was at its lowest since July 2004. Since the series&#39; inception in 1997 there has been a 60% correlation between the level of the ISM non-manufacturing employment index and the m/m change in payroll employment in the service producing plus the construction industries.
Pricing power was stable last month with December. Since inception eight years ago, there has been a 70% correlation between the price index and the y/y change in the GDP Services chain price index.
ISM surveys more than 370 purchasing managers in more than 62 industries including construction, law firms, hospitals, government and retailers. The non-manufacturing survey dates only to July 1997, therefore its seasonal adjustment should be viewed tentatively.
Business Activity Index for the non-manufacturing sector reflects a question separate from the subgroups mentioned above. In contrast, the NAPM manufacturing sector composite index is a weighted average five components.

<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/@EF03/@EF03.HTM">ISM Nonmanufacturing Survey</a></th>
<th scope="col">Jan</th>
<th scope="col">Dec</th>
<th scope="col">Jan &#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">Business Activity Index</td>
<td>56.8</td>
<td>61.0</td>
<td>60.3</td>
<td>60.1</td>
<td>62.5</td>
<td>58.3</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>67.2</td>
<td>67.2</td>
<td>66.8</td>
<td>67.9</td>
<td>68.8</td>
<td>56.6</td>
</tr>
</tbody>
</table>


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The Institute for Supply Management (ISM) reported that the Business Activity Index for the non-manufacturing sector fell last month to 56.8 from an upwardly revised 61.0 in December. A reading above 50 indicates expansion. The latest [...]

ISM Nonmanufacturing Index Fell

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203b.jpg" width="353">
In January, non-farm payrolls rose 193,000 following a December increase revised to 140,000 from the 108,000 reported last month. In addition, the November increase was revised up further 354,000 from last month&#39;s reported 305,000 gain and from 215,000 reported initially. Consensus expectations had been for a 250,000 January increase.
Benchmark revisions of the establishment survey data extended back to 2001. For 2005, the average monthly increase in payrolls was revised down to 165,000 from 179,300, but the average gain during 2004 was revised up to 175,000 from 123,000.
From the household survey the unemployment rate fell to the lowest level since July 2001. At 4.7%, the rate reflected a 295,000 (2.0% y/y) rise in employment and a 39,000 (1.5% y/y) decline in the labor force. A 4.9% unemployment rate had been the Consensus expectation for January.
Factory sector payrolls increased modestly following a downwardly revised December decline and the average gain in factory payrolls during the last three months of 2005 was revised slightly lower to 9,000. Nevertheless, the breadth of gain in factory payrolls rose to 52.4%, its best since July 2004.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203a.jpg" width="353">
Warm weather helped lift construction employment in January by 46,000 (4.8% y/y) following an upwardly revised 5,000 increase during December.
Private service producing payrolls rose the same 136,000 (1.8% y/y) in January as during an upwardly revised December despite a 1,500 decline in retail employment (+1.0% y/y). That decline was offset by a 21,000 (1.9% y/y) gain in finance and a 24,000 (3.1% y/y) increase in professional &amp; business services. Education &amp; health services jobs posted a 39,000 (2.1% y/y) increase while jobs in leisure &amp; hospitality rose 26,000 (2.0% y/y).
Government sector employment fell 1,000 (+0.7% y/y) for the third decline in the last four months. Federal hiring fell 5,000 (-0.5% y/y) and state &amp; local jobs increased 4,000 (0.9% y/y).
Average hourly earnings again were a bit stronger than expected, rising 0.4%. Factory sector earnings rose 0.2% (2.2% y/y) and private service producing wages rose 0.4% (3.5% y/y).
2006: A Year of Transition at the Federal Reserve from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-1.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EB/@EB01/@EB01.HTM">Employment</a></th>
<th scope="col">Jan</th>
<th scope="col">Dec</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Payroll Employment</td>
<td>193,000</td>
<td>140,000</td>
<td>1.6%</td>
<td>1.6%</td>
<td>1.1%</td>
<td>-0.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Manufacturing</td>
<td>7,000</td>
<td>-1,000</td>
<td>-0.3%</td>
<td>-0.6%</td>
<td>-1.3%</td>
<td>-4.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Average Weekly Hours</td>
<td>33.8</td>
<td>33.8</td>
<td>33.7 (Jan &#39;05)</td>
<td>33.8</td>
<td>33.7</td>
<td>33.7</td>
</tr>
<tr>
<td class="firstcol">Average Hourly Earnings</td>
<td>0.4%</td>
<td>0.4%</td>
<td>3.3%</td>
<td>2.8%</td>
<td>2.1%</td>
<td>2.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment Rate</td>
<td>4.7%</td>
<td>4.9%</td>
<td>5.2% (Jan &#39;05)</td>
<td>5.1%</td>
<td>5.5%</td>
<td>6.0%</td>
</tr>
</tbody>
</table>
</body>
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In January, non-farm payrolls rose 193,000 following a December increase revised to 140,000 from the 108,000 reported last month. In addition, the November increase was revised up further 354,000 from last month's reported 305,000 [...]

