Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030711b.jpg" width="353">
Finished producer prices rose 0.5% in June, a bit more than Consensus expectations for a 0.3% gain. The rise was the first in three months.
Finished energy prices jumped 3.4% for the first gain in three months. That accounted for virtually all of the PPI&#39;s rise last month. Gasoline prices rose 5.5% (16.5% y/y) while fuel oil prices jumped 3.5% (23.7% y/y). Residential gas prices rose 3.0% and are up 35.5% y/y. These energy product price series are NSA.
Excluding food and energy, prices fell 0.1% for the third monthly decline this year. The core PPI is up 0.3% YTD.
Core finished consumer goods prices fell 0.1% (-0.5% y/y) for the third consecutive monthly drop. Passenger car prices fell 1.5% (-1.3% y/y). Prices for household appliances fell for the fourth month this year (-1.9% y/y) and home electronic equipment prices also fell (-2.2% y/y). Core consumer nondurable prices rose for the fourth month this year (-0.3% y/y). Capital goods prices dropped for the fourth month this year (0.0% y/y).
Intermediate goods prices rose by 0.5%, the first increase in three months. Energy prices led the gain, up 2.0%, but food prices rose a strong 1.9% (0.8% y/y). Less food &amp; energy intermediate goods prices were unchanged. 
Crude goods prices jumped 4.5% reflecting a 10.7% gain in energy prices. Core crude prices rose 0.6%, the first gain in four months. These prices are up 0.4% YTD.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E802/@E80201/@E80201.HTM">Producer Price Index</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
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<td class="firstcol">Finished Goods</td>
<td>0.5%</td>
<td>-0.3%</td>
<td>2.9%</td>
<td>-1.3%</td>
<td>2.0%</td>
<td>3.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>-0.1%</td>
<td>0.1%</td>
<td>-0.1%</td>
<td>0.1%</td>
<td>1.4%</td>
<td>1.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>0.5%</td>
<td>-0.8%</td>
<td>4.5%</td>
<td>-1.5%</td>
<td>0.4%</td>
<td>4.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.0%</td>
<td>-0.1%</td>
<td>2.1%</td>
<td>-0.5%</td>
<td>-0.1%</td>
<td>2.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Crude Goods</td>
<td>4.5%</td>
<td>1.7%</td>
<td>29.5%</td>
<td>-10.6%</td>
<td>0.3%</td>
<td>22.8%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.6%</td>
<td>-1.9%</td>
<td>4.9%</td>
<td>3.8%</td>
<td>-10.0%</td>
<td>7.4%</td>
</tr>
</tbody>
</table>
U.S. Trade Deficit Stable 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 11, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030711a.jpg" width="353">
The U.S. foreign trade deficit in May remained near the record level at $41.8B. That was about stable with an April deficit that was revised slightly shallower. Consensus expectations were for a deficit of $41.5B.
For the first five months of this year, the trade deficit averaged a $492.2B annual rate.
Imports rose 0.7% in May as a decline in the value of petroleum product imports was offset by higher imports of capital goods (+3.0% y/y) and autos (+3.8% y/y).
The quantity of crude petroleum imports rose 1.9% (8.1% y/y) but the average price fell 7.3% to $24.11, about even with last May.
Exports rose 0.9% and are up slightly YTD. Exports of capital goods rose 1.3%, up 3.8% YTD.
A report from the Federal Reserve Bank of St. Louis titled &quot;World Trade: Past, Present, and Future&quot; can be found <a href="http://research.stlouisfed.org/publications/iet/20030501/cover.pdf">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EE/@EE03/@EE03.HTM">Foreign Trade</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
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<td class="firstcol">Trade Deficit</td>
<td>$41.8B</td>
<td>$41.6B</td>
<td>$35.1B(5/02)</td>
<td>$418.0B</td>
<td>$357.8B</td>
<td>$375.4B</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Exports - Goods &amp; Services</td>
<td>0.9%</td>
<td>-1.8%</td>
<td>1.2%</td>
<td>-3.3%</td>
<td>-5.8%</td>
<td>11.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Imports - Goods &amp; Services</td>
<td>0.7%</td>
<td>-2.2%</td>
<td>6.7%</td>
<td>2.0%</td>
<td>-5.5%</td>
<td>18.5%</td>
</tr>
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Finished producer prices rose 0.5% in June, a bit more than Consensus expectations for a 0.3% gain. The rise was the first in three months. Finished energy prices jumped 3.4% for the first gain in three months. That accounted for [...]

