Tom Moeller

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Job cut announcements jumped by more than one third in June and added to a sharp gain in May raising the level to the highest since January 2004. The three month average of job cut announcements also rose but just moderately.
During the last ten years there has been an 84% (inverse) correlation between the three month moving average of announced job cuts and the three month change payroll employment.
Job cut announcements in the automotive industry increased roughly ten-fold m/m. Outside of autos job cut announcement fell m/m (+6.6% y/y). In June job cuts did rise sharply in the retail and pharmaceutical industries.
Job cut announcements differ from layoffs. Many are achieved through attrition, early retirement or just never occur.
Challenger also reported that announced hiring plans improved sharply to the highest level since February. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050706d.jpg" width="353"><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050706c.jpg" width="353">

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S3/@S301/@S301.HTM">Challenger, Gray &amp; Christmas</a></th>
<th scope="col">June</th>
<th scope="col">May</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">Announced Job Cuts</td>
<td>110,996</td>
<td>82,283</td>
<td>72.5%</td>
<td>1,039,175</td>
<td>1,236,426</td>
<td>1,431,052</td>
</tr>
</tbody>
</table>
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Job cut announcements jumped by more than one third in June and added to a sharp gain in May raising the level to the highest since January 2004. The three month average of job cut announcements also rose but just moderately. During [...]

Challenger Layoffs Jumped

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050706e.jpg" width="353">
The Business Activity Index for the non-manufacturing sector recovered in June all of the prior month&#39;s decline and rose to 62.2, reported the Institute for Supply Management. Consensus expectations had been for stability at 58.2.
Since the series&#39; inception in 1997 there has been a 50% correlation between the Business Activity Index and the q/q change in real GDP for services plus construction.
A higher employment index led the improvement last month. The rise to 57.4 was to the highest level since February. Since the series&#39; inception in 1997 there has been a 60% correlation between the level of the ISM non-manufacturing employment index and the m/m change in payroll employment in the service producing plus the construction industries.
The index of new orders dipped slightly to 59.5 but pricing power recovered a bit.
ISM surveys more than 370 purchasing managers in more than 62 industries including construction, law firms, hospitals, government and retailers. The non-manufacturing survey dates only to July 1997, therefore its seasonal adjustment should be viewed tentatively.
Business Activity Index for the non-manufacturing sector reflects a question separate from the subgroups mentioned above. In contrast, the NAPM manufacturing sector composite index is a weighted average five components.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF03/@EF03.HTM">ISM Nonmanufacturing Survey</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">June &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Business Activity Index</td>
<td>62.2</td>
<td>58.5</td>
<td>61.1</td>
<td>62.4</td>
<td>58.2</td>
<td>55.1</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>59.8</td>
<td>57.9</td>
<td>72.9</td>
<td>69.0</td>
<td>56.8</td>
<td>54.0</td>
</tr>
</tbody>
</table>


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The Business Activity Index for the non-manufacturing sector recovered in June all of the prior month's decline and rose to 62.2, reported the Institute for Supply Management. Consensus expectations had been for stability at 58.2. [...]

ISM Non-Manufacturing Index Recovered

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050706e.jpg" width="353">
The Business Activity Index for the non-manufacturing sector recovered in June all of the prior month&#39;s decline and rose to 62.2, reported the Institute for Supply Management. Consensus expectations had been for stability at 58.2.
Since the series&#39; inception in 1997 there has been a 50% correlation between the Business Activity Index and the q/q change in real GDP for services plus construction.
A higher employment index led the improvement last month. The rise to 57.4 was to the highest level since February. Since the series&#39; inception in 1997 there has been a 60% correlation between the level of the ISM non-manufacturing employment index and the m/m change in payroll employment in the service producing plus the construction industries.
The index of new orders dipped slightly to 59.5 but pricing power recovered a bit.
ISM surveys more than 370 purchasing managers in more than 62 industries including construction, law firms, hospitals, government and retailers. The non-manufacturing survey dates only to July 1997, therefore its seasonal adjustment should be viewed tentatively.
Business Activity Index for the non-manufacturing sector reflects a question separate from the subgroups mentioned above. In contrast, the NAPM manufacturing sector composite index is a weighted average five components.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF03/@EF03.HTM">ISM Nonmanufacturing Survey</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">June &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
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<td class="firstcol">Business Activity Index</td>
<td>62.2</td>
<td>58.5</td>
<td>61.1</td>
<td>62.4</td>
<td>58.2</td>
<td>55.1</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>59.8</td>
<td>57.9</td>
<td>72.9</td>
<td>69.0</td>
<td>56.8</td>
<td>54.0</td>
</tr>
</tbody>
</table>
Challenger Layoffs Jumped 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 6, 2005


Job cut announcements jumped by more than one third in June and added to a sharp gain in May raising the level to the highest since January 2004. The three month average of job cut announcements also rose but just moderately.
During the last ten years there has been an 84% (inverse) correlation between the three month moving average of announced job cuts and the three month change payroll employment.
Job cut announcements in the automotive industry increased roughly ten-fold m/m. Outside of autos job cut announcement fell m/m (+6.6% y/y). In June job cuts did rise sharply in the retail and pharmaceutical industries.
Job cut announcements differ from layoffs. Many are achieved through attrition, early retirement or just never occur.
Challenger also reported that announced hiring plans improved sharply to the highest level since February. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050706d.jpg" width="353"><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050706c.jpg" width="353">

