Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060206c.jpg" width="353">
Friday&#39;s gold price of $569 per ounce underscored concerns that inflationary price pressures continue to build. Since 1980 there has been a 66% correlation between the level of gold prices and the y/y change in consumer prices. Gold prices, certainly, have been higher. In 1980 they neared $700 per ounce. But gold prices reflect and do not cause higher prices. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060206b.jpg" width="353">
Higher oil prices fueled much of the real concern. On Friday, spot WTI crude stood at $65.38 per barrel. That was down slightly from earlier highs near $68 but prices nevertheless remained up 44% from the year ago level.
Conversely, U.S. economic pressures that might generate inflation have subsided recently. Monetary pressures certainly are down as a result of the Fed&#39;s efforts to raise interest rates. Growth in the monetary base and M2 both have decelerated to roughly 4%, a 50% deceleration from earlier rates of growth generated to combat deflation fears.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060206a.jpg" width="353">
Real economic growth also has slowed. After surpassing the Congressional Budget Office&#39;s estimate of potential for just two years, U.S. GDP growth at 3.1% through 4Q05 is back down to potential. A separate calculation of the U.S. economy&#39;s potential, however, suggests that less pressure built up (see chart) when the economy was stronger.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060206d.jpg" width="353">
Imported inflation? With economic growth perking up abroad the question might be asked. But during the last five years growth in the major seven OECD countries has averaged a sub par 2.2%, well below the 3.0% rates of growth during the late 1990s and the 4.0% growth rates during the late 1980s. Additionally, the real value of the U.S. dollar against its major trading partners recently has strengthed.
The Long-Run Benefits of Sustained Low Inflation from the Federal Reserve Bank of St. Louis can be found <a href="http://research.stlouisfed.org/publications/net/20060201/cover.pdf"> here</a>.
Energy Prices and the Economy, a 2004 article from the Federal Reserve Bank of Dallas is available <a href="http://www.dallasfed.org/research/indepth/2004/id0402.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W4/@W4.HTM">Weekly Prices</a></th>
<th scope="col">01/31/06</th>
<th scope="col">12/27/05</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">Light Sweet Crude Oil, WTI&nbsp; (per bbl.)</td>
<td>$67.93</td>
<td>$58.16</td>
<td>44.1%</td>
<td>$57.59</td>
<td>$41.73</td>
<td>$31.00</td>
</tr>
<tr>
<td class="firstcol">Gold: Handy &amp; Harmon (per Troy Oz.)</td>
<td>$568.75</td>
<td>$507.40</td>
<td>35.1%</td>
<td>$447.13</td>
<td>$411.72</td>
<td>$367.78</td>
</tr>
</tbody>
</table>
German New Orders and Sales Decline in December  
by <a href="/comment/Curley.html">Louise Curley</a> February 6, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060206f.jpg" width="353">
German manufacturing and mining new orders faltered in December after having risen for the three previous months. The index (2000=100) for new orders declined by 1.61% from 118.1 in November to 116.2 in December but was 4.12% above December 2004. Domestic new orders fell 1.24% while foreign new orders fell 2.00% in December from November. The data were somewhat surprising in view of the big improvement in the IFO business climate measure in January, noted last week by Carol Stone.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060206e.jpg" width="353"> However, the business climate may have been affected more by the outlook than the immediate past. Moreover, the course of new orders has never been smooth as can be seen in the first chart that shows domestic and foreign new orders. While there is evidence of a strong upward trend in foreign new orders and a much weaker upward trend in domestic new orders, these trends have not been smooth. A one month decline has, more often than not, been followed by an increase that has raised the level of new orders above the previous peak.
Sales follow closely on new orders as can be seen in the second chart where sales and new orders are plotted. The correlation of .94 between the two series gives an R2 of .88, indicating that new orders account for .88% of the variation in sales.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060206g.jpg" width="353">
Just as foreign new orders have outpaced domestic orders foreign sales have been the dynamic area within the manufacturing and mining industries since late 2003 as shown in the third chart. The decline in the euro, starting in December 2004 has been a major factor in last year&#39;s rise. Domestic sales, on the other hand, have been hampered by a high level of unemployment and, more recently, by rising energy costs.

<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/GERMANY/@D6/@D6.HTM">Germany New Orders and Sales for Manufacturing and Mining (2000=100)</a></th>
<th scope="col">Q3 05&nbsp;&nbsp;</th>
<th scope="col">Q2 05</th>
<th scope="col">Q1 04</th>
<th scope="col">Q/Q %</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 New Orders Nominal</td>
<td>116.2</td>
<td>118.1</td>
<td>111.6</td>
<td>-1.61</td>
<td>4.12</td>
<td>111.4</td>
<td>104.8</td>
<td>99.0</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Domestic</td>
<td>103.4</td>
<td>104.7</td>
<td>105.4</td>
<td>-1.24</td>
<td>-1.90</td>
<td>101.1</td>
<td>98.3</td>
<td>94.6</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Foreign</td>
<td>132.2</td>
<td>134.9</td>
<td>119.4</td>
<td>-1.92</td>
<td>11.06</td>
<td>124.3</td>
<td>112.5</td>
<td>103.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Total Sales Nominal</td>
<td>111.7</td>
<td>112.6</td>
<td>106.3</td>
<td>-0.80</td>
<td>5.08</td>
<td>110.1</td>
<td>105.2</td>
<td>100.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Domestic</td>
<td>102.4</td>
<td>103.0</td>
<td>100.2</td>
<td>-0.58</td>
<td>2.20</td>
<td>101.8</td>
<td>99.4</td>
<td>96.9</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Foreign</td>
<td>126.6</td>
<td>128.1</td>
<td>116.1</td>
<td>-1.17</td>
<td>9.04</td>
<td>123.2</td>
<td>114.5</td>
<td>106.7&nbsp;</td>
</tr>
</tbody>
</table>
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Friday's gold price of $569 per ounce underscored concerns that inflationary price pressures continue to build. Since 1980 there has been a 66% correlation between the level of gold prices and the y/y change in consumer prices. Gold [...]