Higher Energy Prices Raised The June PPI, Core Prices Fell

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030710a.jpg" width="353">
Initial claims for unemployment insurance rose unexpectedly by 5,000 last week, to 439,000, and added to a 26,000 increase the prior week that was revised up. Consensus expectations had been for claims of 420,000
The four-week moving average of initial claims rose to 426,750 (+8.2% y/y).
Continuing claims for unemployment insurance surged by 87,000 (2.3%) w/w. The prior week&#39;s level was revised down slightly.
During the last ten years there has been a 79% (inverse) correlation between the level of initial claims for unemployment insurance and the y/y change in nonfarm payrolls.
The insured rate of unemployment rose to 3.0% from a downwardly revised 2.9% the week prior.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">7/2/03</th>
<th scope="col">6/28/03</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
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<td class="firstcol">Initial Claims</td>
<td>439.0</td>
<td>434.0</td>
<td>9.7%</td>
<td>404.3</td>
<td>406.0</td>
<td>299.7</td>
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<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>3,818</td>
<td>5.4%</td>
<td>3,575</td>
<td>3,022</td>
<td>2,114</td>
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</table>
Import Prices Up 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 10, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030710b.jpg" width="353">
Prices for imported commodities rose more than expected last month. The 0.8% rise was double Consensus expectations. The 0.8% decline in prices in May was much deeper than the initial estimate of a 0.3% decline.
Petroleum import prices rose 4.7% last month and recovered most of a 5.4% May decline that was deepened sharply. So far in July the price of Brent Crude Oil has been around $28.00 versus $27.49/bbl averaged in June.
Nonpetroleum import prices rose 0.5%, the first increase in three months. The gain reflected increases in each of the categories. Nonauto consumer goods prices rose 0.2% (0.0% y/y) for the first gain this year. Prices for industrial supplies and materials jumped 2.6% (8.8% y/y).
Export prices fell 0.2% for the second decline in the last three months. Export prices for food and capital goods fell.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E807/@E807.HTM">Import/Export Prices (NSA)</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
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<td class="firstcol">Import - All Commodities</td>
<td>0.8%</td>
<td>-0.8%</td>
<td>2.0%</td>
<td>-2.5%</td>
<td>-3.5%</td>
<td>6.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Petroleum</td>
<td>4.7%</td>
<td>-5.4%</td>
<td>12.0%</td>
<td>3.0%</td>
<td>-17.2%</td>
<td>66.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Nonpetroleum</td>
<td>0.5%</td>
<td>-0.3%</td>
<td>1.1%</td>
<td>-2.4%</td>
<td>-1.5%</td>
<td>1.0%</td>
</tr>
<tr>
<td class="firstcol">Export - All Commodities</td>
<td>-0.2%</td>
<td>0.1%</td>
<td>1.5%</td>
<td>-1.0%</td>
<td>-0.8%</td>
<td>1.6%</td>
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Initial claims for unemployment insurance rose unexpectedly by 5,000 last week, to 439,000, and added to a 26,000 increase the prior week that was revised up. Consensus expectations had been for claims of 420,000 The four-week moving [...]

Initial Jobless Insurance Claims Again Higher

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030709b.jpg" width="353">
Consumer credit outstanding (which excludes mortgages) rose $7.3B (5.0% AR) in May. Consensus expectations had been for a $5.5B rise. The surge in April was revised down due to a lowered gain in nonrevolving credit. 
During the first five months of this year, consumer credit usage rose at a 4.7% annual rate.
Nonrevolving credit (which includes auto loans) rose at a 4.9% annual rate following the 7.8% jump in April. Year to date, nonrevolving credit usage is up at a 4.9% rate. 
Revolving credit rose at a 5.3% annual rate and recovered from the weak 2.0% gain in April.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E1/@E103/@E10308/@E10308.HTM">Consumer Credit Outstanding</a></th>
<th scope="col">May m/m</th>
<th scope="col">April m/m</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
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<td class="firstcol">Total</td>
<td>$7.3B</td>
<td>$7.9B</td>
<td>3.3%</td>
<td>3.6%</td>
<td>6.9%</td>
<td>10.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Revolving</td>
<td>$3.1B</td>
<td>$1.2B</td>
<td>2.2%</td>
<td>1.5%</td>
<td>5.1%</td>
<td>11.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Nonrevolving</td>
<td>$4.2B</td>
<td>$6.6B</td>
<td>4.1%</td>
<td>5.0%</td>
<td>8.2%</td>
<td>9.1%</td>
</tr>
</tbody>
</table>
Mortgage Applications Plunge 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 9, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030709a.jpg" width="353">
The index of mortgage applications compiled by the Mortgage Bankers Association plunged 17.7% last week as interest rates rose. It was the largest drop in one week since late October of last year, also a time when interest rates blipped up.
Applications to refinance fell 21.3% w/w to the lowest level since early May.
Applications for home purchase fell a moderate 5.5% w/w. That followed the 6.6% gain the week prior which was to a record level.
During the last ten years there has been a 51% correlation between the y/y change in purchase applications and the change in new plus existing home sales.
Interest rates on a conventional 30-Year mortgage moved higher for the third week with the effective rate at 5.67% versus 6.13% averaged in December. The effective rate on a 15-year mortgage also rose to 5.07%, the first week over 5% since mid-May.
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 at <a href="http://www.mbaa.org/">www.mbaa.org.</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">7/04/03</th>
<th scope="col">6/27/03</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>1,346.3</td>
<td>1,635.5</td>
<td>799.7</td>
<td>625.6</td>
<td>322.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>414.1</td>
<td>438.4</td>
<td>354.7</td>
<td>304.9</td>
<td>302.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>6,768.3</td>
<td>8,599.1</td>
<td>3,388.0</td>
<td>2,491.0</td>
<td>438.8</td>
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Consumer credit outstanding (which excludes mortgages) rose $7.3B (5.0% AR) in May. Consensus expectations had been for a $5.5B rise. The surge in April was revised down due to a lowered gain in nonrevolving credit. During the first [...]

Consumer Credit Use Up Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030708a.jpg" width="353">
The Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) reported in June that &quot;... the U.S. economy continues to experience growth in income and output but employment continues to decline. Because of the divergent behavior of various indicators, the NBER&#39;s Business Cycle Dating Committee believes that additional time is needed before interpreting the movements of the economy over the past two years.&quot; 
Despite the uncertainties, there is much to suggest that the most recent recession ended late in 2001. Its duration was roughly nine months.
For purposes of shading the economic cycles, Haver Analytics will commence ending the last recession in November 2001 in all of its charts. The fourth quarter of 2001 will be recession shaded since growth that quarter was a sub par 2.7% (AR). Our reasons for picking late 2001 as the cycle trough include:<ol><li>The Index of Coincident Indicators compiled by the Economic Cycle Research Institute (ECRI) touched bottom in November 2001. It has since risen 1.8% and has been 0.1% above its prior peak in December 2000.</li><li>Monthly real GDP as compiled by Macroeconomic Advisers troughed in September 2001. It has since risen 4.5% and is 2.7% above its prior peak in February 2001.</li><li>The Index of Coincident Indicators compiled by the Conference Board touched bottom in November 2001. It has since risen 0.8% but it has not yet surpassed its prior peak in December 2000.</li></ol>
Each of these monthly indicators recently has failed to exhibit much strength which is consistent with a US economy growing below its trend rate of about 3.5%. The National Activity Index from the Chicago Federal Reserve supports this point as it has consistently since early 2000. This indicator touched bottom in September 2001.
Below-trend economic growth is characterized by unused productive capacity. The recently rising unemployment rate and the falling capacity utilization rate indicate that economic slack is building. This pattern repeats that of the &quot;jobless recovery&quot; of 1992.
September 2001 was not chosen as the trough date for the last recession. The events of 9/11 greatly depressed economic activity but were unrelated to the normal business cycle.
Click <a href="http://nber.com/cycles/recessions.html"> here</a> for &quot;The NBER&#39;s Recession Dating Procedure.&quot;

