Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060106b.jpg" width="353">
Non-farm payrolls in December grew just 108,000. Nevertheless, when averaged with a November increase revised up to 305,000 from 215,000 reported initially, the gain was a sharp improvement from the prior two months&#39; average of just 21,000. Consensus expectations had been for a 200,000 increase in December. The average monthly increase in payrolls during 2005 was 179,300 versus 123,000 during 2004.
From the household survey the unemployment rate fell to 4.9%, a bit lower than expected. Employment rose 168,000 (1.9% y/y) after a 14,000 decline in November, revised shallower from the initial report. The labor force fell 30,000 (1.3% y/y).
Factory sector payrolls increased 18,000 (-0.4% y/y). The average gain in factory payrolls during the last three months of 13,000 is the best showing since mid-2004. An improvement in the industry breadth of gain during that period to 54.8% reflected gains in durable manufacturing but not nondurables.
Construction employment fell 9,000 (+3.5% y/y) following an upwardly revised 42,000 increase in November.
Private service producing payrolls rose a modest 82,000 (1.8% y/y) last month though the November increase was revised to 228,000 from 144,000. Retail trade jobs declined for the fourth month in the last five (+0.6% y/y) and job losses were widespread amongst industries. Education &amp; health services jobs increased 25,000 (2.1% y/y) and remained on the earlier pace while professional &amp; business services jobs rose 33,000(2.9% y/y). Jobs in financial services rose 12,000 (2.3% y/y) and leisure &amp; hospitality rose 23,000 (1.9% y/y) and November&#39;s increase was revised up sharply.
Average hourly earnings were a bit stronger than expected, rising 0.3%, but the prior month&#39;s gain was lessened. Factory sector earnings rose just 0.1% (2.3% y/y) following no change in November.
Higher education and economic growth from the Federal Reserve Bank of Chicago can be found <a href="http://www.chicagofed.org/publications/fedletter/cfljanuary2006_222a.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EB/@EB01/@EB01.HTM">Employment</a></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">Payroll Employment</td>
<td>108,000</td>
<td>305,000</td>
<td>1.5%</td>
<td>1.6%</td>
<td>1.1%</td>
<td>-0.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Manufacturing</td>
<td>18,000</td>
<td>8,000</td>
<td>-0.4%</td>
<td>-0.3%</td>
<td>-1.2%</td>
<td>-4.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Average Weekly Hours</td>
<td>33.7</td>
<td>33.8</td>
<td>33.7 (Dec &#39;04)</td>
<td>33.7</td>
<td>33.7</td>
<td>33.7</td>
</tr>
<tr>
<td class="firstcol">Average Hourly Earnings</td>
<td>0.3%</td>
<td>0.1%</td>
<td>3.1%</td>
<td>2.8%</td>
<td>2.1%</td>
<td>2.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment Rate</td>
<td>4.9%</td>
<td>5.0%</td>
<td>5.4% (Dec &#39;04)</td>
<td>5.1%</td>
<td>5.5%</td>
<td>6.0%</td>
</tr>
</tbody>
</table>
Challenger Layoffs Up Again in December 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 6, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060106a.jpg" width="353">
Challenger, Grey &amp; Christmas reported that job cut announcements in December rose for the fourth consecutive month. The 8.6% rise versus November to 107,822 pulled the three month average of job cut announcements up to 96,134 (-8.6% y/y).
For the year, job cut announcement rose 3.1%, the first annual increase since 2001.
An increased level of job cuts in government dominated the December report. Declines in layoff announcements were widespread throughout other industries.
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 a sharp m/m drop in announced hiring plans (102.1% y/y).

