Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060119d.jpg" width="353">
Housing starts slumped 8.0% m/m last month to 1.933M units following a little revised 3.4% increase in November. The decline was to the lowest level since March but did not prevent starts for all of 2005 from rising 6.0% to a record 2.066M. Consensus expectations had been for a lesser decline in December to 2.05M starts.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060119c.jpg" width="353">
Single-family starts plummeted 12.3% m/m to 1.577M from the near record November level. The gain was most pronounced in the West where starts fell 21.7% (-17.1% y/y) and in the Midwest where single family starts dropped 22.6% (-23.8% y/y). In the Northeast single family starts fell for the fifth month in the last six, down 4.5% (-9.3% y/y) and in the South starts fell 4.2% (+4.3% y/y).
Multi family starts rose 10.2% m/m following a downwardly revised gain during November. Building permits fell 4.4% to the lowest level since May.
The latest Beige Book covering regional economic conditions in the US from the Federal Reserve Board can be found <a href="http://www.federalreserve.gov/fomc/beigebook/2006/20060118/default.htm"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E901/@E90101/@E90101.HTM">Housing Starts (000s, AR)</a> </th>
<th scope="col">Dec</th>
<th scope="col">Nov</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>1,933</td>
<td>2,121</td>
<td>-5.7%</td>
<td>2,066</td>
<td>1,950</td>
<td>1,854</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Single-family</td>
<td>1,577</td>
<td>1,798</td>
<td>-7.9%</td>
<td>1,713</td>
<td>1,604</td>
<td>1,505</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Multi-family</td>
<td>356</td>
<td>323</td>
<td>5.6%</td>
<td>353</td>
<td>345</td>
<td>349</td>
</tr>
<tr>
<td class="firstcol">Building Permits</td>
<td>2,068</td>
<td>2,163</td>
<td>-0.6%</td>
<td>2,121</td>
<td>2,058</td>
<td>1,8 88</td>
</tr>
</tbody>
</table>
Initial Jobless Insurance Claims Dropped Sharply 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 19, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060119a.jpg" width="353">
Initial claims for unemployment insurance dropped 36,000 to 271,000 last week following a downwardly revised 15,000 increase the prior week. Consensus expectations had been for 315,000 claims.
The latest figure covers the survey period for January nonfarm payrolls and initial claims fell a sharp 48,000 (15.0%) from the December period to the lowest level since March 2000.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060119b.jpg" width="353">
During the last ten years there has been a (negative) 75% correlation between the level of initial jobless insurance claims and the m/m change in payroll employment.
The four-week moving average of initial claims fell sharply to 299,000 (-11.2% y/y), its lowest level since July 2000.
Continuing unemployment insurance claims dropped a sharp 158,000 to the lowest level since February 2001.
The insured rate of unemployment fell to 2.0% after four weeks at 2.1%.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">01/14/06</th>
<th scope="col">01/07/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>271</td>
<td>307</td>
<td>-16.9%</td>
<td>332</td>
<td>343</td>
<td>402</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,534</td>
<td>-6.4%</td>
<td>2,663</td>
<td>2,924</td>
<td>3,532</td>
</tr>
</tbody>
</table>
Philadelphia Fed Business Activity Off Sharply  
by <a href="/comment/Moeller.html">Tom Moeller</a> January 19, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060119g.jpg" width="353">
The Index of General Business Conditions in the manufacturing sector for January from the Philadelphia Fed fell sharply to 3.3 from 10.9 in December. Consensus expectations had been for improvement to 13.1. It was the lowest level for the index since last June.
During the last ten years there has been a 68% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 50% correlation with q/q growth in real GDP.
The business conditions index reflects a separate survey question, not the sub indexes, and most of the sub indexes improved this month versus December.
The sub index measuring new orders rose to 11.1, its highest since October, from 5.8. Shipments also rose to 18.6 from 9.4 while the index covering the number of employees advanced to 11.7 from 7.9. During the last ten years there has been a 64% correlation between the employment index and the three month growth in factory payrolls.
The separate index of expected business conditions in six months fell moderately, reversing most of the revised rise in December. Expectations for employment also backpedaled after sharp improvement during December.
The prices paid index fell moderately and the index of future prices fell to its lowest level since last June. During the last ten years there has been a 75% correlation between the prices paid index and the three month growth in the intermediate goods PPI. The correlation with the finished goods PPI has been 50% and with the CPI it&#39;s been 43%.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos0106.html">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</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>
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</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>3.3</td>
<td>10.9</td>
<td>11.0</td>
<td>12.4</td>
<td>28.0</td>
<td>10.5</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>44.9</td>
<td>47.1</td>
<td>64.1</td>
<td>43.5</td>
<td>51.2</td>
<td>16.8</td>
</tr>
</tbody>
</table>
Italian Industry Moves Unevenly Higher Through November 
by <a href="/comment/Stone.html">Carol Stone</a> January 19, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060119e.jpg" width="353">
Industrial sales and orders rebounded markedly in Italy in November after pausing in October, according to data reported today by Istat, the Italian national statistical agency. Total orders gained 1.8% and stand 4.0% above a year ago, while sales (often called &#147;turnover&#148; there) were up 1.6% in the month and 4.4% on the year. 
As the case in much of Europe, the foreign sector is tending to run ahead of the domestic economy. For the entire period since the index base year of 2000, foreign orders are up 14.5%, while domestic orders have been virtually flat. In the past year, foreign orders are up 5.8% and foreign sales by 7.6%, compared with somewhat over 3% for domestic orders and sales.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060119f.jpg" width="353">
Individual industries are experiencing mixed fortunes, with electrical equipment, furniture and chemicals advancing in the last year. Metals and machinery see slowing growth, and transportation equipment and wood products have been flat. Finally, textiles and paper products are declining.
By type, consumer goods turnover seems recently to have the most consistent growth, albeit less dramatic expansion. Capital goods are tending to expand, but very unevenly from month-to-month, so there is little identifiable momentum. Energy products are very strong, but other intermediate goods have been erratic and trendless.
A reminder that these data appear in several Haver databases: most obviously in ITALY, our comprehensive and detailed country-source database. But also, a summary is presented in G10, a collection of major industrial countries in Europe plus the US, Canada, and Japan. And EUROSTAT, compiled from Eurostat, the EU statistical agency, contains an array of industrial orders throughout Europe.<span style="font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Verdana;
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mso-ansi-language:EN-US;mso-fareast-language:EN-US;mso-bidi-language:AR-SA"> 

