Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051228e.jpg" width="353">
The total number of mortgage applications fell a hard 6.8% last week to the lowest level since mid-2002 and pulled the average level during December down 6.0% from November.
Purchase applications were notably weak, again. The 4.5% w/w drop was the third consecutive weekly hard decline and was to the lowest level since mid-February. The December average of purchase applications was off 1.7% from November.
During the last ten years there has been a 50% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales
Applications to refinance were even weaker. An 11.2% w/w plunge pulled the December average 13.0% below November.
The effective interest rate on a conventional 30-year mortgage was steady at 6.44% versus 6.45% the prior week. Rates averaged 6.52% in November and averaged 5.81% in June. The effective rate on a 15-year mortgage also was steady at 6.06%. The interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">12/23/05</th>
<th scope="col">12/16/05</th>
<th scope="col">Y/Y</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">Total Market Index</td>
<td>554.1</td>
<td>594.6</td>
<td>-18.2%</td>
<td>735.1</td>
<td>1,067.9</td>
<td>799.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>432.9</td>
<td>453.1</td>
<td>-10.5%</td>
<td>454.5</td>
<td>395.1</td>
<td>354.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,259.1</td>
<td>1,418.1</td>
<td>-30.2%</td>
<td>2,366.8</td>
<td>4,981.8</td>
<td>3,388.0</td>
</tr>
</tbody>
</table>
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The total number of mortgage applications fell a hard 6.8% last week to the lowest level since mid-2002 and pulled the average level during December down 6.0% from November. Purchase applications were notably weak, again. The 4.5% w/w [...]

Mortgage Applications At Three Year Low

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051228d.jpg" width="353">
Chain store sales added 2.8% last week to the 2.4% jump during the week prior according to the International Council of Shopping Centers (ICSC)-UBS survey. 
The two increases did much to rescue the December average from an abysmal start when sales fell 3.1% during the opening week. As a result the month&#39;s average is down just 0.8% from November which rose 1.2% from October.
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.
Lower gasoline prices may have added to consumers&#39; Holiday spirit. Retail gas prices fell a penny to $2.20 per gallon (22.7% y/y) last week after two weeks of moderate increase. Natural gas prices also backed off a bit after five weeks of strong gain although they were still roughly double last year&#39;s level. 
Further declines in gasoline &amp; natural gas prices were evident in yesterday&#39;s spot market trading when gasoline ended down four cents from the week prior. Warmer weather helped lower natural gas prices roughly $3/mmbtu or 22% to the lowest level since mid-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.

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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">12/24/05</th>
<th scope="col">12/17/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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</thead>
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<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>467.6</td>
<td>455.0</td>
<td>3.9%</td>
<td>4.6%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>


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Chain store sales added 2.8% last week to the 2.4% jump during the week prior according to the International Council of Shopping Centers (ICSC)-UBS survey. The two increases did much to rescue the December average from an abysmal [...]

Chain Store Sales Reflect A Cheery Spirit & Lower Gas Prices

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051228f.jpg" width="353">
The December index of Consumer Confidence surged 5.4% to 103.6 on top of a 15.4% recovery the prior month, reported the conference Board. The index stood at the highest level since August and exceeded Consensus expectations for a lesser gain to 102.3. The gain lagged a bit the 12.1% m/m jump in Consumer sentiment reported last week by the University of Michigan.
During the last twenty years there has been a 52% correlation between the level of consumer confidence and the y/y change in real consumer spending. The correlation rose to 66% during the last ten years.
The index of consumers&#39; expectations added 3.6% (-9.0% y/y) to the 26.1% m/m spike during November. Optimism rose that more jobs would be created and that the inflation rate during the during the next year would ease.
Consumers&#39; assessment of the present situation rose 7.3% (14.9% y/y) on top of a 5.0% increase during November. Jobs were viewed as plentiful by 23.3% of respondents, the highest since August and fewer (22.2%) thought jobs were hard to get, the lowest since 2002.
The Conference Board&#146;s survey isconducted by a mailed questionnaire to 5,000 households and about 3,500 typically respond.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1401/@EF1401.HTM">Conference Board</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>
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<td class="firstcol">Consumer Confidence</td>
<td>103.6</td>
<td>98.3</td>
<td>0.9%</td>
<td>100.3</td>
<td>96.1</td>
<td>79.8</td>
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The December index of Consumer Confidence surged 5.4% to 103.6 on top of a 15.4% recovery the prior month, reported the conference Board. The index stood at the highest level since August and exceeded Consensus expectations for a [...]