Chain Store Sales Jump 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 8, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030708b.jpg" width="353">
Chain store sales jumped 0.7% last week according to the BTM-UBSW survey. The rise recovered all of a 0.5% decline the week prior.
Sales started July 0.6% ahead of June which were barely changed from May.
During the last five years there has been a 61% correlation between the year-to-year percent change in chain store sales and the change in nonauto retail sales less gasoline.
The BTM leading indicator of chain store sales fell 0.1% in the last week of June. That was the fourth decline in the last five weeks for this indicator.
The BTM-UBSW retail chain-store sales index is constructed from the sales results reported by 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">BTM-UBSW (SA, 1977=100)</a></th>
<th scope="col">7/5/03</th>
<th scope="col">6/28/03</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
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</thead>
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<td class="firstcol">Total Weekly Retail Chain Store Sales</td>
<td>420.1</td>
<td>417.3</td>
<td>1.1%</td>
<td>3.6%</td>
<td>2.1%</td>
<td>3.4%</td>
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The Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) reported in June that "... the U.S. economy continues to experience growth in income and output but employment continues to decline. Because of the [...]

Looks Like The Recession Ended Late in 2001

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030707a.jpg" width="353">
The Chicago Fed National Activity Index (CFNAI) improved in May to -0.39 from a downwardly revised reading of -1.04 in April. . A zero value of the CFNAI indicates that the economy is expanding at its historical trend rate of growth of over 3% p.a.
The improvement in May followed three months of readings which together were the weakest since late 2001.
The three-month moving average of the CFNAI improved to -0.69, still the second lowest level since late 2001 and consistent with negligible or negative real GDP growth.
The CFNAI is a weighted average of 85 indicators of economic activity. The indicators reflect activity in the following categories: production &amp; income, the labor market, personal consumption &amp; housing, mfg. &amp; trade sales, and inventories &amp; orders.
For a complete discussion of the latest Chicago Fed&#39;s National Activity Index click <a href="http://www.chicagofed.org/economicresearchanddata/national/index.cfm">here</a>.
A discussion of the CFNAI and its role as a business cycle indicator can be found <a href="http://www.chicagofed.org/publications/economicperspectives/2002/3qepart2.pdf">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S503/@S503.HTM">Chicago Fed</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">May &#39;02</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">CFNAI</td>
<td>-0.39</td>
<td>-1.04</td>
<td>-0.10</td>
<td>-0.33</td>
<td>-1.19</td>
<td>-0.13</td>
</tr>
</tbody>
</table>
</body>
</html>

The Chicago Fed National Activity Index (CFNAI) improved in May to -0.39 from a downwardly revised reading of -1.04 in April. . A zero value of the CFNAI indicates that the economy is expanding at its historical trend rate of growth [...]

Chicago Fed National Activity Index Up in May

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030703a.jpg" width="353">
The unemployment rate jumped to 6.4% in June, further than Consensus expectations for a rise to 6.2%. It was the highest rate of unemployment since April 1994. Employment did rise 251,000 (+1.0% y/y) but that gain was outpaced by a 611,000 (+1.5% y/y) worker surge in the labor force.
Nonfarm payrolls fell 30,000 in June versus Consensus expectations for no change. The decline in May payrolls was revised deeper to 70,000 from 17,000 reported last month.
The one month diffusion index for nonfarm payrolls was little changed at 43.3, suggesting poor hiring prospects. The three month diffusion index fell to 43.9. By measuring the breadth of hiring increases, these indexes are leading indicators of job growth.
Where Jobs Fell: The number of factory sector jobs fell 56,000 (-0.4% m/m, -4.2% y/y) and are down 2.2% year to date. The one-month diffusion index for the factory sector rose slightly to 32.1. That is versus 19.0 in February and 9.5 in December 2001. Retail hiring fell 12,800 (-0.6% y/y). Professional &amp; business services jobs fell 3,000 (-0.3% y/y).
Where Jobs Rose: Construction jobs rose 16,000 (1.1% y/y) for the fourth consecutive monthly gain. Jobs in the financial industries rose 9,000 (1.9% y/y for the tenth consecutive monthly gain. Leisure &amp; hospitality jobs rose 22,000 (1.2% y/y). The number of government sector jobs nudged up 1,000 (-0.0% y/y) following three months of decline.
The index of aggregate hours worked (employment times hours worked) was unchanged (-1.7% y/y). Hours worked last quarter fell 0.4% from 1Q.
Over the last ten years there has been a 61% correlation between the quarterly change in aggregate hours worked and real GDP. That correlation is down from 87% in the 1980s due to the recent acceleration in productivity growth.
Average hourly earnings rose 0.2% and in 2Q rose only 0.5%, the slimmest quarterly increase since 1Q 2002.
The nonfarm payroll employment figures are based on reports provided to the US Labor Department by businesses, while the figures from which the unemployment rate is derived are based on a survey of US households.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EB/@EB01/@EB01.HTM">Employment</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Payroll Employment</td>
<td>-30,000</td>
<td>-70,000</td>
<td>-0.3%</td>
<td>-1.1%</td>
<td>0.0%</td>
<td>2.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Manufacturing</td>
<td>-56,000</td>
<td>-44,000</td>
<td>-4.2%</td>
<td>-6.9%</td>
<td>-4.8%</td>
<td>-0.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Average Weekly Hours</td>
<td>33.7</td>
<td>33.7</td>
<td>34.0</td>
<td>33.9</td>
<td>34.0</td>
<td>34.3</td>
</tr>
<tr>
<td class="firstcol">Average Hourly Earnings</td>
<td>0.2%</td>
<td>0.3%</td>
<td>3.0%</td>
<td>2.9%</td>
<td>3.8%</td>
<td>3.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment Rate</td>
<td>6.4%</td>
<td>6.1%</td>
<td>5.8%</td>
<td>5.8%</td>
<td>4.8%</td>
<td>4.0%</td>
</tr>
</tbody>
</table>
Initial Jobless Insurance Claims Rose 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 3, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030703c.jpg" width="353">
Initial claims for unemployment insurance rose 21,000 (5.1%) last week to 430,000. The level of claims was higher than Consensus expectations for 413,000. Claims in the prior week were revised up.
The four-week moving average of initial claims fell to 425,000 (+8.4% y/y).
Continuing claims for unemployment insurance rose 0.9% w/w although the prior week&#39;s level was revised down.
During the last ten years there has been a 79% (inverse) correlation between the level of initial claims for unemployment insurance and the y/y change in nonfarm payrolls.
The insured rate of unemployment rose to 3.0% from a downwardly revised 2.9% the week prior.