Gold & Oil Prices Higher Still

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/060203g.jpg" width="353">
International trade for Australia looks to be very dynamic process. The trade balance widened to a significant deficit in 2003 and 2004, but moderated considerably in 2005, mirroring a pattern of decline and then rapid turnaround in exports. Exports fell 9.3% in 2003, but recovered almost exactly that amount in 2004. Then last year, they surged ahead 17.8% for the year as a whole, with 9.0% in the month of December alone over November. Exports in December, as seen in the table below, grew a whopping 28.5% from December 2004.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203h.jpg" width="353">
At the same time, imports have not been sluggish, as they were up 10% for 2005 as a whole. As elsewhere, some of this was oil-price related, with imports of mineral fuels, lubricants and related up 34% for the year, following 28% in 2004. Chemicals also rose by more than 10%. Other manufactured goods weren&#39;t that strong, but they gained in a range of 8%-9%, so they were hardly weak.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203i.jpg" width="353">
The two most interesting developments in Australian trade -- at least in our view -- concern metals exports and exports to China. These may be related, but available data can&#39;t confirm that. The third graph is very suggestive, however. Exports to China rose 45.5% in 2005, with a final spurt in December carrying them to A$1.8 billion, up nearly 66% from December 2004. (For comparison, shipments to the US, which were larger than those to China as recently as 2003, were relatively flat at about A$800 million/month from then until late last year.) Among kinds of goods Australia has exported, non-food crude materials also increased substantially, 29% for the year and 49% December-on-December. Over the past five years, the monthly pattern of the year-to-year changes in these raw materials has a 76% correlation with growth in exports to China. Australia is a major producer of copper and aluminum; it may well be that they are shipping considerable quantities of those metals to their large neighbor to the north. This would bode well for both countries, a fine illustration of the &quot;gains from trade&quot;, and would help minimize Australia&#39;s trade deficit with China.

<table border="0" cellspacing="0" width="100%">
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<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/ANZ/@A1/@A109/@A1098/@A1098.HTM">Australia Trade (Mil.A$)</a></th>
Month/Month
<th scope="col">Yr/Yr</th>
Monthly Average
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Dec 2005*</td>
<td>Nov 2005*</td>
<td>Oct 2005*</td>
<td>Dec 2004*</td>
<td>2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">Goods &amp; Services: Balance</td>
<td>-1168</td>
<td>-2473</td>
<td>-1371</td>
<td>-2480</td>
<td>-1668</td>
<td>-2102</td>
<td>-1818</td>
</tr>
<tr class="odd">
<td class="firstcol">Goods: Exports</td>
<td>13214</td>
<td>12129</td>
<td>11999</td>
<td>10229</td>
<td>11619</td>
<td>9848</td>
<td>9067</td>
</tr>
<tr>
<td class="firstcol">&nbsp; % Change</td>
<td>9.0</td>
<td>1.1</td>
<td>3.8</td>
<td>28.5**</td>
<td>17.8</td>
<td>9.4</td>
<td>-9.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Goods: Imports</td>
<td>14150</td>
<td>14227</td>
<td>13285</td>
<td>12502</td>
<td>13163</td>
<td>11875</td>
<td>10974</td>
</tr>
<tr>
<td class="firstcol">&nbsp; % Change</td>
<td>-1.9</td>
<td>8.6</td>
<td>1.1</td>
<td>9.3**</td>
<td>10.1</td>
<td>8.7</td>
<td>1.7</td>
</tr>
<tr class="odd">
<td class="firstcol">China: Exports (NSA)</td>
<td>1827</td>
<td>1419</td>
<td>1509</td>
<td>1102</td>
<td>1336</td>
<td>918</td>
<td>757</td>
</tr>
<tr>
<td class="firstcol">USA: Exports (NSA)</td>
<td>914</td>
<td>840</td>
<td>773</td>
<td>835</td>
<td>772</td>
<td>796</td>
<td>788</td>
</tr>
</tbody>
</table>
</body>
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International trade for Australia looks to be very dynamic process. The trade balance widened to a significant deficit in 2003 and 2004, but moderated considerably in 2005, mirroring a pattern of decline and then rapid turnaround in [...]

Large Shipments to China Help Australia Trade Balance

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203c.jpg" width="353">
Factory inventories grew 0.5% during December following an upwardly revised 0.3% increase during November. During the year, the rate of inventory accumulation slowed to 4.3% from 7.7% during 2004.
The rise last year in oil prices actually dampened the degree of that slowdown. During 2005, petroleum refineries&#39; inventories rose 26.0%. Less oil, factory inventories rose 3.4%, down from a 7.4% gain during 2004 and down from a 8.7% rate of accumulation early in the year.
December inventory accumulation was paced by a 0.8% (4.7% y/y) increase in primary metal which was the first monthly increase since May. Electrical equipment inventories also rose a strong 1.0% (5.7% y/y) but inventories of computers &amp; electronic products fell 0.9% (0.5% y/y) and that y/y gain was down from +7.1% last January. Machinery inventories rose just 0.1% (6.4% y/y), half the annual rate of accumulation early in the year.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203f.jpg" width="353">
Factory shipments surged 2.2% but the gain was pumped by a 14.4% (83.8% y/y) rise in nondefense aircraft and a 4.2% (-0.2% y/y) gain in motor vehicles &amp; parts. Less transportation altogether as well as petroleum, shipments rose 0.9% (5.1% y/y).
Total factory orders rose 1.1% and the advance report of a 1.3% rise in durable goods orders was revised up to 1.8%.
Unfilled orders surged another 2.4% powered by a 7.6% (55.8% y/y) rise in backlogs for nondefense aircraft orders. Less the transportation sector, backlogs rose 0.5% (10.0% y/y) and the ratio of total unfilled orders to shipments fell.<a href="http://research.stlouisfed.org/publications/review/05/07/Gali.pdf"> </a>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED01/@ED0101/@ED01016/@ED01016.HTM">Factory Survey</a> (NAICS)</th>
<th scope="col">Dec</th>
<th scope="col">Nov</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Inventories</td>
<td>0.5%</td>
<td>0.3%</td>
<td>4.3%</td>
<td>4.3%</td>
<td>7.7%</td>
<td>-1.1%</td>
</tr>
<tr>
<td class="firstcol">New Orders</td>
<td>1.1%</td>
<td>3.3%</td>
<td>10.5%</td>
<td>8.4%</td>
<td>9.3%</td>
<td>3.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Shipments</td>
<td>2.2%</td>
<td>0.8%</td>
<td>7.2%</td>
<td>7.4%</td>
<td>9.5%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">Unfilled Orders</td>
<td>2.4%</td>
<td>3.1%</td>
<td>16.3%</td>
<td>16.3%</td>
<td>8.4%</td>
<td>8.0%</td>
</tr>
</tbody>
</table>
</body>
</html>

Factory inventories grew 0.5% during December following an upwardly revised 0.3% increase during November. During the year, the rate of inventory accumulation slowed to 4.3% from 7.7% during 2004. The rise last year in oil prices [...]