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/ITALY/@I06/@I06.HTM">Italy Industry</a> </th>
Nov 2005 
<th scope="col">Oct 2005 </th>
<th scope="col">Year Ago </th>
<th scope="col">2004 </th>
<th scope="col">2003 </th>
<th scope="col">2002 </th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Index* </td>
<td>% Chg </td>
</tr>
<tr>
<td class="firstcol"><h1>Sales </h1></td>
<td>109.6 </td>
<td>1.6 </td>
<td>-0.6 </td>
<td>4.4 </td>
<td>3.1 </td>
<td>-1.0 </td>
<td>1.1 </td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Domestic </td>
<td>108.2 </td>
<td>1.4 </td>
<td>-0.3 </td>
<td>3.3 </td>
<td>2.9 </td>
<td>-0.6 </td>
<td>0.8 </td>
</tr>
<tr>
<td class="firstcol">&nbsp; Foreign </td>
<td>113.5 </td>
<td>2.0 </td>
<td>-1.4 </td>
<td>7.6 </td>
<td>3.6 </td>
<td>-2.3 </td>
<td>1.7 </td>
</tr>
<tr class="odd">
<td class="firstcol">Orders </td>
<td>104.1 </td>
<td>1.8 </td>
<td>-0.9 </td>
<td>4.0 </td>
<td>4.7 </td>
<td>-3.8 </td>
<td>2.3 </td>
</tr>
<tr>
<td class="firstcol">&nbsp; Domestic </td>
<td>99.5 </td>
<td>2.1 </td>
<td>-1.3 </td>
<td>3.1 </td>
<td>3.9 </td>
<td>-3.5 </td>
<td>1.0 </td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Foreign </td>
<td>114.5 </td>
<td>1.1 </td>
<td>-0.1 </td>
<td>5.8 </td>
<td>6.3 </td>
<td>-4.2 </td>
<td>5.1 </td>
</tr>
</tbody>
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Housing starts slumped 8.0% m/m last month to 1.933M units following a little revised 3.4% increase in November. The decline was to the lowest level since March but did not prevent starts for all of 2005 from rising 6.0% to a record [...]