Consumer Confidence Buoyed By More Jobs & Lower Gas Prices

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051228f.jpg" width="353">
The December index of Consumer Confidence surged 5.4% to 103.6 on top of a 15.4% recovery the prior month, reported the conference Board. The index stood at the highest level since August and exceeded Consensus expectations for a lesser gain to 102.3. The gain lagged a bit the 12.1% m/m jump in Consumer sentiment reported last week by the University of Michigan.
During the last twenty years there has been a 52% correlation between the level of consumer confidence and the y/y change in real consumer spending. The correlation rose to 66% during the last ten years.
The index of consumers&#39; expectations added 3.6% (-9.0% y/y) to the 26.1% m/m spike during November. Optimism rose that more jobs would be created and that the inflation rate during the during the next year would ease.
Consumers&#39; assessment of the present situation rose 7.3% (14.9% y/y) on top of a 5.0% increase during November. Jobs were viewed as plentiful by 23.3% of respondents, the highest since August and fewer (22.2%) thought jobs were hard to get, the lowest since 2002.
The Conference Board&#146;s survey isconducted by a mailed questionnaire to 5,000 households and about 3,500 typically respond.

<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/USECON/@EF/@EF14/@EF1401/@EF1401.HTM">Conference Board</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">Consumer Confidence</td>
<td>103.6</td>
<td>98.3</td>
<td>0.9%</td>
<td>100.3</td>
<td>96.1</td>
<td>79.8</td>
</tr>
</tbody>
</table>
Chain Store Sales Reflect A Cheery Spirit & Lower Gas Prices 
by <a href="/comment/Moeller.html">Tom Moeller</a> December 28, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051228d.jpg" width="353">
Chain store sales added 2.8% last week to the 2.4% jump during the week prior according to the International Council of Shopping Centers (ICSC)-UBS survey. 
The two increases did much to rescue the December average from an abysmal start when sales fell 3.1% during the opening week. As a result the month&#39;s average is down just 0.8% from November which rose 1.2% from October.
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.
Lower gasoline prices may have added to consumers&#39; Holiday spirit. Retail gas prices fell a penny to $2.20 per gallon (22.7% y/y) last week after two weeks of moderate increase. Natural gas prices also backed off a bit after five weeks of strong gain although they were still roughly double last year&#39;s level. 
Further declines in gasoline &amp; natural gas prices were evident in yesterday&#39;s spot market trading when gasoline ended down four cents from the week prior. Warmer weather helped lower natural gas prices roughly $3/mmbtu or 22% to the lowest level since mid-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.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">12/24/05</th>
<th scope="col">12/17/05</th>
<th scope="col">Y/Y</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>467.6</td>
<td>455.0</td>
<td>3.9%</td>
<td>4.6%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>
Mortgage Applications At Three Year Low 
by <a href="/comment/Moeller.html">Tom Moeller</a> December 28, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051228e.jpg" width="353">
The total number of mortgage applications fell a hard 6.8% last week to the lowest level since mid-2002 and pulled the average level during December down 6.0% from November.
Purchase applications were notably weak, again. The 4.5% w/w drop was the third consecutive weekly hard decline and was to the lowest level since mid-February. The December average of purchase applications was off 1.7% from November.
During the last ten years there has been a 50% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales
Applications to refinance were even weaker. An 11.2% w/w plunge pulled the December average 13.0% below November.
The effective interest rate on a conventional 30-year mortgage was steady at 6.44% versus 6.45% the prior week. Rates averaged 6.52% in November and averaged 5.81% in June. The effective rate on a 15-year mortgage also was steady at 6.06%. The interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.