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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">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>
<td class="firstcol">Announced Job Cuts</td>
<td>107,822</td>
<td>99,279</td>
<td>-1.3%</td>
<td>1,072,054</td>
<td>1,039,935</td>
<td>1,236,426</td>
</tr>
</tbody>
</table>
Canada Employment Eases in December, But Only in Elderly Age Group 
by <a href="/comment/Stone.html">Carol Stone</a> January 6, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060106c.jpg" width="353">
Canada&#39;s labor market was fairly firm in 2005, despite a modest reversal in employment for December, data for which were published this morning by Statistics Canada. In December, employment fell by 2,100 from November, but both November and October had good gains, so that Q4 as a whole added 97,000 jobs, the best since Q2 2004. Consequently, unemployment in Canada has come down. The 6.4% in November was the lowest since December 1974, with this December&#39;s 6.5% still the lowest since early 1975.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060106d.jpg" width="353">
The age distribution of employment in December suggests that the slight reversal in total employment should have only limited overall economic impact. Jobs still increased in the major livelihood-earning segment, ages 15-64, with the decline more than accounted for among the elderly population. The former mid-range group increased in all but one month of 2005; the gains were not as large as in some months of the prior couple of years, but they were clearly steadier.
For the elderly population, the last four years have seen remarkable job growth accompanying a major increase in labor force participation. We can calculate a participation rate for the population over 65 and find that it has risen from 6% of that population in 2000 and 2001 to 8% in 2005. At the same time, the growth of that population group turned upward from a long, secular decline, bottoming at 1.56% in the year to January 2000 and reaching 2.17% in the year to December 2005. So the population is growing and so are employment opportunities for this age group. This process paused in November and December, but we&#39;d surmise that it will resume soon. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/CANSIM/@C6/@C6.HTM">Canada</a> (SA, Thous or %)</th>
<th scope="col">Dec 2005</th>
<th scope="col">Nov 2005</th>
<th scope="col">Oct 2005</th>
<th scope="col">Dec 2004</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">Employment, Age 15+</td>
<td>16,296</td>
<td>16,298</td>
<td>16,267</td>
<td>16,063</td>
<td>16,175</td>
<td>15,952</td>
<td>15,664</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td>-2</td>
<td>31</td>
<td>69</td>
<td>1.4%</td>
<td>1.4%</td>
<td>1.8%</td>
<td>2.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Age 15-64</td>
<td>15,988</td>
<td>15,974</td>
<td>15,943</td>
<td>15,763</td>
<td>15,868</td>
<td>15,664</td>
<td>15,393</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td>14</td>
<td>31</td>
<td>51</td>
<td>1.4%</td>
<td>1.3%</td>
<td>1.8%</td>
<td>2.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Age 65+</td>
<td>307</td>
<td>323</td>
<td>324</td>
<td>300</td>
<td>307</td>
<td>287</td>
<td>271</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td>-16</td>
<td>-1</td>
<td>18</td>
<td>2.4%</td>
<td>6.8%</td>
<td>5.9%</td>
<td>13.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment Rate, Age 15+</td>
<td>6.5%</td>
<td>6.4%</td>
<td>6.6%</td>
<td>7.0%</td>
<td>6.8%</td>
<td>7.2%</td>
<td>7.6%</td>
</tr>
<tr>
<td class="firstcol">Age 15-64</td>
<td>6.6%</td>
<td>6.4%</td>
<td>6.8%</td>
<td>7.2%</td>
<td>6.8%</td>
<td>7.3%</td>
<td>7.7%</td>
</tr>
</tbody>
</table>
</body>
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Non-farm payrolls in December grew just 108,000. Nevertheless, when averaged with a November increase revised up to 305,000 from 215,000 reported initially, the gain was a sharp improvement from the prior two months' average of just [...]

