Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051219c.jpg" width="353">
China&#39;s total balance of merchandise trade declined $328 million in November from $7,188 million in October to $6,860. China&#39;s trade balance with the United States, however, increased $267 million to $10,583 million from $10,315 million in October. Through November of this year, the cumulative over-all balance of trade was $92,049 million and that with the United States $103,348 million.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051219d.jpg" width="353">
China typically runs an even larger favorable balance of trade with Hong Kong. In 2004, the balance with Hong Kong was $89,326 million compared with $80,321 million for the United States. In both countries, a large part of the Chinese exports are the products of Hong Kong and U.S. factories built in China. Because of its special relationship with China, Hong Kong is much less concerned with the imbalance in its trade with China than is the United States. The other area where China has a significant positive balance of trade is Europe. Over the past five years, the balance of trade with the United States has almost always been larger than the total balance as shown in the first chart.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051219e.jpg" width="353">
China does have substantial trade deficits on merchandise in many Asian countries. The largest of these are Taiwan, Korea and Japan. In the second and third charts, China&#39;s exports to and imports from Korea and Japan are shown. The deficit with Korea, as shown by the difference between the two series, has been growing steadily over the past several years. The deficit with Japan had been narrowing, but more recently has widened. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">China:&nbsp; Merchandise Trade Balances (Millions US$)&nbsp;</th>
<th scope="col">Nov 05&nbsp;&nbsp;</th>
<th scope="col">Oct 05&nbsp;</th>
<th scope="col">Nov 04&nbsp;</th>
<th scope="col">M/M Dif</th>
<th scope="col">Y/Y Dif</th>
<th scope="col">2004&nbsp; </th>
<th scope="col">2003&nbsp;</th>
<th scope="col">2002&nbsp;</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>6,860</td>
<td>7,188</td>
<td>7,531</td>
<td>-328</td>
<td>-671</td>
<td>32,569</td>
<td>25,389</td>
<td>30,426</td>
</tr>
<tr>
<td class="firstcol">With:&nbsp;</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">United States</td>
<td>10,583</td>
<td>10,316</td>
<td>8,344</td>
<td>267</td>
<td>2,240</td>
<td>80,321</td>
<td>58,627</td>
<td>42,731</td>
</tr>
<tr>
<td class="firstcol">Europe</td>
<td>n.a.</td>
<td>5,976</td>
<td>4,817</td>
<td>n.a.</td>
<td>n.a.</td>
<td>33,648</td>
<td>18,401</td>
<td>5,770</td>
</tr>
<tr class="odd">
<td class="firstcol">Hong Kong</td>
<td>n.a.</td>
<td>10,292</td>
<td>8,738</td>
<td>n.a.</td>
<td>n.a.</td>
<td>89,326</td>
<td>65,185</td>
<td>47,695</td>
</tr>
<tr>
<td class="firstcol">Taiwan</td>
<td>-5,378</td>
<td>-5,315</td>
<td>-4,140</td>
<td>-63</td>
<td>-1,238</td>
<td>-51,212</td>
<td>-40,350</td>
<td>-31,493</td>
</tr>
<tr class="odd">
<td class="firstcol">Japan</td>
<td>-2,631</td>
<td>-2,123</td>
<td>-1,458</td>
<td>-508</td>
<td>-1,173</td>
<td>-20,655</td>
<td>-14,750</td>
<td>-5,001&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Korea</td>
<td>-3,806</td>
<td>-4,047</td>
<td>-2,687</td>
<td>241</td>
<td>-1,119</td>
<td>-34,356</td>
<td>-23,056</td>
<td>-13,073</td>
</tr>
</tbody>
</table>
</body>
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China's total balance of merchandise trade declined $328 million in November from $7,188 million in October to $6,860. China's trade balance with the United States, however, increased $267 million to $10,583 million from $10,315 [...]