<table border="0" cellspacing="0" width="100%">
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<thead>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">12/23/05</th>
<th scope="col">12/16/05</th>
<th scope="col">Y/Y</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">Total Market Index</td>
<td>554.1</td>
<td>594.6</td>
<td>-18.2%</td>
<td>735.1</td>
<td>1,067.9</td>
<td>799.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>432.9</td>
<td>453.1</td>
<td>-10.5%</td>
<td>454.5</td>
<td>395.1</td>
<td>354.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,259.1</td>
<td>1,418.1</td>
<td>-30.2%</td>
<td>2,366.8</td>
<td>4,981.8</td>
<td>3,388.0</td>
</tr>
</tbody>
</table>
Japan's CPI: Firming or Still Soft? 
by <a href="/comment/Stone.html">Carol Stone</a> December 28, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051228g.jpg" width="353">
Japan&#39;s Statistics Bureau in the Ministry of Internal Affairs and Communications (MIC) yesterday reported consumer prices for November. Generally, these prices seem to be working their way into an upturn, but the extent of this firming trend depends on the price measure being applied and what time comparison is being used.
The total index, the so-called General CPI, continues to decline on a year-over-year basis. In November it was 0.8% below November 2004, the weakest change since October 2002. Seasonally adjusted and compared month-to-month, however, it looks to be stabilizing: it has actually increased from 97.5 in June to November&#39;s 97.8.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051228h.jpg" width="353">
As in many other countries, a &quot;core&quot; rate is used for government policymaking and investment planning. Core rates are supposedly less volatile that total indexes and are defined to exclude items where supply forces predominate. So their movements reflect such non-economic events as bad weather, war and possibly political priorities, not so much market influences. Up to now in Japan, the &quot;core&quot; has been the general index less fresh food. This latter item is clearly more subject to weather and seasonal forces than to consumer demand pressures. The subset of the CPI excluding fresh food has been deemed the most useful for monetary policy focus. Thus, yesterday [overnight in Western markets between Monday and Tuesday] the November report made news when this core index rose on a year-to-year basis for the first time since October 2003 and for only the second time since the spring of 1998. On a month-to-month basis, this index too has been rising over the course of this year, suggesting that the year-to-year pattern could stay positive. At least one news account reported that some investors were beginning to look for a change in the Bank of Japan&#39;s current &quot;quantitative monetary easing&quot; as this price trend might be sustained during 2006.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051228i.jpg" width="353">
At the same time, with this release, the MIC has introduced still another core rate, one similar to those used elsewhere which exclude both food and energy products. Haver Analytics added this new series to the JAPAN database just this morning. Only two years of history are available, running back to November 2003, so these data are not yet seasonally adjusted. This price measure is still going down. In the month from October, the index fell from 97.4 to 97.1, which in turn is off 0.2% from November 2004. The earliest levels, in November and December 2003, were 97.9. So it appears that the pick up in the standard core rate may be due to energy, and when that is excluded, general prices remain soft. Among various &quot;subgroups&quot; of prices, clothing has risen for well over a year and furniture has edged up just the last three months. Housing costs and reading and recreation appear to be stabilizing after long downward paths. Thus, while the pace of deflation has surely slowed, it is hard to read any threat of renewed inflation into this price behavior.
At the same time, the Japanese economy itself is firming. Today, for example, METI reported that industrial production for November was up 1.4% from October, a fourth consecutive monthly advance after some hesitation in the spring and early summer. So forces may be developing for more sustainable growth and firmer prices in Japan, but the mixed behavior of the various CPI measures leaves implications for monetary policy fairly vague at the present time.

