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/060524f.jpg" width="353">
Two widely followed industrial surveys in Europe showed a slight pause in their May results, following marked improvements in the prior couple of months. They also both indicated continuing firmness in export sectors, but some hesitation in domestic activity.
The UK&#39;s Confederation of British Industry (CBI) reports that the balance on total industry orders is -12 for May, down from April&#39;s -11, but obviously much better than anytime in the previous year. Within total orders, those for exports gained dramatically, reaching a neutral value for the first time since February 1996. Thus, the UK is seeing significant and persistent improvement in export demand, but this month&#39;s gain there, combined with the decline in the overall orders balance, shows that the domestic sector faltered. In total then, the progress in manufacturing remains tenuous.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060524g.jpg" width="353">
The German organization Ifo, which specializes in applied economic research, reports that in its latest survey, the overall Business Climate Index edged down to 105.6 this month from 105.9 in April (2000=100), corresponding to diffusion balance figures of +10.4% and +11.0%, respectively. As Louise Curley noted here a month ago, these are the best readings since the spring of 1991; manufacturing, despite a slight downtick this month, is experiencing the best readings in the total history of the survey.
Details are not yet available for the factors in the Ifo survey, but as shown in the table below, wholesale trade continues to gain, while retail trade has moderated. This suggests that as in the UK, domestic demand -- at least consumption -- remains fragile, while broader industry is still advancing. Businesses also report to Ifo that they are less confident about activity in the next six months; the business expectations index decreased 3 points from 13.4% in April to 10.4% in May, which also is the lowest since January. The business situation index, in contrast, continues to increase, showing that current activity is expanding at more and more firms.
We&#39;d guess that skepticism over the outlook is related to energy prices and to the recent surge in the euro. While the latter wouldn&#39;t correspond to assessments of better export performance, it also might foster more imports, to the detriment of local industry. So, despite the recent gains in both Germany and the UK, it&#39;s not hard to understand that business leaders remain cautious.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">% Balance, SA</th>
<th scope="col">May 2006</th>
<th scope="col">Apr 2006</th>
<th scope="col">Mar 2006</th>
<th scope="col">May 2005</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">UK CBI Total Orders</td>
<td>-12</td>
<td>-11</td>
<td>-16</td>
<td>-22</td>
<td>-21</td>
<td>-9</td>
<td>-29</td>
</tr>
<tr>
<td class="firstcol">Export Orders</td>
<td>0</td>
<td>-13</td>
<td>-12</td>
<td>-17</td>
<td>-21</td>
<td>-13</td>
<td>-33</td>
</tr>
<tr class="odd">
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">German Ifo Business Climate </td>
<td>10.4</td>
<td>11.0</td>
<td>10.0</td>
<td>-15.7</td>
<td>-9.7</td>
<td>-9.9</td>
<td>-17.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Manufacturing</td>
<td>19.4</td>
<td>20.7</td>
<td>19.2</td>
<td>-5.6</td>
<td>1.2</td>
<td>4.4</td>
<td>-7.9</td>
</tr>
<tr>
<td class="firstcol">Wholesale Trade</td>
<td>12.4</td>
<td>10.8</td>
<td>9.7</td>
<td>-16.6</td>
<td>-9.9</td>
<td>-16.6</td>
<td>-25.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Retail Trade</td>
<td>-5.7</td>
<td>-5.2</td>
<td>-1.8</td>
<td>-35.1</td>
<td>-28.0</td>
<td>-30.7</td>
<td>-22.5</td>
</tr>
<tr>
<td class="firstcol">Services*</td>
<td>22.5</td>
<td>23.5</td>
<td>21.0</td>
<td>4.0</td>
<td>8.1</td>
<td>6.5</td>
<td>-0.4</td>
</tr>
</tbody>
</table>
</body>
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Two widely followed industrial surveys in Europe showed a slight pause in their May results, following marked improvements in the prior couple of months. They also both indicated continuing firmness in export sectors, but some [...]

UK and German Business Confidence Gains Pause in May; Export Demand Favorable

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060524e.jpg" width="353">
The total number of mortgage applications fell a hard 6.0% last week and pulled the average level in May 1.0% below April.
Purchase applications cratered 7.1% w/w but in May remained 0.3% ahead of April which rose 1.1% versus March.
During the last ten years there has been a negative 80% correlation between the interest rate level on 30-year financing and purchase applications while during those years there has been a 54% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
Applications to refinance reversed about half of the prior week&#39;s rise with a 4.3% decline. The May level is 2.8% below the April average which fell 4.1% from March.
The effective interest rate on a conventional 30-year mortgage retraced all of the prior week&#39;s increase and fell back to 6.84% while the rate on 15-year financing fell to 6.52%. Rates have risen roughly 50 basis points since year end 2005. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities and during the last ten years there has been a (negative) 82% correlation between purchase applications and the effective rate on a 30-Year mortgage.
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>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">05/19/06</th>
<th scope="col">05/12/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>552.6</td>
<td>588.0</td>
<td>-24.3%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>396.4</td>
<td>426.7</td>
<td>-9.1%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,480.5</td>
<td>1,546.8</td>
<td>-31.7%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
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The total number of mortgage applications fell a hard 6.0% last week and pulled the average level in May 1.0% below April. Purchase applications cratered 7.1% w/w but in May remained 0.3% ahead of April which rose 1.1% versus March. [...]

