Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051206a.jpg" width="353">
Non-farm labor productivity growth for 3Q was revised higher to 4.7% versus the initial estimate of a 4.1% gain. Consensus expectations had been for a revision to 4.5%. The strength of these increases is impressive given that three hurricanes hit the Gulf Coast last quarter. Further evidence of strength is the comparison to the five year average of 3.4% growth. The recent trend rate of increase is the strongest since the mid 1960s.
Notable is that the trend in productivity exceeds average output growth of 2.9% during the last five years. For 3Q, output growth was revised up to 4.8% (4.4% y/y) from 4.2% reported initially. The estimate of hours worked last quarter was unrevised at 0.1% (1.2% y/y).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051206b.jpg" width="353">
Compensation costs were little revised for 3Q at 3.7% (5.0 y/y) but the 2Q gain was revised sharply lower to 0.9%. As a result, unit labor costs fell 1.0% following a revised 1.2% decline in 2Q.
Factory sector productivity growth was revised lower for 3Q to 3.4% (4.5% y/y) from 4.5%. Compensation growth was little revised at 3.1% (6.2% y/y) and the 0.3% (+1.7% y/y) decline in unit labor costs followed a revised 2Q drop.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051206c.jpg" width="353">
Productivity in the nonfinancial corporate sector for 3Q, reported for the first time, grew 3.2% (4.7% y/y) versus 4.3% growth in 2Q which was revised down. In fact, the estimate of y/y productivity growth through 2Q was lowered substantially to 4.3% from 6.3% due to a lowered estimate of output, however, compensation growth was lowered as well. Unit labor costs rose 1.3% in 3Q (0.7% y/y) as output grew 4.0% (6.0% y/y). Nonfinancial corporate sector output is gleaned from the income side of the National Income &amp; Product Accounts (NIPA) as opposed to the non-farm output figures which are derived from the output side of the NIPA. Factory sector output is derived from the industrial production measures compiled by the Federal Reserve Board.
The implicit price deflator for nonfarm business was little revised at 3.1% (2.8% y/y). The increase lifted the ratio of prices to unit labor costs to its highest since 1997. During the last ten years there has been a 60% correlation between the ratio and the y/y growth in operating corporate profits.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EC/@EC02/@EC02.HTM">Non-farm Business Sector</a> (SAAR)</th>
<th scope="col">3Q &#39;05</th>
<th scope="col">3Q &#39;05</th>
<th scope="col">2Q &#39;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">Output per Hour</td>
<td>4.7%</td>
<td>4.1%</td>
<td>2.1%</td>
<td>3.1%</td>
<td>3.4%</td>
<td>3.8%</td>
<td>4.0%</td>
</tr>
<tr>
<td class="firstcol">Compensation</td>
<td>3.7%</td>
<td>3.6%</td>
<td>0.9%</td>
<td>5.0%</td>
<td>4.5%</td>
<td>4.0%</td>
<td>3.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unit Labor Costs</td>
<td>-1.0%</td>
<td>-0.5%</td>
<td>-1.2%</td>
<td>1.8%</td>
<td>1.1%</td>
<td>0.2%</td>