<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/JAPAN/@J5/@J504/@J50401/@J50401.HTM">Japan CPI (2000=100)</a></th>
<th scope="col">Nov 2005</th>
<th scope="col">Oct 2005</th>
<th scope="col">Sept 2005</th>
<th scope="col">Year Ago</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">General CPI, SA</td>
<td>97.8</td>
<td>97.7</td>
<td>97.8</td>
<td>98.6</td>
<td>98.1</td>
<td>98.1</td>
<td>98.3</td>
</tr>
<tr>
<td class="firstcol">Yr/Yr % Change, NSA</td>
<td>-0.8</td>
<td>-0.7</td>
<td>-0.3</td>
<td>&nbsp;</td>
<td>-0.0*</td>
<td>-0.3*</td>
<td>-0.9*</td>
</tr>
<tr class="odd">
<td class="firstcol">Gen CPI ex Fresh Food, SA</td>
<td>97.9</td>
<td>98.0</td>
<td>97.9</td>
<td>97.8</td>
<td>97.9</td>
<td>98.0</td>
<td>98.3</td>
</tr>
<tr>
<td class="firstcol">Yr/Yr % Change, NSA</td>
<td>0.1</td>
<td>0.0</td>
<td>-0.1</td>
<td>&nbsp;</td>
<td>-0.1*</td>
<td>-0.3*</td>
<td>-0.8*</td>
</tr>
<tr class="odd">
<td class="firstcol">Gen CPI ex Food &amp; Fuel, NSA</td>
<td>97.1</td>
<td>97.4</td>
<td>97.4</td>
<td>97.3</td>
<td>97.4</td>
<td>[97.9**]</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">Yr/Yr % Change, NSA</td>
<td>-0.2</td>
<td>-0.3</td>
<td>-0.2</td>
<td>&nbsp;</td>
<td>-0.6*</td>
<td>--</td>
<td>--</td>
</tr>
</tbody>
</table>


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Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051228a.jpg" width="353">
The Economic Sentiment Indicator of Slovakia has been on a generally rising trend since early 2004. (See the first chart.) The index rose 0.4% in December to 113.4 (2000=100) from November and was 7.0% above the December, 2004 level of 106.0. The index is based on four confidence indicators that measure the balance between optimists and pessimists. These are the Industrial Confidence Indicator which has a weight of 40% and the Construction Confidence, the Consumer Confidence and the Retail Trade Confidence indicators each of which has a weight of 20%. A strong rise in confidence in the retail trade sector overcame weakness in confidence in the Industrial, Construction and Consumer sectors. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051228b.jpg" width="353">
Consumers have generally taken a dim view of the economy. In December there were 17.8% more pessimists than optimists among consumers, an increase of 3.2 percentage points from November and 1.0 percentage points from December, 2004. Until the recent deterioration in consumer confidence, it had shown an improving trend starting in early 2004. In spite of the generally pessimistic view of consumers, retailers have consistently been, on balance, optimistic. In December the balance of optimists for retail trade was 23.0%, up from 22.0% in November and from a -6.7 in December of 2004. The contrast between the trends in consumer confidence and that of the retailers is shown in the second chart. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051228c.jpg" width="353">
Similar trends are found in comparing confidence in the Industrial and Constructions sectors, as shown in the third chart. Except for a small excess of pessimists in late 2001 optimists have until recently outweighed pessimists in the Industrial sector while there has been a preponderance of pessimists in the construction sector. In December, however there was another slight excess of pessimists in the industrial sector as the 6.7% excess of optimists in November fell 7.4 percentage points to 0.7% excess of pessimists. The 6.5% excess of pessimists in the construction sector in December was 2.0 percentage points above November but it was 12.5 percentage points lower than that of December, 2004.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/EMERGECW/@EC/@EC7/@EC7.HTM">Slovakia</a>&nbsp;</th>
<th scope="col">Dec 05&nbsp;</th>
<th scope="col">Nov 05 </th>
<th scope="col">Dec 04</th>
<th scope="col">M/M Dif&nbsp;</th>
<th scope="col">Y/Y Dif</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">Economic Sentiment Indicator (2000=100)</td>
<td>113.4</td>
<td>112.9</td>
<td>106.0</td>
<td>0.44*</td>
<td>6.98*</td>
<td>111.6</td>
<td>106.2</td>
<td>105.3</td>
</tr>
<tr>
<td class="firstcol">Components (Balances)</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Industrial confidence (40%)</td>
<td>-0.7</td>
<td>6.7</td>
<td>-0.3</td>
<td>-7.4</td>
<td>-0.4</td>
<td>4.6</td>
<td>6.8</td>
<td>4.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Construction confidence (20%)</td>
<td>-6.5</td>
<td>-4.5</td>
<td>-19.0</td>
<td>-2.0</td>
<td>12.5</td>
<td>-10.2</td>
<td>-21.8</td>
<td>-18.3</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Retail trade confidence&nbsp; (20%)</td>
<td>23.0</td>
<td>22.0</td>
<td>-6.7</td>
<td>3.0</td>
<td>31.7</td>
<td>14.5</td>
<td>4.4</td>
<td>12.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Consumer confidence&nbsp; (20%)</td>
<td>-17.8</td>
<td>-14.6</td>
<td>-16.8</td>
<td>-3.2</td>
<td>-1.0</td>
<td>-14.6</td>
<td>-23.9</td>
<td>-34.8</td>
</tr>
</tbody>
</table>
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The Economic Sentiment Indicator of Slovakia has been on a generally rising trend since early 2004. (See the first chart.) The index rose 0.4% in December to 113.4 (2000=100) from November and was 7.0% above the December, 2004 level [...]