Shortfall in U.S. Payrolls Offset By Upward Revision

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/060105e.jpg" width="353">
Today, January 5, a wide variety of data was reported by national statistical agencies and private sources all over the world. Some of these reports glean considerable press coverage, particularly if the results are a surprise, such as with German manufacturing orders: these orders grew again in November, when market forecasters had expected them to decline.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060105f.jpg" width="353">
But Haver&#39;s databases, of course, carry far more background material on the economies of myriad countries. For instance, yesterday in this space, we highlighted the CPI of Thailand, a major release in a small country. Today we take the opposite approach, describing a secondary release in a major country, to wit, corporate profitability in the UK. The ONS publishes quarterly rates of return for total private non-financial corporations and some subsets of companies. Most prominently, oil companies are highlighted, referred to as &quot;UK continental shelf companies&quot;. Separately, manufacturing and service sector groups are shown. A few other miscellaneous sectors, such as construction, are not shown individually.
In Q3 2005, all private nonfinancial companies earned a 13.4% net return on their capital. This is down from 13.8% in Q2, but that was a 6-1/2 year high. The average for the last five years is 12.9%. Manufacturing companies earned just 6.2% on assets in Q3, following a somewhat higher 7.9% in Q2. This group has experienced basically flat returns in recent years, averaging about 7% since 2002. Services industries have higher rates of return, averaging 16.3% over the last four years, but these too are trendless, moving back and forth in a saw-tooth pattern.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060105g.jpg" width="353">
The breakout of the petroleum industry is informative. It shows that back in the early 1990s this sector had about the same magnitude return as the rest of UK industry. However, this relationship has changed markedly, with the &quot;Continental Shelf companies&quot; seeing far higher returns now, 36.3% in Q3. Annual data from ONS give some detail on the operating surpluses and capital that generate the return ratio. They indicate that the recent high rates of return are not, as one might think, due totally to higher oil prices. Specifically, since 2000, the UK oil industry has stopped expanding, as capital employed, shown in the third graph, has flattened. At the same time, sharply higher oil prices are surely responsible for 2005&#39;s further escalation of returns into the mid-30% range.
Normally, higher returns might be expected to prompt the renewed expansion of an industry. There are mixed signals about these prospects. Haver&#39;s OGJ database and OGJANN from the &quot;Oil and Gas Journal&quot; contain other broad data on the UK petroleum industry. Petroleum reserves in the UK are decreasing, and daily production of crude oil has fallen even into Q3. However, the so-called &quot;rig count&quot; of operating oil rigs shows a sustained upturn over the last six months. With this mixed picture about specific UK potential, perhaps what the high returns mean is more general, and perhaps they will be used for new kinds of energy development, not just the expansion of local output. 

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/UK/@U2/@U224/@U224.HTM">United Kingdom: Private Nonfin Corps: Net Rates of Return (%)</a></th>
<th scope="col">Q3 2005</th>
<th scope="col">Q2 2005</th>
<th scope="col">Q1 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">All PNFCs</td>
<td>13.4</td>
<td>13.8</td>
<td>13.3</td>
<td>13.3</td>
<td>12.9</td>
<td>12.5</td>
</tr>
<tr>
<td class="firstcol">UK Continental Shelf</td>
<td>36.3</td>
<td>34.4</td>
<td>30.6</td>
<td>29.3</td>
<td>29.2</td>
<td>30.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Non-Continental Shelf</td>
<td>12.6</td>
<td>13.0</td>
<td>12.7</td>
<td>12.7</td>
<td>12.2</td>
<td>11.7</td>
</tr>
<tr>
<td class="firstcol">Manufacturing</td>
<td>6.2</td>
<td>7.9</td>
<td>5.8</td>
<td>7.1</td>
<td>6.9</td>
<td>7.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Services</td>
<td>16.6</td>
<td>16.5</td>
<td>17.3</td>
<td>16.3</td>
<td>16.5</td>
<td>16.1</td>
</tr>
</tbody>
</table>
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Today, January 5, a wide variety of data was reported by national statistical agencies and private sources all over the world. Some of these reports glean considerable press coverage, particularly if the results are a surprise, such [...]