Housing Starts Fell To Lowest Level Since March

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/060118f.jpg" width="353">
Employment has begun to falter in the UK, according to the latest Labor Force Survey, published today by the Office of National Statistics (ONS). In the 3 months centered on October, the number of people employed fell 49,000 from September&#39;s 3-month average and stood only 0.8% above a year ago. As recently as August the year-on-year gain was 1.3%. The employment rate decreased 0.2 percentage points in the October reading to 74.5% from 74.7% in September and 74.8 in the October period of 2004. This rate, the number employed compared to the population of &quot;working age&quot; (16-59 for women and 16-64 for men), peaked at 75.0% last January. Commensurately, the unemployment rate has risen, reaching 5.0% most recently, up from a low of 4.7% recorded in August.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060118g.jpg" width="353">
Associated wage and unemployment insurance data also show softening. The average earnings index, watched by many in the UK as a harbinger of inflation pressures, had just a 3.4% yearly growth rate in the three months ended November, slowing from 4.6% as recently as April. The number of claimants for Jobseeker&#39;s Allowance benefits rose in the month of December to 909,100 from 901,900 in November and 825,000 in December 2004.
There are other scattered signs of softening in the UK. Consumer confidence turned negative in October, and industrial production declined irregularly through much of 2005. The CBI industrial trends survey shows marked declines in order books continuously since March. GDP growth slowed to below 2% year-on-year in Q2 and Q3. [Q4 data are due to be reported next Wednesday, January 25.] Exports, by contrast, have been rising as have retail sales. So there is some mixed quality to UK economic activity, but the basic industry appears sluggish and it&#39;s hardly surprising that the labor market is sharing in this.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/UK/@U7/@U7.HTM">UK Labor Force Survey (SA)</a></th>
<th scope="col">Dec 2005</th>
<th scope="col">Nov 2005</th>
<th scope="col">Oct 2005</th>
<th scope="col">Sept 2005</th>
<th scope="col">Year Ago</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
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</thead>
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<td class="firstcol">Employment (Thous)</td>
<td>--</td>
<td>--</td>
<td>28,764</td>
<td>28,813</td>
<td>28,542</td>
<td>28,465</td>
<td>28,183</td>
<td>27,917</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Change (Thous/%)</td>
<td>--</td>
<td>--</td>
<td>-49</td>
<td>-12</td>
<td>0.8</td>
<td>1.0</td>
<td>1.0</td>
<td>0.8</td>
</tr>
<tr class="odd">
<td class="firstcol">Employment Rate (%)</td>
<td>--</td>
<td>--</td>
<td>74.5</td>
<td>74.7</td>
<td>74.8</td>
<td>74.8</td>
<td>74.6</td>
<td>74.5</td>
</tr>
<tr>
<td class="firstcol">Unemployment Rate (%)</td>
<td>--</td>
<td>--</td>
<td>5.0</td>
<td>4.9</td>
<td>4.7</td>
<td>4.8</td>
<td>5.0</td>
<td>5.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Average Earnings Index (Yr/Yr %) </td>
<td>--</td>
<td>3.4</td>
<td>3.6</td>
<td>4.1</td>
<td>4.3</td>
<td>4.3</td>
<td>3.4</td>
<td>3.5</td>
</tr>
<tr>
<td class="firstcol">Claimant Count (Thous)</td>
<td>909.1</td>
<td>901.9</td>
<td>891.5</td>
<td>878.0</td>
<td>825.0</td>
<td>853.6</td>
<td>933.3</td>
<td>946.7</td>
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Employment has begun to falter in the UK, according to the latest Labor Force Survey, published today by the Office of National Statistics (ONS). In the 3 months centered on October, the number of people employed fell 49,000 from [...]

UK Labor Market Weakens in Late 2005

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060118b.jpg" width="353">
The total number of mortgage applications rose 2.2% last week, the second up week following four consecutive weeks down. This year, mortgage applications are 2.1% higher than during December.
Higher applications to refinance accounted for all of last week&#39;s rise. A 9.9% w/w gain followed a like increase which opened the new year and lifted the level of refis 11.0% this month above December.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060118a.jpg" width="353">
The effective interest rate on a conventional 30-year mortgage fell for the eighth week in the last nine to 6.31% versus an average 6.48% in December. The effective rate on a 15-year mortgage also fell to 5.94%, the second week below 6% since October. The interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities.
Purchase applications fell 3.0% following a 9.3% surge the prior week. The decline pulled purchase applications in January 1.1% below the December average.
During the last ten years there has been a 50% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.
Are Banks Vulnerable to a Housing Bust from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/publications/mt/20060201/cover.pdf"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">01/13/06</th>
<th scope="col">01/06/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>613.3</td>
<td>600.1</td>
<td>-10.2%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>443.9</td>
<td>457.4</td>
<td>-0.9%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,645.2</td>
<td>1,497.5</td>
<td>-19.7%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
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The total number of mortgage applications rose 2.2% last week, the second up week following four consecutive weeks down. This year, mortgage applications are 2.1% higher than during December. Higher applications to refinance accounted [...]