<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/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">6/28/03</th>
<th scope="col">6/21/03</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>430.0</td>
<td>409.0</td>
<td>10.3%</td>
<td>404.3</td>
<td>406.0</td>
<td>299.7</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>3,751</td>
<td>2.4%</td>
<td>3,575</td>
<td>3,022</td>
<td>2,114</td>
</tr>
</tbody>
</table>
ISM Nonmanufacturing Index Up 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 3, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030703b.jpg" width="353">
The Institute for Supply Management reported that its nonmanufacturing sector business activity index surged to 60.6 last month, the highest level since September 2000. The Consensus expectation was for a much smaller rise to 55.0.
The 6.1 point m/m rise was the sharpest since November 2001.
During the last five years, there has been a 65% correlation between the level of the Business Activity Index from the ISM nonmanufacturing survey and quarterly growth in real GDP in the service sector plus structures.
The seasonally adjusted new orders index rose to 57.5, its highest level since October 2000. The employment index rose to 50.3, only the second month above 50 since early 2001.
Business activity for the nonmanufacturing sector is a question separate from the subgroups mentioned above. In contrast, the NAPM manufacturing sector composite index weights the components.
The seasonally adjusted prices index rose to 51.4, still the second lowest level since March 2002.
ISM surveys more than 370 purchasing managers in more than 62 industries including construction, law firms, hospitals, government and retailers. The nonmanufacturing survey dates only to July 1997, therefore its seasonal adjustment should be viewed tentatively. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF03/@EF03.HTM">ISM Nonmanufacturing Survey</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Business Activity Index</td>
<td>60.6</td>
<td>54.5</td>
<td>57.4</td>
<td>55.1</td>
<td>49.0</td>
<td>59.3</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>51.4</td>
<td>49.6</td>
<td>52.5</td>
<td>53.9</td>
<td>51.6</td>
<td>63.5</td>
</tr>
</tbody>
</table>


</html>

The unemployment rate jumped to 6.4% in June, further than Consensus expectations for a rise to 6.2%. It was the highest rate of unemployment since April 1994. Employment did rise 251,000 (+1.0% y/y) but that gain was outpaced by a [...]

Unemployment Rate Surged, Payrolls Down Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030702c.jpg" width="353">
Unit sales of light vehicles rose 1.9% m/m in June to an annual rate of 16.43 million units. Consensus expectations were for sales of 16.1 mil. units.
The increase in June sales recovered virtually all of the decline in May. It continued the erratic sideways movement of sales in place for the last two and one half years.
Sales of cars rose 4.0% m/m for the first gain since March. Truck sales were about flat month to month.
Since the peak in early 1997, the CPI for new vehicles has fallen 4.7%.

<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">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>16.43</td>
<td>16.12</td>
<td>0.5%</td>
<td>16.81</td>
<td>17.26</td>
<td>17.40</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Autos</td>
<td>7.56</td>
<td>7.27</td>
<td>-4.9%</td>
<td>8.07</td>
<td>8.48</td>
<td>8.83</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Light Trucks</td>
<td>8.87</td>
<td>8.86</td>
<td>5.5%</td>
<td>8.74</td>
<td>8.78</td>
<td>8.56</td>
</tr>
</tbody>
</table>
Mortgage Applications Rose 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 2, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030702b.jpg" width="353">
The index of mortgage applications compiled by the Mortgage Bankers Association rose 5.2% last week and recouped most of the prior week&#39;s decline. For all of June, mortgage applications rose 6.5%.
Applications to refinance rose 4.8% w/w and jumped 8.1% last month to a new monthly record.
Applications for home purchase surged 6.6% w/w and added 1.3% in all of June to the 11.6% gain in May.
During the last ten years there has been a 51% correlation between the y/y change in purchase applications and the change in new plus existing home sales.
Interest rates on a conventional 30-Year mortgage moved higher for the second week with the effective rate at 5.52% versus 6.13% averaged in December. The effective rate on a 15-year mortgage also rose to 4.97% versus 5.55% averaged in December.
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 at <a href="http://www.mbaa.org/">www.mbaa.org.</a>