U.S. Payrolls Just Below Expectations, Jobless Rate Lowest Since 2001

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203b.jpg" width="353">
In January, non-farm payrolls rose 193,000 following a December increase revised to 140,000 from the 108,000 reported last month. In addition, the November increase was revised up further 354,000 from last month&#39;s reported 305,000 gain and from 215,000 reported initially. Consensus expectations had been for a 250,000 January increase.
Benchmark revisions of the establishment survey data extended back to 2001. For 2005, the average monthly increase in payrolls was revised down to 165,000 from 179,300, but the average gain during 2004 was revised up to 175,000 from 123,000.
From the household survey the unemployment rate fell to the lowest level since July 2001. At 4.7%, the rate reflected a 295,000 (2.0% y/y) rise in employment and a 39,000 (1.5% y/y) decline in the labor force. A 4.9% unemployment rate had been the Consensus expectation for January.
Factory sector payrolls increased modestly following a downwardly revised December decline and the average gain in factory payrolls during the last three months of 2005 was revised slightly lower to 9,000. Nevertheless, the breadth of gain in factory payrolls rose to 52.4%, its best since July 2004.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203a.jpg" width="353">
Warm weather helped lift construction employment in January by 46,000 (4.8% y/y) following an upwardly revised 5,000 increase during December.
Private service producing payrolls rose the same 136,000 (1.8% y/y) in January as during an upwardly revised December despite a 1,500 decline in retail employment (+1.0% y/y). That decline was offset by a 21,000 (1.9% y/y) gain in finance and a 24,000 (3.1% y/y) increase in professional &amp; business services. Education &amp; health services jobs posted a 39,000 (2.1% y/y) increase while jobs in leisure &amp; hospitality rose 26,000 (2.0% y/y).
Government sector employment fell 1,000 (+0.7% y/y) for the third decline in the last four months. Federal hiring fell 5,000 (-0.5% y/y) and state &amp; local jobs increased 4,000 (0.9% y/y).
Average hourly earnings again were a bit stronger than expected, rising 0.4%. Factory sector earnings rose 0.2% (2.2% y/y) and private service producing wages rose 0.4% (3.5% y/y).
2006: A Year of Transition at the Federal Reserve from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-1.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EB/@EB01/@EB01.HTM">Employment</a></th>
<th scope="col">Jan</th>
<th scope="col">Dec</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Payroll Employment</td>
<td>193,000</td>
<td>140,000</td>
<td>1.6%</td>
<td>1.6%</td>
<td>1.1%</td>
<td>-0.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Manufacturing</td>
<td>7,000</td>
<td>-1,000</td>
<td>-0.3%</td>
<td>-0.6%</td>
<td>-1.3%</td>
<td>-4.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Average Weekly Hours</td>
<td>33.8</td>
<td>33.8</td>
<td>33.7 (Jan &#39;05)</td>
<td>33.8</td>
<td>33.7</td>
<td>33.7</td>
</tr>
<tr>
<td class="firstcol">Average Hourly Earnings</td>
<td>0.4%</td>
<td>0.4%</td>
<td>3.3%</td>
<td>2.8%</td>
<td>2.1%</td>
<td>2.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment Rate</td>
<td>4.7%</td>
<td>4.9%</td>
<td>5.2% (Jan &#39;05)</td>
<td>5.1%</td>
<td>5.5%</td>
<td>6.0%</td>
</tr>
</tbody>
</table>
ISM Nonmanufacturing Index Fell 
by <a href="/comment/Moeller.html">Tom Moeller</a> February 3, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203e.jpg" width="353">
The Institute for Supply Management (ISM) reported that the Business Activity Index for the non-manufacturing sector fell last month to 56.8 from an upwardly revised 61.0 in December. A reading above 50 indicates expansion. The latest reading was weaker than Consensus expectations for a decline to 59.5.
Since the series&#39; inception in 1997 there has been a 53% correlation between the level of the Business Activity Index and the q/q change in real GDP for services plus construction.
The new orders component slipped sharply to its lowest level since May 2003 and the employment index, though still indicating growth at 51.1, was at its lowest since July 2004. Since the series&#39; inception in 1997 there has been a 60% correlation between the level of the ISM non-manufacturing employment index and the m/m change in payroll employment in the service producing plus the construction industries.
Pricing power was stable last month with December. Since inception eight years ago, there has been a 70% correlation between the price index and the y/y change in the GDP Services chain price index.
ISM surveys more than 370 purchasing managers in more than 62 industries including construction, law firms, hospitals, government and retailers. The non-manufacturing survey dates only to July 1997, therefore its seasonal adjustment should be viewed tentatively.
Business Activity Index for the non-manufacturing sector reflects a question separate from the subgroups mentioned above. In contrast, the NAPM manufacturing sector composite index is a weighted average five components.