Mortgage Applications Up With More Refinancing

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060118c.jpg" width="353">
Chain store sales fell 1.4% last week following the modest 0.1% rise which opened the new year according to the International Council of Shopping Centers (ICSC)-UBS survey.
Solid increases throughout December pulled the yearend level up. Therefore, despite recent weakness, sales in January are 1.5% ahead of December.
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 rose strongly for the second consecutive week. The 0.6% gain pulled January 1.2% ahead of December which rose 0.8% from November.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.

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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">01/14/06</th>
<th scope="col">01/07/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>457.7</td>
<td>464.3</td>
<td>3.1%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>


</html>

Chain store sales fell 1.4% last week following the modest 0.1% rise which opened the new year according to the International Council of Shopping Centers (ICSC)-UBS survey. Solid increases throughout December pulled the yearend level [...]

Chain Store Sales Fell Last Week

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060118d.jpg" width="353">
The consumer price index (CPI-U) fell 0.1% last month on the heels of the 0.6% drop during November. Consensus expectations had been for a 0.2% rise. Despite the latest declines, the 2005 average rise in prices of 3.4% was the strongest since 2000 while the December to December rise of 3.4% equaled the 2004 increase.
Energy prices posted a surprising 2.2% decline last month due to widespread m/m declines in fuel oil (+24.0% y/y) and natural gas (+30.1% y/y) prices. Gasoline prices also fell for the third straight month (+16.1% y/y) to an average $2.19 but have wince risen to an average $2.30 in January.
Food prices likewise were under control and rose just 0.2%, the slimmest increase since August.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060118e.jpg" width="353">
Prices less food &amp; energy again rose 0.2%, the third consecutive such increase and matched Consensus expectations. The year to year gain in core prices core prices accelerated during the last two years from the low of 1.5% during 2003 as core goods prices inflated rather than fell. In December, goods prices less food &amp; energy were unchanged and the 2005 increase of 0.5% was the strongest since 2000.
A 0.3% decline in apparel prices (-1.1% y/y) was accompanied by lower prices for new &amp; used vehicles (+0.4% y/y). These declines were offset by higher furniture &amp; bedding prices (0.6% y/y) and higher appliance prices (3.0% y/y). Medical care commodity prices rose 0.2% (3.7% y/y) while educational books &amp; supplies also rose 0.4% (5.1% y/y).
Core services prices increased 0.3% but the full year gain of 2.8% just equaled 2004. The increase in medical care prices faded late in the year (4.4% y/y) and but school tuition &amp; fees posted a strong 6.2% December to December spike. The increase in shelter prices was steady at (2.5% y/y).
The chained CPI which adjusts for shifts in the mix of consumer purchases fell for the second consecutive month though the full year gain of 2.8% was the strongest since the series inception. Less food &amp; energy prices also fell m/m but the annual increase of 1.8% was the strongest since 2002.
Productivity and Economic Outlook, today&#39;s speech by Fed Governor Susan Schmidt Bies can be found <a href="http://www.federalreserve.gov/boarddocs/speeches/2006/20060118/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/@E8/@E801/@E80101/@E80101.HTM">Consumer Price Index</a> </th>
<th scope="col">Dec</th>
<th scope="col">Nov</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total&nbsp;</td>
<td>-0.1%</td>
<td>-0.6%</td>
<td>3.4%</td>
<td>3.4%</td>
<td>2.7%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.2%</td>
<td>2.2%</td>
<td>1.8%</td>
<td>1.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Goods less Food &amp; Energy</td>
<td>0.0%</td>
<td>-0.1%</td>
<td>0.1%</td>
<td>0.5%</td>
<td>-0.9%</td>
<td>-2.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Services less Energy</td>
<td>0.3%</td>
<td>0.4%</td>
<td>3.0%</td>
<td>2.8%</td>
<td>2.8%</td>
<td>2.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Energy</td>
<td>-2.2%</td>
<td>-8.0%</td>
<td>17.0%</td>
<td>16.9%</td>
<td>10.9%</td>
<td>12.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Food</td>
<td>0.2%</td>
<td>0.3%</td>
<td>2.4%</td>
<td>2.5%</td>
<td>3.4%</td>
<td>2.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80113/@E80113.HTM">Chained CPI: Total (NSA)</a> </td>
<td>-0.3%</td>
<td>-0.5%</td>
<td>2.8%</td>
<td>2.8%</td>
<td>2.3%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>-0.2%</td>
<td>0.0%</td>
<td>1.7%</td>
<td>1.8%</td>
<td>1.5%</td>
<td>1.1%</td>
</tr>
</tbody>
</table>
</body>
</html>

The consumer price index (CPI-U) fell 0.1% last month on the heels of the 0.6% drop during November. Consensus expectations had been for a 0.2% rise. Despite the latest declines, the 2005 average rise in prices of 3.4% was the [...]