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S3/@S301/@S301.HTM">Challenger, Gray &amp; Christmas</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
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</thead>
<tbody>
<tr>
<td class="firstcol">Announced Job Cuts</td>
<td>110,996</td>
<td>82,283</td>
<td>72.5%</td>
<td>1,039,175</td>
<td>1,236,426</td>
<td>1,431,052</td>
</tr>
</tbody>
</table>
Chain Store Sales: July Began Firmer 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 6, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050706b.jpg" width="353">
Chain store sales rose 0.5% during the opening week of July following a like-sized drop the prior week, according to the International Council of Shopping Centers (ICSC)-UBS survey. Sales began the month 0.2% above the June average which fell 0.4% versus May.
During the last ten years there has been a 56% correlation between the y/y change in chain store sales and the change in non-auto retail sales less gasoline, as published by the US Census Department. Chain store sales correspond directly with roughly 14% of non-auto retail sales less gasoline.
The leading indicator of chain store sales from ICSC ticked 0.1% higher w/w (+2.2% y/y) following a 0.2% decline the week prior.
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">07/02/05</th>
<th scope="col">06/25/05</th>
<th scope="col">Y/Y</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">Total Weekly Chain Store Sales</td>
<td>455.2</td>
<td>453.0</td>
<td>3.8%</td>
<td>4.6%</td>
<td>2.9%</td>
<td>3.6%</td>
</tr>
</tbody>
</table>
Mortgage Applications Surged 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 6, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050706a.jpg" width="353">
Total mortgage applications surged 9.6% in the opening week of July, according to the Mortgage Bankers Association, and began the month 6.4% above the June average which rose 9.9% versus May.
Purchase applications jumped 9.1% w/w and began the month 6.0% above June which rose 1.3% from May. During the last ten years there has been a 50% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
Applications to refinance recovered 10.2% w/w following two weeks of decline and opened the month 6.9% ahead of June.
The effective interest rate on a conventional 30-year mortgage rose to 5.81% following several weeks of decline from the peak of 6.34% in late March. The effective rate on a 15-year mortgage also rose to 5.47% after falling from the peak of 5.96%.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">07/01/05</th>
<th scope="col">06/24/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>853.4</td>
<td>778.4</td>
<td>24.2%</td>
<td>735.1</td>
<td>1,067.9</td>
<td>799.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>520.8</td>
<td>477.4</td>
<td>4.0%</td>
<td>454.5</td>
<td>395.1</td>
<td>354.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>2,788.2</td>
<td>2,529.2</td>
<td>57.6%</td>
<td>2,366.8</td>
<td>4,981.8</td>
<td>3,388.0</td>
</tr>
</tbody>
</table>
UK Corporations Achieve High Profitability in Q1, Led by Oil Companies and Service Industries 
by <a href="/comment/Stone.html">Carol Stone</a> July 6, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050706f.jpg" width="353">
Net rates of return for UK corporations have run strong in the last several quarters. The first quarter&#39;s outcome, 13.3%, was the third highest in the 16-year history of these quarterly data. These figures on corporate profitability were reported yesterday, July 5, by the UK Office of National Statistics and have just recently been added to Haver&#39;s UK database. The information, called &quot;Profitability of UK Companies&quot;, is listed in both the Financial Data and National Accounts menus.
The rates of return are defined as the ratio of the net operating surplus to net capital employed. [The values in &quot;gross&quot; terms, i.e., before the deduction of capital consumption, are also published, but the &quot;net&quot; data get far more attention.] The factors in the ratio, net operating surplus and net capital employed, are published annually; rates of return are available quarterly for all private non-financial corporations and three categories: &quot;Continental Shelf&quot; companies, manufacturing firms and service sector companies. &quot;Continental Shelf&quot; refers to the UK petroleum industry.
In the first quarter, the 13.3% overall return represented a pick-up from the fourth quarter&#39;s 13.1% and was equal to the 2004 average of 13.3%. As might be expected, the Continental Shelf firms saw a boost in their return, to 29.6%, up from the prior quarter; the last five years have averaged 30.8%, the highest ever, with a range among individual quarters of 25.6%, right after 9/11, to 38.1% at the end of 2000.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050706g.jpg" width="353">
Non-financial service industries experienced their strongest returns in the late 1990s. We&#39;d speculate that computer software developers, internet companies and other tech firms led this high-profit time in the UK, when returns on capital peaked at 19.5% in the second quarter of 1998. The recent period, while lower, isn&#39;t &quot;bad&quot;, with profitability still running at about 16.5% on average and this latest quarter at 17.5%.
Manufacturing returns have lagged. This has been so for a long time, throughout the history of these data back to 1970. The worst performance was during the energy &quot;crisis&quot;/stagflation recessions of the late 1970s and early 1980s, when, for instance, the net return dipped to just 1.5% in 1981. More currently, manufacturing firms saw good results from 1994 to 1999, but since then have fallen back to single-digits. The 6.0% in Q1 is among the lowest since the 1991 recession. The ONS suggests that the lower returns in manufacturing reflect their higher capital intensity, compared with service firms. This is certainly true, but perhaps their greater cyclicality and variability also restrain their overall performance. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/UK/UK.HTM">UK</a>:&nbsp; % except as noted</th>
<th scope="col">Q1 2005</th>
<th scope="col">Q4 2004</th>
<th scope="col">Q3 2003</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">Net Rate of Return: All PNFCs*</td>
<td>13.3</td>
<td>13.1</td>
<td>13.4</td>
<td>13.3</td>
<td>12.9</td>
<td>12.5</td>
</tr>
<tr>
<td class="firstcol">Net Operating Surplus (&pound; Billions)</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>152.2</td>
<td>140.2</td>
<td>132.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Net Capital Employed (&pound; Billions)</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>1146.4</td>
<td>1089.4</td>
<td>1056.5</td>
</tr>
<tr>
<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 class="odd">
<td class="firstcol">Continental Shelf Companies**</td>
<td>29.6</td>
<td>27.6</td>
<td>30.5</td>
<td>29.1</td>
<td>29.2</td>
<td>30.4</td>
</tr>
<tr>
<td class="firstcol">Manufacturing </td>
<td>6.0</td>
<td>7.7</td>
<td>5.8</td>
<td>6.9</td>
<td>6.9</td>
<td>7.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Service Sector</td>
<td>17.5</td>
<td>15.9</td>
<td>16.4</td>
<td>16.5</td>
<td>16.5</td>
<td>16.1</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/050705f.jpg" width="353">
Retail sales provided another positive statistic for Germany in May. The volume of retail sales was up 1.2% in May on a seasonally adjusted basis from April and the value was up 1.8%. On a seasonally unadjusted basis, the volume of retail sales was 2.7% over May 2004 and the value was 3.2% over the same period.
The recently revised series for German retail sales shows a somewhat better picture over the past few years than that previously reported. For example the new data show that retail sales increased 1.2% in 2004 instead of declining 1.7% as reported earlier. For 2003 the difference was much smaller--a decline of 0.5% vs. one of 0.6% reported earlier.
The headline series excludes automobiles and gas stations and is shown seasonally adjusted and unadjusted for values and volumes. Data on automobiles and gas stations are released some weeks after the retail sales release. However, a memo item is included in the current release that shows total retail sales including estimated automobiles and gas stations on a seasonally adjusted bases in value and volume terms. The two value series are shown in the attached chart. It may seem strange that the total excluding automobiles and gas stations is at times higher than the total including these items. But these data are index numbers relative to the year 2003, not absolute levels. Except for the items just noted most of the data are not seasonally adjusted. .