<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/@EF03/@EF03.HTM">ISM Nonmanufacturing Survey</a></th>
<th scope="col">Jan</th>
<th scope="col">Dec</th>
<th scope="col">Jan &#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">Business Activity Index</td>
<td>56.8</td>
<td>61.0</td>
<td>60.3</td>
<td>60.1</td>
<td>62.5</td>
<td>58.3</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>67.2</td>
<td>67.2</td>
<td>66.8</td>
<td>67.9</td>
<td>68.8</td>
<td>56.6</td>
</tr>
</tbody>
</table>
U.S. Consumer Sentiment Slipped Late in January 
by <a href="/comment/Moeller.html">Tom Moeller</a> February 3, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203d.jpg" width="353">
The University of Michigan reported that consumer sentiment for all of January fell a slight 0.3% from December to 91.2. The decline was due to a fall late in the month and compared to an initial read of 93.4. Consensus expectations had been for 93.0 for the full month.
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.
The current conditions index rose just 1.1% compared to a mid-month 2.7% increase. The reading of buying conditions for large household goods rose less than initially estimated and the reading of personal finances showed the same, slight decline (-4.1% y/y). Consumers&#39; assessment of gov&#39;t economic policy (-11.2% y/y) improved to the highest level since July.
Consumers&#39; expectations slipped 1.6% instead of increasing that amount as indicated mid-month. Expectations for personal finances fell sharply (-9.8% y/y).
The mean expected inflation rate for the next twelve months increased to 3.8% from 3.5% expected mid-month.
The University of Michigan survey is not seasonally adjusted.The mid-month survey is based on telephone interviews with 250 households nationwide on personal finances and business and buying conditions. The survey is expanded to a total of 500 interviews at month end.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM">University of Michigan</a></th>
<th scope="col">Jan&nbsp;</th>
<th scope="col">Dec</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>91.2</td>
<td>91.5</td>
<td>-4.5%</td>
<td>88.6</td>
<td>95.2</td>
<td>87.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>110.3</td>
<td>109.1</td>
<td>-0.5%</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>78.9</td>
<td>80.2</td>
<td>-7.9%</td>
<td>77.4</td>
<td>88.5</td>
<td>81.4</td>
</tr>
</tbody>
</table>
U.S. Factory Inventory Accumulation Slowed 
by <a href="/comment/Moeller.html">Tom Moeller</a> February 3, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203c.jpg" width="353">
Factory inventories grew 0.5% during December following an upwardly revised 0.3% increase during November. During the year, the rate of inventory accumulation slowed to 4.3% from 7.7% during 2004.
The rise last year in oil prices actually dampened the degree of that slowdown. During 2005, petroleum refineries&#39; inventories rose 26.0%. Less oil, factory inventories rose 3.4%, down from a 7.4% gain during 2004 and down from a 8.7% rate of accumulation early in the year.
December inventory accumulation was paced by a 0.8% (4.7% y/y) increase in primary metal which was the first monthly increase since May. Electrical equipment inventories also rose a strong 1.0% (5.7% y/y) but inventories of computers &amp; electronic products fell 0.9% (0.5% y/y) and that y/y gain was down from +7.1% last January. Machinery inventories rose just 0.1% (6.4% y/y), half the annual rate of accumulation early in the year.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203f.jpg" width="353">
Factory shipments surged 2.2% but the gain was pumped by a 14.4% (83.8% y/y) rise in nondefense aircraft and a 4.2% (-0.2% y/y) gain in motor vehicles &amp; parts. Less transportation altogether as well as petroleum, shipments rose 0.9% (5.1% y/y).
Total factory orders rose 1.1% and the advance report of a 1.3% rise in durable goods orders was revised up to 1.8%.
Unfilled orders surged another 2.4% powered by a 7.6% (55.8% y/y) rise in backlogs for nondefense aircraft orders. Less the transportation sector, backlogs rose 0.5% (10.0% y/y) and the ratio of total unfilled orders to shipments fell.<a href="http://research.stlouisfed.org/publications/review/05/07/Gali.pdf"> </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/@ED/@ED01/@ED0101/@ED01016/@ED01016.HTM">Factory Survey</a> (NAICS)</th>
<th scope="col">Dec</th>
<th scope="col">Nov</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">Inventories</td>
<td>0.5%</td>
<td>0.3%</td>
<td>4.3%</td>
<td>4.3%</td>
<td>7.7%</td>
<td>-1.1%</td>
</tr>
<tr>
<td class="firstcol">New Orders</td>
<td>1.1%</td>
<td>3.3%</td>
<td>10.5%</td>
<td>8.4%</td>
<td>9.3%</td>
<td>3.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Shipments</td>
<td>2.2%</td>
<td>0.8%</td>
<td>7.2%</td>
<td>7.4%</td>
<td>9.5%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">Unfilled Orders</td>
<td>2.4%</td>
<td>3.1%</td>
<td>16.3%</td>
<td>16.3%</td>
<td>8.4%</td>
<td>8.0%</td>
</tr>
</tbody>
</table>
Large Shipments to China Help Australia Trade Balance 
by <a href="/comment/Stone.html">Carol Stone</a> February 3, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203g.jpg" width="353">
International trade for Australia looks to be very dynamic process. The trade balance widened to a significant deficit in 2003 and 2004, but moderated considerably in 2005, mirroring a pattern of decline and then rapid turnaround in exports. Exports fell 9.3% in 2003, but recovered almost exactly that amount in 2004. Then last year, they surged ahead 17.8% for the year as a whole, with 9.0% in the month of December alone over November. Exports in December, as seen in the table below, grew a whopping 28.5% from December 2004.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203h.jpg" width="353">
At the same time, imports have not been sluggish, as they were up 10% for 2005 as a whole. As elsewhere, some of this was oil-price related, with imports of mineral fuels, lubricants and related up 34% for the year, following 28% in 2004. Chemicals also rose by more than 10%. Other manufactured goods weren&#39;t that strong, but they gained in a range of 8%-9%, so they were hardly weak.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203i.jpg" width="353">
The two most interesting developments in Australian trade -- at least in our view -- concern metals exports and exports to China. These may be related, but available data can&#39;t confirm that. The third graph is very suggestive, however. Exports to China rose 45.5% in 2005, with a final spurt in December carrying them to A$1.8 billion, up nearly 66% from December 2004. (For comparison, shipments to the US, which were larger than those to China as recently as 2003, were relatively flat at about A$800 million/month from then until late last year.) Among kinds of goods Australia has exported, non-food crude materials also increased substantially, 29% for the year and 49% December-on-December. Over the past five years, the monthly pattern of the year-to-year changes in these raw materials has a 76% correlation with growth in exports to China. Australia is a major producer of copper and aluminum; it may well be that they are shipping considerable quantities of those metals to their large neighbor to the north. This would bode well for both countries, a fine illustration of the &quot;gains from trade&quot;, and would help minimize Australia&#39;s trade deficit with China.

<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/ANZ/@A1/@A109/@A1098/@A1098.HTM">Australia Trade (Mil.A$)</a></th>
Month/Month
<th scope="col">Yr/Yr</th>
Monthly Average
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Dec 2005*</td>
<td>Nov 2005*</td>
<td>Oct 2005*</td>
<td>Dec 2004*</td>
<td>2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">Goods &amp; Services: Balance</td>
<td>-1168</td>
<td>-2473</td>
<td>-1371</td>
<td>-2480</td>
<td>-1668</td>
<td>-2102</td>
<td>-1818</td>
</tr>
<tr class="odd">
<td class="firstcol">Goods: Exports</td>
<td>13214</td>
<td>12129</td>
<td>11999</td>
<td>10229</td>
<td>11619</td>
<td>9848</td>
<td>9067</td>
</tr>
<tr>
<td class="firstcol">&nbsp; % Change</td>
<td>9.0</td>
<td>1.1</td>
<td>3.8</td>
<td>28.5**</td>
<td>17.8</td>
<td>9.4</td>
<td>-9.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Goods: Imports</td>
<td>14150</td>
<td>14227</td>
<td>13285</td>
<td>12502</td>
<td>13163</td>
<td>11875</td>
<td>10974</td>
</tr>
<tr>
<td class="firstcol">&nbsp; % Change</td>
<td>-1.9</td>
<td>8.6</td>
<td>1.1</td>
<td>9.3**</td>
<td>10.1</td>
<td>8.7</td>
<td>1.7</td>
</tr>
<tr class="odd">
<td class="firstcol">China: Exports (NSA)</td>
<td>1827</td>
<td>1419</td>
<td>1509</td>
<td>1102</td>
<td>1336</td>
<td>918</td>
<td>757</td>
</tr>
<tr>
<td class="firstcol">USA: Exports (NSA)</td>
<td>914</td>
<td>840</td>
<td>773</td>
<td>835</td>
<td>772</td>
<td>796</td>
<td>788</td>
</tr>
</tbody>
</table>