CPI Fell Again, Unexpectedly; 2005 Strongest Since 2000

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060118d.jpg" width="353">
The consumer price index (CPI-U) fell 0.1% last month on the heels of the 0.6% drop during November. Consensus expectations had been for a 0.2% rise. Despite the latest declines, the 2005 average rise in prices of 3.4% was the strongest since 2000 while the December to December rise of 3.4% equaled the 2004 increase.
Energy prices posted a surprising 2.2% decline last month due to widespread m/m declines in fuel oil (+24.0% y/y) and natural gas (+30.1% y/y) prices. Gasoline prices also fell for the third straight month (+16.1% y/y) to an average $2.19 but have wince risen to an average $2.30 in January.
Food prices likewise were under control and rose just 0.2%, the slimmest increase since August.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060118e.jpg" width="353">
Prices less food &amp; energy again rose 0.2%, the third consecutive such increase and matched Consensus expectations. The year to year gain in core prices core prices accelerated during the last two years from the low of 1.5% during 2003 as core goods prices inflated rather than fell. In December, goods prices less food &amp; energy were unchanged and the 2005 increase of 0.5% was the strongest since 2000.
A 0.3% decline in apparel prices (-1.1% y/y) was accompanied by lower prices for new &amp; used vehicles (+0.4% y/y). These declines were offset by higher furniture &amp; bedding prices (0.6% y/y) and higher appliance prices (3.0% y/y). Medical care commodity prices rose 0.2% (3.7% y/y) while educational books &amp; supplies also rose 0.4% (5.1% y/y).
Core services prices increased 0.3% but the full year gain of 2.8% just equaled 2004. The increase in medical care prices faded late in the year (4.4% y/y) and but school tuition &amp; fees posted a strong 6.2% December to December spike. The increase in shelter prices was steady at (2.5% y/y).
The chained CPI which adjusts for shifts in the mix of consumer purchases fell for the second consecutive month though the full year gain of 2.8% was the strongest since the series inception. Less food &amp; energy prices also fell m/m but the annual increase of 1.8% was the strongest since 2002.
Productivity and Economic Outlook, today&#39;s speech by Fed Governor Susan Schmidt Bies can be found <a href="http://www.federalreserve.gov/boarddocs/speeches/2006/20060118/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/@E8/@E801/@E80101/@E80101.HTM">Consumer Price Index</a> </th>
<th scope="col">Dec</th>
<th scope="col">Nov</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total&nbsp;</td>
<td>-0.1%</td>
<td>-0.6%</td>
<td>3.4%</td>
<td>3.4%</td>
<td>2.7%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.2%</td>
<td>2.2%</td>
<td>1.8%</td>
<td>1.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Goods less Food &amp; Energy</td>
<td>0.0%</td>
<td>-0.1%</td>
<td>0.1%</td>
<td>0.5%</td>
<td>-0.9%</td>
<td>-2.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Services less Energy</td>
<td>0.3%</td>
<td>0.4%</td>
<td>3.0%</td>
<td>2.8%</td>
<td>2.8%</td>
<td>2.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Energy</td>
<td>-2.2%</td>
<td>-8.0%</td>
<td>17.0%</td>
<td>16.9%</td>
<td>10.9%</td>
<td>12.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Food</td>
<td>0.2%</td>
<td>0.3%</td>
<td>2.4%</td>
<td>2.5%</td>
<td>3.4%</td>
<td>2.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80113/@E80113.HTM">Chained CPI: Total (NSA)</a> </td>
<td>-0.3%</td>
<td>-0.5%</td>
<td>2.8%</td>
<td>2.8%</td>
<td>2.3%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>-0.2%</td>
<td>0.0%</td>
<td>1.7%</td>
<td>1.8%</td>
<td>1.5%</td>
<td>1.1%</td>
</tr>
</tbody>
</table>
Chain Store Sales Fell Last Week 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 18, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060118c.jpg" width="353">
Chain store sales fell 1.4% last week following the modest 0.1% rise which opened the new year according to the International Council of Shopping Centers (ICSC)-UBS survey.
Solid increases throughout December pulled the yearend level up. Therefore, despite recent weakness, sales in January are 1.5% ahead of December.
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 rose strongly for the second consecutive week. The 0.6% gain pulled January 1.2% ahead of December which rose 0.8% from November.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">01/14/06</th>
<th scope="col">01/07/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>457.7</td>
<td>464.3</td>
<td>3.1%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>
Mortgage Applications Up With More Refinancing 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 18, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060118b.jpg" width="353">
The total number of mortgage applications rose 2.2% last week, the second up week following four consecutive weeks down. This year, mortgage applications are 2.1% higher than during December.