<table border="0" cellspacing="0" width="100%">

</table>
<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/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">6/27/03</th>
<th scope="col">6/20/03</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>1,635.5</td>
<td>1,554.5</td>
<td>799.7</td>
<td>625.6</td>
<td>322.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>438.4</td>
<td>411.2</td>
<td>354.7</td>
<td>304.9</td>
<td>302.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>8,599.1</td>
<td>8,204.6</td>
<td>3,388.0</td>
<td>2,491.0</td>
<td>438.8</td>
</tr>
</tbody>
</table>
Factory Inventories Down Again 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 2, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030702d.jpg" width="353">
Manufacturing inventories fell 0.1% in May, down for the third consecutive month. The steep drop in the June ISM inventory index suggests further decumulation, although the rate of decline has slowed since 2001.
Inventories fell across the board in May with computers and electronic products down 1.0% (-9.1% y/y). Electrical equipment inventories fell a slight 0.1% (-6.1% y/y) but machinery inventories fell 0.3% (-4.3% y/y). Furniture inventories fell 0.3% m/m but are up 1.5% y/y.
Nondurable goods inventories were unchanged for the second month (+4.3% y/y).
Factory shipments rose 0.4% (-0.7% y/y). Shipments of petroleum and coal rose 9.3% m/m following the 19.4% plunge in April.
Factory orders rose 0.4%. Durable goods orders fell 0.4%, little revised from the advance report.

<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">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Inventories</td>
<td>-0.1%</td>
<td>-0.1%</td>
<td>0.7%</td>
<td>-1.9%</td>
<td>-8.0%</td>
<td>4.5%</td>
</tr>
<tr>
<td class="firstcol">New Orders</td>
<td>0.4%</td>
<td>-3.0%</td>
<td>-0.1%</td>
<td>-0.8%</td>
<td>-7.2%</td>
<td>5.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Shipments</td>
<td>0.4%</td>
<td>-2.3%</td>
<td>-0.7%</td>
<td>-1.1%</td>
<td>-5.3%</td>
<td>4.4%</td>
</tr>
</tbody>
</table>
</body>
</html>

Unit sales of light vehicles rose 1.9% m/m in June to an annual rate of 16.43 million units. Consensus expectations were for sales of 16.1 mil. units. The increase in June sales recovered virtually all of the decline in May. It [...]

U.S. Light Vehicle Sales Up Slightly

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/030701c.jpg" width="353">
According to the Bank of Japan&#39;s quarterly survey of business conditions--the Tankan--sentiment among executives of large manufacturing companies in Japan rose in June to minus 5 from minus 10 in March. This was better than consensus estimates and the best showing since March 2001. These executives expect that sentiment will continue at this level in the next quarter. Rising stock prices in recent months and the lessening of concerns over the impact of SARS on trade as the World Health Organization lifted travel advisories for Singapore, Hong Kong and Beijing in May and June may have been factors in the improvement of sentiment.
Sentiment in the nonmanufacturing sector improved but to a lesser extent than in manufacturing. It rose to minus 13 from minus 14 in March.
Large companies in all industries plan to increase spending on fixed investment in the current fiscal year, ending March 2004, by 4.9% over fiscal 2003. In the March Tankan, executives had estimated a decline of 0.8% in investment spending for the current fiscal year.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Current Business Conditions</th>
<th scope="col">June Q 2003</th>
<th scope="col">March Q 2003</th>
<th scope="col">June Q&nbsp; 2002</th>
<th scope="col">Q/Q</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Large Manufacturing Companies</td>
<td>-5</td>
<td>-10</td>
<td>-18</td>
<td>5</td>
<td>13</td>
<td>-20</td>
<td>-23</td>
<td>4</td>
</tr>
<tr>
<td class="firstcol">Large Nonmanufacturing&nbsp; Companies&nbsp;</td>
<td>-13</td>
<td>-14</td>
<td>-16</td>
<td>1</td>
<td>3</td>
<td>-17</td>
<td>-16</td>
<td>-12</td>
</tr>
</tbody>
</table>
</body>
</html>

According to the Bank of Japan's quarterly survey of business conditions--the Tankan--sentiment among executives of large manufacturing companies in Japan rose in June to minus 5 from minus 10 in March. This was better than consensus [...]

Japanese Tankan Shows Good Improvement in Sentiment of Large Manufacturing Companies

PMIs showing widespread revival of global economy

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

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Michael J. Moran

260713A.jpg

260713B.jpg

Most analysts were looking for a dip in the CPI because of a likely retreat in gasoline prices, but the published decline of 0.4% in the headline index was noticeably softer than the consensus estimate of -0.1%. Gasoline prices did not disappoint, with a drop of 9.7% offsetting approximately one-quarter of the cumulative surge in the prior three months. Prices of fuel oil fell almost as much as gasoline prices, and electricity charges contributed to the softness with a decline of 1.0%. The price of natural gas services was the only major energy item to increase in June (0.5%). All told, the energy component of the CPI fell 5.7% after climbing 19.6% in the prior three months.

The drop in energy prices was notable, but the core component provided a bigger surprise by posting a decline, the first since a series of three consecutive decreases during the pandemic. Before the pandemic-related retreat, the core component fell only twice from 1990 to 2019. The drop in June was minuscule (-0.02%), but the fact that it carried a minus sign was striking.

Both the goods and services components of the core index contributed to the restraint. Prices of goods other than food and energy fell 0.1%. The Bureau of Labor Statistics publishes six key subcategories of core goods, and five of them fell in June. Apparel prices stood out with a decline of 0.6%. Prices of core services were nearly unchanged at 0.03%, restrained by declines in medical services and motor vehicle insurance. Airfares, which showed upward pressure from rising fuel prices in the prior three months, posted a nondescript increase of 0.2%. The modest increase in the prices of core services led to a dip in the 12-month average increase after stepping up in April and May. The trend in core goods prices continued its gradual deceleration (chart, below right).