U.S. Factory Inventory Accumulation Slowed

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203d.jpg" width="353">
The University of Michigan reported that consumer sentiment for all of January fell a slight 0.3% from December to 91.2. The decline was due to a fall late in the month and compared to an initial read of 93.4. Consensus expectations had been for 93.0 for the full month.
During the last ten years there has been a 76% correlation between the level of consumer sentiment and the y/y change in real consumer spending.
The current conditions index rose just 1.1% compared to a mid-month 2.7% increase. The reading of buying conditions for large household goods rose less than initially estimated and the reading of personal finances showed the same, slight decline (-4.1% y/y). Consumers&#39; assessment of gov&#39;t economic policy (-11.2% y/y) improved to the highest level since July.
Consumers&#39; expectations slipped 1.6% instead of increasing that amount as indicated mid-month. Expectations for personal finances fell sharply (-9.8% y/y).
The mean expected inflation rate for the next twelve months increased to 3.8% from 3.5% expected mid-month.
The University of Michigan survey is not seasonally adjusted.The mid-month survey is based on telephone interviews with 250 households nationwide on personal finances and business and buying conditions. The survey is expanded to a total of 500 interviews at month end.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM">University of Michigan</a></th>
<th scope="col">Jan&nbsp;</th>
<th scope="col">Dec</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Consumer Sentiment</td>
<td>91.2</td>
<td>91.5</td>
<td>-4.5%</td>
<td>88.6</td>
<td>95.2</td>
<td>87.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>110.3</td>
<td>109.1</td>
<td>-0.5%</td>
<td>105.9</td>
<td>105.6</td>
<td>97.2</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Expectations</td>
<td>78.9</td>
<td>80.2</td>
<td>-7.9%</td>
<td>77.4</td>
<td>88.5</td>
<td>81.4</td>
</tr>
</tbody>
</table>
</body>
</html>

The University of Michigan reported that consumer sentiment for all of January fell a slight 0.3% from December to 91.2. The decline was due to a fall late in the month and compared to an initial read of 93.4. Consensus expectations [...]

U.S. Consumer Sentiment Slipped Late in January

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203e.jpg" width="353">
The Institute for Supply Management (ISM) reported that the Business Activity Index for the non-manufacturing sector fell last month to 56.8 from an upwardly revised 61.0 in December. A reading above 50 indicates expansion. The latest reading was weaker than Consensus expectations for a decline to 59.5.
Since the series&#39; inception in 1997 there has been a 53% correlation between the level of the Business Activity Index and the q/q change in real GDP for services plus construction.
The new orders component slipped sharply to its lowest level since May 2003 and the employment index, though still indicating growth at 51.1, was at its lowest since July 2004. Since the series&#39; inception in 1997 there has been a 60% correlation between the level of the ISM non-manufacturing employment index and the m/m change in payroll employment in the service producing plus the construction industries.
Pricing power was stable last month with December. Since inception eight years ago, there has been a 70% correlation between the price index and the y/y change in the GDP Services chain price index.
ISM surveys more than 370 purchasing managers in more than 62 industries including construction, law firms, hospitals, government and retailers. The non-manufacturing survey dates only to July 1997, therefore its seasonal adjustment should be viewed tentatively.
Business Activity Index for the non-manufacturing sector reflects a question separate from the subgroups mentioned above. In contrast, the NAPM manufacturing sector composite index is a weighted average five components.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF03/@EF03.HTM">ISM Nonmanufacturing Survey</a></th>
<th scope="col">Jan</th>
<th scope="col">Dec</th>
<th scope="col">Jan &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Business Activity Index</td>
<td>56.8</td>
<td>61.0</td>
<td>60.3</td>
<td>60.1</td>
<td>62.5</td>
<td>58.3</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>67.2</td>
<td>67.2</td>
<td>66.8</td>
<td>67.9</td>
<td>68.8</td>
<td>56.6</td>
</tr>
</tbody>
</table>


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The Institute for Supply Management (ISM) reported that the Business Activity Index for the non-manufacturing sector fell last month to 56.8 from an upwardly revised 61.0 in December. A reading above 50 indicates expansion. The latest [...]

ISM Nonmanufacturing Index Fell

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

In January, non-farm payrolls rose 193,000 following a December increase revised to 140,000 from the 108,000 reported last month. In addition, the November increase was revised up further 354,000 from last month's reported 305,000 [...]