China's Trade Balance with the U. S. Heading for More Than $100 billion This Year

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051219a.jpg" width="353">
The weekly leading index of the US economy published by the Economic Cycle Research Institute (ECRI) fell 0.1% last week following a 0.1% gain the prior week. These muted changes underscore a pattern of sideways movement in the ECRI series since this past August. Growth in the index has since decelerated by more than half to 1.4%.
During the last ten years there has been a 53% correlation between the change in the weekly leading index and US real GDP growth during the following quarter. The correlation has risen to 76% during the last five years.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051219b.jpg" width="353">
The recent deceleration in the leaders&#39; growth is part of a longer lived deceleration since early last year when growth was near its peak of 12%. That slowdown mirrors the pattern toward slower growth in the leading series from the Conference Board and the OECD.
Visit the <a href="http://www.businesscycle.com/">Economic Cycle Research Institute</a> for analysis of US and international business cycles.
The Bretton Woods System: Are We Experiencing a Revival? Symposium Summary from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2005/el2005-32.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">Economic Cycle Research Institute&nbsp;</th>
<th scope="col">12/09/05</th>
<th scope="col">12/31/04</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>
<td class="firstcol">Weekly Leading Index</td>
<td>135.4</td>
<td>132.5</td>
<td>2.9%</td>
<td>132.6</td>
<td>124.9</td>
<td>119.8</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; 6 Month Growth Rate</td>
<td>1.4%</td>
<td>1.6%</td>
<td>&nbsp;</td>
<td>4.2%</td>
<td>6.7%</td>
<td>1.1%</td>
</tr>
</tbody>
</table>
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The weekly leading index of the US economy published by the Economic Cycle Research Institute (ECRI) fell 0.1% last week following a 0.1% gain the prior week. These muted changes underscore a pattern of sideways movement in the ECRI [...]