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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/060202g.jpg" width="353">
Low interest rates tend to help construction, and this has been the case in Europe recently.Eurostat this morning reported construction orders through Q3 2005 for the region as a whole and for selected countries through November. Specific performance varies by country, but the renewal of this sector for the area as a whole is impressive. These orders cover contracts for nonresidential projects, including buildings and infrastructure.
Construction orders for the entire Euro-Zone 12 actually eased 1.1% in September from August, but the level over the last few months was running about 10% above 2004 amounts.Spain is a good example of the strength, with September&#39;s value almost 18% higher than a year ago. The UK, a member of the European Union (&quot;EU-25&quot;), but not the Euro-Zone, is also seeing a strong advance, with November&#39;s index 123.0 (2000=100) up 14% from November 2004.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060202h.jpg" width="353">
Germany looks to be a special case here. Its construction sector has long been in decline, basically for more than 10 years. But the last several months have seen a stabilization and some modest gains. The upturn is not steep, but for that reason, perhaps it can last a good while. Both buildings and infrastructure construction are participating, although the latter is more uneven.
Among the entire Euro-Zone, the index for buildings was 122.66 in September, up 10.1% from the year-earlier month; it averaged 122.08 in Q3, up 11.9%. Civil engineering orders were 116.49 in September, just 2.8% above September 2004, but they are more irregular than smaller project orders; the quarterly average was 117.82, up 5.0% on the year. As seen in the first graph, these orders all together have a 61% negative correlation with long-term interest rates. These latter, though, have been rising for the last few months. Will that constrain the vigor of this building activity? Possibly, but the rate increase is quite modest and the level remains near the lowest for the history of this average of European yields since 1990.

<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/EUROSTAT/@UC/@UC02/@UC02.HTM">EU-12 &amp; Select Countries,</a> 2000=100</th>
<th scope="col">Nov 2005</th>
<th scope="col">Oct 2005</th>
<th scope="col">Sept 2005</th>
<th scope="col">Aug 2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Euro-Zone 12</td>
<td>--</td>
<td>--</td>
<td>120.27</td>
<td>121.66</td>
<td>110.26</td>
<td>105.29</td>
<td>105.42</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>76.54</td>
<td>71.86</td>
<td>76.10</td>
<td>78.99</td>
<td>74.54</td>
<td>78.46</td>
<td>88.46</td>
</tr>
<tr class="odd">
<td class="firstcol">Spain</td>
<td>--</td>
<td>--</td>
<td>173.89</td>
<td>173.43</td>
<td>145.16</td>
<td>130.21</td>
<td>113.29</td>
</tr>
<tr>
<td class="firstcol">UK</td>
<td>123.00</td>
<td>124.50</td>
<td>110.80</td>
<td>117.90</td>
<td>104.81</td>
<td>97.80</td>
<td>102.51</td>
</tr>
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Low interest rates tend to help construction, and this has been the case in Europe recently.Eurostat this morning reported construction orders through Q3 2005 for the region as a whole and for selected countries through November. [...]

European Construction Activity Picks Up Some Steam

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060202e.jpg" width="353">
Initial claims for unemployment insurance reversed the prior week&#39;s little revised gain and fell 11,000 to 273,000. Consensus expectations had been for an increase to 295,000 claims.
During the last ten years there has been a (negative) 75% correlation between the level of initial jobless insurance claims and the m/m change in payroll employment.
The four-week moving average of initial claims fell further to 284,250 (-13.9% y/y), its lowest level since June 2000.
Continuing unemployment insurance claims also reversed the prior week&#39;s downwardly revised increase and fell 64,000.
The insured rate of unemployment fell back to the lowest level since early 2001, at 1.9% from 2.0% the prior week.

<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">01/28/06</th>
<th scope="col">01/21/06</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>273</td>
<td>284</td>
<td>-15.5%</td>
<td>332</td>
<td>343</td>
<td>402</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,509</td>
<td>-7.2%</td>
<td>2,663</td>
<td>2,924</td>
<td>3,532</td>
</tr>
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Initial claims for unemployment insurance reversed the prior week's little revised gain and fell 11,000 to 273,000. Consensus expectations had been for an increase to 295,000 claims. During the last ten years there has been a [...]

Initial Unemployment Insurance Claims Fell

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060202f.jpg" width="353">
Challenger, Grey &amp; Christmas reported that January job cut announcements reversed about half of the rise in December and fell 4.0% to 103,466.
Like the December report, one industry dominated the monthly total. Auto industry layoff announcements rose nearly ten fold from December on the heels of a December report when layoffs in government rose more than three times (reversed in January). Layoffs in the retail industry also surged m/m and were more than three times higher than last January.
During the last ten years there has been an 84% (inverse) correlation between the three month moving average of announced job cuts and the three month change payroll employment.
Job cut announcements differ from layoffs. Many are achieved through attrition, early retirement or just never occur.
Challenger also reported the second consecutive sharp m/m drop in announced hiring plans and they were down 53.3% from a year ago.