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

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203b.jpg" width="353">
In January, non-farm payrolls rose 193,000 following a December increase revised to 140,000 from the 108,000 reported last month. In addition, the November increase was revised up further 354,000 from last month&#39;s reported 305,000 gain and from 215,000 reported initially. Consensus expectations had been for a 250,000 January increase.
Benchmark revisions of the establishment survey data extended back to 2001. For 2005, the average monthly increase in payrolls was revised down to 165,000 from 179,300, but the average gain during 2004 was revised up to 175,000 from 123,000.
From the household survey the unemployment rate fell to the lowest level since July 2001. At 4.7%, the rate reflected a 295,000 (2.0% y/y) rise in employment and a 39,000 (1.5% y/y) decline in the labor force. A 4.9% unemployment rate had been the Consensus expectation for January.
Factory sector payrolls increased modestly following a downwardly revised December decline and the average gain in factory payrolls during the last three months of 2005 was revised slightly lower to 9,000. Nevertheless, the breadth of gain in factory payrolls rose to 52.4%, its best since July 2004.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203a.jpg" width="353">
Warm weather helped lift construction employment in January by 46,000 (4.8% y/y) following an upwardly revised 5,000 increase during December.
Private service producing payrolls rose the same 136,000 (1.8% y/y) in January as during an upwardly revised December despite a 1,500 decline in retail employment (+1.0% y/y). That decline was offset by a 21,000 (1.9% y/y) gain in finance and a 24,000 (3.1% y/y) increase in professional &amp; business services. Education &amp; health services jobs posted a 39,000 (2.1% y/y) increase while jobs in leisure &amp; hospitality rose 26,000 (2.0% y/y).
Government sector employment fell 1,000 (+0.7% y/y) for the third decline in the last four months. Federal hiring fell 5,000 (-0.5% y/y) and state &amp; local jobs increased 4,000 (0.9% y/y).
Average hourly earnings again were a bit stronger than expected, rising 0.4%. Factory sector earnings rose 0.2% (2.2% y/y) and private service producing wages rose 0.4% (3.5% y/y).
2006: A Year of Transition at the Federal Reserve from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-1.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EB/@EB01/@EB01.HTM">Employment</a></th>
<th scope="col">Jan</th>
<th scope="col">Dec</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Payroll Employment</td>
<td>193,000</td>
<td>140,000</td>
<td>1.6%</td>
<td>1.6%</td>
<td>1.1%</td>
<td>-0.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Manufacturing</td>
<td>7,000</td>
<td>-1,000</td>
<td>-0.3%</td>
<td>-0.6%</td>
<td>-1.3%</td>
<td>-4.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Average Weekly Hours</td>
<td>33.8</td>
<td>33.8</td>
<td>33.7 (Jan &#39;05)</td>
<td>33.8</td>
<td>33.7</td>
<td>33.7</td>
</tr>
<tr>
<td class="firstcol">Average Hourly Earnings</td>
<td>0.4%</td>
<td>0.4%</td>
<td>3.3%</td>
<td>2.8%</td>
<td>2.1%</td>
<td>2.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment Rate</td>
<td>4.7%</td>
<td>4.9%</td>
<td>5.2% (Jan &#39;05)</td>
<td>5.1%</td>
<td>5.5%</td>
<td>6.0%</td>
</tr>
</tbody>
</table>
ISM Nonmanufacturing Index Fell 
by <a href="/comment/Moeller.html">Tom Moeller</a> February 3, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203e.jpg" width="353">
The Institute for Supply Management (ISM) reported that the Business Activity Index for the non-manufacturing sector fell last month to 56.8 from an upwardly revised 61.0 in December. A reading above 50 indicates expansion. The latest reading was weaker than Consensus expectations for a decline to 59.5.
Since the series&#39; inception in 1997 there has been a 53% correlation between the level of the Business Activity Index and the q/q change in real GDP for services plus construction.
The new orders component slipped sharply to its lowest level since May 2003 and the employment index, though still indicating growth at 51.1, was at its lowest since July 2004. Since the series&#39; inception in 1997 there has been a 60% correlation between the level of the ISM non-manufacturing employment index and the m/m change in payroll employment in the service producing plus the construction industries.
Pricing power was stable last month with December. Since inception eight years ago, there has been a 70% correlation between the price index and the y/y change in the GDP Services chain price index.
ISM surveys more than 370 purchasing managers in more than 62 industries including construction, law firms, hospitals, government and retailers. The non-manufacturing survey dates only to July 1997, therefore its seasonal adjustment should be viewed tentatively.
Business Activity Index for the non-manufacturing sector reflects a question separate from the subgroups mentioned above. In contrast, the NAPM manufacturing sector composite index is a weighted average five components.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF03/@EF03.HTM">ISM Nonmanufacturing Survey</a></th>
<th scope="col">Jan</th>
<th scope="col">Dec</th>
<th scope="col">Jan &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Business Activity Index</td>
<td>56.8</td>
<td>61.0</td>
<td>60.3</td>
<td>60.1</td>
<td>62.5</td>
<td>58.3</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>67.2</td>
<td>67.2</td>
<td>66.8</td>
<td>67.9</td>
<td>68.8</td>
<td>56.6</td>
</tr>
</tbody>
</table>
U.S. Consumer Sentiment Slipped Late in January 
by <a href="/comment/Moeller.html">Tom Moeller</a> February 3, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203d.jpg" width="353">
The University of Michigan reported that consumer sentiment for all of January fell a slight 0.3% from December to 91.2. The decline was due to a fall late in the month and compared to an initial read of 93.4. Consensus expectations had been for 93.0 for the full month.
During the last ten years there has been a 76% correlation between the level of consumer sentiment and the y/y change in real consumer spending.
The current conditions index rose just 1.1% compared to a mid-month 2.7% increase. The reading of buying conditions for large household goods rose less than initially estimated and the reading of personal finances showed the same, slight decline (-4.1% y/y). Consumers&#39; assessment of gov&#39;t economic policy (-11.2% y/y) improved to the highest level since July.
Consumers&#39; expectations slipped 1.6% instead of increasing that amount as indicated mid-month. Expectations for personal finances fell sharply (-9.8% y/y).
The mean expected inflation rate for the next twelve months increased to 3.8% from 3.5% expected mid-month.
The University of Michigan survey is not seasonally adjusted.The mid-month survey is based on telephone interviews with 250 households nationwide on personal finances and business and buying conditions. The survey is expanded to a total of 500 interviews at month end.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM">University of Michigan</a></th>
<th scope="col">Jan&nbsp;</th>
<th scope="col">Dec</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Consumer Sentiment</td>
<td>91.2</td>
<td>91.5</td>
<td>-4.5%</td>
<td>88.6</td>
<td>95.2</td>
<td>87.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>110.3</td>
<td>109.1</td>
<td>-0.5%</td>
<td>105.9</td>
<td>105.6</td>
<td>97.2</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Expectations</td>
<td>78.9</td>
<td>80.2</td>
<td>-7.9%</td>
<td>77.4</td>
<td>88.5</td>
<td>81.4</td>
</tr>
</tbody>
</table>
U.S. Factory Inventory Accumulation Slowed 
by <a href="/comment/Moeller.html">Tom Moeller</a> February 3, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203c.jpg" width="353">
Factory inventories grew 0.5% during December following an upwardly revised 0.3% increase during November. During the year, the rate of inventory accumulation slowed to 4.3% from 7.7% during 2004.
The rise last year in oil prices actually dampened the degree of that slowdown. During 2005, petroleum refineries&#39; inventories rose 26.0%. Less oil, factory inventories rose 3.4%, down from a 7.4% gain during 2004 and down from a 8.7% rate of accumulation early in the year.
December inventory accumulation was paced by a 0.8% (4.7% y/y) increase in primary metal which was the first monthly increase since May. Electrical equipment inventories also rose a strong 1.0% (5.7% y/y) but inventories of computers &amp; electronic products fell 0.9% (0.5% y/y) and that y/y gain was down from +7.1% last January. Machinery inventories rose just 0.1% (6.4% y/y), half the annual rate of accumulation early in the year.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203f.jpg" width="353">
Factory shipments surged 2.2% but the gain was pumped by a 14.4% (83.8% y/y) rise in nondefense aircraft and a 4.2% (-0.2% y/y) gain in motor vehicles &amp; parts. Less transportation altogether as well as petroleum, shipments rose 0.9% (5.1% y/y).
Total factory orders rose 1.1% and the advance report of a 1.3% rise in durable goods orders was revised up to 1.8%.
Unfilled orders surged another 2.4% powered by a 7.6% (55.8% y/y) rise in backlogs for nondefense aircraft orders. Less the transportation sector, backlogs rose 0.5% (10.0% y/y) and the ratio of total unfilled orders to shipments fell.<a href="http://research.stlouisfed.org/publications/review/05/07/Gali.pdf"> </a>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED01/@ED0101/@ED01016/@ED01016.HTM">Factory Survey</a> (NAICS)</th>
<th scope="col">Dec</th>
<th scope="col">Nov</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Inventories</td>
<td>0.5%</td>
<td>0.3%</td>
<td>4.3%</td>
<td>4.3%</td>
<td>7.7%</td>
<td>-1.1%</td>
</tr>
<tr>
<td class="firstcol">New Orders</td>
<td>1.1%</td>
<td>3.3%</td>
<td>10.5%</td>
<td>8.4%</td>
<td>9.3%</td>
<td>3.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Shipments</td>
<td>2.2%</td>
<td>0.8%</td>
<td>7.2%</td>
<td>7.4%</td>
<td>9.5%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">Unfilled Orders</td>
<td>2.4%</td>
<td>3.1%</td>
<td>16.3%</td>
<td>16.3%</td>
<td>8.4%</td>
<td>8.0%</td>
</tr>
</tbody>
</table>
Large Shipments to China Help Australia Trade Balance 
by <a href="/comment/Stone.html">Carol Stone</a> February 3, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203g.jpg" width="353">
International trade for Australia looks to be very dynamic process. The trade balance widened to a significant deficit in 2003 and 2004, but moderated considerably in 2005, mirroring a pattern of decline and then rapid turnaround in exports. Exports fell 9.3% in 2003, but recovered almost exactly that amount in 2004. Then last year, they surged ahead 17.8% for the year as a whole, with 9.0% in the month of December alone over November. Exports in December, as seen in the table below, grew a whopping 28.5% from December 2004.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203h.jpg" width="353">
At the same time, imports have not been sluggish, as they were up 10% for 2005 as a whole. As elsewhere, some of this was oil-price related, with imports of mineral fuels, lubricants and related up 34% for the year, following 28% in 2004. Chemicals also rose by more than 10%. Other manufactured goods weren&#39;t that strong, but they gained in a range of 8%-9%, so they were hardly weak.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060203i.jpg" width="353">
The two most interesting developments in Australian trade -- at least in our view -- concern metals exports and exports to China. These may be related, but available data can&#39;t confirm that. The third graph is very suggestive, however. Exports to China rose 45.5% in 2005, with a final spurt in December carrying them to A$1.8 billion, up nearly 66% from December 2004. (For comparison, shipments to the US, which were larger than those to China as recently as 2003, were relatively flat at about A$800 million/month from then until late last year.) Among kinds of goods Australia has exported, non-food crude materials also increased substantially, 29% for the year and 49% December-on-December. Over the past five years, the monthly pattern of the year-to-year changes in these raw materials has a 76% correlation with growth in exports to China. Australia is a major producer of copper and aluminum; it may well be that they are shipping considerable quantities of those metals to their large neighbor to the north. This would bode well for both countries, a fine illustration of the &quot;gains from trade&quot;, and would help minimize Australia&#39;s trade deficit with China.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/ANZ/@A1/@A109/@A1098/@A1098.HTM">Australia Trade (Mil.A$)</a></th>
Month/Month
<th scope="col">Yr/Yr</th>
Monthly Average
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Dec 2005*</td>
<td>Nov 2005*</td>
<td>Oct 2005*</td>
<td>Dec 2004*</td>
<td>2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">Goods &amp; Services: Balance</td>
<td>-1168</td>
<td>-2473</td>
<td>-1371</td>
<td>-2480</td>
<td>-1668</td>
<td>-2102</td>
<td>-1818</td>
</tr>
<tr class="odd">
<td class="firstcol">Goods: Exports</td>
<td>13214</td>
<td>12129</td>
<td>11999</td>
<td>10229</td>
<td>11619</td>
<td>9848</td>
<td>9067</td>
</tr>
<tr>
<td class="firstcol">&nbsp; % Change</td>
<td>9.0</td>
<td>1.1</td>
<td>3.8</td>
<td>28.5**</td>
<td>17.8</td>
<td>9.4</td>
<td>-9.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Goods: Imports</td>
<td>14150</td>
<td>14227</td>
<td>13285</td>
<td>12502</td>
<td>13163</td>
<td>11875</td>
<td>10974</td>
</tr>
<tr>
<td class="firstcol">&nbsp; % Change</td>
<td>-1.9</td>
<td>8.6</td>
<td>1.1</td>
<td>9.3**</td>
<td>10.1</td>
<td>8.7</td>
<td>1.7</td>
</tr>
<tr class="odd">
<td class="firstcol">China: Exports (NSA)</td>
<td>1827</td>
<td>1419</td>
<td>1509</td>
<td>1102</td>
<td>1336</td>
<td>918</td>
<td>757</td>
</tr>
<tr>
<td class="firstcol">USA: Exports (NSA)</td>
<td>914</td>
<td>840</td>
<td>773</td>
<td>835</td>
<td>772</td>
<td>796</td>
<td>788</td>
</tr>
</tbody>
</table>