Higher applications to refinance accounted for all of last week&#39;s rise. A 9.9% w/w gain followed a like increase which opened the new year and lifted the level of refis 11.0% this month above December.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060118a.jpg" width="353">
The effective interest rate on a conventional 30-year mortgage fell for the eighth week in the last nine to 6.31% versus an average 6.48% in December. The effective rate on a 15-year mortgage also fell to 5.94%, the second week below 6% since October. The interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities.
Purchase applications fell 3.0% following a 9.3% surge the prior week. The decline pulled purchase applications in January 1.1% below the December average.
During the last ten years there has been a 50% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.
Are Banks Vulnerable to a Housing Bust from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/publications/mt/20060201/cover.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/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">01/13/06</th>
<th scope="col">01/06/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>613.3</td>
<td>600.1</td>
<td>-10.2%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>443.9</td>
<td>457.4</td>
<td>-0.9%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,645.2</td>
<td>1,497.5</td>
<td>-19.7%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
UK Labor Market Weakens in Late 2005 
by <a href="/comment/Stone.html">Carol Stone</a> January 18, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060118f.jpg" width="353">
Employment has begun to falter in the UK, according to the latest Labor Force Survey, published today by the Office of National Statistics (ONS). In the 3 months centered on October, the number of people employed fell 49,000 from September&#39;s 3-month average and stood only 0.8% above a year ago. As recently as August the year-on-year gain was 1.3%. The employment rate decreased 0.2 percentage points in the October reading to 74.5% from 74.7% in September and 74.8 in the October period of 2004. This rate, the number employed compared to the population of &quot;working age&quot; (16-59 for women and 16-64 for men), peaked at 75.0% last January. Commensurately, the unemployment rate has risen, reaching 5.0% most recently, up from a low of 4.7% recorded in August.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060118g.jpg" width="353">
Associated wage and unemployment insurance data also show softening. The average earnings index, watched by many in the UK as a harbinger of inflation pressures, had just a 3.4% yearly growth rate in the three months ended November, slowing from 4.6% as recently as April. The number of claimants for Jobseeker&#39;s Allowance benefits rose in the month of December to 909,100 from 901,900 in November and 825,000 in December 2004.
There are other scattered signs of softening in the UK. Consumer confidence turned negative in October, and industrial production declined irregularly through much of 2005. The CBI industrial trends survey shows marked declines in order books continuously since March. GDP growth slowed to below 2% year-on-year in Q2 and Q3. [Q4 data are due to be reported next Wednesday, January 25.] Exports, by contrast, have been rising as have retail sales. So there is some mixed quality to UK economic activity, but the basic industry appears sluggish and it&#39;s hardly surprising that the labor market is sharing in this.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/UK/@U7/@U7.HTM">UK Labor Force Survey (SA)</a></th>
<th scope="col">Dec 2005</th>
<th scope="col">Nov 2005</th>
<th scope="col">Oct 2005</th>
<th scope="col">Sept 2005</th>
<th scope="col">Year Ago</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Employment (Thous)</td>
<td>--</td>
<td>--</td>
<td>28,764</td>
<td>28,813</td>
<td>28,542</td>
<td>28,465</td>
<td>28,183</td>
<td>27,917</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Change (Thous/%)</td>
<td>--</td>
<td>--</td>
<td>-49</td>
<td>-12</td>
<td>0.8</td>
<td>1.0</td>
<td>1.0</td>
<td>0.8</td>
</tr>
<tr class="odd">
<td class="firstcol">Employment Rate (%)</td>
<td>--</td>
<td>--</td>
<td>74.5</td>
<td>74.7</td>
<td>74.8</td>
<td>74.8</td>
<td>74.6</td>
<td>74.5</td>
</tr>
<tr>
<td class="firstcol">Unemployment Rate (%)</td>
<td>--</td>
<td>--</td>
<td>5.0</td>
<td>4.9</td>
<td>4.7</td>
<td>4.8</td>
<td>5.0</td>
<td>5.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Average Earnings Index (Yr/Yr %) </td>
<td>--</td>
<td>3.4</td>
<td>3.6</td>
<td>4.1</td>
<td>4.3</td>
<td>4.3</td>
<td>3.4</td>
<td>3.5</td>
</tr>
<tr>
<td class="firstcol">Claimant Count (Thous)</td>
<td>909.1</td>
<td>901.9</td>
<td>891.5</td>
<td>878.0</td>
<td>825.0</td>
<td>853.6</td>
<td>933.3</td>
<td>946.7</td>
</tr>
</tbody>
</table>