ECRI Leading Index: Meandering Movement

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051219a.jpg" width="353">
The weekly leading index of the US economy published by the Economic Cycle Research Institute (ECRI) fell 0.1% last week following a 0.1% gain the prior week. These muted changes underscore a pattern of sideways movement in the ECRI series since this past August. Growth in the index has since decelerated by more than half to 1.4%.
During the last ten years there has been a 53% correlation between the change in the weekly leading index and US real GDP growth during the following quarter. The correlation has risen to 76% during the last five years.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051219b.jpg" width="353">
The recent deceleration in the leaders&#39; growth is part of a longer lived deceleration since early last year when growth was near its peak of 12%. That slowdown mirrors the pattern toward slower growth in the leading series from the Conference Board and the OECD.
Visit the <a href="http://www.businesscycle.com/">Economic Cycle Research Institute</a> for analysis of US and international business cycles.
The Bretton Woods System: Are We Experiencing a Revival? Symposium Summary from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2005/el2005-32.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">Economic Cycle Research Institute&nbsp;</th>
<th scope="col">12/09/05</th>
<th scope="col">12/31/04</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>
<td class="firstcol">Weekly Leading Index</td>
<td>135.4</td>
<td>132.5</td>
<td>2.9%</td>
<td>132.6</td>
<td>124.9</td>
<td>119.8</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; 6 Month Growth Rate</td>
<td>1.4%</td>
<td>1.6%</td>
<td>&nbsp;</td>
<td>4.2%</td>
<td>6.7%</td>
<td>1.1%</td>
</tr>
</tbody>
</table>
China's Trade Balance with the U. S. Heading for More Than $100 billion This Year 
by <a href="/comment/Curley.html">Louise Curley</a> December 19, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051219c.jpg" width="353">
China&#39;s total balance of merchandise trade declined $328 million in November from $7,188 million in October to $6,860. China&#39;s trade balance with the United States, however, increased $267 million to $10,583 million from $10,315 million in October. Through November of this year, the cumulative over-all balance of trade was $92,049 million and that with the United States $103,348 million.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051219d.jpg" width="353">
China typically runs an even larger favorable balance of trade with Hong Kong. In 2004, the balance with Hong Kong was $89,326 million compared with $80,321 million for the United States. In both countries, a large part of the Chinese exports are the products of Hong Kong and U.S. factories built in China. Because of its special relationship with China, Hong Kong is much less concerned with the imbalance in its trade with China than is the United States. The other area where China has a significant positive balance of trade is Europe. Over the past five years, the balance of trade with the United States has almost always been larger than the total balance as shown in the first chart.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051219e.jpg" width="353">
China does have substantial trade deficits on merchandise in many Asian countries. The largest of these are Taiwan, Korea and Japan. In the second and third charts, China&#39;s exports to and imports from Korea and Japan are shown. The deficit with Korea, as shown by the difference between the two series, has been growing steadily over the past several years. The deficit with Japan had been narrowing, but more recently has widened. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">China:&nbsp; Merchandise Trade Balances (Millions US$)&nbsp;</th>
<th scope="col">Nov 05&nbsp;&nbsp;</th>
<th scope="col">Oct 05&nbsp;</th>
<th scope="col">Nov 04&nbsp;</th>
<th scope="col">M/M Dif</th>
<th scope="col">Y/Y Dif</th>
<th scope="col">2004&nbsp; </th>
<th scope="col">2003&nbsp;</th>
<th scope="col">2002&nbsp;</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>6,860</td>
<td>7,188</td>
<td>7,531</td>
<td>-328</td>
<td>-671</td>
<td>32,569</td>
<td>25,389</td>
<td>30,426</td>
</tr>
<tr>
<td class="firstcol">With:&nbsp;</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">United States</td>
<td>10,583</td>
<td>10,316</td>
<td>8,344</td>
<td>267</td>
<td>2,240</td>
<td>80,321</td>
<td>58,627</td>
<td>42,731</td>
</tr>
<tr>
<td class="firstcol">Europe</td>
<td>n.a.</td>
<td>5,976</td>
<td>4,817</td>
<td>n.a.</td>
<td>n.a.</td>
<td>33,648</td>
<td>18,401</td>
<td>5,770</td>
</tr>
<tr class="odd">
<td class="firstcol">Hong Kong</td>
<td>n.a.</td>
<td>10,292</td>
<td>8,738</td>
<td>n.a.</td>
<td>n.a.</td>
<td>89,326</td>
<td>65,185</td>
<td>47,695</td>
</tr>
<tr>
<td class="firstcol">Taiwan</td>
<td>-5,378</td>
<td>-5,315</td>
<td>-4,140</td>
<td>-63</td>
<td>-1,238</td>
<td>-51,212</td>
<td>-40,350</td>
<td>-31,493</td>
</tr>
<tr class="odd">
<td class="firstcol">Japan</td>
<td>-2,631</td>
<td>-2,123</td>
<td>-1,458</td>
<td>-508</td>
<td>-1,173</td>
<td>-20,655</td>
<td>-14,750</td>
<td>-5,001&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Korea</td>
<td>-3,806</td>
<td>-4,047</td>
<td>-2,687</td>
<td>241</td>
<td>-1,119</td>
<td>-34,356</td>
<td>-23,056</td>
<td>-13,073</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/051216e.jpg" width="353">
Business is looking better in Germany. Just three days ago, Louise Curley discussed the ZEW Investor Survey, which showed a surprising gain. Now we have the parallel business confidence data compiled by Ifo, a German economic research institute, from a survey of 7,000 business firms in manufacturing, construction and trade. This survey, too, as the ZEW, turned in a favorable performance for December, better than market expectations. The &quot;Business Climate Index&quot; is 99.6 (2000=100), with the component &quot;Business Situation&quot; and Business Expectations also both at 99.6. All three indicators improved from 97.8 in November. The improvement was shared by all major industry segments in the survey, manufacturing, construction, wholesale and retail trade.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051216f.jpg" width="353">
Accompanying these indexes are diffusion measures showing the balance of better and worse conditions. These diffusion gauges have generally been negative, that is, more business managers continue to experience deterioration than growth. Still, there is considerably less deterioration than in the recent past. The overall business climate gauge is -1.7% in December, its best level since August 2000 and up from -14.9% last May. Current conditions are -6.0%, the best since January 2001 and much better than April&#39;s -18.7%. Expectations are +2.6. This last, reflecting business leaders&#39; persistent hopes for better times, has frequently been positive, most recently in late 2003 and early 2004.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051216g.jpg" width="353">
These improvements seem stronger than some views expressed recently -- prompted perhaps by the riots in neighboring France, by recent political uncertainty and by high energy costs -- that Germany is mired in a distressing economic morass. But the upturns in these confidence measures began about mid-year and survived all those negative weights on the economy. Offsetting these factors has been the weaker euro and commensurate advance in German competitiveness. Further, even employment has been increasing. Since bottoming in April, employment has risen 164,000 and the locally defined unemployment rate has eased from 12.0% in March to 11.5% in November, still high but well below the peak. Thus, the German economy looks better, and this week investors in the ZEW survey and business leaders in the Ifo poll have agreed with that perspective.