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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060202g.jpg" width="353">
Low interest rates tend to help construction, and this has been the case in Europe recently.Eurostat this morning reported construction orders through Q3 2005 for the region as a whole and for selected countries through November. Specific performance varies by country, but the renewal of this sector for the area as a whole is impressive. These orders cover contracts for nonresidential projects, including buildings and infrastructure.
Construction orders for the entire Euro-Zone 12 actually eased 1.1% in September from August, but the level over the last few months was running about 10% above 2004 amounts.Spain is a good example of the strength, with September&#39;s value almost 18% higher than a year ago. The UK, a member of the European Union (&quot;EU-25&quot;), but not the Euro-Zone, is also seeing a strong advance, with November&#39;s index 123.0 (2000=100) up 14% from November 2004.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060202h.jpg" width="353">
Germany looks to be a special case here. Its construction sector has long been in decline, basically for more than 10 years. But the last several months have seen a stabilization and some modest gains. The upturn is not steep, but for that reason, perhaps it can last a good while. Both buildings and infrastructure construction are participating, although the latter is more uneven.
Among the entire Euro-Zone, the index for buildings was 122.66 in September, up 10.1% from the year-earlier month; it averaged 122.08 in Q3, up 11.9%. Civil engineering orders were 116.49 in September, just 2.8% above September 2004, but they are more irregular than smaller project orders; the quarterly average was 117.82, up 5.0% on the year. As seen in the first graph, these orders all together have a 61% negative correlation with long-term interest rates. These latter, though, have been rising for the last few months. Will that constrain the vigor of this building activity? Possibly, but the rate increase is quite modest and the level remains near the lowest for the history of this average of European yields since 1990.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/EUROSTAT/@UC/@UC02/@UC02.HTM">EU-12 &amp; Select Countries,</a> 2000=100</th>
<th scope="col">Nov 2005</th>
<th scope="col">Oct 2005</th>
<th scope="col">Sept 2005</th>
<th scope="col">Aug 2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Euro-Zone 12</td>
<td>--</td>
<td>--</td>
<td>120.27</td>
<td>121.66</td>
<td>110.26</td>
<td>105.29</td>
<td>105.42</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>76.54</td>
<td>71.86</td>
<td>76.10</td>
<td>78.99</td>
<td>74.54</td>
<td>78.46</td>
<td>88.46</td>
</tr>
<tr class="odd">
<td class="firstcol">Spain</td>
<td>--</td>
<td>--</td>
<td>173.89</td>
<td>173.43</td>
<td>145.16</td>
<td>130.21</td>
<td>113.29</td>
</tr>
<tr>
<td class="firstcol">UK</td>
<td>123.00</td>
<td>124.50</td>
<td>110.80</td>
<td>117.90</td>
<td>104.81</td>
<td>97.80</td>
<td>102.51</td>
</tr>
</tbody>
</table>
</body>
</html>

Low interest rates tend to help construction, and this has been the case in Europe recently.Eurostat this morning reported construction orders through Q3 2005 for the region as a whole and for selected countries through November. [...]

European Construction Activity Picks Up Some Steam

Crude oil price has returned to pre-conflict level but traffic through Hormuz still subpar

Surging orders for computers and electronics propelling durable goods orders

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

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

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

US is big leader in global surge in private AI investment

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

Sharply rising share of AI-related jobs

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

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

Cost of transporting crude oil has soared to series high

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

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

Is recent drop in sentiment signaling softer growth ahead?