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Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060124a.jpg" width="353">
Canadian firms remain optimistic regarding the business outlook according to the latest Business Outlook Survey of the Bank of Canada that was released today. The Bank conducts interviews with the senior management of about 100 companies, selected in accordance with the composition of Canada&#39;s gross domestic product. Topics discussed include the companies&#39; views on such factors as the outlooks for the economy and inflation, plans for investments and pressures on production capacity and labor shortages. According to the Bank, &quot;The method of sample selection ensures a good cross-section of opinion. Nevertheless, the statistical reliability of the survey is limited, given the small sample size.&quot;
The excess of those who think future sales will be higher over those who think they will be lower rose to 15.84% in the fourth quarter of 2005 from 13.86% in the third quarter and was 7.92 percentage points above the excess in the fourth quarter of 2004. Along with a higher balance of opinion on the sales outlook, there has been and increase in the proportion of respondents who expect to incur difficulties in meeting demand. Those expecting some difficulty declined slightly to 34.70% in the fourth quarter from 35.60% in the third and was 3.30 percentage points below the fourth quarter of 2004. However, those expecting significant difficulty rose to 14.90% in the fourth quarter from 9.90% in the third quarter and from 7.00% in the fourth quarter of 2004. The increases in those expecting some, and those expecting significant, difficulty in meeting demand are shown in the first chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060124b.jpg" width="353">
In spite of the increase in those expecting significant difficulty in meeting demand, the balance of opinion regarding for investment in machinery and equipment declined slightly in the fourth quarter and was 2.78 percentage points below the fourth quarter of 2004. The balance of opinion regarding future employment also declined slightly in the fourth quarter from the third, but was almost 12 percentage points above the fourth quarter of 2004.
According to the survey, inflationary expectations have moderated. The number of firms expecting consumer price inflation to exceed 3% over the next two years declined to 18.80% in the fourth quarter from 26.70% in the third quarter but was 6.80 percentage points above the fourth quarter of 2004. The second chart shows the percent of firms expecting inflation to range between 1-3% and those expecting inflation to exceed 3%. 

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<tr>
<th scope="col" class="firstcol">The Business Outlook Survey of the Bank of Canada</th>
<th scope="col">Q4 05 %</th>
<th scope="col">Q3 05 % </th>
<th scope="col">Q4 04 %</th>
<th scope="col"> Q/Q % pt</th>
<th scope="col">Y/Y % pt</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">Percent Balance </td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp; Future Sales Growth</td>
<td>15.84</td>
<td>13.86</td>
<td>7.92</td>
<td>&nbsp;1.98</td>
<td>7.92</td>
<td>17.43</td>
<td>17.91</td>
<td>21.38</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Plans for Investment</td>
<td>19.00</td>
<td>19.80</td>
<td>21.78</td>
<td>-0.80</td>
<td>-2.78</td>
<td>19.20</td>
<td>16.95</td>
<td>2.99</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Future Employment</td>
<td>49.50</td>
<td>50.50</td>
<td>37.62</td>
<td>-1.00</td>
<td>11.88</td>
<td>42.75</td>
<td>33.42</td>
<td>27.96</td>
</tr>
<tr class="odd">
<td class="firstcol"> Percent of Respondents </td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">Inflation Expectations</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&lt;1%</td>
<td>0.00</td>
<td>0.00</td>
<td>0.00</td>
<td>0.00</td>
<td>0.00</td>
<td>0.25</td>
<td>0.00</td>
<td>0.50</td>
</tr>
<tr>
<td class="firstcol">&nbsp; 1-2%</td>
<td>13.90</td>
<td>9.90</td>
<td>29.00</td>
<td>4.00</td>
<td>15.10</td>
<td>18.70</td>
<td>32.25</td>
<td>34.25</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; 2-3%</td>
<td>61.40</td>
<td>60.40</td>
<td>56.00</td>
<td>1.00</td>
<td>5.40</td>
<td>62.45</td>
<td>53.00</td>
<td>54.50&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&gt;3%</td>
<td>18.80</td>
<td>26.70</td>
<td>12.00</td>
<td>-7.90</td>
<td>6.80</td>
<td>14.13</td>
<td>10.75</td>
<td>9.50&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">Ability to Meet Demand</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Some Difficulty</td>
<td>34.70&nbsp;</td>
<td>35.60&nbsp;</td>
<td>38.00&nbsp;</td>
<td>-0.90&nbsp;</td>
<td>-3.30&nbsp;</td>
<td>32.58&nbsp;</td>
<td>34.00&nbsp;</td>
<td>32.50&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Significant Difficulty</td>
<td>14.90</td>
<td>9.90&nbsp;</td>
<td>7.00&nbsp;</td>
<td>5.00&nbsp;</td>
<td>7.90&nbsp;</td>
<td>11.20&nbsp;</td>
<td>7.25&nbsp;</td>
<td>6.25&nbsp;</td>
</tr>
</tbody>
</table>
</body>
</html>