UK Corporations' Profitability Still Firm, Led by High Oil Company Returns

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060105d.jpg" width="353">
Chain store sales dipped 0.8% during the final week of 2005 according to the International Council of Shopping Centers (ICSC)-UBS survey. The decline, however, followed three weeks of solid increase. Therefore, December sales on average gained 0.4%, double the November increase.
During the last ten years there has been a 51% correlation between the y/y change in chain store sales and the change in non-auto retail sales less gasoline, as published by the US Census Department. Chain store sales correspond directly with roughly 14% of non-auto retail sales less gasoline.
The leading indicator of chain store sales slipped 0.1% in the latest week and the December average was unchanged from November.
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 Redbook Research survey of chain store sales painted a weaker picture of yearend selling. In fact, weakness throughout the month left the December average of general merchandise sales 0.2% below November.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">12/31/05</th>
<th scope="col">12/24/05</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>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>464.0</td>
<td>467.6</td>
<td>2.9%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>


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Chain store sales dipped 0.8% during the final week of 2005 according to the International Council of Shopping Centers (ICSC)-UBS survey. The decline, however, followed three weeks of solid increase. Therefore, December sales on [...]

Chain Store Sales Dipped

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060105c.jpg" width="353">
The Business Activity Index for the non-manufacturing sector recovered in December about all that it lost in November. The 1.3 point gain to 59.8 followed an unrevised 1.5 point slip in November. A reading above 50 indicates expansion. The latest reading was firmer than Consensus expectations for a rise to 59.0.
Since the series&#39; inception in 1997 there has been a 53% correlation between the Business Activity Index and the q/q change in real GDP for services plus construction.
The new orders component rose for the third straight month and the employment index added marginally to a 4 point November rise to the highest level since August. 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 fell for the third month to the lowest level since August. 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>
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<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">Dec</th>
<th scope="col">Nov</th>
<th scope="col">Dec &#39;04</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>59.8</td>
<td>58.5</td>
<td>63.9</td>
<td>60.1</td>
<td>62.4</td>
<td>58.2</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>69.5</td>
<td>74.2</td>
<td>73.6</td>
<td>68.2</td>
<td>69.0</td>
<td>56.8</td>
</tr>
</tbody>
</table>


</html>

The Business Activity Index for the non-manufacturing sector recovered in December about all that it lost in November. The 1.3 point gain to 59.8 followed an unrevised 1.5 point slip in November. A reading above 50 indicates [...]

ISM: Activity Outside the Factory Sector Recovered

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060105b.jpg" width="353">
Initial claims for unemployment insurance fell a sharp 35,000 to 291,000 in the last week of 2005 following an upwardly revised 7,000 increase the prior period. The latest level was the lowest since September 2000. Consensus expectations had been for 320,000 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 sharply to 316,750 (-4.0% y/y), the lowest level since August.
Continuing unemployment insurance claims increased 13,000 following the downwardly revised 75,000 spike during the prior week.
The insured rate of unemployment remained at 2.1% for the third week.

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<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">12/31/05</th>
<th scope="col">12/24/05</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>
<td class="firstcol">Initial Claims</td>
<td>291</td>
<td>326</td>
<td>-15.9%</td>
<td>331</td>
<td>343</td>
<td>402</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,718</td>
<td>-3.3%</td>
<td></td>
<td>2,926</td>
<td>3,531</td>
</tr>
</tbody>
</table>
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Initial claims for unemployment insurance fell a sharp 35,000 to 291,000 in the last week of 2005 following an upwardly revised 7,000 increase the prior period. The latest level was the lowest since September 2000. Consensus [...]