Food prices in June rose 0.2%, a reading comfortably within the range of the past few years.

The Consumer Price figures can be found in Haver's **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

260713C.jpg

260713D.jpg

- The energy component retraced a portion of its surge in the prior three months.
- Prices excluding food and energy provided a surprise by posting a rare decline.

June CPI: Cooling Energy Prices and a Restrained Core Component

Robert Brusca

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Industrial output in Norway fell by 1% in May after rising by 0.6 in April and falling by 1.1% in March. The seesaw act for output continues. Over broader horizons, however, output is falling. It falls by 0.1% over 12 months, falls at a 1.1% annual rate over six months, and falls at a 6.2% annual rate over three months, giving us a clear sequential trend toward falling and decelerating output. Utilities output has chaotic trends, as do mining and quarrying; however, manufacturing shows a clear trend toward output acceleration, with a 2.1% output increase over 12 months, a 2.6% annual rate rise over six months, and a 9% annual rate increase over three months.

Manufacturing sectors show consumer goods output increasing in May, also showing secular acceleration from 12 months to six months to three months. Durable goods, however, are the fly in the ointment, with output up 2.2% over 12 months, accelerating over six months, and then dropping at a 20.4% annual rate over three months. However, consumer nondurables show growth and acceleration, with a 12-month gain of 1.8%, rising to a 3.6% annual rate increase over six months and a 10.9% annual rate increase over three months. Intermediate goods output trends return to more difficult times and show declines over 12 months, six months, and three months, but not a clear path of deceleration. Capital goods output is up 5.4% over 12 months and at an 8.5% annual rate over three months, but there is an intervening soft spot with output up at only a 3.4% annual rate over six months.

Against this background, inflation in Norway showed solid increases in May, rising by 0.2% overall and by 0.3% for the core HICP. However, sequentially inflation gains 3% over 12 months, rises at a 3.8% annual rate over six months, and then backs down to a 1.2% annual rate over three months. The core HICP is steadier, with a 3.4% gain over 12 months, rising to a 3.8% annual rate over six months, and then backing down to 3.2% at an annual rate over three months. That's a set of growth rates that are more stable than either accelerating or decelerating.

In the quarter-to-date (QTD) basis, industrial production is falling 4.6%; this is two months into the second quarter. On the other hand, manufacturing output is rising QTD at a 4.9% annual rate, with consumer nondurables showing strong positive growth along with intermediate goods output. There is a solid gain of 3.1% at an annual rate from capital goods. The QTD inflation trends remain somewhat mixed, with a weak headline showing a 1.6% annual rate, against a core HICP at a 3.4% annual rate rise, the latter gain being well in step with its sequential results.

The far right-hand column compares industrial production over the broad period from just before COVID (in January 2020) looking at the ratio of the level of output in May 2026 to its index value in January 2020. Remember that IP data are inflation-adjusted, so these are real data. Over this span, industrial production excluding construction is up by approximately 10%, with utilities output up at about 21%, mining and quarrying up about 5%, and manufacturing up a little more than 7%. This is a 5½-year period. Consumer goods output is up by 2.7%, led by consumer nondurables which rise 4.1% on the period and against durable goods output where there is a decline of about 13% on that timeline. Intermediate goods output drops slightly on the timeline by less than half a percentage point, while capital goods output is up at a solid and strong 23% gain. Looking at prices over the same period, the headline HICP is higher by 27% while the core is higher by 24%.

The weakened output shows the stresses and strains of the period, with weak gains in place over the last 5½ years and with the consumer showing considerable wear and tear, leaving consumer goods output lower on balance over this 5½-year span. It hasn't been such a bad time for capital goods, where output rose by 23% over the period. Inflation got out-of-the-box and grew quite strongly. The headline HICP grew by 27% since January 2020, a duration of time during which, sticking to its target, would have implied a gain in the price level of only 11.5%.

**Ongoing overshooting**
Even now central banks are trying to decide how to come to grips with the inflation pressures from that. Pressures continue to linger and threaten the economies. Of course, there are some new factors in place, but that's the nature of inflation: if it's not one thing, it's something else. And failing to respond to the one thing means that you're going to get hit even worse when it becomes something else. This is the lesson the central banks haven't learned during this period. 

**Have central banks learned their lesson?**
Noting that inflation is over target and then forecasting that it's going to come back down to target over some period ahead puts the inflation performance at risk to whatever happens between now and the end of that period ‘ahead.’ If that forecast isn't perfectly right and if there's something else that disturbs the path of prices, what will happen is that an inflation that is already over the top of the target will push even farther over the top of the target and the dilemma faced by the central bank will become even worse. This is why kicking the can down the road generally is not a very good strategy, but it's one that virtually all the central banks pursued in the wake of COVID. So, will central bankers come to see inflation that is here and now as a here-and-now problem to be addressed here and now, or as a candidate for tomorrow land? The ECB seems to be changing, and the Fed has formed task forces. What about Norway and the rest of the world? Norway did push its target rate up as the ECB hiked. But what is its plan?