<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/GERMANY/@D8/@D8.HTM">Ifo Indexes</a>, 2000=100, SA</th>
<th scope="col">Dec 2005</th>
<th scope="col">Nov 2005</th>
<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">Business Climate</td>
<td>99.6</td>
<td>97.8</td>
<td>98.8</td>
<td>96.0</td>
<td>95.7</td>
<td>91.7</td>
<td>89.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Diffusion %</td>
<td>-1.7</td>
<td>-5.3</td>
<td>-3.4</td>
<td>-8.8</td>
<td>-9.6</td>
<td>-17.5</td>
<td>-22.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Business Situation</td>
<td>99.6</td>
<td>97.8</td>
<td>98.9</td>
<td>95.8</td>
<td>94.0</td>
<td>88.3</td>
<td>85.3</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Diffusion %</td>
<td>-6.0</td>
<td>-9.5</td>
<td>-7.3</td>
<td>-13.4</td>
<td>-17.0</td>
<td>-27.9</td>
<td>-34.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Business Expectations</td>
<td>99.6</td>
<td>97.8</td>
<td>98.6</td>
<td>96.3</td>
<td>97.4</td>
<td>95.1</td>
<td>93.8</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Diffusion %</td>
<td>+2.6</td>
<td>-1.1</td>
<td>+0.6</td>
<td>-4.1</td>
<td>-1.8</td>
<td>-6.5</td>
<td>-9.1</td>
</tr>
</tbody>
</table>
</body>
</html>

Business is looking better in Germany. Just three days ago, Louise Curley discussed the ZEW Investor Survey, which showed a surprising gain. Now we have the parallel business confidence data compiled by Ifo, a German economic research [...]

German Ifo Business Climate Index Approaches Balance in December as Business Confidence Improves

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051216a.jpg" width="353">
The December Index of General Business Conditions in the manufacturing sector from the Philadelphia Fed rose slightly to 12.6 from 11.5 the prior month. Consensus expectations had been for improvement to 14.0.
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 sub index measuring new orders fell sharply as did the shipments index though both remained positive. The index covering the number of employees and delivery times also fell. These declines were offset by increases in unfilled orders and inventories. During the last ten years there has been a 64% correlation between the employment index and the three month growth in factory payrolls.
The business conditions index reflects a separate survey question, not the sub indexes.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051216b.jpg" width="353">
The separate index of expected business conditions in six months improved a sharp 10 points to 39.0 and was at its best level in a year. Expectations for employment also jumped to the highest level since January but capital spending intentions fell.
The prices paid index fell for the second month to a still high reading of 49.0. 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 Philadelphia Fed index is based on a survey of 250 regional manufacturing firms, but these firms sell nationally and internationally. How Well Do Diffusion Indexes Capture Business Cycles? A Spectral Analysis from the Federal Reserve Bank of Richmond is available <a href="http://www.richmondfed.org/publications/economic_research/economic_quarterly/pdfs/fall2005/sarte_owens.pdf"> here</a>.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos1205.html">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">Dec</th>
<th scope="col">Nov</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>12.6</td>
<td>11.5</td>
<td>12.5</td>
<td>28.1</td>
<td>10.6</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>49.0</td>
<td>56.8</td>
<td>43.6</td>
<td>51.3</td>
<td>16.8</td>
</tr>
</tbody>
</table>
</body>
</html>