<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/@S3/@S301/@S301.HTM">Challenger, Gray &amp; Christmas</a></th>
<th scope="col">Jan</th>
<th scope="col">Dec</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">Announced Job Cuts</td>
<td>103,466</td>
<td>107,822</td>
<td>12.0%</td>
<td>1,072,054</td>
<td>1,039,935</td>
<td>1,236,426</td>
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Challenger, Grey & Christmas reported that January job cut announcements reversed about half of the rise in December and fell 4.0% to 103,466. Like the December report, one industry dominated the monthly total. Auto industry layoff [...]

Challenger Layoffs Retreated

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060202b.jpg" width="353">
Non-farm labor productivity fell last quarter after a revised 4.5% increase during 3Q. It was the first decline in output per hour since 1Q &#39;01 and followed an average gain of 3.7% during the prior ten quarters. Consensus expectations had been for a 1.5% increase.
Slower output growth accounted for the drop in productivity. The marked slowdown in output to 0.9% (3.6% y/y) from 4.7% during 3Q was accompanied by an acceleration in hours worked to 1.5% (1.2% y/y) from 0.1%.
Compensation costs rose 2.8% after an upwardly revised 3Q increase. As a result, unit labor costs rose 3.5%, the quickest gain in a year.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060202a.jpg" width="353">
Factory sector productivity growth rose a firm 3.9% (4.1% y/y) during 4Q following a 3.7% gain during 3Q. Compensation growth slowed to 1.9% (4.1% y/y) from 3.7% and unit labor costs in the factory sector fell 1.9% (0.0% y/y) as a result.
The implicit price deflator for the nonfarm business sector rose 3.2% (3.1% y/y). Since the increase trailed the rise in costs, the ratio of prices to unit labor costs slipped from the record high of the prior quarter. During the last ten years there has been a 60% correlation between the ratio and the y/y growth in operating corporate profits.

<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/@EC/@EC02/@EC02.HTM">Non-farm Business Sector</a> (SAAR)</th>
<th scope="col">4Q &#39;05</th>
<th scope="col">3Q &#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">Output per Hour</td>
<td>-0.6%</td>
<td>4.5%</td>
<td>2.3%</td>
<td>2.7%</td>
<td>3.4%</td>
<td>3.8%</td>
</tr>
<tr>
<td class="firstcol">Compensation</td>
<td>2.8%</td>
<td>4.1%</td>
<td>3.3%</td>
<td>5.2%</td>
<td>4.5%</td>
<td>4.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unit Labor Costs</td>
<td>3.5%</td>
<td>-0.5%</td>
<td>1.0%</td>
<td>2.4%</td>
<td>1.1%</td>
<td>0.2%</td>
</tr>
</tbody>
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Non-farm labor productivity fell last quarter after a revised 4.5% increase during 3Q. It was the first decline in output per hour since 1Q '01 and followed an average gain of 3.7% during the prior ten quarters. Consensus expectations [...]

U.S. Productivity Fell During 4Q '05

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060202d.jpg" width="353">
The Autodata Corporation reported that in January, US light vehicle sales rose 2.7% from December to 17.64M units. Consensus expectations had been for a decline to 16.3M.
The surprise stemmed from a 25.7% (23.9% y/y) rise in sales of US made cars as automakers &quot;restocked&quot; rental fleets. In contrast, imported car sales fell 18.9% (-7.0% y/y). <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060202c.jpg" width="353">
Sales of domestic trucks also fell 5.9% (+0.5% y/y) though sales of imported trucks added 2.9% (9.5% y/y) to the sharp 12.5% increase during December.
Imports&#39; share of the US light vehicle market fell sharply to 18.1% from 21.0% during December.
Consumption-based macroeconomic forecasting from the Federal Reserve Bank of Chicago is available <a href="http://www.chicagofed.org/publications/economicperspectives/ep_4qtr2005_part4_campbell_krane.pdf"> here</a>. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED09/@ED0901/@ED0901.HTM">Light Vehicle Sales (SAAR, Mil. Units)</a></th>
<th scope="col">Jan</th>
<th scope="col">Dec</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>17.64</td>
<td>17.17</td>
<td>7.9%</td>
<td>16.92</td>
<td>16.87</td>
<td>16.63</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Autos</td>
<td>8.56</td>
<td>7.64</td>
<td>15.4%</td>
<td>7.65</td>
<td>7.49</td>
<td>7.62</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Trucks</td>
<td>9.08</td>
<td>9.53</td>
<td>1.7%</td>
<td>9.27</td>
<td>9.37</td>
<td>9.01</td>
</tr>
</tbody>
</table>
</body>
</html>

The Autodata Corporation reported that in January, US light vehicle sales rose 2.7% from December to 17.64M units. Consensus expectations had been for a decline to 16.3M. The surprise stemmed from a 25.7% (23.9% y/y) rise in sales of [...]

Fleet Purchases Raised U.S. Vehicle Sales in January

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

Cost of transporting crude oil has soared to series high

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

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

Is recent drop in sentiment signaling softer growth ahead?

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

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

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

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

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

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

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

AI boosting US investment in data centers

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

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Michael J. Moran

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The Consumer Price Index rose 0.9% in March, easily the sharpest monthly rise since the inflation burst in 2022. Although pronounced in magnitude, the increase was not surprising, as essentially all analysts had built in pressure from the energy sector. Energy prices jumped 10.9%, led by a surge of 21.2% in gasoline prices. Other energy components wiggled: charges for electricity services rose 0.8%, offsetting declines in the prior two months; a drop 0.9% in the price of natural gas services followed sharp increases in the prior three months.

The press report from the Bureau of Labor Statistics showed food prices as unchanged, but calculating the shift to more than one decimal point showed a marginal decline (-0.005%) The dip was almost imperceptible, but it nevertheless was a welcome rarity. The decline occurred in the food-at-home component (i.e. grocery store prices, -0.2%); prices of food away from home (i.e. at restaurants and bars) rose 0.2%.