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">German Retail Sales ex Automobiles and Gas Stations</th>
<th scope="col">May 05</th>
<th scope="col">Apr 05</th>
<th scope="col">May 04</th>
<th scope="col">M/M%</th>
<th scope="col">Y/Y%</th>
<th scope="col">&nbsp;2004&nbsp;&nbsp;</th>
<th scope="col">&nbsp;2003</th>
<th scope="col">&nbsp;2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Value (2003=100)</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;&nbsp; Not seasonally adjusted</td>
<td>98.8</td>
<td>103.4</td>
<td>95.8</td>
<td>-4.45</td>
<td>3.13</td>
<td>101.4</td>
<td>100.0</td>
<td>100.5</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Seasonally adjusted</td>
<td>102.2</td>
<td>100.4</td>
<td>98.1</td>
<td>1.79</td>
<td>4.18</td>
<td>100.7</td>
<td>100.1</td>
<td>100.5</td>
</tr>
<tr>
<td class="firstcol">SA Value incl autos &amp; gas stations</td>
<td>102.2</td>
<td>100.8</td>
<td>98.9</td>
<td>1.39</td>
<td>3.34</td>
<td>101.0</td>
<td>100.2</td>
<td>99.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Volume 2000 Prices (2003=100)</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;&nbsp; Not seasonally adjusted</td>
<td>98.0</td>
<td>102.7</td>
<td>95.4</td>
<td>94.58</td>
<td>2.73</td>
<td>101.2</td>
<td>100.0</td>
<td>100.5</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Seasonally adjusted</td>
<td>101.3</td>
<td>100.1</td>
<td>98.0</td>
<td>1.20</td>
<td>3.37</td>
<td>100.7</td>
<td>100.1</td>
<td>100.5</td>
</tr>
<tr>
<td class="firstcol">SA Value incl autos &amp; gas stations</td>
<td>100.9</td>
<td>100.0</td>
<td>98.3</td>
<td>0.90</td>
<td>2.64</td>
<td>100.6</td>
<td>100.2</td>
<td>100.2</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>
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Retail sales provided another positive statistic for Germany in May. The volume of retail sales was up 1.2% in May on a seasonally adjusted basis from April and the value was up 1.8%. On a seasonally unadjusted basis, the volume of [...]

Revised German Retail Sales Data

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050705d.jpg" width="353">
Factory inventories were unchanged in May following a downwardly revised slight decline in April. Three month growth in inventories fell to 2.7% (AR) from the peak rate of growth near 12% in March and that slowdown explains much of the slowdown in factory output growth.
Slower rates of inventory accumulation continue notable in the furniture industry where three month growth fell to 2.3% from versus the high of 28.4% and in the electrical equipment industry where growth in inventories fell to 6.0% with outright decumulation in May. The level of computer inventories has been declining this year with three month growth at -4.6% versus a peak of 13% last summer.
Factory shipments were roughly unchanged in May but three month growth improved to 9.2% due to rebounds in computers and heavy duty trucks.
Orders to the factory sector jumped 2.9% due to the unrevised 5.5% surge in durable goods orders.
Unfilled orders jumped 1.9% due to the 10.6% spike in unfilled orders for aircraft &amp; parts. Less transportation altogether backlogs fell 0.1% (+7.6% y/y). The ratio of unfilled orders to shipments outside of transportation has moved sideways since early last year. 
Trends in Hours, Balanced Growth and the Role of Technology in the Business Cycle from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/publications/review/05/07/Gali.pdf">here</a>.<a href="http://research.stlouisfed.org/publications/review/05/07/Gali.pdf"> </a><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050705c.jpg" width="353"> <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050705e.jpg" width="353">