The December Index of General Business Conditions in the manufacturing sector from the Philadelphia Fed rose slightly to 12.6 from 11.5 the prior month. Consensus expectations had been for improvement to 14.0. During the last ten [...]

Philadelphia Fed Business Activity Up a Bit

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051216d.jpg" width="353">
The US current account deficit improved slightly last quarter to $195.8B but it was from a 2Q deficit that was revised deeper. Also lessening the economic significance of the improvement, it was entirely due to a narrower unilateral transfers deficit caused by private transfers associated with hurricanes and homeland security.
The 3Q current account deficit amounted to 6.2% of GDP and is averaging 6.4% this year versus 5.7% in 2004. Consensus expectations had been for a deepening of the 3Q deficit to $204.6B.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051216c.jpg" width="353">
The deficit in merchandise trade deteriorated to a record $197.9B from $186.9B in 2Q. Exports grew just 0.8% (10.0% y/y), held back by the damage to Gulf Coast port facilities caused by Hurricane Katrina. Imports, meanwhile, rose 3.1% (13.6% y/y) in large part due to the 17% surge in value of petroleum products.
The surplus on services improved for the fourth consecutive quarter to $15.1B and rose versus a surplus of $10.3B a year ago. Exports of services grew 1.9% (11.7% y/y and imports were roughly flat q/q (6.8% y/y).
From the capital account, net US foreign direct investment abroad was positive for the first time since 1982 while foreign direct investment in the US surged to its highest since 2001.

<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/@EE/@EE01/@EE01.HTM">US Int&#39;l Balance of Payments</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">Current Account Deficit</td>
<td>$195.8B</td>
<td>$197.8B</td>
<td>$167.0B</td>
<td>$668.1B</td>
<td>$519.7B</td>
<td>$475.2B</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Goods/Services/Income Deficit</td>
<td>$182.3B</td>
<td>$175.1B</td>
<td>$151.2B</td>
<td>$587.1B</td>
<td>$448.5B</td>
<td>$411.2B</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Exports</td>
<td>2.6%</td>
<td>3.6%</td>
<td>13.9%</td>
<td>14.9%</td>
<td>6.8%</td>
<td>-3.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Imports</td>
<td>3.0%</td>
<td>3.0%</td>
<td>15.8%</td>
<td>18.1%</td>
<td>7.3%</td>
<td>1.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Unilateral Transfers Deficit</td>
<td>$13.5B</td>
<td>$22.6B</td>
<td>$20.5B</td>
<td>$80.9B</td>
<td>$71.2B</td>
<td>$64.0B</td>
</tr>
</tbody>
</table>
</body>
</html>

The US current account deficit improved slightly last quarter to $195.8B but it was from a 2Q deficit that was revised deeper. Also lessening the economic significance of the improvement, it was entirely due to a narrower unilateral [...]