<td>-0.5%</td>
</tr>
</tbody>
</table>
U.S. Factory Inventories Back on the Rise, Order Backlogs Surged 
by <a href="/comment/Moeller.html">Tom Moeller</a> December 6, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051206d.jpg" width="353">
Factory inventories in October rose 0.6% following an upwardly revised 0.1% up tick in September. Less petroleum, the 0.4% (3.9% y/y) rise in factory inventories was the strongest since February.
The October inventory gain was led by a 11.4% rise in motor vehicles but additionally reflected a 0.4% (4.1% y/y) increase in electrical equipment and a 0.5% (-1.1% y/y) rise in computers &amp; electronic products. Nondurables inventories rose 0.9% (4.9% y/y) and less petroleum, the 0.5% (+2.7% y/y) rise in nondurable inventories was the first in four months.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051206e.jpg" width="353">
Factory shipments recovered 1.0% and factory sector orders surged 2.2%. The advance report of a 3.4% jump in durables goods orders was revised to 3.7%.
Unfilled orders jumped 1.6% and pulled the year to year gain to a near record 12.1%. Less the transportation sector backlogs continued strong and surged 1.1% (9.8% y/y) while the ratio of total unfilled orders to shipments rose further to the highest level since 2002.<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">Oct</th>
<th scope="col">Sept</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">Inventories</td>
<td>0.6%</td>
<td>0.1%</td>
<td>4.7%</td>
<td>7.7%</td>
<td>-1.1%</td>
<td>-5.4%</td>
</tr>
<tr>
<td class="firstcol">New Orders</td>
<td>2.2%</td>
<td>-1.4%</td>
<td>9.0%</td>
<td>9.3%</td>
<td>3.5%</td>
<td>-2.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Shipments</td>
<td>1.0%</td>
<td>-0.4%</td>
<td>6.5%</td>
<td>9.5%</td>
<td>1.5%</td>
<td>-2.5%</td>
</tr>
<tr>
<td class="firstcol">Unfilled Orders</td>
<td>1.6%</td>
<td>0.6%</td>
<td>12.1%</td>
<td>8.4%</td>
<td>8.0%</td>
<td>-8.5%</td>
</tr>
</tbody>
</table>
Chain Store Sales Down Sharply 
by <a href="/comment/Moeller.html">Tom Moeller</a> December 6, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051206f.jpg" width="353">
The International Council of Shopping Centers (ICSC)-UBS survey indicated that chain store sales collapsed 3.1% last week following the 0.7% drop during Thanksgiving week. It was the sharpest w/w drop since 1996 and lowered the starting point for December sales by 3.3% versus the November average which rose 1.2% m/m.
During the last ten years there has been a 51% correlation between the y/y change in chain store sales and the change in non-auto retail sales less gasoline, as published by the US Census Department. Chain store sales correspond directly with roughly 14% of non-auto retail sales less gasoline.
The leading indicator of chain store sales from ICSC recovered 1.1% (-0.5% y/y) following the prior week&#39;s revised 0.3% dip.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.
The latest decline in store sales was accompanied by an unchanged level of retail gasoline prices which held at $2.15 (12.3% y/y).