Initial Claims for Unemployment Insurance Lowest Since 2000

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060105a.jpg" width="353">
The Autodata Corporation reported that December US sales of light vehicles rose 9.1% to 17.17M units. The gain added to a 6.7% m/m rise in November but the increases were from an October level that was the most depressed since 1998. In addition, the increase left sales below December 2004 and the 2005 average of sales rose just 0.3% y/y and the annual level was down 2.8% from the record set in 2000. Consensus expectations had been for December sales of 16.8M.
Gasoline also moved higher at yearend with the average retail price at $2.24 per gallon (25.9% y/y), up four cents from the prior week and up a dime from the early December low. This week in spot market trading, gasoline is up another fourteen cents from the last week in December. The latest figures on the demand for gasoline indicate full recovery from declines during the Fall. 
Gauging the Size of Today&#39;s Price Shocks from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/publications/net/20060101/cover.pdf"> here</a>.
Sales of US made cars &amp; trucks rose 9.3% m/m in December (-5.3% y/y) while the 2005 sales average declined 0.2% from 2004 and fell 7.5% from the 2000 peak. Domestic truck sales rose 17.2% (-3.1% y/y) in December and the 2005 average fell 0.9%. Car sales slid 1.1% (-8.6% y/y) though the annual sales average increased 0.9%.
Sales of imported cars &amp; trucks increased 8.3% m/m (-0.3% y/y) in December and for the year rose 2.1%. Sales of imported trucks rose a sharp 12.5% (-4.7% y/y) and sales of imported autos rose 6.2% (2.3% y/y).
Import&#39;s share of the US light vehicle market slipped m/m in December to 21.0% and for the year increased to a record 20.4% versus 12.9% ten years ago. 

<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">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">Total</td>
<td>17.17</td>
<td>15.74</td>
<td>-4.3%</td>
<td>16.92</td>
<td>16.87</td>
<td>16.63</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Autos</td>
<td>7.64</td>
<td>7.56</td>
<td>1.7%</td>
<td>7.65</td>
<td>7.49</td>
<td>7.62</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Trucks</td>
<td>9.53</td>
<td>8.18</td>
<td>-3.3%</td>
<td>9.27</td>
<td>9.37</td>
<td>9.01</td>
</tr>
</tbody>
</table>
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The Autodata Corporation reported that December US sales of light vehicles rose 9.1% to 17.17M units. The gain added to a 6.7% m/m rise in November but the increases were from an October level that was the most depressed since 1998. [...]

U.S. Vehicle Sales Recovered at Yearend, Along With Gas Price

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060105a.jpg" width="353">
The Autodata Corporation reported that December US sales of light vehicles rose 9.1% to 17.17M units. The gain added to a 6.7% m/m rise in November but the increases were from an October level that was the most depressed since 1998. In addition, the increase left sales below December 2004 and the 2005 average of sales rose just 0.3% y/y and the annual level was down 2.8% from the record set in 2000. Consensus expectations had been for December sales of 16.8M.
Gasoline also moved higher at yearend with the average retail price at $2.24 per gallon (25.9% y/y), up four cents from the prior week and up a dime from the early December low. This week in spot market trading, gasoline is up another fourteen cents from the last week in December. The latest figures on the demand for gasoline indicate full recovery from declines during the Fall. 
Gauging the Size of Today&#39;s Price Shocks from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/publications/net/20060101/cover.pdf"> here</a>.
Sales of US made cars &amp; trucks rose 9.3% m/m in December (-5.3% y/y) while the 2005 sales average declined 0.2% from 2004 and fell 7.5% from the 2000 peak. Domestic truck sales rose 17.2% (-3.1% y/y) in December and the 2005 average fell 0.9%. Car sales slid 1.1% (-8.6% y/y) though the annual sales average increased 0.9%.
Sales of imported cars &amp; trucks increased 8.3% m/m (-0.3% y/y) in December and for the year rose 2.1%. Sales of imported trucks rose a sharp 12.5% (-4.7% y/y) and sales of imported autos rose 6.2% (2.3% y/y).
Import&#39;s share of the US light vehicle market slipped m/m in December to 21.0% and for the year increased to a record 20.4% versus 12.9% ten years ago. 