Economic Sentiment in Slovakia Slows in December

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051227a.jpg" width="353">
At 4.40%, current yields on 10 Year Treasury securities for the most part match the yields on the 2 Year. Fed Chairman Alan Greenspan, and many economists, have indicated that the yield curve&#39;s ability to signal changes in economic conditions has slackened as financial markets have broadened and become more complex.
Narrow Money, Broad Money, and the Transmission of Monetary Policy from the Federal Reserve Bank of Richmond is available <a href="http://www.federalreserve.gov/events/conferences/mmp2004/pdf/goodfriend.pdf"> here</a>.
In the past the move of toward parity, let alone inversion, of the 10-2 Year spread has preceded recessions in the U.S. Without fail it has signaled a marked slowing of liquidity and recently the growth in the monetary base has slowed to 3% from 9% in 2002.
The slowing reflects the effects of higher interest rates on consumers&#39; inclination to borrow and spend as well as banks&#39; inclination to lend.
Certainly, the U.S. economy is &quot;awash in cash.&quot; But in a twelve trillion dollar economy such as the U.S., growth is determined at the margin.

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At 4.40%, current yields on 10 Year Treasury securities for the most part match the yields on the 2 Year. Fed Chairman Alan Greenspan, and many economists, have indicated that the yield curve's ability to signal changes in economic [...]

Inverted Treasury Yield Curve Signals Less Liquidity

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051227a.jpg" width="353">
At 4.40%, current yields on 10 Year Treasury securities for the most part match the yields on the 2 Year. Fed Chairman Alan Greenspan, and many economists, have indicated that the yield curve&#39;s ability to signal changes in economic conditions has slackened as financial markets have broadened and become more complex.
Narrow Money, Broad Money, and the Transmission of Monetary Policy from the Federal Reserve Bank of Richmond is available <a href="http://www.federalreserve.gov/events/conferences/mmp2004/pdf/goodfriend.pdf"> here</a>.
In the past the move of toward parity, let alone inversion, of the 10-2 Year spread has preceded recessions in the U.S. Without fail it has signaled a marked slowing of liquidity and recently the growth in the monetary base has slowed to 3% from 9% in 2002.
The slowing reflects the effects of higher interest rates on consumers&#39; inclination to borrow and spend as well as banks&#39; inclination to lend.
Certainly, the U.S. economy is &quot;awash in cash.&quot; But in a twelve trillion dollar economy such as the U.S., growth is determined at the margin.