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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">12/03/05</th>
<th scope="col">11/26/05</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>440.6</td>
<td>454.8</td>
<td>3.5%</td>
<td>4.6%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>


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Non-farm labor productivity growth for 3Q was revised higher to 4.7% versus the initial estimate of a 4.1% gain. Consensus expectations had been for a revision to 4.5%. The strength of these increases is impressive given that three [...]

3Q U.S. Productivity Revised Up, 2Q Compensation Lower

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051205c.jpg" width="353">
Corporate profits in Japan have begun to decelerate after the exceedingly good years of 2003 and 2004, but they are still, in the aggregate, showing positive year-over-year changes so far this year. Rising prices, particularly for energy, and increased wages as the labor market has begun to tighten are the principal factors accounting for the slowdown. The slowdown, however, has varied according to industry and to the size of corporations.
In the third quarter of 2005, profits in the non-manufacturing industry were only 2.39% above the third quarter of 2004, while the corresponding figure for profits in the manufacturing industries was 12.62%. The first chart shows the year-over-year changes in profits for the manufacturing and non manufacturing industries. For the past year, profits in the manufacturing industries have tended to increase faster than those in the non-manufacturing industries. Over the longer term, profits in the manufacturing industries tend to be more volatile than those in the non-manufacturing industries.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051205d.jpg" width="353">
The trend in profits by size of corporation varies widely. Profits in large non-manufacturing corporations declined 3.18% in the third quarter while medium and small sized corporations continued to show year-over-year gains. Profits in large corporations in the manufacturing sector increased 9.25% and those in small corporations were up 42.84%. The weakness in the manufacturing sector was in the profits of medium sized corporation where profits in all three quarters of this year have been lower than those of the corresponding quarters of 2004. (Differences rather than percentage changes are shown for the profits of medium sized corporations because, in the past, this sector has experienced losses and percentage changes cannot be computed from a negative to a positive number). The second chart compares the year-over-year percent changes in profits of all large corporations with those of all small corporations.Note: Profit data for Japanese corporations are found in the JAPAN database in the Financial section under the heading, Corporate Financial Statement, Quarterly Data. Data for all industry, manufacturing and non-manufacturing industries are shown in billions of yen in the section Value of Capital Assets, Liabilities, Equity, Profit and Loss. Data are also available in 100 million yen for corporations in all industry, manufacturing and non manufacturing industries by size of capital under the heading--Financial Statement by Size of Capital.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Corporate Profits in Japan</th>
<th scope="col">Q3 05&nbsp; Y/Y%</th>
<th scope="col">Q2 05 Y/Y% </th>
<th scope="col">Q1 05 Y/Y%</th>
<th scope="col">2004 % &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </th>
<th scope="col">2003 %</th>
<th scope="col">2002 %&nbsp;</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">All Industries&nbsp;</td>
<td>6.56</td>
<td>12.86</td>
<td>15.84</td>
<td>27.66</td>
<td>12.56</td>
<td>-0.70</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; B Large Corp (1 bil Y and over)&nbsp;</td>
<td>2.68</td>
<td>16.49</td>
<td>12.81</td>
<td>28.22</td>
<td>12.82</td>
<td>11.01</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; C Medium (100 mil-1 bil Y) </td>
<td>3.56</td>
<td>4.47</td>
<td>24.19</td>
<td>20.76</td>
<td>19.00</td>
<td>10.63</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; D Small (10 -100 mil Y)</td>
<td>17.68</td>
<td>9.92</td>
<td>16.16</td>
<td>29.62</td>
<td>9.71</td>
<td>-17.39</td>
</tr>
<tr class="odd">
<td class="firstcol">Manufacturing</td>
<td>12.62</td>
<td>14.47</td>
<td>18.96</td>
<td>30.51</td>
<td>20.39</td>
<td>2.26</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; B Large Corp (1 bil Y and over)&nbsp;</td>
<td>9.25</td>
<td>13.86</td>
<td>16.02</td>
<td>28.63</td>
<td>24.99</td>
<td>6.56</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; &nbsp; C Medium (100 mil-1 bil Y) </td>
<td>-199</td>
<td>-119</td>
<td>-203</td>
<td>5953</td>
<td>4428</td>
<td>1815</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; D Small (10 -100 mil Y)</td>
<td>42.84</td>
<td>25.31</td>
<td>42.33</td>
<td>36.01</td>
<td>0.49</td>
<td>-13.24</td>
</tr>
<tr class="odd">
<td class="firstcol">Non-Manufacturing</td>
<td>&nbsp;2.39</td>
<td>11.89&nbsp;</td>
<td>14.02</td>
<td>25.77</td>
<td>&nbsp;7.92</td>
<td>&nbsp;-2.37</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; B Large Corp (1 bil Y and over)&nbsp;</td>
<td>-3.18</td>
<td>19.69&nbsp;</td>
<td>9.02&nbsp;</td>
<td>27.77&nbsp;</td>
<td>1.95&nbsp;</td>
<td>&nbsp;15.31</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; C Medium (100 mil-1 bil Y) </td>
<td>8.50</td>
<td>9.36</td>
<td>38.88</td>
<td>14.21</td>
<td>12.84</td>
<td>14.21</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; D Small (10 -100 mil Y)</td>
<td>&nbsp;9.55</td>
<td>5.35&nbsp;</td>
<td>10.03&nbsp;</td>
<td>27.81&nbsp;</td>
<td>12.64&nbsp;</td>
<td>-18.63&nbsp;</td>
</tr>
</tbody>
</table>
</body>
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Corporate profits in Japan have begun to decelerate after the exceedingly good years of 2003 and 2004, but they are still, in the aggregate, showing positive year-over-year changes so far this year. Rising prices, particularly for [...]