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED01/@ED0101/@ED01016/@ED01016.HTM">Factory Survey</a> (NAICS)</th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Inventories</td>
<td>0.0%</td>
<td>-0.0%</td>
<td>7.7%</td>
<td>7.5%</td>
<td>-1.3%</td>
<td>-1.8%</td>
</tr>
<tr>
<td class="firstcol">New Orders</td>
<td>2.9%</td>
<td>0.7%</td>
<td>9.3%</td>
<td>10.9%</td>
<td>3.7%</td>
<td>-1.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Shipments</td>
<td>-0.0%</td>
<td>0.7%</td>
<td>7.2%</td>
<td>10.5%</td>
<td>2.6%</td>
<td>-2.0%</td>
</tr>
<tr>
<td class="firstcol">Unfilled Orders</td>
<td>1.9%</td>
<td>-0.1%</td>
<td>7.5%</td>
<td>9.1%</td>
<td>4.2%</td>
<td>-6.1%</td>
</tr>
</tbody>
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Factory inventories were unchanged in May following a downwardly revised slight decline in April. Three month growth in inventories fell to 2.7% (AR) from the peak rate of growth near 12% in March and that slowdown explains much of [...]

U.S. Factory Inventories Unchanged

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050705a.jpg" width="353">
US sales of light vehicles in June recovered all of recent months&#39; weakness and rose to the highest level in nearly four years, according to the Autodata Corporation. At 17.53M, sales rose 5.2% from May and rose 13.8% versus a depressed level one year ago.
Sales of light trucks surged 11.9% m/m to the highest level since 2001. The gain lifted the average level of truck sales so far this year 1.6% versus the first six months of 2004. Sales of US made trucks were notably strong, rising 13.2% m/m and 25.1% y/y. Domestics account for 88% of total light truck sales in the US.
Despite the drag on truck sales from higher gasoline prices, Bureau of Labor Statistics&#39; data indicates that truck prices firmed this year through May versus deflation from 2002 to 2004. Gasoline prices rose to an average $2.22 per gallon (15.3% y/y) during the latest week. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050705b.jpg" width="353"> 
Car sales fell for the second consecutive month in June and for the fourth month this year. The 2.9% m/m decline left the average level of car sales 1.6% above last year.
Imports&#39; share of the US market for new vehicles fell sharply to 19.6% in June versus 20.2 during the first five months of 2005.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED09/@ED0901/@ED0901.HTM">Light Vehicle Sales (SAAR, Mil. Units)</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>17.53</td>
<td>16.67</td>
<td>13.8%</td>
<td>16.88</td>
<td>16.63</td>
<td>16.81</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Autos</td>
<td>7.31</td>
<td>7.53</td>
<td>3.9%</td>
<td>7.49</td>
<td>7.62</td>
<td>8.07</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Trucks</td>
<td>10.22</td>
<td>9.14</td>
<td>22.1%</td>
<td>9.39</td>
<td>9.01</td>
<td>8.74</td>
</tr>
</tbody>
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US sales of light vehicles in June recovered all of recent months' weakness and rose to the highest level in nearly four years, according to the Autodata Corporation. At 17.53M, sales rose 5.2% from May and rose 13.8% versus a [...]

U.S. Vehicle Sales Led Higher By Truck Rebound

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050705a.jpg" width="353">
US sales of light vehicles in June recovered all of recent months&#39; weakness and rose to the highest level in nearly four years, according to the Autodata Corporation. At 17.53M, sales rose 5.2% from May and rose 13.8% versus a depressed level one year ago.
Sales of light trucks surged 11.9% m/m to the highest level since 2001. The gain lifted the average level of truck sales so far this year 1.6% versus the first six months of 2004. Sales of US made trucks were notably strong, rising 13.2% m/m and 25.1% y/y. Domestics account for 88% of total light truck sales in the US.
Despite the drag on truck sales from higher gasoline prices, Bureau of Labor Statistics&#39; data indicates that truck prices firmed this year through May versus deflation from 2002 to 2004. Gasoline prices rose to an average $2.22 per gallon (15.3% y/y) during the latest week. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050705b.jpg" width="353"> 
Car sales fell for the second consecutive month in June and for the fourth month this year. The 2.9% m/m decline left the average level of car sales 1.6% above last year.
Imports&#39; share of the US market for new vehicles fell sharply to 19.6% in June versus 20.2 during the first five months of 2005.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED09/@ED0901/@ED0901.HTM">Light Vehicle Sales (SAAR, Mil. Units)</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>17.53</td>
<td>16.67</td>
<td>13.8%</td>
<td>16.88</td>
<td>16.63</td>
<td>16.81</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Autos</td>
<td>7.31</td>
<td>7.53</td>
<td>3.9%</td>
<td>7.49</td>
<td>7.62</td>
<td>8.07</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Trucks</td>
<td>10.22</td>
<td>9.14</td>
<td>22.1%</td>
<td>9.39</td>
<td>9.01</td>
<td>8.74</td>
</tr>
</tbody>
</table>
U.S. Factory Inventories Unchanged 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 5, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050705d.jpg" width="353">
Factory inventories were unchanged in May following a downwardly revised slight decline in April. Three month growth in inventories fell to 2.7% (AR) from the peak rate of growth near 12% in March and that slowdown explains much of the slowdown in factory output growth.
Slower rates of inventory accumulation continue notable in the furniture industry where three month growth fell to 2.3% from versus the high of 28.4% and in the electrical equipment industry where growth in inventories fell to 6.0% with outright decumulation in May. The level of computer inventories has been declining this year with three month growth at -4.6% versus a peak of 13% last summer.
Factory shipments were roughly unchanged in May but three month growth improved to 9.2% due to rebounds in computers and heavy duty trucks.
Orders to the factory sector jumped 2.9% due to the unrevised 5.5% surge in durable goods orders.
Unfilled orders jumped 1.9% due to the 10.6% spike in unfilled orders for aircraft &amp; parts. Less transportation altogether backlogs fell 0.1% (+7.6% y/y). The ratio of unfilled orders to shipments outside of transportation has moved sideways since early last year. 
Trends in Hours, Balanced Growth and the Role of Technology in the Business Cycle from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/publications/review/05/07/Gali.pdf">here</a>.<a href="http://research.stlouisfed.org/publications/review/05/07/Gali.pdf"> </a><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050705c.jpg" width="353"> <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050705e.jpg" width="353">