Core prices rose 0.2 percent, softer than the expected increase of 0.3%. Only two areas posted high-side readings. Apparel prices increased 1.0% after a jump of 1.3% in February, perhaps reflecting hope for an active spring selling season. Airfares jumped 2.7%, hardly surprising in light of recent energy developments. Sharper increases are likely in coming months because of higher fuel prices. Most other core items were contained, including declines of 1.0% in medical-care commodities and 0.4% in the prices of used motor vehicles. Prices of medical-care commodities have been quiet since the middle of 2024; the latest year-over-year change totaled only 0.3%. Prices of used cars and trucks have declined for four consecutive months, leaving a year-over-year decline of 3.2%.

Although core prices were well contained in March, the outlook is uncertain because of potential passthrough from higher energy prices. At the same time, recent trends in the inflation rates for core goods and core services offer a reason to be optimistic, as both are decelerating. As shown in the left chart below, core goods prices in the past six months have been subdued, which has pulled the year-over-year change from 1.5% last fall (August to October) to 1.2% in March. Core service prices, shown in the right chart below, have registered changes of 0.3% or 0.4% in the three months before the 0.2% reading in March. However, results for October and November were restrained, and changes in the past six months in total show deceleration. The year-over-year change of 3.0% in core service prices in March reflects an advance of 3.3% in the first six months of this span (annual rate) and 2.7% in the past six months. The pattern is choppy, but it traces a decelerating trend.

The Consumer Price figures can be found in Haver's **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

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- Gasoline prices drove the energy component higher; electricity prices also contributed.
- Food prices provided a surprise by posting a fractional decline.
- Core prices rose less than expected; both goods and services components were contained.

March CPI: Pressure in the Energy Sector (as Expected); Tame Elsewhere (Surprisingly)

Winnie Tapasanun

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Total factory orders were virtually unchanged m/m in February following a flat reading in January and a 0.4% decline in December, data from the U.S. Census Bureau showed. The Action Economics Forecast Survey had expected a 0.2% m/m February increase. The year-on-year growth rate eased to 3.7% in February, the lowest since October, from 4.2% in January (+3.0% in February 2025), remaining far below the April 2021 peak of 39.6%. Notably, orders for nondefense aircraft & parts plunged 28.6% m/m in February following decreases of 1.7% in January and 22.7% in December, while orders for defense aircraft & parts fell 2.1% after a 26.9% January slump and an 11.8% December jump. Factory orders excluding defense edged up 0.1% (3.6% y/y), the third m/m increase in four months, following a 0.4% January rebound. Factory orders excluding the transportation sector rose 1.2% (2.5% y/y), the strongest of four consecutive m/m gains, after a 0.5% January increase.

Durable goods orders fell 1.3% (+7.4% y/y) in February after a 0.4% decline in January (in line with a 1.4% m/m decrease in the advance report on April 7), marking the fourth m/m decline in five months. The February m/m fall reflected a 5.3% orders drop (+10.2% y/y) in transportation equipment following a 1.9% January decrease, alongside m/m declines of 0.5% (+2.4% y/y) in furniture & related products and 0.3% (+4.9% y/y) in electrical equipment, appliances & components. Other major durable goods orders categories rose m/m in February, led by a 2.4% gain (10.5% y/y) in primary metals, followed by increases of 1.7% (9.5% y/y) in machinery, 0.5% (5.4% y/y) in fabricated metal products, and 0.2% (7.7% y/y) in computers & electronic products.

Nondurable goods orders, which equal nondurable goods shipments, advanced 1.5% (0.1% y/y) in February, the biggest of three successive m/m gains, after a 0.5% increase in January. The February m/m rise was led by a 6.2% jump (-6.4% y/y) in petroleum & coal products, followed by gains of 5.9% (-5.8% y/y) leather & allied products, 1.2% (-2.8% y/y) in textile mills, 1.0% (1.6% y/y) in paper products, 0.9% (1.2% y/y) in plastics & rubber products, 0.6% (3.7% y/y) in beverage & tobacco products, 0.5% (3.2% y/y) in chemical products, 0.4% (3.2% y/y) in apparel, and 0.2% (0.5% y/y) in food products. To the downside, nondurable goods shipments for textile products (-1.4%; -1.5% y/y) and printing (-0.4%; -0.9% y/y) fell m/m in February following their January increases.

Total shipments rose 1.4% (3.5% y/y) in February after gains of 0.7% in January and December, registering the fourth m/m rise in five months. Excluding transportation, shipments advanced 1.4% (2.3% y/y), the fifth m/m gain in six months, after a 0.5% January increase. Shipments of durable goods industries also rose 1.4% (6.9% y/y), up for the fifth time in six months, after a 0.9% January gain. This reflected m/m increases across nearly all durable goods shipments categories, led by a 2.5% rise (10.1% y/y) in primary metals, followed by gains of 1.7% (5.5% y/y) in electrical equipment, appliances & components, 1.7% (4.0% y/y) in furniture & related products, 1.6% (9.7% y/y) in transportation equipment, 1.4% (7.6% y/y) in machinery, 1.3% (3.8% y/y) in nonmetallic mineral products, 1.0% (6.1% y/y) in computers & electronic products, 1.0% (2.5% y/y) in miscellaneous durable goods, and 0.9% (5.4% y/y) in fabricated metal products. In contrast, durable goods shipments for wood products were the only category with a monthly decline in February, easing 0.1% (-2.9% y/y) following a flat January reading.

Unfilled orders edged up 0.1% (11.1% y/y) in February, the smallest of seven consecutive m/m increases, following a 0.6% rise in January. Excluding transportation, unfilled orders grew 0.2% (1.9% y/y), up for the seventh straight month, after a 0.3% January increase. Backlogs of durable goods ticked up 0.1% (11.1% y/y) in February, led by gains of 0.5% (2.0% y/y) in machinery and 0.2% (4.9% y/y) in electrical equipment, appliances & components, partially offset by declines of 0.7% (+1.5% y/y) in furniture & related products and 0.1% (+2.3% y/y) in primary metals.