Growth in Japanese Corporate Profits Slowing

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051205a.jpg" width="353">
The Institute for Supply Management reported that the Business Activity Index for the non-manufacturing sector in November slipped to 58.5 from an unrevised 60.0 the prior month. A reading above 50 indicates expansion. The latest about matched Consensus expectations for a decline to 59.0.
Since the series&#39; inception in 1997 there has been a 53% correlation between the Business Activity Index and the q/q change in real GDP for services plus construction.
Despite the decline in the Business Activity gauge, the new orders component rose for the second month after a sharp September decline. In addition, the employment index rose 4 points to the highest level since August. Since the series&#39; inception in 1997 there has been a 60% correlation between the level of the ISM non-manufacturing employment index and the m/m change in payroll employment in the service producing plus the construction industries.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051205b.jpg" width="353">
Pricing power fell for the second month after a 14 point September surge. 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">Nov</th>
<th scope="col">Oct</th>
<th scope="col">Nov &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Business Activity Index</td>
<td>58.5</td>
<td>60.0</td>
<td>61.9</td>
<td>62.4</td>
<td>58.2</td>
<td>55.1</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>74.2</td>
<td>78.0</td>
<td>73.2</td>
<td>69.0</td>
<td>56.8</td>
<td>54.0</td>
</tr>
</tbody>
</table>


</html>

The Institute for Supply Management reported that the Business Activity Index for the non-manufacturing sector in November slipped to 58.5 from an unrevised 60.0 the prior month. A reading above 50 indicates expansion. The latest [...]