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED01/@ED0101/@ED01016/@ED01016.HTM">Factory Survey</a> (NAICS)</th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Inventories</td>
<td>0.0%</td>
<td>-0.0%</td>
<td>7.7%</td>
<td>7.5%</td>
<td>-1.3%</td>
<td>-1.8%</td>
</tr>
<tr>
<td class="firstcol">New Orders</td>
<td>2.9%</td>
<td>0.7%</td>
<td>9.3%</td>
<td>10.9%</td>
<td>3.7%</td>
<td>-1.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Shipments</td>
<td>-0.0%</td>
<td>0.7%</td>
<td>7.2%</td>
<td>10.5%</td>
<td>2.6%</td>
<td>-2.0%</td>
</tr>
<tr>
<td class="firstcol">Unfilled Orders</td>
<td>1.9%</td>
<td>-0.1%</td>
<td>7.5%</td>
<td>9.1%</td>
<td>4.2%</td>
<td>-6.1%</td>
</tr>
</tbody>
</table>
Revised German Retail Sales Data 
by <a href="/comment/Curley.html">Louise Curley</a> July 5, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050705f.jpg" width="353">
Retail sales provided another positive statistic for Germany in May. The volume of retail sales was up 1.2% in May on a seasonally adjusted basis from April and the value was up 1.8%. On a seasonally unadjusted basis, the volume of retail sales was 2.7% over May 2004 and the value was 3.2% over the same period.
The recently revised series for German retail sales shows a somewhat better picture over the past few years than that previously reported. For example the new data show that retail sales increased 1.2% in 2004 instead of declining 1.7% as reported earlier. For 2003 the difference was much smaller--a decline of 0.5% vs. one of 0.6% reported earlier.
The headline series excludes automobiles and gas stations and is shown seasonally adjusted and unadjusted for values and volumes. Data on automobiles and gas stations are released some weeks after the retail sales release. However, a memo item is included in the current release that shows total retail sales including estimated automobiles and gas stations on a seasonally adjusted bases in value and volume terms. The two value series are shown in the attached chart. It may seem strange that the total excluding automobiles and gas stations is at times higher than the total including these items. But these data are index numbers relative to the year 2003, not absolute levels. Except for the items just noted most of the data are not seasonally adjusted. .

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">German Retail Sales ex Automobiles and Gas Stations</th>
<th scope="col">May 05</th>
<th scope="col">Apr 05</th>
<th scope="col">May 04</th>
<th scope="col">M/M%</th>
<th scope="col">Y/Y%</th>
<th scope="col">&nbsp;2004&nbsp;&nbsp;</th>
<th scope="col">&nbsp;2003</th>
<th scope="col">&nbsp;2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Value (2003=100)</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;&nbsp; Not seasonally adjusted</td>
<td>98.8</td>
<td>103.4</td>
<td>95.8</td>
<td>-4.45</td>
<td>3.13</td>
<td>101.4</td>
<td>100.0</td>
<td>100.5</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Seasonally adjusted</td>
<td>102.2</td>
<td>100.4</td>
<td>98.1</td>
<td>1.79</td>
<td>4.18</td>
<td>100.7</td>
<td>100.1</td>
<td>100.5</td>
</tr>
<tr>
<td class="firstcol">SA Value incl autos &amp; gas stations</td>
<td>102.2</td>
<td>100.8</td>
<td>98.9</td>
<td>1.39</td>
<td>3.34</td>
<td>101.0</td>
<td>100.2</td>
<td>99.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Volume 2000 Prices (2003=100)</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;&nbsp; Not seasonally adjusted</td>
<td>98.0</td>
<td>102.7</td>
<td>95.4</td>
<td>94.58</td>
<td>2.73</td>
<td>101.2</td>
<td>100.0</td>
<td>100.5</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Seasonally adjusted</td>
<td>101.3</td>
<td>100.1</td>
<td>98.0</td>
<td>1.20</td>
<td>3.37</td>
<td>100.7</td>
<td>100.1</td>
<td>100.5</td>
</tr>
<tr>
<td class="firstcol">SA Value incl autos &amp; gas stations</td>
<td>100.9</td>
<td>100.0</td>
<td>98.3</td>
<td>0.90</td>
<td>2.64</td>
<td>100.6</td>
<td>100.2</td>
<td>100.2</td>
</tr>
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<td>&nbsp;</td>
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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/050701e.jpg" width="353">
The Japanese labor market looks to be turning around. We last wrote about these employment data three months ago, and in that discussion, Louise Curley called them &quot;disappointing&quot; for February. Another weak performance followed in March. But April and May have seen strong gains in jobs, totaling 830,000, and the unemployment rate, at 4.4% in both months, is the lowest since late 1998. The number unemployed has been below 3.0 million in four of the last six months, also the lowest since that late 1998 period.
Further, overall labor force participation - employment plus unemployment as a percentage of the working age population - has started to rise. From a recent peak of just under 64% in early 1997, this ratio moved down steadily to a low of barely 60% just last November. It has since added 0.8 percentage point, an indication of rising consumer confidence.
Employment is seeing gains in both manufacturing and non-manufacturing sectors. Factory jobs are still lower than than a year ago, but they rose 300,000 in May, a large monthly gain. Nonmanufacturing employment touched 50.0 million for the first time in May, an increase of 270,000 on the month. [These figures cover nonagricultural employment only.]<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050701f.jpg" width="353">
These employment results bear out what business leaders told the Bank of Japan in the quarterly TANKAN survey. Its &quot;headline series&quot;, the diffusion index for large manufacturing companies, reached +18 in Q2, up 4 points from Q1 and also 4 points higher than the forecast these company managers had made three months ago. This is particularly encouraging after that Q1 result fell short of both the preceding quarter and its own forecast. The special linked TANKAN index Haver reports in the G10 database, which covers all enterprises in all industries, is hovering right around 0, also its best performance since late 1997.