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

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

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

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Sandy Batten

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The luster fell a bit off the employment rose in June with nonfarm payrolls rising 57,000 against expectations of a 115,000 increase, according to today’s report from the Bureau of Labor Statistics. Moreover, the increases previously reported for April and May were revised down by a total of 74,000. Upon revision, payrolls increased 148,000 in April versus 179,000 previously reported and rose 129,000 in May versus 172,000 previously reported. The average increase over the past three months fell to 111,000 from 164,000 in May while the average increase over the past six months rose to 92,000 in June, its highest reading since February 2025, from 80,000 in May. Both remain on a modest uptrend and much stronger than payroll gains last year. In 2025, monthly payroll gains averaged only 10,000.

The weaker-than-expected payroll report was reinforced by a weak report from the **household survey**. While the number of unemployed fell 213,000 and the unemployment rate edged down to 4.2% from 4.3% in May, the number of employed slumped 507,000 in June, the largest monthly decline since May 2025 (with population adjustment to January 2026). The labor force plunged 720,000 with the labor force participation rate falling to 61.5%, its lowest level since March 2021.

Growth of average hourly earnings (AHE), a key variable for the Federal Reserve, was relatively well behaved in June. AHE increased 0.3% m/m, the same monthly gain as in May, in line with expectations. The y/y rate of advance edged up to 3.5% in June from 3.4% in May. Wage growth in private services-producing firms picked up in June, rising 0.4% m/m (3.4% y/y) versus 0.2% m/m (3.2% y/y) in May. Goods-producing wages increased 0.2% m/m in June after 0.3% monthly gains in both April and May with the y/y rate holding at 4.1%.

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In the **establishment survey**, private-sector employment was also weaker than expected in June, increasing only 49,000 against an expected 115,000 increase. Moreover, April and May figures were also revised down by a total of 50,000. Government employment rose 8,000 following a 32,000 increase in May. Private goods-producing employment increased 10,000, its largest monthly gain in three months with an 11,000 gain in construction and a 3,000 rise in manufacturing jobs, the first increase in three months. In contrast, services-producing employment increased only 39,000 in June, its weakest monthly performance in four months. Private education and health services jobs posted another solid gain of 69,000, up from 45,000 in May. However, retail jobs fell 7,500, their first monthly decline in four months, and leisure and hospitality jobs slumped 61,000, their largest monthly decline since December 2020, after increasing 40,000 in May. There had been speculation in the market that the World Cup would generate additional leisure and hospitality jobs, but this obviously failed to pan out. On a brighter note, although the one-month payroll diffusion index, a measure of the breadth of job gains, slipped to 54.4 in June from 56.0 in May, it remained well above the key 50 level that indicates that more industries were adding jobs than losing them.

The length of the workweek was unchanged at 34.3 hours in June with the aggregate weekly hours index edging up 0.1% m/m, the same monthly gain as in May. The aggregate hours index rose 1.3% q/q saar in Q2, the fastest quarterly gain in four quarters, providing a solid base for Q2 real GDP growth. The goods-producing workweek was unchanged at 40.1 hours, the highest since January 2023, while the private service-producing workweek edged down to 33.2 hours from 33.3 hours in May.

The employment and earnings data are collected from surveys taken each month during the week containing the 12th day of the month. The labor market data are contained in Haver's **USECON** database. Detailed figures are in the **EMPL** and **LABOR** databases. The expectations figures are in the **AS1REPNA** database.

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- U.S. nonfarm payrolls increased 57,000 in June with meaningful downward revisions to both April and May.
- The market consensus looked for a 115,000 increase.
- The unemployment rate edged down to 4.2% from 4.3%, due mostly to a large decrease in the labor force.
- Average hourly earnings rose 0.3% m/m (3.5% y/y), in line with expectations.

U.S. Payroll Employment Gains Smaller than Expected in June

Robert Brusca

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Unemployment rates in the European Monetary Union (EMU) were steady in May at 6.2%, the same level as in April, after April had fallen to 6.2% from 6.3%. The 6.2% reading is the lowest for the community since it was formed. Meanwhile, for the larger community, the EU, the unemployment rate has stabilized at 5.9%, the same as in April, again, a tick lower than it was in March. This 5.9% reading is a tick above the historic low for the European Union (EU). In both cases, the performance of these two economic conglomerations is quite excellent.

**Monthly**
The table looks at 12 of the most senior members of the monetary union, including an observation for the United Kingdom based on its claimant-count unemployment rate, presented at the bottom of the table. In May, the monetary union saw 4 of 12 members in the table with lower unemployment rates than they had in April. In April, five members had lower unemployment rates than in March. In March, seven members had lower unemployment rates than they posted in February. The progression to lower unemployment rates has slowed based on monthly data.

**Sequentially**
Looking at changes in the unemployment rates over broader sequential periods—three months, six months, and 12 months—6 out of 12 reporters have lower unemployment rates over three months; 7 have lower unemployment rates over six months; only 4 report unemployment rates that are lower over 12 months. The broader periods for comparison show changes in the unemployment rates that report more declines over the shorter and more recent periods compared to the longer/older periods. This is not the same trend leaning that we get from the last three months of data. It'll be good to watch these developments in the coming months to see if the tendency to lower unemployment rates is slowing or whether dropping unemployment is continuing in force.

**Rankings**
The ranking of unemployment rates since 1990 finds only three of these 12 monetary union members with unemployment rates above their medians. Those are Luxembourg, with a 98.2 percentile standing, Finland with an 81.9 percentile standing, and Austria with a 76.6 percentile standing. Italy, on the other hand, is reporting the lowest unemployment rate that it has seen during this period. The Greek unemployment rate has been this low or lower only about 3% of the time, while in Spain the unemployment rate has been this low or lower 11% of the time. For Portugal, the unemployment ranking figure has been weaker 13% of the time. The monetary union continues to report excellent labor market results even though economic growth has been relatively disappointing.

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**Summing up and central bankers**
In the wake of the monetary conference in the Sintra this past week, central banks featuring contributions from the European Central Bank, the Bank of England, the Federal Reserve, and the Bank of Canada, saw central bank heads talking about getting back to basics and stopping the use of some of the newer tools that had been pressed into service after the great financial crisis and during COVID. Bankers are getting back to basics to focus on short-term interest rates and say they will stop fiddling with the size of the balance sheet and to largely set aside the use of forward guidance. It will take time to determine what these changes are going to mean in terms of how policy performs and how markets will react. While there was a lot of discussion, and in some places concerns about the loss of forward guidance, what is clear is that, with forward guidance gone, there will be more volatility; however, the markets will be freer to price economic events themselves and will not be so stuck to the outlook of the central bank.  That could turn out to be a gigantic win for both markets and central bankers.