<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">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">Total</td>
<td>17.17</td>
<td>15.74</td>
<td>-4.3%</td>
<td>16.92</td>
<td>16.87</td>
<td>16.63</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Autos</td>
<td>7.64</td>
<td>7.56</td>
<td>1.7%</td>
<td>7.65</td>
<td>7.49</td>
<td>7.62</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Trucks</td>
<td>9.53</td>
<td>8.18</td>
<td>-3.3%</td>
<td>9.27</td>
<td>9.37</td>
<td>9.01</td>
</tr>
</tbody>
</table>
ISM: Activity Outside the Factory Sector Recovered 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 5, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060105c.jpg" width="353">
The Business Activity Index for the non-manufacturing sector recovered in December about all that it lost in November. The 1.3 point gain to 59.8 followed an unrevised 1.5 point slip in November. A reading above 50 indicates expansion. The latest reading was firmer than Consensus expectations for a rise to 59.0.
Since the series&#39; inception in 1997 there has been a 53% correlation between the Business Activity Index and the q/q change in real GDP for services plus construction.
The new orders component rose for the third straight month and the employment index added marginally to a 4 point November rise to the highest level since August. 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 fell for the third month to the lowest level since August. 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">Dec</th>
<th scope="col">Nov</th>
<th scope="col">Dec &#39;04</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>59.8</td>
<td>58.5</td>
<td>63.9</td>
<td>60.1</td>
<td>62.4</td>
<td>58.2</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>69.5</td>
<td>74.2</td>
<td>73.6</td>
<td>68.2</td>
<td>69.0</td>
<td>56.8</td>
</tr>
</tbody>
</table>
Initial Claims for Unemployment Insurance Lowest Since 2000 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 5, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060105b.jpg" width="353">
Initial claims for unemployment insurance fell a sharp 35,000 to 291,000 in the last week of 2005 following an upwardly revised 7,000 increase the prior period. The latest level was the lowest since September 2000. Consensus expectations had been for 320,000 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 sharply to 316,750 (-4.0% y/y), the lowest level since August.
Continuing unemployment insurance claims increased 13,000 following the downwardly revised 75,000 spike during the prior week.
The insured rate of unemployment remained at 2.1% for the third 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">12/31/05</th>
<th scope="col">12/24/05</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>
<td class="firstcol">Initial Claims</td>
<td>291</td>
<td>326</td>
<td>-15.9%</td>
<td>331</td>
<td>343</td>
<td>402</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,718</td>
<td>-3.3%</td>
<td></td>
<td>2,926</td>
<td>3,531</td>
</tr>
</tbody>
</table>
Chain Store Sales Dipped 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 5, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060105d.jpg" width="353">
Chain store sales dipped 0.8% during the final week of 2005 according to the International Council of Shopping Centers (ICSC)-UBS survey. The decline, however, followed three weeks of solid increase. Therefore, December sales on average gained 0.4%, double the November increase.
During the last ten years there has been a 51% correlation between the y/y change in chain store sales and the change in non-auto retail sales less gasoline, as published by the US Census Department. Chain store sales correspond directly with roughly 14% of non-auto retail sales less gasoline.
The leading indicator of chain store sales slipped 0.1% in the latest week and the December average was unchanged from November.
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 Redbook Research survey of chain store sales painted a weaker picture of yearend selling. In fact, weakness throughout the month left the December average of general merchandise sales 0.2% below November.