<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/JAPAN1.HTM">Japan</a></th>
<th scope="col">May 2005</th>
<th scope="col">Apr 2005</th>
<th scope="col">Mar 2005</th>
<th scope="col">May 2004</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 (millions)</td>
<td>63.95</td>
<td>63.53</td>
<td>63.12</td>
<td>63.48</td>
<td>63.30</td>
<td>63.16</td>
<td>63.29</td>
</tr>
<tr>
<td class="firstcol">Change (thousands)</td>
<td>420</td>
<td>410</td>
<td>-270</td>
<td>0.7%</td>
<td>0.2%</td>
<td>-0.2%</td>
<td>-1.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment (millions)</td>
<td>2.96</td>
<td>2.93</td>
<td>2.97</td>
<td>3.08</td>
<td>3.13</td>
<td>3.50</td>
<td>3.59</td>
</tr>
<tr>
<td class="firstcol">Unemployment Rate (%)</td>
<td>4.4</td>
<td>4.4</td>
<td>4.5</td>
<td>4.6</td>
<td>4.7</td>
<td>5.2</td>
<td>5.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Participation Rate* (%)</td>
<td>60.8</td>
<td>60.5</td>
<td>60.1</td>
<td>60.5</td>
<td>60.4</td>
<td>60.8</td>
<td>61.2</td>
</tr>
</tbody>
</table>
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The Japanese labor market looks to be turning around. We last wrote about these employment data three months ago, and in that discussion, Louise Curley called them "disappointing" for February. Another weak performance followed in [...]

Japanese Employment, Unemployment and TANKAN All Show Improvement

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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Winnie Tapasanun

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The U.S. ISM Services PMI edged down to 54.0 in June, the third m/m decline in four months, following a 0.9-point increase to 54.5 in May, according to data from the Institute for Supply Management, indicating expansion in the services sector for the 24th straight month, albeit at a slightly slower pace. The June index, while above 50.8 in June 2025 and a low of 49.4 in June 2024, remained below its recent high of 56.1 in February and a record-high 67.5 in November 2021. The 12-month average was 53.1, pointing to continued growth in the U.S. services sector. The Action Economics Forecast Survey had also expected 54.0 for June.

Haver Analytics constructs a composite index combining the services index and the manufacturing reading. This index slipped to 53.9 in June after a 0.9-point increase to 54.4 in May, signaling expansion for the 13th consecutive month but at a slightly slower rate. The latest reading was above 50.6 in June 2025 and a low of 49.3 in June 2024, while remaining below a record-high 66.7 in November 2021. These series date back to July 1997.

In the latest services survey, the business activity index fell to 55.4 in June following a 1.8-point rise to 57.7 in May, indicating continued expansion in business activity for 24 months in a row, though at the slowest pace since March. The index was above a low of 50.0 in June 2024 but below a peak of 70.9 in November 2021. In June, 24.3% of respondents (NSA) reported higher activity while 14.5% reported an activity decline. The new orders index decreased to 55.1 in June after a 3.8-point gain to 57.3 in May, reflecting expansion in new orders for the 13th successive month but at a slower pace. The index was above a low of 47.2 in May 2025 but below a high of 61.0 in February 2023 and a record-high 69.2 in October 2021. In June, 25.9% of respondents (NSA) reported higher new orders while 17.1% reported declines. Meanwhile, the supplier deliveries index (NSA) fell to 54.4 in June from 55.2 in May, indicating slower supplier delivery performance for the 19th straight month after one month in faster territory in November 2024.

On the labor front, the employment index recovered to 51.2 in June from 47.9 in May, showing employment activity in the services sector expanded for the first time since February. The latest reading was above a low of 43.5 in December 2023 but below a high of 54.1 in June 2023 and a peak of 58.9 in April 2021. An increased 16.0% of respondents (NSA) indicated higher employment in June while 10.9% reported declines.

On the inflation front, the prices index fell to a still-elevated 67.7 in June from 71.3 in May, indicating prices paid by services organizations for materials and services had risen (i.e., above 50) since June 2017 but at the slowest rising pace in four months. The index was above a low of 53.9 in March 2024 but significantly below a peak of 83.7 in March 2022. In June, 40.7% of respondents (NSA) reported higher prices while only 3.8% reported price declines.

Additionally, the new export orders index edged up to 50.4 in June from a neutral 50.0 in May, showing new export orders expanded for the fourth time in five months, while the imports index fell to 49.4 from 51.1, marking the first contraction since January. The inventories index dropped to 51.2 in June from 62.5 in May (the highest level since May 2010), indicating inventories expanded for the fifth successive month. The inventory sentiment index fell to 52.6 in June from 55.2 in May, showing continued expansion since May 2023. The backlog of orders index rebounded to 54.9 in June from 51.3 in May, registering the fifth consecutive month of expansion following 11 straight months of contraction. These series are not seasonally adjusted and not included in the ISM Services PMI total.