U.S. Current Account Deficit Improved Slightly

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051216d.jpg" width="353">
The US current account deficit improved slightly last quarter to $195.8B but it was from a 2Q deficit that was revised deeper. Also lessening the economic significance of the improvement, it was entirely due to a narrower unilateral transfers deficit caused by private transfers associated with hurricanes and homeland security.
The 3Q current account deficit amounted to 6.2% of GDP and is averaging 6.4% this year versus 5.7% in 2004. Consensus expectations had been for a deepening of the 3Q deficit to $204.6B.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051216c.jpg" width="353">
The deficit in merchandise trade deteriorated to a record $197.9B from $186.9B in 2Q. Exports grew just 0.8% (10.0% y/y), held back by the damage to Gulf Coast port facilities caused by Hurricane Katrina. Imports, meanwhile, rose 3.1% (13.6% y/y) in large part due to the 17% surge in value of petroleum products.
The surplus on services improved for the fourth consecutive quarter to $15.1B and rose versus a surplus of $10.3B a year ago. Exports of services grew 1.9% (11.7% y/y and imports were roughly flat q/q (6.8% y/y).
From the capital account, net US foreign direct investment abroad was positive for the first time since 1982 while foreign direct investment in the US surged to its highest since 2001.

<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/@EE/@EE01/@EE01.HTM">US Int&#39;l Balance of Payments</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">Current Account Deficit</td>
<td>$195.8B</td>
<td>$197.8B</td>
<td>$167.0B</td>
<td>$668.1B</td>
<td>$519.7B</td>
<td>$475.2B</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Goods/Services/Income Deficit</td>
<td>$182.3B</td>
<td>$175.1B</td>
<td>$151.2B</td>
<td>$587.1B</td>
<td>$448.5B</td>
<td>$411.2B</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Exports</td>
<td>2.6%</td>
<td>3.6%</td>
<td>13.9%</td>
<td>14.9%</td>
<td>6.8%</td>
<td>-3.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Imports</td>
<td>3.0%</td>
<td>3.0%</td>
<td>15.8%</td>
<td>18.1%</td>
<td>7.3%</td>
<td>1.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Unilateral Transfers Deficit</td>
<td>$13.5B</td>
<td>$22.6B</td>
<td>$20.5B</td>
<td>$80.9B</td>
<td>$71.2B</td>
<td>$64.0B</td>
</tr>
</tbody>
</table>
Philadelphia Fed Business Activity Up a Bit  
by <a href="/comment/Moeller.html">Tom Moeller</a> December 16, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051216a.jpg" width="353">
The December Index of General Business Conditions in the manufacturing sector from the Philadelphia Fed rose slightly to 12.6 from 11.5 the prior month. Consensus expectations had been for improvement to 14.0.
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 sub index measuring new orders fell sharply as did the shipments index though both remained positive. The index covering the number of employees and delivery times also fell. These declines were offset by increases in unfilled orders and inventories. During the last ten years there has been a 64% correlation between the employment index and the three month growth in factory payrolls.
The business conditions index reflects a separate survey question, not the sub indexes.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051216b.jpg" width="353">
The separate index of expected business conditions in six months improved a sharp 10 points to 39.0 and was at its best level in a year. Expectations for employment also jumped to the highest level since January but capital spending intentions fell.
The prices paid index fell for the second month to a still high reading of 49.0. 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 Philadelphia Fed index is based on a survey of 250 regional manufacturing firms, but these firms sell nationally and internationally. How Well Do Diffusion Indexes Capture Business Cycles? A Spectral Analysis from the Federal Reserve Bank of Richmond is available <a href="http://www.richmondfed.org/publications/economic_research/economic_quarterly/pdfs/fall2005/sarte_owens.pdf"> here</a>.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos1205.html">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">Dec</th>
<th scope="col">Nov</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>12.6</td>
<td>11.5</td>
<td>12.5</td>
<td>28.1</td>
<td>10.6</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>49.0</td>
<td>56.8</td>
<td>43.6</td>
<td>51.3</td>
<td>16.8</td>
</tr>
</tbody>
</table>
German Ifo Business Climate Index Approaches Balance in December as Business Confidence Improves 
by <a href="/comment/Stone.html">Carol Stone</a> December 16, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051216e.jpg" width="353">
Business is looking better in Germany. Just three days ago, Louise Curley discussed the ZEW Investor Survey, which showed a surprising gain. Now we have the parallel business confidence data compiled by Ifo, a German economic research institute, from a survey of 7,000 business firms in manufacturing, construction and trade. This survey, too, as the ZEW, turned in a favorable performance for December, better than market expectations. The &quot;Business Climate Index&quot; is 99.6 (2000=100), with the component &quot;Business Situation&quot; and Business Expectations also both at 99.6. All three indicators improved from 97.8 in November. The improvement was shared by all major industry segments in the survey, manufacturing, construction, wholesale and retail trade.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051216f.jpg" width="353">
Accompanying these indexes are diffusion measures showing the balance of better and worse conditions. These diffusion gauges have generally been negative, that is, more business managers continue to experience deterioration than growth. Still, there is considerably less deterioration than in the recent past. The overall business climate gauge is -1.7% in December, its best level since August 2000 and up from -14.9% last May. Current conditions are -6.0%, the best since January 2001 and much better than April&#39;s -18.7%. Expectations are +2.6. This last, reflecting business leaders&#39; persistent hopes for better times, has frequently been positive, most recently in late 2003 and early 2004.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051216g.jpg" width="353">
These improvements seem stronger than some views expressed recently -- prompted perhaps by the riots in neighboring France, by recent political uncertainty and by high energy costs -- that Germany is mired in a distressing economic morass. But the upturns in these confidence measures began about mid-year and survived all those negative weights on the economy. Offsetting these factors has been the weaker euro and commensurate advance in German competitiveness. Further, even employment has been increasing. Since bottoming in April, employment has risen 164,000 and the locally defined unemployment rate has eased from 12.0% in March to 11.5% in November, still high but well below the peak. Thus, the German economy looks better, and this week investors in the ZEW survey and business leaders in the Ifo poll have agreed with that perspective.