ISM: Activity Expanded Outside the Factory Sector

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051205a.jpg" width="353">
The Institute for Supply Management reported that the Business Activity Index for the non-manufacturing sector in November slipped to 58.5 from an unrevised 60.0 the prior month. A reading above 50 indicates expansion. The latest about matched Consensus expectations for a decline to 59.0.
Since the series&#39; inception in 1997 there has been a 53% correlation between the Business Activity Index and the q/q change in real GDP for services plus construction.
Despite the decline in the Business Activity gauge, the new orders component rose for the second month after a sharp September decline. In addition, the employment index rose 4 points to the highest level since August. Since the series&#39; inception in 1997 there has been a 60% correlation between the level of the ISM non-manufacturing employment index and the m/m change in payroll employment in the service producing plus the construction industries.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051205b.jpg" width="353">
Pricing power fell for the second month after a 14 point September surge. 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">Nov</th>
<th scope="col">Oct</th>
<th scope="col">Nov &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Business Activity Index</td>
<td>58.5</td>
<td>60.0</td>
<td>61.9</td>
<td>62.4</td>
<td>58.2</td>
<td>55.1</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>74.2</td>
<td>78.0</td>
<td>73.2</td>
<td>69.0</td>
<td>56.8</td>
<td>54.0</td>
</tr>
</tbody>
</table>
Growth in Japanese Corporate Profits Slowing  
by <a href="/comment/Curley.html">Louise Curley</a> December 5, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051205c.jpg" width="353">
Corporate profits in Japan have begun to decelerate after the exceedingly good years of 2003 and 2004, but they are still, in the aggregate, showing positive year-over-year changes so far this year. Rising prices, particularly for energy, and increased wages as the labor market has begun to tighten are the principal factors accounting for the slowdown. The slowdown, however, has varied according to industry and to the size of corporations.
In the third quarter of 2005, profits in the non-manufacturing industry were only 2.39% above the third quarter of 2004, while the corresponding figure for profits in the manufacturing industries was 12.62%. The first chart shows the year-over-year changes in profits for the manufacturing and non manufacturing industries. For the past year, profits in the manufacturing industries have tended to increase faster than those in the non-manufacturing industries. Over the longer term, profits in the manufacturing industries tend to be more volatile than those in the non-manufacturing industries.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051205d.jpg" width="353">
The trend in profits by size of corporation varies widely. Profits in large non-manufacturing corporations declined 3.18% in the third quarter while medium and small sized corporations continued to show year-over-year gains. Profits in large corporations in the manufacturing sector increased 9.25% and those in small corporations were up 42.84%. The weakness in the manufacturing sector was in the profits of medium sized corporation where profits in all three quarters of this year have been lower than those of the corresponding quarters of 2004. (Differences rather than percentage changes are shown for the profits of medium sized corporations because, in the past, this sector has experienced losses and percentage changes cannot be computed from a negative to a positive number). The second chart compares the year-over-year percent changes in profits of all large corporations with those of all small corporations.Note: Profit data for Japanese corporations are found in the JAPAN database in the Financial section under the heading, Corporate Financial Statement, Quarterly Data. Data for all industry, manufacturing and non-manufacturing industries are shown in billions of yen in the section Value of Capital Assets, Liabilities, Equity, Profit and Loss. Data are also available in 100 million yen for corporations in all industry, manufacturing and non manufacturing industries by size of capital under the heading--Financial Statement by Size of Capital.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Corporate Profits in Japan</th>