Europe

Unemployment Remains Quite Low in Europe

Andrew Cates

**Tightening Bias Intact, but Unevenly Distributed**
The July Blue Chip Financial Forecasts survey's expectations for policy rate changes over the next twelve months reveal a striking divergence across the major advanced economies, as chart 1 below makes clear. Across the board, the rate outlook is higher than it was in late February, before the US-Iran conflict escalated: the energy price shock and its inflationary consequences have left an imprint on the panel's thinking, even as oil prices have since retreated. Japan tops the list with an expected increase of around 40 basis points, reflecting the building pressure on the Bank of Japan to respond to yen weakness and still-elevated domestic inflation. Canada and the euro area also sit firmly in positive territory, with expected increases of around 30 and 20 basis points respectively. The US and the UK, by contrast, are in negative territory — the US barely so, the UK more distinctly, with the panel pencilling in modest rate reductions over the coming year. This pattern is not simply a reflection of where each economy sits in the inflation cycle. It also encodes a judgement about the current stance of monetary policy: in Japan, the euro area and Canada, policy is likely seen as insufficiently tight relative to the inflation challenge, and the conflict has reinforced that view. In the US and UK, by contrast, policy is judged to be closer to or already beyond neutral, meaning the next move is more likely to be an easing than a further tightening — even if, in the US case, that easing has been pushed well into 2027.

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**When Will the Next Move Come?**
Chart 2 below adds a timing dimension to the rate outlook, showing where the BCFF panel currently places the next policy move for the Fed, ECB, Bank of England and Bank of Japan. For the BoJ, the distribution is concentrated around the near term, with a significant share of respondents expecting action in September or October — consistent with the building pressure illustrated in chart 1 and with the BoJ’s next scheduled decision on 31 July. For the ECB, September or later than November emerge as the most likely timing for the next step. The Bank of England panel is more spread, with a meaningful share expecting action to come later. For the Fed, the dominant view places the next move firmly in the ‘later’ category, consistent with the BCFF consensus that the Fed funds rate will hold through the rest of 2026, with a first cut not expected until Q2 2027. Under chair Kevin Warsh, the June FOMC meeting delivered a hawkish dot plot that shifted some participants toward a hike before year-end, but the panel as a whole has not moved that far.

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**Headline Up, Core Contained: The Inflation Picture Across Advanced Economies**
One of the more reassuring features of the current inflation episode has been the limited pass-through from energy prices to underlying price dynamics. Across the advanced economies, headline CPI inflation has risen materially since the conflict escalated in March, driven overwhelmingly by consumer energy costs. Core inflation — stripping out food and energy — has edged higher, but only modestly, suggesting that second-round effects remain contained for now. In the United States, the pressures are arguably more alarming, with core PCE rising sharply between February and May to its highest level since October 2023. In the euro area, the focus this week has been firmly on Eurostat's June flash CPI estimate, published yesterday. Headline inflation fell back to 2.8% from a peak of 3.2% in May, as energy costs — the main driver of the surge since the conflict began — eased meaningfully. Crucially, core inflation also ticked down, and services inflation retreated as well. The June data therefore tell a broadly reassuring story: the energy shock is unwinding without leaving a lasting imprint on underlying price dynamics — precisely what the ECB will have been hoping for.

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**Consumer Price Expectations: Are Households Convinced?**
The aggregate inflation picture looks relatively contained at the macro level, but whether households are similarly reassured is a separate question. Chart 4 below draws on the European Commission's consumer survey data on price expectations — one of the more timely and widely watched indicators of inflation psychology in the euro area. The survey captures whether consumers expect prices to rise, stay the same or fall over the coming twelve months, and its relationship with actual inflation outturns has historically been close. A sustained elevation in consumer price expectations risks becoming self-fulfilling, feeding into wage demands and pricing behaviour in ways that complicate the ECB's task considerably. The June survey, however, brought an encouraging development: expectations fell steeply, suggesting that households have begun to register the reversal in energy prices and the broader easing of the inflationary impulse. That said, the absolute level of expectations remains elevated relative to the pre-conflict period, and one month's decline does not constitute a trend. Whether the June reading marks the beginning of a sustained normalisation — or proves a temporary dip before expectations re-anchor at a higher level — will be one of the key variables shaping the ECB's decision calculus in the months ahead.

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**Japan: A Weak Yen at the Worst Possible Time**
Japan occupies a particularly uncomfortable position in the current global conjuncture. The yen has depreciated to levels not seen since December 1986, with USD/JPY touching 162 this week. The move reflects the persistence of a large interest rate differential: even as the Bank of Japan has continued its gradual tightening, the Fed’s hawkish pivot under chair Kevin Warsh — with the mid-June FOMC dot plot signalling a possible hike before year-end — has reinforced the carry trade dynamics weighing on the currency. For Japan, which imports virtually all of its energy, yen weakness at a time of still-elevated global oil prices is a double burden, amplifying domestic inflation and squeezing real incomes. Verbal warnings from Japan’s Finance Ministry have had only a modest and short-lived effect on the exchange rate. The Bank of Japan’s next policy decision is on 31 July, and the pressure to act more decisively is building. The BCFF panel’s July survey revised upward its expectation for a stronger US dollar against the yen over the coming year — consistent with the fundamental picture that chart 5 below describes.

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**AI: Optimism on the Technology, Scepticism on the Price**
Returning to the BCFF survey, its special questions reveal a panel that continues to look beyond the current cyclical turbulence toward a longer-horizon structural narrative. On artificial intelligence, respondents are broadly optimistic: 45% expect a noticeable impact on US productivity and growth within one to three years, with a further 45% believing those effects are already becoming evident. That is a striking degree of conviction about a technology whose macro-level productivity impact remains, by most empirical measures, still to fully materialise. Yet the same panellists are considerably more cautious about financial markets than about the technology itself. Nearly all respondents believe that expected AI gains are already fully reflected — or even over-reflected — in current asset prices. Chart 6 below captures this tension. It is a combination — high conviction on transformative potential, high scepticism on current valuations — that has historically been associated with stretched risk premia and vulnerability to disappointment, even where the underlying technology story ultimately proves correct.

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Global financial markets have had a more settled feel this week, reflecting the continued unwinding of the geopolitical risk premium that had built up during the worst of the US-Iran conflict. Oil prices have fallen further, equity markets have been broadly supported, and incoming inflation data — notably the euro area’s June flash CPI estimate — have come in below expectations. The US holiday-shortened week ahead, with Independence Day on Friday, is likely to keep volumes thin and activity subdued. The bigger picture, however, remains one of tension between a more benign near-term inflation trajectory and central banks that may not yet be ready to stand down. In the charts below we look first at what the latest Blue Chip Financial Forecasts (BCFF) survey reveals about the expected change in and timing of policy rates across the major economies (charts 1 and 2), then at the divergence between headline and core inflation across the advanced economies (chart 3), and at what euro area consumers are more specifically expecting about inflation in the period ahead (chart 4). We turn next to Japan and the yen’s slide this week to 40-year lows (chart 5), and finally to the BCFF survey’s special questions on artificial intelligence and asset valuations (chart 6).