Inventories inched up 0.1% (0.8% y/y) in February, the fourth successive m/m increase, following matching 0.1% gains in January and December. Excluding transportation, inventories edged up 0.1% (1.0% y/y) after no change in January. Durable goods inventories increased 0.1% (1.8% y/y) in February after rising 0.2% for four straight months, while nondurable goods inventories were virtually unchanged (-0.8% y/y) after declining 0.3% in January and December.

The factory sector data are available in Haver’s **USECON** database. The Action Economics Forecast Survey is in the **AS1REPNA** database.

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- Factory orders virtually unchanged (+3.7% y/y) in Feb. for second straight month; still 7.6% above the Jan. ’24 low.
- Durable goods orders (-1.3%), fourth m/m fall in five mths.; nondurable goods orders (+1.5%), largest of three successive m/m gains; shipments (+1.4%), fourth m/m rise in five mths.
- Transportation orders -5.3% m/m, led by a 28.6% plunge in nondefense aircraft orders.
- Unfilled orders +0.1%, smallest of seven straight m/m increases.
- Inventories +0.1%, holding within a narrow 0.1%-0.2% range for four consecutive mths.

U.S. Factory Orders Flat in February on Weak Nondefense Aircraft Orders

Andrew Cates

**Positive Growth Surprises, Negative Inflation Surprises—For Now**
The global macro backdrop heading into the latest Middle East shock was, by recent standards, relatively constructive. As the chart shows, growth data had been consistently surprising to the upside, while inflation surprises have been in negative territory—an unusually benign combination suggesting resilient activity alongside easing price pressures. What is striking, however, is that—at least through March and into early April—this pattern has not yet been meaningfully dislodged. For now, the data flow still reflects a world that was stabilising rather than deteriorating. That said, this is almost certainly a lagging signal. Supply-side shocks of this nature—particularly those centred on energy—tend to work with a delay but can be highly disruptive once they feed through. The risk, therefore, is that the current “goldilocks” surprise dynamic proves short-lived as higher energy costs, supply chain frictions and rising uncertainty begin to reshape the incoming data in the weeks ahead.

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**Monetary Policy Expectations Shift as Easing Bets Are Repriced**
How policymakers respond to the evolving situation in the Middle East will be critical in shaping both market dynamics and the broader global outlook. This chart, based on the latest April Blue Chip Financial Forecasts survey, suggests that expectations are already beginning to shift. Forecasters are now less inclined to anticipate policy easing in the period ahead—particularly in the euro area, where expectations for rate cuts have been scaled back. Similarly, some of the easing previously priced for the Federal Reserve and the Bank of England has been pared back over the next 12 months. While this is not yet a full pivot toward tightening, it does point to a more cautious policy backdrop, reflecting the risk that renewed energy-driven inflation pressures could constrain central banks’ ability to support growth.

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**Delay, Don’t Tighten: Central Banks’ Likely Playbook**
If the previous chart highlights a shift in policy expectations, this one gives a clearer sense of the reaction function underpinning it. When asked how central banks would respond if energy-driven inflation proves more persistent, most panellists point not to renewed tightening, but to a more cautious delay in easing. In other words, the hurdle for rate cuts has risen, even if the bar for  hikes remains relatively high. This distinction matters. It suggests that policymakers are likely to treat the shock as a supply-driven inflation impulse—one that complicates the outlook but does not automatically warrant aggressive tightening. At the same time, the responses underscore a second important theme: divergence. A sizeable share of forecasters expect policy paths to vary significantly across regions, reflecting differences in energy exposure, inflation dynamics and domestic growth conditions. Taken together, the message is one of constrained flexibility. Central banks may want to support growth, but persistent energy pressures could keep them on hold for longer than previously anticipated—reinforcing the more cautious policy outlook already evident in market pricing.

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**Markets Signal Fiscal Concern, Not Inflation Panic**
If central banks are likely to proceed cautiously, financial markets are already beginning to draw their own conclusions. This chart shows that the recent adjustment in US Treasury markets has been driven primarily by a rise in real yields rather than a meaningful increase in inflation expectations. In other words, markets are not yet pricing a loss of monetary policy credibility or a sharp unanchoring of inflation expectations. Instead, the move points more toward concerns around the broader policy mix—particularly the fiscal backdrop and the potential for increased borrowing needs in an environment of heightened geopolitical risk. This distinction is important. A rise in inflation expectations would suggest fears of central banks falling behind the curve. What we are seeing instead is a repricing of real rates, consistent with tighter financial conditions and a higher risk premium. For now, at least, markets appear to view the shock less as a classic inflation spiral and more as a development that complicates the growth outlook and places greater strain on policy frameworks—especially on the fiscal side.

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**Electricity Prices Reflect Energy Dependence**
The initial response in electricity markets since the Middle East disruption has followed a familiar pattern. Economies with greater domestic energy capacity—such as Scandinavia and, to a lesser extent, the US—have seen relatively contained electricity prices. By contrast, those more reliant on imported energy—most notably the UK and parts of Europe—continue to face significantly higher costs

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**Generation Capacity Determines Energy Resilience**
These price dynamics are closely linked to underlying differences in electricity generation capacity. As the sixth chart shows, countries with higher per capita electricity production—again including Scandinavia and the US—are structurally better positioned to absorb external shocks. In contrast, economies with more limited domestic generation capacity, such as the UK and Germany, are inherently more exposed to fluctuations in global energy markets. This structural divide is likely to prove increasingly important in the period ahead, influencing not just near-term inflation outcomes but also the relative resilience of growth across economies as energy costs remain volatile.