<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/GERMANY/@D8/@D8.HTM">Ifo Indexes</a>, 2000=100, SA</th>
<th scope="col">Dec 2005</th>
<th scope="col">Nov 2005</th>
<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">Business Climate</td>
<td>99.6</td>
<td>97.8</td>
<td>98.8</td>
<td>96.0</td>
<td>95.7</td>
<td>91.7</td>
<td>89.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Diffusion %</td>
<td>-1.7</td>
<td>-5.3</td>
<td>-3.4</td>
<td>-8.8</td>
<td>-9.6</td>
<td>-17.5</td>
<td>-22.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Business Situation</td>
<td>99.6</td>
<td>97.8</td>
<td>98.9</td>
<td>95.8</td>
<td>94.0</td>
<td>88.3</td>
<td>85.3</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Diffusion %</td>
<td>-6.0</td>
<td>-9.5</td>
<td>-7.3</td>
<td>-13.4</td>
<td>-17.0</td>
<td>-27.9</td>
<td>-34.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Business Expectations</td>
<td>99.6</td>
<td>97.8</td>
<td>98.6</td>
<td>96.3</td>
<td>97.4</td>
<td>95.1</td>
<td>93.8</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Diffusion %</td>
<td>+2.6</td>
<td>-1.1</td>
<td>+0.6</td>
<td>-4.1</td>
<td>-1.8</td>
<td>-6.5</td>
<td>-9.1</td>
</tr>
</tbody>
</table>
</body>
</html>