<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/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">12/31/05</th>
<th scope="col">12/24/05</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>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>464.0</td>
<td>467.6</td>
<td>2.9%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>
UK Corporations' Profitability Still Firm, Led by High Oil Company Returns 
by <a href="/comment/Stone.html">Carol Stone</a> January 5, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060105e.jpg" width="353">
Today, January 5, a wide variety of data was reported by national statistical agencies and private sources all over the world. Some of these reports glean considerable press coverage, particularly if the results are a surprise, such as with German manufacturing orders: these orders grew again in November, when market forecasters had expected them to decline.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060105f.jpg" width="353">
But Haver&#39;s databases, of course, carry far more background material on the economies of myriad countries. For instance, yesterday in this space, we highlighted the CPI of Thailand, a major release in a small country. Today we take the opposite approach, describing a secondary release in a major country, to wit, corporate profitability in the UK. The ONS publishes quarterly rates of return for total private non-financial corporations and some subsets of companies. Most prominently, oil companies are highlighted, referred to as &quot;UK continental shelf companies&quot;. Separately, manufacturing and service sector groups are shown. A few other miscellaneous sectors, such as construction, are not shown individually.
In Q3 2005, all private nonfinancial companies earned a 13.4% net return on their capital. This is down from 13.8% in Q2, but that was a 6-1/2 year high. The average for the last five years is 12.9%. Manufacturing companies earned just 6.2% on assets in Q3, following a somewhat higher 7.9% in Q2. This group has experienced basically flat returns in recent years, averaging about 7% since 2002. Services industries have higher rates of return, averaging 16.3% over the last four years, but these too are trendless, moving back and forth in a saw-tooth pattern.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060105g.jpg" width="353">
The breakout of the petroleum industry is informative. It shows that back in the early 1990s this sector had about the same magnitude return as the rest of UK industry. However, this relationship has changed markedly, with the &quot;Continental Shelf companies&quot; seeing far higher returns now, 36.3% in Q3. Annual data from ONS give some detail on the operating surpluses and capital that generate the return ratio. They indicate that the recent high rates of return are not, as one might think, due totally to higher oil prices. Specifically, since 2000, the UK oil industry has stopped expanding, as capital employed, shown in the third graph, has flattened. At the same time, sharply higher oil prices are surely responsible for 2005&#39;s further escalation of returns into the mid-30% range.
Normally, higher returns might be expected to prompt the renewed expansion of an industry. There are mixed signals about these prospects. Haver&#39;s OGJ database and OGJANN from the &quot;Oil and Gas Journal&quot; contain other broad data on the UK petroleum industry. Petroleum reserves in the UK are decreasing, and daily production of crude oil has fallen even into Q3. However, the so-called &quot;rig count&quot; of operating oil rigs shows a sustained upturn over the last six months. With this mixed picture about specific UK potential, perhaps what the high returns mean is more general, and perhaps they will be used for new kinds of energy development, not just the expansion of local output. 