Economic Sentiment in Slovakia Slows in December 
by <a href="/comment/Curley.html">Louise Curley</a> December 27, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051228a.jpg" width="353">
The Economic Sentiment Indicator of Slovakia has been on a generally rising trend since early 2004. (See the first chart.) The index rose 0.4% in December to 113.4 (2000=100) from November and was 7.0% above the December, 2004 level of 106.0. The index is based on four confidence indicators that measure the balance between optimists and pessimists. These are the Industrial Confidence Indicator which has a weight of 40% and the Construction Confidence, the Consumer Confidence and the Retail Trade Confidence indicators each of which has a weight of 20%. A strong rise in confidence in the retail trade sector overcame weakness in confidence in the Industrial, Construction and Consumer sectors. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051228b.jpg" width="353">
Consumers have generally taken a dim view of the economy. In December there were 17.8% more pessimists than optimists among consumers, an increase of 3.2 percentage points from November and 1.0 percentage points from December, 2004. Until the recent deterioration in consumer confidence, it had shown an improving trend starting in early 2004. In spite of the generally pessimistic view of consumers, retailers have consistently been, on balance, optimistic. In December the balance of optimists for retail trade was 23.0%, up from 22.0% in November and from a -6.7 in December of 2004. The contrast between the trends in consumer confidence and that of the retailers is shown in the second chart. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051228c.jpg" width="353">
Similar trends are found in comparing confidence in the Industrial and Constructions sectors, as shown in the third chart. Except for a small excess of pessimists in late 2001 optimists have until recently outweighed pessimists in the Industrial sector while there has been a preponderance of pessimists in the construction sector. In December, however there was another slight excess of pessimists in the industrial sector as the 6.7% excess of optimists in November fell 7.4 percentage points to 0.7% excess of pessimists. The 6.5% excess of pessimists in the construction sector in December was 2.0 percentage points above November but it was 12.5 percentage points lower than that of December, 2004.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/EMERGECW/@EC/@EC7/@EC7.HTM">Slovakia</a>&nbsp;</th>
<th scope="col">Dec 05&nbsp;</th>
<th scope="col">Nov 05 </th>
<th scope="col">Dec 04</th>
<th scope="col">M/M Dif&nbsp;</th>
<th scope="col">Y/Y Dif</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">Economic Sentiment Indicator (2000=100)</td>
<td>113.4</td>
<td>112.9</td>
<td>106.0</td>
<td>0.44*</td>
<td>6.98*</td>
<td>111.6</td>
<td>106.2</td>
<td>105.3</td>
</tr>
<tr>
<td class="firstcol">Components (Balances)</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Industrial confidence (40%)</td>
<td>-0.7</td>
<td>6.7</td>
<td>-0.3</td>
<td>-7.4</td>
<td>-0.4</td>
<td>4.6</td>
<td>6.8</td>
<td>4.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Construction confidence (20%)</td>
<td>-6.5</td>
<td>-4.5</td>
<td>-19.0</td>
<td>-2.0</td>
<td>12.5</td>
<td>-10.2</td>
<td>-21.8</td>
<td>-18.3</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Retail trade confidence&nbsp; (20%)</td>
<td>23.0</td>
<td>22.0</td>
<td>-6.7</td>
<td>3.0</td>
<td>31.7</td>
<td>14.5</td>
<td>4.4</td>
<td>12.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Consumer confidence&nbsp; (20%)</td>
<td>-17.8</td>
<td>-14.6</td>
<td>-16.8</td>
<td>-3.2</td>
<td>-1.0</td>
<td>-14.6</td>
<td>-23.9</td>
<td>-34.8</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/051223d.jpg" width="353">
The European Central Bank today reported that the Euro-Zone12 countries had an aggregate current account deficit of &#128;9 billion in October, the largest monthly deficit since December 2000. Adverse movements in both credit and debit flows were responsible for the sizable deterioration from -&#128;3.3 billion in September and a surplus of &#128;3.1 billion in the year-earlier month. (All data here are seasonally adjusted.)<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051223e.jpg" width="353">
In the month, goods exports fell &#128;2.8 billion, so token increases in credit flows in other parts of the current account were not able to offset completely that decline and total credits to the current account eased by &#128;1.0 billion. Debit items, however, rose once again, this month by &#128;4.8 billion, with a total increase of &#128;22.6 billion in the last year. It&#39;s easy to say, oh well, higher priced petroleum must have done that. It was important, but total goods imports accounted for only about 60% of the deterioration. Outflows of investment income were the other major negative, increasing &#128;3.2 billion from September to &#128;32.6 billion, tied for a record high with September 2000. Growth in foreign investments into the Euro-Zone countries over the last five years, particularly for portfolio investment, have apparently generated the rising outflow of interest and dividends. All together, the balance on goods, usually in comfortable surplus for the Euro-Zone as a whole, diminished to just barely positive in October, &#128;300 million. Net investment income was -&#128;7.4 billion, the second largest such shortfall since these accounts began in 1997; only August 2000 was larger, with &#128;8.0 billion.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051223f.jpg" width="353">
One bittersweet note on these data at this holiday season. Net current transfers in October were -&#128;4.4 billion, less negative than September&#39;s &#128;6.2 billion and similar to their recent range between &#128;4 and &#128;5 billion. However, in January 2005, this balance was -&#128;7.9 billion, by far the largest ever, with &#128;14.8 billion in debit outflows, also considerably larger than any other month. We&#39;d surmise that at least some of the extra funds in that month represented European governments&#39; and residents&#39; contributions to Asian tsunami relief, widely recognized as an extraordinary disaster fund-raising effort. See the third graph for an illustration.