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051215f.jpg" width="353">
Three diverse countries which reported their latest labor fore data today, have shown improving trends in the last couple of months. In the Netherlands, Sweden and South Korea, the most current unemployment rates have decreased and employment, while not reaching records, also appears to be on a firm uptrend in each region.
In the Netherlands, employment gained 4,000 in October, following an increase of 33,000 in August and September combined. These data are quoted as 3-month centered moving averages. As shown in the first graph, the first half of 2005 saw a flat pattern for employment, so the recent rise is encouraging even though the level remains well below prior years. The Dutch labor force survey only began in 2000, so there is little history to compare. Unemployment has begun an ever so gradual decline after reaching a high of 6.7% in February and March. Although down only 0.2 percentage point, the improvement looks to be sustainable, since it accompanies rising employment, not the &quot;discouraged worker&quot; syndrome of a shrinking labor force. Indeed, using Excel to calculate a labor force participation rate (those in labor force as a percentage of the sum of the labor force and those not in labor force), we find it at 67.44% in September and October, up from a low of 67.16% in April and the highest so far this year.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051215g.jpg" width="353">
In Sweden, employment was up in November by 117,500 from a year ago, in data that are not seasonally adjusted; this extends a firming trend that began in May and represents 2.8% growth in the number of people with jobs. The unemployment rate, at 5.0% last month, is up 0.1% from the year-ago amount, but it accompanies a participation rate that is also rising and is the highest in more than 3-1/2 years. So, here, as in Holland, people are not backing off from the labor force, but joining it. Indeed, the labor force is growing at a record rate by far. In the second graph, we show a six-month moving average of year-to-year growth rates. For November this was 2.2%, a record for this 30-year-old survey. It looks impressive together with the employment growth, indicating resilience of the Swedish labor market.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051215h.jpg" width="353">
The situation in South Korea looks a bit different than might be expected. Employment is growing, although not as rapidly as before the currency crisis period of the late 1990s or in the immediate recovery from that in 1999 and 2000. At the same time, a broad industry breakdown into manufacturing and services shows that manufacturing jobs are actually declining and have been all this year, so that the November figure is 107,000 below a year earlier. However, the service sector has been expanding by more than enough to make up for that -- 482,000 over the last 12 months. The unemployment rate has thus been able to come down, reaching 3.5% in November, the lowest since January 2004.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Employment (thous) Unemployment Rate (%)</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">Netherlands*: Employment </td>
<td>--</td>
<td>6,937</td>
<td>6,933</td>
<td>6,914</td>
<td>7,037</td>
<td>7,114</td>
<td>7,125</td>
</tr>
<tr>
<td class="firstcol">Unemployment Rate</td>
<td>--</td>
<td>6.5</td>
<td>6.5</td>
<td>6.6</td>
<td>6.4</td>
<td>5.3</td>
<td>4.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Sweden**: Employment</td>
<td>4,304</td>
<td>4,238</td>
<td>4,259</td>
<td>4,186</td>
<td>4,213</td>
<td>4,232</td>
<td>4,242</td>
</tr>
<tr>
<td class="firstcol">Unemployment Rate</td>
<td>5.0</td>
<td>5.6</td>
<td>5.4</td>
<td>4.9</td>
<td>5.5</td>
<td>4.9</td>
<td>4.0</td>
</tr>
<tr class="odd">
<td class="firstcol">South Korea***: Employment</td>
<td>23,030</td>
<td>22,914</td>
<td>22,836</td>
<td>22,639</td>
<td>22,557</td>
<td>22,139</td>
<td>22,169</td>
</tr>
<tr>
<td class="firstcol">Unemployment Rate</td>
<td>3.5</td>
<td>3.9</td>
<td>4.0</td>
<td>3.7</td>
<td>3.7</td>
<td>3.6</td>
<td>3.3</td>
</tr>
</tbody>
</table>
</body>
</html>

Three diverse countries which reported their latest labor fore data today, have shown improving trends in the last couple of months. In the Netherlands, Sweden and South Korea, the most current unemployment rates have decreased and [...]

Employment Conditions Firm in Netherlands, Sweden & Korea in October, November Data

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

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Stable job openings and hiring rates point to cautious hiring

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Sandy Batten

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

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

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

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

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

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

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

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

Robert Brusca

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

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

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

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

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

Europe

Unemployment Remains Quite Low in Europe

Andrew Cates

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

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

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

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

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

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

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

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Charts of the Week: Forecasters Hold Firm

Winnie Tapasanun

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

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

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

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

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

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

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

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

Michael J. Moran

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

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

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

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

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

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

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

Economy in Brief

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