<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/UK/@U2/@U224/@U224.HTM">United Kingdom: Private Nonfin Corps: Net Rates of Return (%)</a></th>
<th scope="col">Q3 2005</th>
<th scope="col">Q2 2005</th>
<th scope="col">Q1 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">All PNFCs</td>
<td>13.4</td>
<td>13.8</td>
<td>13.3</td>
<td>13.3</td>
<td>12.9</td>
<td>12.5</td>
</tr>
<tr>
<td class="firstcol">UK Continental Shelf</td>
<td>36.3</td>
<td>34.4</td>
<td>30.6</td>
<td>29.3</td>
<td>29.2</td>
<td>30.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Non-Continental Shelf</td>
<td>12.6</td>
<td>13.0</td>
<td>12.7</td>
<td>12.7</td>
<td>12.2</td>
<td>11.7</td>
</tr>
<tr>
<td class="firstcol">Manufacturing</td>
<td>6.2</td>
<td>7.9</td>
<td>5.8</td>
<td>7.1</td>
<td>6.9</td>
<td>7.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Services</td>
<td>16.6</td>
<td>16.5</td>
<td>17.3</td>
<td>16.3</td>
<td>16.5</td>
<td>16.1</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/060104g.jpg" width="353">
The overall CPI for Thailand was flat in December from November, when it had fallen 0.4% from October. But the total index for the year was up 5.8%, exactly double the increase in 2004. The December &quot;core&quot; rate, excluding raw food and energy, was 2.6%, compared with a mere 0.6% in 2004 and zero in 2003. This is the highest core rate for Thailand since the aftermath of the currency crises in 1997-98. Thus, this marked advance in core inflation in 2005, indicates at least one nation where energy prices forced up some other costs enough to show through in core and total inflation outcomes. These data were reported today by the Thai Ministry of Commerce and are contained in Haver&#39;s EMERGEPR database.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060104h.jpg" width="353">
As regular readers might be aware, we have monitored consumer prices throughout 2005 for signs of second-round effects of surging energy costs on other prices and have found precious little evidence of this. In the table below, we include data for Italy and the &quot;flash&quot; estimate for the Euro-Zone, which were both released today as well. They show that total inflation was steady or lower in 2005 compared with 2004, and through November, the Euro-Zone core CPI (excludes energy and unprocessed food) was 1.5%, lower than 2.1% across all of 2004.
In Thailand, though, there was apparently some pass-through of energy large enough to impact core inflation. Several categories experienced larger price increases last year, and the most notable was transportation and communication. This sector began to trend upward more rapidly in the spring of 2004 and continued to accelerate during 2005, reaching 13.3% in December, year-on-year. World Bank reports indicate that the government had been subsidizing diesel fuel and discontinued this subsidy; this added to the price increase from the cost of the fuel alone and led to substantially greater diesel costs in 2005, which apparently then generated a sizable rise in transportation costs generally in Thailand. This effect may not spread, especially since it was due to a change in Thai government price policy as well as the raw material cost, so we would conclude in this instance that the pick-up in Thai core inflation is &quot;the exception that proves the rule&quot; that general world-wide inflation has been remarkably impervious to the enormous rises in energy prices. Whether this will last through the winter heating season in the northern hemisphere remains to be seen, however. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/EMERGEPR/@P3/@P34/@P34.HTM">Thailand</a></th>
<th scope="col">Dec 2005</th>
<th scope="col">Nov 2005</th>
<th scope="col">Oct 2005</th>
December/December
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2004</td>
<td>2003</td>
<td>2002</td>
</tr>
<tr>
<td class="firstcol">All Commodities (SA)</td>
<td>0.0</td>
<td>-0.4</td>
<td>0.4</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Yr/Yr % (NSA)</td>
<td>5.8</td>
<td>5.9</td>
<td>6.2</td>
<td>2.9</td>
<td>1.8</td>
<td>1.4</td>
</tr>
<tr>
<td class="firstcol">Core CPI (SA)</td>
<td>0.2</td>
<td>0.0</td>
<td>0.2</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Yr/Yr % (NSA)</td>
<td>2.6</td>
<td>2.4</td>
<td>2.4</td>
<td>0.6</td>
<td>0.0</td>
<td>0.3</td>
</tr>
<tr>
<td class="firstcol">Transportation &amp; Communication (SA)</td>
<td>0.2</td>
<td>-0.7</td>
<td>0.1</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Yr/Yr % (NSA)</td>
<td>13.3</td>
<td>11.3</td>
<td>13.1</td>
<td>4.1</td>
<td>3.1</td>
<td>4.7</td>
</tr>
<tr>
<td class="firstcol">Memo: Italy CPI (NSA, Yr/Yr %)</td>
<td>2.0</td>
<td>2.2</td>
<td>2.2</td>
<td>2.0</td>
<td>2.5</td>
<td>2.8</td>
</tr>
<tr class="odd">
<td class="firstcol">Euro-Zone CPI &quot;Flash&quot; (NSA, Yr/Yr %)</td>
<td>2.2</td>
<td>2.3</td>
<td>2.5</td>
<td>2.4</td>
<td>2.0</td>
<td>2.3</td>
</tr>
</tbody>
</table>
</body>
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The overall CPI for Thailand was flat in December from November, when it had fallen 0.4% from October. But the total index for the year was up 5.8%, exactly double the increase in 2004. The December "core" rate, excluding raw food and [...]

Higher CPI in Thailand Is Rare Instance of Energy Cost Pass-Through

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

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