<th scope="col">Q3 05&nbsp; Y/Y%</th>
<th scope="col">Q2 05 Y/Y% </th>
<th scope="col">Q1 05 Y/Y%</th>
<th scope="col">2004 % &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </th>
<th scope="col">2003 %</th>
<th scope="col">2002 %&nbsp;</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">All Industries&nbsp;</td>
<td>6.56</td>
<td>12.86</td>
<td>15.84</td>
<td>27.66</td>
<td>12.56</td>
<td>-0.70</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; B Large Corp (1 bil Y and over)&nbsp;</td>
<td>2.68</td>
<td>16.49</td>
<td>12.81</td>
<td>28.22</td>
<td>12.82</td>
<td>11.01</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; C Medium (100 mil-1 bil Y) </td>
<td>3.56</td>
<td>4.47</td>
<td>24.19</td>
<td>20.76</td>
<td>19.00</td>
<td>10.63</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; D Small (10 -100 mil Y)</td>
<td>17.68</td>
<td>9.92</td>
<td>16.16</td>
<td>29.62</td>
<td>9.71</td>
<td>-17.39</td>
</tr>
<tr class="odd">
<td class="firstcol">Manufacturing</td>
<td>12.62</td>
<td>14.47</td>
<td>18.96</td>
<td>30.51</td>
<td>20.39</td>
<td>2.26</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; B Large Corp (1 bil Y and over)&nbsp;</td>
<td>9.25</td>
<td>13.86</td>
<td>16.02</td>
<td>28.63</td>
<td>24.99</td>
<td>6.56</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; &nbsp; C Medium (100 mil-1 bil Y) </td>
<td>-199</td>
<td>-119</td>
<td>-203</td>
<td>5953</td>
<td>4428</td>
<td>1815</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; D Small (10 -100 mil Y)</td>
<td>42.84</td>
<td>25.31</td>
<td>42.33</td>
<td>36.01</td>
<td>0.49</td>
<td>-13.24</td>
</tr>
<tr class="odd">
<td class="firstcol">Non-Manufacturing</td>
<td>&nbsp;2.39</td>
<td>11.89&nbsp;</td>
<td>14.02</td>
<td>25.77</td>
<td>&nbsp;7.92</td>
<td>&nbsp;-2.37</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; B Large Corp (1 bil Y and over)&nbsp;</td>
<td>-3.18</td>
<td>19.69&nbsp;</td>
<td>9.02&nbsp;</td>
<td>27.77&nbsp;</td>
<td>1.95&nbsp;</td>
<td>&nbsp;15.31</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; C Medium (100 mil-1 bil Y) </td>
<td>8.50</td>
<td>9.36</td>
<td>38.88</td>
<td>14.21</td>
<td>12.84</td>
<td>14.21</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; D Small (10 -100 mil Y)</td>
<td>&nbsp;9.55</td>
<td>5.35&nbsp;</td>
<td>10.03&nbsp;</td>
<td>27.81&nbsp;</td>
<td>12.64&nbsp;</td>
<td>-18.63&nbsp;</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/051202e.jpg" width="353">
House prices are a major economic indicator for the UK. They are seen by many as a measure of the housing market, and also as a gauge of consumer confidence and spending potential. So after a substantial run-up in those prices from 2001 through the middle of last year, it was of no small concern that they flattened out until a few months ago.
The measure here is the &quot;Halifax House Price Index&quot;, a compilation by the country&#39;s largest mortgage lender, HBOS plc. It is based on about 15,000 home sales monthly; the data are adjusted for the size and style of home, so that month-to-month comparisons are calculated from like or &quot;standardized&quot; properties. Thus, the index measures only price change, not movements due to differing house or location characteristics.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051202f.jpg" width="353">
The index began to rise again in June after stagnating for nearly a year. A 1.2% rise in November was the fifth increase in six months, and over the last six months, prices have gone up at a 9.7% annual rate. This compares with a low in the six-month annualized percent change of -0.4% in July. Relative to the enormous increases in 2002 and 2003, the recent pace is not fast, but it clearly is an improvement over the weakness of earlier this year. Accompanying data show that the recovery has been firmer in the existing home segment than in new houses. And as shown in the second graph, prices of the obviously smaller homes purchased by first-time buyers have generally been more vigorous than those bought by previous home owners.
All these data are in Haver&#39;s UK database, plus quarterly data for the various regions of the UK. Halifax&#39;s researchers publish the data both unadjusted and seasonally adjusted.