The ISM Services PMI is a composite index consisting of four equally weighted diffusion indexes: Business Activity, New Orders, Employment, and Supplier Deliveries. A reading above 50 indicates expansion in the services sector; below 50 suggests contraction. Supplier Deliveries is the only ISM index that is inversed; a reading above 50 indicates slower deliveries. The ISM figures are available in Haver's **USECON** database, with additional detail in the **SURVEYS** database. The expectations figure from Action Economics is in the **AS1REPNA** database.

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- ISM Services PMI down to 54.0 in June, remaining above the 12-month avg. of 53.1.
- Business Activity (55.4) expands for the 24th consecutive mth.; New Orders (55.1) for the 13th straight mth.; Employment (51.2, first expansion since Feb.); Supplier Deliveries (54.4 vs. 55.2).
- Prices Index (67.7) at a four-month low, still indicating prices rising since June ’17.

U.S. ISM Services PMI Eases in June, Still Indicating Expansion for the 24th Straight Month

Robert Brusca

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The global PMI data for a select group of 24 countries and their composites, provided on the graph, indicate a slight overall improvement for the total PMIs in June, with the service sector getting slightly stronger as the manufacturing sector is slightly weaker.

Conditions, however, remain uneven. The overall average for the PMI composite in June moved up to 51.4 from 50.7 in May, but the May reading had fallen from 51 in April. The median rose to 50.8 in June from 50.2 in May, but it had been at 51.2 in April. There continues to be a great deal of weakness and irregularity in the progression of the global economy—not surprisingly with the recent data coming during the period when oil prices had surged in the Strait of Hormuz had been closed. We now are seeing different conditions in force, and we'll see how much improvement occurs in July if the current global situation remains improved.

In June, nine of twenty-four reporters had PMI readings below 50, indicating contraction in economic activity. In May, there had been ten such reporters, while in April there had been nine. These readings, of course, are less than half of the reporters; however, it's still a very large proportion of the reporters where the total PMI gauges are indicating economic contraction. Over three months, there are nine reporters with average readings below 50; over six months, there are only seven; and over 12 months, there are six. This progression tells us that the situation has been getting worse rather than better.

Based on monthly data, the European Monetary Union, Germany, France, Russia, Egypt, and Qatar each recorded three consecutive months of readings below 50, indicating contraction in each of those months. Sequentially, over 12 months, six months, and three months, only France, Russia, Ghana, Egypt, and Qatar show consistent readings that average below 50 (based on raw data).

The queue standings of the levels reported by countries in June show only seven with standings above the 50th percentile; this means there are only seven countries whose PMIs in June are higher than their average back to January 2022. Not surprisingly with the recent events really focused on oil prices and the situation in the Middle East and the closure of the Strait of Hormuz, some of the weakest ranking readings are coming from oil producers in the Middle East such as Qatar (6.1%), the UAE (1.5%), Saudi Arabia (6.1%), and Egypt (18.2%). Clearly, the interruption of the oil flow and war damage has had an outsized impact on these data.

However, quite apart from the current situation and the closure of the Strait, if we calculate the average PMI standing rather than the ranking just the average of the PMI total sector ranking, there are four countries that have averaged readings below 50 based on monthly data back to January 2022. Those countries are France, Zambia, Egypt, and Kenya. The average readings across all countries back to January 2022 is a reading of 52.3. The highest ranking during this previous period is from India; its ranking is at 58.1. Ironically, some of the strongest readings in the earlier period come from oil producers whose current rankings are so low such as Saudi Arabia at 56.6, the UAE at 54.6, and Qatar at 53.4.

There has been upward momentum this month, particularly in services, while manufacturing backtracked. However, the trend to improve conditions is no longer so clear. What is clear is that the outlook is going to depend upon whatever peace agreement proves durable involving Iran and traffic through the Strait of Hormuz. This conclusion is not rocket-science; it is obvious. And it's going to take close-watching because there have been so many missteps around alleged ceasefires and treaty discussions that we can't be very sure about what's going to play out in the future and what will last.

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Globally S&P PMIs Gain a Modicum of Traction

Tian Yong Woon

In this week's Letter, we trace how an energy shock and a resilient AI upcycle shaped Asia through the first half of 2026 and weigh the risks that may define the second. The year opened hopeful on AI, though some feared stretched valuations, before the US-Iran conflict and a closed Strait of Hormuz shook the mood (chart 1). A later MoU eased energy prices and inflation fears, yet valuations largely held on AI optimism, despite bouts of reassessment. The oil surge hit import-reliant emerging Asia hardest, leaving India, Thailand and the Philippines doubly exposed through their Middle East sourcing (chart 2). Pass-through inflation, subsidies that some governments later pared back, and currency pressure followed, though resuming Strait traffic should ease these strains. Rising inflation then boxed in policymakers, straining already-stretched fiscal positions and limiting more pro-growth monetary policy stances in some economies (chart 3). Our latest Blue Chip survey found a slim majority reassessed the risk balance after oil fell, though the shifts stayed mild versus the June survey (chart 4). Most still rank upside inflation risk above downside employment risk, even as a slightly larger share now see the balance as more even. AI remains the region's key offset, with Taiwan and South Korea riding a sharp rise in memory and chip exports (chart 5). Malaysia and Thailand instead draw data centre FDI, so Asia gains from the buildout phase rather than the West's hoped-for productivity gains. We close on an uncertain second half, where a possible Super El Niño could revive food-driven inflation even as energy pressures fade (chart 6). Beyond that, an AI reassessment, fresh geopolitical flashpoints, trade tensions and the US midterms could each reshape the outlook.