<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/EUROSTAT/@U7/@U7A/@U7A19/@U7A19.HTM">Euro-Zone12</a>Bil.&#128;, Seasonally Adjusted</th>
<th scope="col">Oct 2005</th>
<th scope="col">Sept 2005</th>
<th scope="col">Oct 2004</th>
Monthly Averages
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2004</td>
<td>2003</td>
<td>2002</td>
</tr>
<tr>
<td class="firstcol">Current Account Balance</td>
<td>-9.0</td>
<td>-3.3</td>
<td>3.1</td>
<td>3.6</td>
<td>2.9</td>
<td>4.9</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Credit</td>
<td>166.8</td>
<td>167.8</td>
<td>156.3</td>
<td>152.5</td>
<td>141.2</td>
<td>144.0</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Debit</td>
<td>175.8</td>
<td>171.1</td>
<td>153.2</td>
<td>148.8</td>
<td>138.3</td>
<td>139.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Goods Balance</td>
<td>0.3</td>
<td>5.3</td>
<td>6.6</td>
<td>8.8</td>
<td>9.1</td>
<td>10.9</td>
</tr>
<tr>
<td class="firstcol">Services Balance</td>
<td>2.5</td>
<td>2.5</td>
<td>3.4</td>
<td>2.4</td>
<td>1.6</td>
<td>1.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Income Balance</td>
<td>-7.4</td>
<td>-4.9</td>
<td>-2.4</td>
<td>-2.8</td>
<td>-3.1</td>
<td>-3.1</td>
</tr>
<tr>
<td class="firstcol">Net Transfers</td>
<td>-4.4</td>
<td>-6.2</td>
<td>-4.5</td>
<td>-4.7</td>
<td>-4.8</td>
<td>-4.1</td>
</tr>
</tbody>
</table>
</body>
</html>

The European Central Bank today reported that the Euro-Zone12 countries had an aggregate current account deficit of 9 billion in October, the largest monthly deficit since December 2000. Adverse movements in both credit and debit [...]

EU Current Account Deficit Widens in October; Investment Income Contributes as Well as Goods Imports

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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