<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/UK/@U4/@U4.HTM">UK House Prices: Halifax data,</a> Seasonally Adjusted</th>
<th scope="col">Nov 2005</th>
<th scope="col">Oct 2005</th>
<th scope="col">Sept 2005</th>
<th scope="col">Nov 2004</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td colspan="3">Annual Average</td>
</tr>
<tr>
<td class="firstcol">Price (&pound; Thous)</td>
<td>170.1</td>
<td>168.1</td>
<td>168.2</td>
<td>160.7</td>
<td>157.0</td>
<td>132.2</td>
<td>110.9</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td colspan="3">December/December</td>
</tr>
<tr>
<td class="firstcol">% Change*</td>
<td>1.2</td>
<td>-0.0</td>
<td>1.1</td>
<td>5.7</td>
<td>14.2</td>
<td>17.3</td>
<td>23.1</td>
</tr>
</tbody>
</table>
</body>
</html>

House prices are a major economic indicator for the UK. They are seen by many as a measure of the housing market, and also as a gauge of consumer confidence and spending potential. So after a substantial run-up in those prices from [...]

UK House Prices Continue Recovery in November

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051202a.jpg" width="353">
According to the Office of Federal Housing Enterprise Oversight (OFHEO) home prices in the U.S. continued to rise last quarter, but the rate of escalation showed signs of topping out. The 2.9% q/q rise was down from the prior quarter and was down from a 4.7% jump one year ago. As a result the y/y gain slowed to 12.0% from 14.0% in 2Q.
These rates of gain are hardly slow, and given the near record level of home sales, historically low interest rates and rising personal incomes they are widely expected to remain healthy.
Throughout the country, rates of home price appreciation appear to have topped. However, the variance in the rates of growth between regions is high.
During the last year, job cutbacks in the auto industry helped lower the rate of home price appreciation in Michigan to 4.0% and the state&#39;s gain has lagged all others. At the other end of the spectrum, demographic trends pushed the rate of home price appreciation in Arizona to the top of the scale at 30.3% y/y.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051202b.jpg" width="353">
During the last five years, home price appreciation in the District of Columbia has surpassed all others at 118.9% followed closely by California at 112.8%. Indiana with a 20.6% rise is at the bottom of the list during the last five years.
The House Price Indices in this report are weighted indexes based on repeat sales or refinancings using data provided by Fannie Mae or Freddie Mac .
Housing Markets and Demographics from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2005/el2005-21.pdf"> here</a>.
The latest report from the Office of Federal Housing Enterprise Oversight (OFHEO) can be found <a href="http://www.ofheo.gov/media/pdf/3q05hpi.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/REGIONAL/@R11/@R1101/@R1101.HTM">House Price Index (OFHEO)</a></th>
<th scope="col">3Q &#39;05</th>
<th scope="col">2Q &#39;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">United States</td>
<td>2.9%</td>
<td>3.6%</td>
<td>12.0%</td>
<td>10.9%</td>
<td>6.9%</td>
<td>6.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; California</td>
<td>4.2%</td>
<td>5.6%</td>
<td>19.3%</td>
<td>22.4%</td>
<td>12.3%</td>
<td>11.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; New Jersey</td>
<td>3.1%</td>
<td>4.4%</td>
<td>13.7%</td>
<td>15.0%</td>
<td>10.5%</td>
<td>12.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Alabama</td>
<td>2.2%</td>
<td>2.5%</td>
<td>8.1%</td>
<td>4.1%</td>
<td>4.1%</td>
<td>3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Michigan</td>
<td>0.9%</td>
<td>1.0%</td>
<td>4.0%</td>
<td>4.4%</td>
<td>3.5%</td>
<td>4.4%</td>
</tr>
</tbody>
</table>
</body>
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According to the Office of Federal Housing Enterprise Oversight (OFHEO) home prices in the U.S. continued to rise last quarter, but the rate of escalation showed signs of topping out. The 2.9% q/q rise was down from the prior quarter [...]

Home Price Appreciation Strong, But Off Record Pace

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051202d.jpg" width="353">
According to the Autodata Corporation, November US sales of light vehicles recovered most of the prior month&#39;s decline with a 6.7% m/m rise to 15.74M. The increase, however, failed to recoup the decline during the prior three months. As a result, the average of sales so far during 2005 is about equal to all of 2004.
Sales of US made cars &amp; trucks improved 8.6% m/m. Domestic truck sales rose 11.8% (-11.8% y/y) while car sales rose a lesser 4.8% (2.6% y/y).
Sales of imported cars &amp; trucks rose a modest 0.2% m/m (-3.3% y/y) as sales of imported trucks rose 0.8% (-8.5% y/y) and imported auto sales fell slightly (-0.5% y/y).
Import&#39;s share of the US light vehicle market slipped m/m to 21.2%.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED09/@ED0901/@ED0901.HTM">Light Vehicle Sales (SAAR, Mil. Units)</a></th>
<th scope="col">Nov</th>
<th scope="col">Oct</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</td>
<td>15.74</td>
<td>14.75</td>
<td>-5.5%</td>
<td>16.87</td>
<td>16.63</td>
<td>16.81</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Autos</td>
<td>7.56</td>
<td>7.32</td>
<td>1.7%</td>
<td>7.49</td>
<td>7.62</td>
<td>8.07</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Trucks</td>
<td>8.18</td>
<td>7.42</td>
<td>-11.3%</td>
<td>9.37</td>
<td>9.01</td>
<td>8.74</td>
</tr>
</tbody>
</table>
</body>
</html>

According to the Autodata Corporation, November US sales of light vehicles recovered most of the prior month's decline with a 6.7% m/m rise to 15.74M. The increase, however, failed to recoup the decline during the prior three months. [...]