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Amid further tentative signs of de-escalation—most notably President Trump’s decision on April 7th to step back from further escalation—financial markets have stabilised somewhat, but the macroeconomic implications of the Middle East crisis remain highly uncertain. As our charts show, the global economy entered this shock from a position of relative strength, with positive growth surprises and easing inflation pressures still evident in the data (chart 1). However, that benign backdrop now looks vulnerable. Central banks are already reassessing the outlook, with expectations for policy easing being pared back (chart 2) and a growing consensus that any response to persistent energy-driven inflation will likely involve delaying cuts rather than tightening aggressively—albeit with significant regional divergence (chart 3). Financial markets, for their part, are not yet signalling a loss of inflation control, but the rise in real yields suggests increasing concern around the broader policy mix, particularly fiscal pressures (chart 4). Finally, the adjustment to the shock is unlikely to be uniform. Structural differences in domestic energy capacity are already driving wide divergences in electricity prices, leaving more import-dependent economies exposed to higher costs and sharper trade-offs between growth and inflation (charts 5 and 6). Taken together, the message is clear: even if geopolitical tensions ease, the economic aftershocks are likely to be uneven, persistent and increasingly shaped by structural constraints.

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Charts of the Week: From Oil Shock to Policy Dilemma

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This monthly report is always packed with information relating to the household sector. At this time, most observers will probably be most interested in price developments, and the results for February were a bit unsettling. The headline price index rose 0.4%, influenced by a jump of 0.8% in energy prices. This increase was largely anticipated and not especially troubling when viewed in isolation. Energy prices have shown little net change in the past two years, and the latest reading of the index was comfortably within the recent range of observations. However, given developments in the Middle East, energy prices undoubtedly will surge out of that recent range in the months ahead.

Core PCE prices also rose 0.4%, a touch firmer than the expected increase of 0.3%. An increase of 0.4% in core inflation is a quick pace even when viewed in Isolation, but this advance followed a similar increase in January, and the December reading almost rounded to 0.4%. These recent changes pulled the year-over-year increase in core prices to 3.0%, a full percentage point above the Federal Reserve’s target.

Nominal personal income dipped 0.1% in February, which translated to a decline of 0.4% after adjusting for inflation (almost rounding to -0.5%). The softness is striking, but a review of the detail suggests that special factors played a role. Much of the weakness reflected a decline of 1.7% in dividend income, which followed a jump of 1.9% in January. Dividend payments in the prior two years followed the same pattern, leaving one to suspect that seasonal adjustment has gone awry. Government transfer payments also declined, with the miscellaneous category accounting for most of the drop. Medicaid payments also fell, marking the fifth consecutive decline, most likely driven by the tightening of provisions included in the One Big Beautiful Bill Act.

Nominal consumer expenditures rose 0.5%, a seemingly strong result, but the change amounted to only 0.1% in real terms. The small increase followed a flat reading in January and increases of only 0.1% in November and December. Consumers spent actively in the second and third quarters of last year, but they have become cautious recently. The data in hand suggest real outlay growth of approximately 1.0% in the first quarter, slower than the average pace of 3.0% in the middle of last year and 1.9% in 2025-Q4.

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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- The energy component contributed to a high-side reading on the price index for personal consumption expenditures; the core component was firm as well.
- Consumer spending showed signs of slowing.

Personal Income, Consumption, and Prices: Higher Prices Dampen Real Gains

Sandy Batten

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The third estimate of Q4 2025 GDP showed that real GDP growth slowed to 0.5% q/q saar versus 0.7% in the second estimate and 1.4% in the advance estimate. GDP had grown 4.4% in Q3. The more than one-month long shutdown of the federal government continued to have been a notable restraint on GDP growth in Q4, subtracting 1.0%-point from overall growth, the same as in the second estimate.

Revisions were very small across major expenditure categories. Growth of personal consumption expenditures was revised down slightly to 1.9% q/q saar from 2.0% previously. Nonresidential fixed investment increased 2.4%, up slightly from the 2.2% reported in the second estimate. The 0.5% q/q decline previously reported for residential investment was revised to a larger decline of 1.7%, subtracting 0.1%-point from overall growth versus 0.0%-point in the previous estimate. Inventories declined more than previously estimated, reducing their contribution to growth from 0.3%-point in the second estimate to 0.1%-point in today’s estimate.

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There were slight downward revisions to the declines previously reported for both exports and imports, leaving net exports essentially unrevised. As already noted, a 16.6% q/q saar plunge in federal government spending (revised down slightly from -16.7%) accounted for most of the weakness in Q4. This included a 24.3% q/q collapse in nondefense spending, the second largest quarterly decline in nearly forty years. By contrast, state and local government spending increased 1.5%, revised up from 1.2% in the previous estimate.

Private domestic demand growth (final sales to private domestic purchasers, a favored gauge of demand by the Federal Reserve) was revised slower to 1.8% q/q saar in Q4 from 1.9% in the second estimate and 2.4% in the advance report. However, even the revised pace of growth is respectable and close to the economy’s potential growth rate.

The GDP data can be found in Haver’s **USECON** and **USNA** databases. **USNA** contains virtually all of the Bureau of Economic Analysis detail in the national accounts. The Action Economics consensus estimates can be found in **AS1REPNA**.

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- Q4 GDP growth revised to 0.5% q/q saar from 0.7% in the first revision and 1.4% in the advance report.
- The shutdown of the federal government still played a critical role in the slowdown, subtracting 1.0%-point from Q4 growth.
- Domestic demand slowed further with final sales to private domestic purchasers revised down to 1.8% from 1.9% in the first revision and 2.4% in the advance report.

Economy in Brief

Jump to:

ISM Nonmanufacturing Index Fell

U.S. Payrolls Just Below Expectations, Jobless Rate Lowest Since 2001

U.S. Payrolls Just Below Expectations, Jobless Rate Lowest Since 2001

European Construction Activity Picks Up Some Steam

Initial Unemployment Insurance Claims Fell

Challenger Layoffs Retreated

U.S. Productivity Fell During 4Q '05

Fleet Purchases Raised U.S. Vehicle Sales in January