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Charts of the Week: Forecasters Hold Firm

Winnie Tapasanun

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The ISM U.S. manufacturing PMI fell to a lower-than-expected 53.3 in June, the first m/m fall since February, following a 1.3-point increase to 54.0 in May, according to data from the Institute for Supply Management. The June reading, above the 50 expansion-contraction threshold, indicated the U.S. manufacturing sector expanded for the sixth straight month, albeit at a slightly slower pace. A reading of 53.8 for June had been expected in the Action Economics Forecast Survey. The June manufacturing PMI, while above a contraction-level 49.0 in June 2025 and a low of 47.0 in October 2024, remained below a peak of 63.8 in March 2021.

The production index declined to 52.2 in June from 54.3 in May, indicating production expanded for the eighth consecutive month but at the slowest pace since December. The index was above a low of 44.8 in April 2025 but below a peak of 66.5 in March 2021. In June, 19.0% (NSA) of respondents reported higher production while 13.0% reported lower production. The new orders index slipped to 56.0 in June from 56.8 in May, signaling new orders grew for the sixth straight month following four successive months of contraction. The index remained well above a low of 41.8 in January 2023 but below a high of 67.0 in May 2021. In June, 22.3% (NSA) of respondents reported higher new orders while 13.4% reported declines. The inventories index climbed to 51.4 in June from 49.9 in May, marking the first expansion since April 2025. The index was slightly below a high of 52.7 in March 2025 but above a low of 43.8 in October 2024. Meanwhile, the supplier deliveries index fell to 57.4 in June from 60.6 in May and April, indicating slowing delivery performance for the seventh consecutive month after faster deliveries in November. In June, 18.1% (NSA) of respondents reported slower delivery speeds while 3.4% reported faster speeds.

On the labor front, the employment index improved to 49.7 in June from 48.6 in May, showing employment contracted for the 33rd straight month but at the slowest contraction pace since January 2025. The index was above a low of 44.1 in November 2025 but below a high of 56.5 in March 2022. In June, 16.2% (NSA) of respondents reported higher employment while 13.8% reported lower hiring.

On the pricing front, the prices paid index fell to a still-high 73.0 (NSA) in June, a 9.1-point drop—the largest decline since July 2022—from 82.1 in May, indicating raw materials prices rose for the 21st straight month but at the slowest rising pace since February. The index remained well above a low of 39.4 in December 2022 but below a high of 87.1 in March 2022 and a peak of 92.1 in June 2021. In June, 55.1% (NSA) of respondents reported higher prices while 9.2% reported price declines.

In other ISM series not included in the composite index, the new export orders index fell to 48.5 in June from 50.6 in May, indicating new export orders contracted for the third time in four months. The index was up from a low of 40.1 in May 2025 but down from a high of 52.4 in January 2025 and a peak of 57.1 in February 2022. The imports index edged down to 52.9 in June from 53.0 in May, suggesting imports expanded for the fifth successive month. The index was below its recent high of 54.9 in February but above a low of 39.9 in May 2025. The order backlog index decreased to 50.5 (NSA) in June from 52.2 in May, showing backlog levels grew at the slowest pace in six months. The index was below a high of 56.6 in February and a peak of 70.6 in May 2021 but well above a low of 37.5 in May 2023.

The ISM figures are based on responses from over 400 purchasing and supply executives from 18 industries, which are weighted according to each industry’s contribution to GDP. These data are diffusion indexes where a reading above 50 indicates expansion; below 50 indicates contraction. The ISM Manufacturing PMI is a composite index based on the diffusion indexes of five of the indexes (seasonally adjusted) with equal weights: New Orders, Production, Employment, Supplier Deliveries, and Inventories. The figures from the Institute for Supply Management can be found in Haver’s **USECON** database; further detail is found in the **SURVEYS** database. The expectations number is available in Haver’s **AS1REPNA** database.

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- ISM Mfg. PMI down slightly to 53.3 in June; sixth straight month above 50.
- Production (52.2) expands for the eighth consecutive mth.; new orders (56.0) for the sixth successive mth.
- Employment (49.7) contracts for the 33rd straight mth.; at the slowest contraction pace since Jan. ’25.
- Prices Index (73.0) at a four-month low, still indicating prices rising for the 21st consecutive mth.
- Exports (48.5) contract for the third time in four mths.; imports (52.9) continue to grow.

U.S. ISM Manufacturing PMI Still Expansionary in June; New Orders and Production Growing at a Slower Pace; Employment Contracting

Michael J. Moran

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The monthly report on construction activity receives scant attention in the financial press, and investors and traders in financial markets typically pay little heed. However, it is a valuable report for economists, as it provides a broad-based view of building activity, covering private residential and business construction, as well as government-related activity. The figures feed into the calculation of GDP. Unfortunately, results have been soft since early 2025.

Total construction activity rose 0.1 percent in May, marking the third consecutive increase. However, the gains have not been especially large, averaging 0.3%, and they have barely dented the string of weak readings in the preceding 17 months. The year-over-year change in May totaled -1.5%.

Private residential construction, the largest component of the total (41% share), rose 0.3% in May, adding to an average gain of 1.1% in the prior two months and leaving a year-over-year increase of 1.8% (chart, upper left). Most of the advance in the past year was the result of improvements to existing homes (up 8.1%). Construction of new multi-family units has shown little net change in the past year or so, while new single-family building has traced a mild downward trend (off 4.0% in the past year). Public construction has been flat in the past year, with both the federal government and state and local governments showing little net change (chart, upper right).

Private nonresidential construction (34% of the total) has received considerable press attention in the past few years because of explosive growth in the building of data centers. Growth has indeed been vigorous. Building started in 2020 and grew moderately at first, but this sector took off in 2022, about the time when artificial intelligence models became publicly available (chart, lower left, in levels to show the strong trend more clearly). Average annual growth for the three years ended 2025 totaled 48%.

Interestingly, despite the rapid growth in the building of data centers, the private nonresidential sector has been the weakest area of the construction report, with activity trending lower since early 2025 (chart, lower right). Some components of private nonresidential construction have held steady or improved (e.g. amusement & recreation, electric power), but three areas stand out on the soft side: general office, commercial, and manufacturing.

The construction figures can be found in Haver's **USECON** database. The expectations figure is from the Action Economics Forecast Survey in **AS1REPNA**.

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- Building activity in the US was firm in 2023 and 2024, but it has lost ground since then.
- Government-related construction and private residential building have been little changed in the past year or so.
- Private nonresidential construction has been notably weak, despite robust activity in the building of data centers.

Economy in Brief

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Gold & Oil Prices Higher Still

Large Shipments to China Help Australia Trade Balance

U.S. Factory Inventory Accumulation Slowed

U.S. Consumer Sentiment Slipped Late in January

ISM Nonmanufacturing Index Fell

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

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

European Construction Activity Picks Up Some Steam