U.S. Vehicle Sales Up Modestly

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051202c.jpg" width="353">
In November, non-farm payrolls posted the largest gain since July. The 215,000 increase matched Consensus expectations and followed a 44,000 October rise that was slightly lower than initially reported, but the September figure was revised to up 17,000 from a previously reported 8,000 drop.
From the household survey the unemployment rate held at 5.0%, as expected. Employment fell 52,000 (+1.6% y/y) after a 214,000 rise in October and the labor force rose 97,000 (1.3% y/y).
Factory sector payrolls increased 11,000 (-0.5% y/y). Together with a 15,000 worker rise in October, the figure marked the first time since early last year that factory payrolls have risen in consecutive months. Some improvement in the breadth across industries of job gains was suggested by the sector&#39;s one month diffusion index which rose to 51.8%, its highest level since July of last year.
Construction employment rose 37,000 (4.2% y/y), up a bit from the 28,000 average during the prior three months.
Payrolls in private service producing industries rose 144,000 (1.8% y/y) after a little revised 5,000 worker decline in October. Education &amp; health services jobs increased 36,000 (2.2% y/y) and returned to the earlier pace after an October decline. Retail trade added 8,500 (0.7% y/y) jobs but a larger 29,000 (2.8% y/y) gain was posted by professional &amp; business services. Jobs in financial services rose 13,000 (2.4% y/y) and leisure &amp; hospitality recovered 29,000 (1.6% y/y) after two months of decline.
The gain in average hourly earnings eased to an expected 0.2% after the upwardly revised 0.6% spike in October. Factory sector earnings rose 0.2% (2.5% y/y) but private service sector earnings fell 0.1% (+3.4% y/y).
Today&#39;s remarks by Federal Reserve Board Chairman Alan Greenspan on Budget Policy can be found <a href="http://www.federalreserve.gov/boarddocs/speeches/2005/20051202/default.htm"> 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">Nov</th>
<th scope="col">Oct</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">Payroll Employment</td>
<td>215,000</td>
<td>44,000</td>
<td>1.5%</td>
<td>1.1%</td>
<td>-0.3%</td>
<td>-1.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Manufacturing</td>
<td>11,000</td>
<td>15,000</td>
<td>-0.5%</td>
<td>-1.2%</td>
<td>-4.9%</td>
<td>-7.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Average Weekly Hours</td>
<td>33.7</td>
<td>33.8</td>
<td>33.7 (Nov &#39;04)</td>
<td>33.7</td>
<td>33.7</td>
<td>33.8</td>
</tr>
<tr>
<td class="firstcol">Average Hourly Earnings</td>
<td>0.2%</td>
<td>0.6%</td>
<td>3.2%</td>
<td>2.1%</td>
<td>2.7%</td>
<td>2.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment Rate</td>
<td>5.0%</td>
<td>5.0%</td>
<td>5.4% (Nov &#39;04)</td>
<td>5.5%</td>
<td>6.0%</td>
<td>5.8%</td>
</tr>
</tbody>
</table>
</body>
</html>

In November, non-farm payrolls posted the largest gain since July. The 215,000 increase matched Consensus expectations and followed a 44,000 October rise that was slightly lower than initially reported, but the September figure was [...]

U.S. Payrolls Up

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)

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.

U.S. Q4 2025 Real GDP Growth Revised Slower

Robert Brusca

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Germany’s industrial production slipped in February, driven lower by dropping output of consumer goods. Sequential growth rates over 12 months, six months, and three months show a confusing array of patterns, except for intermediate goods, where annualized growth rates for output sequentially weaken and show declines on each horizon. All German sector growth rates for the quarter-to-date are showing declines, and the growth rankings by sector are below 50% across the broad, indicating below median performance across German sectors.  It’s a very unimpressive report.

Real manufacturing orders rose modestly in February against the backdrop of a very sharp drop in January. Real manufacturing sales have been erratic.

German output and industrial gauges, ranked on annual sales growth against historic norms, have been very weak. Only real orders post a standing above 50%, which represents the median.
 
France, Spain, Portugal, Sweden, and Norway provide some perspective on European growth. The northern European non-EMU member countries are much stronger than the EMU reporters, two of which have standings below their median levels (rankings below 50).

Economy in Brief

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