Canadian firms remain optimistic regarding the business outlook according to the latest Business Outlook Survey of the Bank of Canada that was released today. The Bank conducts interviews with the senior management of about 100 [...]

Canadian Business Expects Further Increases in Sales, but Sees More Difficulty in Meeting Demand

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060117d.jpg" width="353">
Overall industrial output rose last month by 0.6% following an upwardly revised 0.8% increase during November. For the second month, the gain exceeded Consensus expectations which had been for a 0.5% rise. For all of 2005, output rose 3.1%. The gain was down from a 4.1% increase during 2004 but the two years together were the strongest in five years.
Factory sector production increased a scant 0.2% (4.1% y/y) following an upwardly revised 0.5% November increase. Again, the annual increase for all of 2005 in factory production of 3.8% was down versus a 5.0% increase during 2004.
Output of business equipment again was notably strong. A 2.7% (26.1% y/y) increase in high tech output was led by another 1.1% (11.7% y/y) increase in computer output, a 3.5% (30.8% y/y) spike in semiconductors and a 1.8% (25.2% y/y) surge in output of communications gear.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060117c.jpg" width="353">
Excluding the high tech sector, factory output was unchanged (2.4% y/y) following an upwardly revised 0.3% November increase. For all 2005, output less the high tech sector rose 2.6% after a 3.8% rise during 2004.
Motor vehicle &amp; parts output fell for the third straight month. The 2.8% (-2.4% y/y) decline slowed the annual increase in output to 2.8%, the worst for motor vehicles since 2002. Output of appliances, furniture &amp; carpeting also fell for the third month but the 0.4% (+2.2% y/y) decline masked a 0.9% (-1.8% y/y) increase in furniture output.
Total capacity utilization rose to 80.7%, the highest level since late 2001. Capacity grew 1.6% y/y and for the year the 1.3% gain was the strongest since 2002. Factory sector utilization remained unchanged at 79.6% in December though the annual average during 2005 of 78.8% was the highest since 2000.
Excluding the high tech sector, the factory utilization rate slipped slightly in December to 80.1%. The annual average of 79.3% about matched the previous high during 2000. Capacity less the high tech sector grew a paltry 0.1% in December, about the monthly rate of the last year. While improved versus declines during 2003 &amp; 2004, the 0.5% increase for all of last year compared unfavorably to a 4.5% increase during 1998.

<table border="0" cellspacing="0" width="100%">

</table>
<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/@EA/@EA.HTM">Production &amp; Capacity</a></th>
<th scope="col">Dec</th>
<th scope="col">Nov</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Industrial Production</td>
<td>0.6%</td>
<td>0.8%</td>
<td>2.9%</td>
<td>3.1%</td>
<td>4.1%</td>
<td>0.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Consumer Goods</td>
<td>0.2%</td>
<td>-0.7%</td>
<td>1.3%</td>
<td>2.0%</td>
<td>2.1%</td>
<td>1.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Business Equipment</td>
<td>0.5%</td>
<td>1.3%</td>
<td>10.2%</td>
<td>9.0%</td>
<td>9.3%</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Capacity Utilization</td>
<td>80.7%</td>
<td>80.3%</td>
<td>79.7% (12/05)</td>
<td>80.0%</td>
<td>78.6%</td>
<td>75.7%</td>
</tr>
</tbody>
</table>
</body>
</html>

Overall industrial output rose last month by 0.6% following an upwardly revised 0.8% increase during November. For the second month, the gain exceeded Consensus expectations which had been for a 0.5% rise. For all of 2005, output rose [...]

Industrial Output Gain Led By High Tech

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

260702E.jpg

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.

260702Z1.jpg

**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.

260702Z2.jpg

**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.

260702Z3.jpg

**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.

260702Z4.jpg

**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.

260702Z5.jpg

**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.

260702Z6.jpg

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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