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Norway

Norwegian IP Struggles, but Manufacturing Shows Some Strength

Tian Yong Woon

In this week's Letter, we examine the underbelly of the AI boom, the risks that sit beneath its optimism. Start with the public mood: American concern about AI has grown alongside adoption over the past three to four years (chart 1). Those worries span mass job displacement, misuse of top-end models by bad actors, and fears of being left behind. The first of these is already surfacing: in June, AI was again the most cited reason for announced US layoffs, with year-to-date AI-linked cuts above 100,000 (chart 2). Technology led all sectors in overall cuts, though the data do not isolate how many were AI-driven. Among those hit, the young are arguably the most exposed to these labour effects. They enter a labour pool swollen by displaced professionals, just as AI masters the entry-level tasks where they would start. India and Indonesia illustrate the stakes on youth NEET, the share not in education, employment, or training, both above 20% and among Asia's highest (chart 3). Beyond the labour market, the same optimism reshapes asset prices. The rally has lifted AI-related valuations to historic highs and concentrated a few names in cap-weighted indexes (chart 4). That raises correlation and the risk of a sharper index fall should the rally unravel. The same concentration runs through economies via exports, from Taiwan's advanced chips to South Korea's memory (chart 5). Its footprint is physical too, and cuts both ways: data-centre investment has lifted growth in Johor, Malaysia (chart 6) while straining local power and water. None of this argues against riding the AI wave, which still promises real productivity and welfare gains. Rather, these are caveats that investors and policymakers must keep in view, since the story is not all upside.

**AI-related concerns**
AI adoption has exploded over the past three to four years, and Americans' concerns have risen alongside it (chart 1). That is understandable, given how advanced and broad AI's proven applications have become. They now span everyday tasks and subject-specific work across fields such as finance and production, as well as tech and development, the sector AI was born in. Major concerns run from mass AI-induced job displacement to a more recent fear, that top-end models fall into the wrong hands and are used by bad actors. A further worry is distributional: AI advances are powerful and could deliver leaps in productivity, yet they may also leave many people behind. Those most exposed include workers already displaced from their jobs and people facing scarcer basic resources as AI demand competes for them. Others simply lack equitable access to AI tools or their benefits.

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**AI-driven job displacement**
Some of the fears US workers first had about AI-driven job displacement are already playing out. In June, AI was again the most cited reason for announced job cuts in the US (chart 2). That pushed year-to-date job cuts attributed to AI above 100,000, more than half of all AI-tagged cuts since AI became a selectable reason in 2023. The data come from the latest survey by Challenger, Gray & Christmas. This likely reflects AI's disproportionately heavy impact on certain industries such as technology, which again led all sectors in cuts. At the same time, announced hiring plans stayed subdued, leaving laid-off workers with limited opportunities to find new roles. All of this is occurring even as market valuations remain elevated on the broader wave of AI optimism.

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**AI and youth unemployment**
Arguably among those bearing the brunt of these labour-related effects are the youth. Many have graduated on a curriculum built largely for a pre-AI era. They now enter a labour pool swollen by experienced professionals whom AI has displaced. At the same time, AI is proving especially capable at the entry-level tasks on which young workers usually start. An elevated youth unemployment rate only intensifies the competition young people face for gainful employment. On the broader NEET measure, which also captures youth who are neither working nor studying, India and Indonesia stand out. On the latest available WDI data, both have youth NEET rates above 20%, among the highest in Asia and above the global average (chart 3). Should employers in these economies adopt AI aggressively across processes and production, including physical AI such as humanoid robots, the problem could worsen. Yet firms that stay purely labour-intensive risk losing out to rivals using more efficient, and perhaps cheaper, AI-driven methods.

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**Concentration risk**
The recent wave of AI optimism has pushed the equity valuations of major AI developers and AI-related goods producers to historically high levels. These gains are partly backed by strong earnings and upbeat forward guidance. Most major indexes are weighted by market capitalisation, so a counter's weight tracks its price. As these counters have outperformed their peers (chart 4), their index weight has risen close to mechanically, when holding the number of shares constant. This raises concentration risk, since a small group of counters now carries more of the index and moves it more closely. So, if the rally in these counters were to unravel deeply, it would drag the broader index down more heavily with it.

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AI-related concentration risk is not confined to equity indexes; it also shows up in the growth of major economies. In Asia, that risk usually runs through a country's exports. Take Taiwan, the world's largest advanced semiconductor exporter, as an example. As chart 5 shows, its recent export growth has come more than entirely from integrated circuits and from infocomm and audiovisual equipment. Other goods categories have often contributed negatively in recent months. This is good news for the Taiwanese economy, which sits right at the centre of the global AI boom. Yet it is also a source of concentration risk, should AI-related goods demand collapse or substantial alternative supply emerge elsewhere. A similar story applies to South Korea, through its role in supplying high-end memory chips.

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**Data centres, energy, and water**
Finally, rapidly advancing AI promises major productivity gains and broad improvements to daily life. Yet AI infrastructure rests on resource-intensive inputs: the energy needed for data centre compute, and the water needed to cool those centres. Both may deprive real people of the very resources they need to survive. One recent hotspot is Malaysia, which has courted a wave of foreign direct investment to expand its data centre footprint in the state of Johor. These capital inflows are welcome, and have lifted state-level growth through the construction sector (chart 6). But they have also raised concerns about straining local grids and water supplies, possibly leaving less for residents. Among estimates, a recent one puts data centres at around 40% of Johor's electricity demand by 2035. That is pressuring the state to expand generation capacity and grid access to match the data centre pipeline already in place. Its neighbour Singapore faced similar strains earlier, and has since repositioned itself as a hub for the most advanced and efficient data centres, partly because of its severe land constraints. 

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Asia

Economic Letter from Asia: The AI Underbelly

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Manufacturing output in the countries of the European Monetary Union continues to underperform. The median change for the 11 countries reporting on the table is a 0.5% decline in May following a 0.3% increase in April. However, only 41.7% of the reporters are accelerating in May, compared to 25% in April, although in March over half of the reporters had showed some acceleration, with output at 61.5%.

In May, of these eleven early reporters, seven showed month-to-month declines in output. This compares to four showing declines in April and four showing declines in March.

**Sequential trends**
Over 12 months, output is declining in four of these eleven countries: Germany, Luxembourg, Ireland, and Portugal. Over six months, output declines in five of the eleven countries. Over three months, output declines in four of the eleven countries. Over these broader sequential periods, output is increasing in most cases; only one country, Ireland, shows consistent declines in output over three months, six months, and 12 months. However, among EMU countries, only Italy shows output expanding on all three timelines, although Sweden, an EU member country, also shows output increasing in all three periods.