**The year thus far**
We began the year on a relatively hopeful note, buoyed by AI optimism and market valuations that reflected it, although some investors worried that valuations had become overstretched. The geopolitical mood shifted quickly in early January, however, when US military forces captured former Venezuelan leader Maduro, though the event did little to move markets (chart 1). A far greater shock came when the US-Iran conflict erupted in late February, closing the Strait of Hormuz and dealing a negative blow to global energy supplies. More recently, the US and Iran have reached a Memorandum of Understanding (MoU) aimed at ceasing hostilities and resuming trade flows through the Strait. This has allowed energy prices to ease, softening policymakers' concerns about energy-driven inflation. Even so, equity valuations have largely remained underpinned by AI optimism, albeit with interim bouts of reassessment and price retracement. This drew on repeated reports of strong growth along the AI supply chain, and on signs that supply could not keep pace with demand. This continued even as AI models with leapfrogging capabilities reached the public. At several points, the US government stepped in to rein in public access to some models, given security concerns about such immense capabilities falling into the wrong hands.

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**Oil impact on Asia**
Within emerging Asia, among the hardest hit by the oil surge are India, Thailand and the Philippines. These are relatively heavy net importers of crude oil, and they source most of that crude from the Middle East. That combination left them doubly exposed when the Strait of Hormuz closed (chart 2). The surge in oil prices also carries multiple, wider impacts. First, the higher cost of imported crude passes through to consumer inflation, leaving households with a heavier energy bill. Several governments have stepped in with energy subsidies to ease the consumer burden. That support has not proved indefinitely sustainable, as some governments eventually pared it back given the immense costs. In effect, subsidies shift some of the burden from consumers to the state, straining public finances. There is also a currency effect, since higher crude prices require more domestic currency to buy the same volume, weighing on the exchange rate. That said, other drivers of currency depreciation may also have been at play over the period. Trade flows through the Strait have recently picked up, with traffic gradually resuming. If the current truce and its conditions hold, these effects may ease before long. On the growth front, higher oil prices would not appear in volume-based measures. Their second-order effects on output would still come through, such as demand dampened by higher energy costs.

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**Inflation and monetary policy**
Higher crude oil prices drove inflation sharply higher across Asia and much of the world. That greatly complicated policymakers' task on both the fiscal and monetary fronts. On the fiscal side, several Asian governments were already facing pressures before the oil shock. These ranged from grand, fiscally costly policy pushes in Indonesia to calls for greater fiscal sustainability in Japan. Higher oil prices added a need for more support, further complicating their position. On the monetary side, previously pro-growth moves, such as rate cuts in India, looked riskier, as they threatened to stoke already-surging inflation (chart 3). That made further easing, or even holding current pro-growth settings, hard to sustain. The danger is sharper still if inflation expectations become unanchored, raising the risk of runaway inflation. The recent US-Iran de-escalation, and the crude price slump that followed, certainly help to ease the situation. One would expect so material a shift in the geopolitical backdrop to prompt a reassessment among policymakers and investors alike. Yet that was not entirely the case, based on our latest Blue Chip Financial Forecast survey, whose results we discuss in the next section.

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**The latest Blue Chip survey results**
The recent US-Iran MoU has largely held, despite occasional flare-ups. Against that backdrop, and the sharp fall in oil prices that followed, we asked panellists to assess the balance of risks between employment and inflation. A slim majority (59%) said their assessment had shifted, while a non-trivial minority said it had not. Looking specifically at how US risk expectations moved, we find the shifts have been quite mild. That is relative to the June survey, which was conducted before the MoU. Even so, most panellists (65%) still see upside risks to inflation as the key risk, rather than downside risks to employment. Meanwhile, a slightly larger share than in June (23%) now see the risks as more balanced.

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**The AI upcycle and Asia**
We turn next to a key offset to the growth dampeners facing much of Asia. It stems from parts of the region being well positioned to capture the current AI upcycle. Advanced economies such as Taiwan and South Korea have benefited from strong demand for AI and related memory chips. This has driven a sharp rise in exports of such goods (chart 5). Those exports have propelled growth in these economies this year, at a pace faster than in previous years. Other economies, such as Malaysia and Thailand, are going through a data centre boom. They benefit through an additional channel beyond AI-related goods exports: robust FDI inflows. Foreign firms are driving these inflows as they expand their data centre footprint in the region. Other economies, including those in the West, hope to reap large productivity gains from the current jump in AI capabilities. By contrast, much of Asia's benefit comes from the ongoing buildout of the parts and infrastructure that the upcycle requires.

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**Watching H2 2026**
Bringing it all together, the first half of the year has been shaped by two main drivers: the US-Iran conflict and the ongoing AI upcycle. What the overarching themes for Asia will be in the second half remains anyone's guess. For one, the threat of an imminent "Super El Niño" event (chart 6) could trigger a crop supply shock. That may reintroduce inflationary pressure, albeit through the food channel. On another front, market optimism around AI-related companies' revenues and spending still persists. Yet disruptions or new discoveries could emerge down the line, including some that sharply reduce the compute needed for a given output. Such developments may in time prompt investors to reassess their views. In addition, pockets of geopolitical pressure are still brimming in parts of the world, including the Middle East. These threaten to upend supply flows of oil, and of other crucial goods too. The trade front, though faded from focus in recent months, could become another flashpoint. It bears on growth and on bilateral relationships, especially those with the US. Finally, other events, such as the US midterm elections later this year, may also skew the global backdrop.

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Asia

Economic Letter from Asia: Woah, We’re Halfway There

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

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.

Economy in Brief

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Japanese Employment, Unemployment and TANKAN All Show Improvement