Amid the output weakness in May, the quarter-to-date calculation for industrial production growth is also broadly weak. In May, seven of the eleven quarter-to-date changes in industrial production are negative. Positive results, increases in the quarter-to-date, are registered by Germany, Luxembourg, Greece, and Portugal.

The ranking of the year-over-year growth rates shows seven countries with output growth rate rankings below 50%, marking them as below their respective medians. The comparisons for output growth are taken back to 2006, a period of about 20 years.

Four EMU countries rank above their twenty-year medians: France, Italy, Luxembourg, and Greece.

The snapshot of industry in the monetary union is consistent, showing little momentum, little strength, and relatively low rankings for current growth rates; only a minority of reporters show an acceleration in growth in May compared to April. With the situation in the Strait of Hormuz deteriorating again, the outlook for industrial production has to remain guarded.

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Europe

Industrial Sector Remains Under Pressure in EMU

Andrew Cates

**Growth Surprises Continue to Underpin Equity Resilience**
Global equity markets have proved remarkably resilient in recent weeks, shrugging off intermittent bouts of geopolitical and policy uncertainty to grind higher. Chart 1 below helps explain why: it tracks the relationship between global growth-versus-inflation surprises and world equity markets, and on that measure the recent run of global growth data has continued to surprise on the upside relative to inflation outturns — a combination that has historically been supportive for risk assets. Whether that resilience persists will depend on whether the growth-surprise advantage evident in the chart below can be sustained in the face of the inflationary pressures explored below.

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**PMIs Confirm a Broadly Solid Global Expansion**
This week's final composite PMI readings for June reinforced the broader impression of resilient global growth. As chart 2 below shows, most major economies posted readings comfortably in expansionary territory, with India continuing to lead the pack and the US not far behind. Even the laggards in the sample are hovering close to the expansion threshold rather than falling decisively below it, suggesting stabilisation rather than outright contraction (and with the UK a notable exception).

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**Inflation Surprises Are Creeping Back, and Bond Yields Are Taking Notice**
The US growth picture painted by Haver's surprise indices broadly echoes the message from the global PMI data. Chart 3 below shows the combined growth-and-inflation surprise index drifting higher this week, and closer inspection suggests growth is doing most of that work, with activity data continuing to outperform expectations. That is, on the face of it, good news. But it has not stopped bond markets from taking notice: short-dated Treasury yields have remained elevated in recent weeks, as stronger growth keeps alive the possibility that the Federal Reserve holds rates higher for longer or even lifts them in coming weeks.

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**Supply Chains Are Tightening** 
Latest data show that global supply chain pressures tightened by less in June than they had the month before, likely reflecting the easing of Middle East tensions through much of the period. Chart 4 below shows that pressures troughed in the middle of last year and have been building gradually since, though June's slower pace of tightening suggests that easing had started to feed through. Still, today's flare-up threatens to undo that improvement, particularly if it affects shipping routes or energy flows through the region once again.

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**Extreme Weather: An Old Supply-Side Risk Returns**
Geopolitics is not the only source of supply-side risk currently in play. Large parts of Europe have been gripped this week by another intense and prolonged heatwave, with temperatures in several major cities running well above seasonal norms. Extreme heat of this kind carries real economic costs: it depresses labour productivity, particularly in outdoor and manufacturing-adjacent sectors, strains electricity grids as air-conditioning demand spikes, and can disrupt agricultural output and river-based transport when water levels fall. Episodes like this have become more frequent in recent years, and while any single heatwave rarely shifts the macro picture on its own, the cumulative effect of more frequent and more severe weather events could start showing up in productivity and inflation data across the advanced economies. It is a reminder that the supply side of the global economy faces structural as well as cyclical challenges, and that climate-related disruption deserves a permanent place alongside geopolitics and demographics in any assessment of medium-term inflation risk.

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**AI Investment: The Other Side of the Supply Equation**
Set against these supply-side headwinds is a genuinely positive structural development: the extraordinary scale of private investment now flowing into artificial intelligence. Chart 6 below shows just how sharply that investment has grown in recent years, reaching a fresh high last year. If even a fraction of that investment translates into genuine productivity gains, it could provide a meaningful long-run offset to the energy, climate and geopolitical constraints highlighted elsewhere in this week's charts. The scale of the bet now being placed on AI is large enough that it is beginning to show up in aggregate investment and capital expenditure data across the advanced economies, and it is likely to remain one of the defining structural themes shaping the global growth outlook over the remainder of this decade.

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Global markets head into this week’s closing stages digesting a mixed set of signals. Last week's US non-farm payrolls report undershot expectations, adding to questions about the durability of the US labour market even as broader activity data have continued to hold up well. Compounding that picture, news broke today of renewed instability in the Middle East, reintroducing a geopolitical risk premium into markets just as investors had begun to look past it. Global equity markets have nonetheless remained resilient, continuing to track the broadly encouraging tone of incoming activity data (chart 1). That resilience was reinforced by a solid set of global PMIs across most major economies over the past few days (chart 2). Haver's surprise indices tell a similar story of positive growth momentum in the US, but with an important caveat: incoming inflation data have also been surprising to the upside, driven largely by higher oil prices (chart 3). These inflation risks could persist moreover, as global supply chain pressures have picked up in recent months and today's flare-up in the Middle East threatens to add further strain (chart 4). The world economy remains vulnerable to other supply-side shocks too, such as the extreme heat gripping much of Europe this week (chart 5). Still, on the other side of the ledger the enormous scale of investment now flowing into artificial intelligence could be a genuine source of supply-side potential (chart 6).

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