Mortgage Applications Recovered

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060524c.jpg" width="353">
New home sales during April again posted an unexpected gain. The 4.9% m/m increase to 1.198 million (SAAR) followed a revised 12.0% rise during March which was revised down slightly. The increased contrasted to Consensus expectations for 1.15M sales.
The latest sales level was 12.4% below last July&#39;s peak and sales so far this year were 11.5% below the 2005 average.
April sales in the Northeast rose 8.2% (-33.3% y/y) and in the West sales rose 2.0% (-12.6% y/y). Sales down South (+6.7% y/y) were notably strong with a 7.8% m/m gain but sales in the Midwest fell 1.1% (-16.9% y/y).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060524d.jpg" width="353">
The number of homes for sale surged for the second month by 2.4% (27.0% y/y). Again in the Northeast the number of homes for sale jumped, by 1.9% (63.6% y/y).
The median sales price of a new home recovered 2.8% (0.9% y/y) following a 6.2% March decline.

<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/@E9/@E904/@E904.HTM">U.S. New Homes</a></th>
<th scope="col">April</th>
<th scope="col">March</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Sales (AR, 000&#39;s)</td>
<td>1,198</td>
<td>1,142</td>
<td>-5.7%</td>
<td>1,280</td>
<td>1,201</td>
<td>1,091</td>
</tr>
<tr>
<td class="firstcol">Median Price (NSA)</td>
<td>$238,500</td>
<td>$232,000</td>
<td>0.9%</td>
<td>$234,208</td>
<td>$217,817</td>
<td>$191,383</td>
</tr>
</tbody>
</table>
</body>
</html>

New home sales during April again posted an unexpected gain. The 4.9% m/m increase to 1.198 million (SAAR) followed a revised 12.0% rise during March which was revised down slightly. The increased contrasted to Consensus expectations [...]

New Home Sales Again Rose Unexpectedly

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060524a.jpg" width="353">
New orders for durable goods fell 4.8% last month, giving back much of the upwardly revised 6.6% March increase. Nevertheless, durable orders in April remained up 11.3% versus last year and for the first four months of this year orders also were 11.2% ahead of 2005. Consensus expectations had been for a 0.5% April decline.
During the last ten years there has been a 69% correlation between the y/y change in durable goods orders and the change in output of durable goods.
A 32.2% (+99.5% y/y) drop in orders for nondefense aircraft &amp; parts led last month&#39;s decline in total orders. In addition, new orders for motor vehicles &amp; parts dropped 1.6% (+2.1% y/y).
Less the transportation sector altogether, durable goods orders fell 1.1% and gave back a piece of the upwardly revised March gain.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060524b.jpg" width="353">
Orders for computers &amp; electronic products gave back all of an upwardly revised March gain and fell 10.4% (+10.0% y/y). Machinery orders, however, fell just 0.2% (+12.1% y/y) after a 5.7% April increase that was little revised. Electrical equipment orders rose for the first month in three, up 5.2% (15.7% y/y), while orders for primary metals jumped 3.2% (16.6% y/y).
Orders for nondefense capital goods gave back half of the prior month&#39;s surge with a 6.0% drop while orders less aircraft fell 1.7% but remained 9.4% ahead of the year ago level. During the last ten years there has been an 86% correlation between the y/y change in capital goods orders less aircraft and the y/y change in business fixed investment in equipment &amp; software from the GDP accounts.
Shipments of durable goods fell 0.9% (+6.0% y/y) following two months of 0.3% gain. Less the transportation sector shipments fell 0.1% (+8.1% y/y) for the second consecutive month. During the last ten years there has been an 82% correlation between the y/y change in durable goods shipments and the change in industrial production of durable goods.
Order backlogs jumped 1.5% (23.0% y/y), again reflecting a surge in nondefense aircraft &amp; parts (75.1% y/y). Less transportation backlogs were strong again and posted a 1.1% (13.7% y/y) rise. The ratio of backlogs to shipments outside of transportation jumped to the highest level in two years.
Durable inventories increased 0.8% (2.9% y/y). Less transportation inventories also rose 0.8% (3.3% y/y) and the inventory to sales ratio outside of the transportation sector rose for the second month.

<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/@ED0101.HTM">NAICS Classification</a></th>
<th scope="col">April</th>
<th scope="col">Mar</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Durable Goods Orders</td>
<td>-4.8%</td>
<td>6.6%</td>
<td>11.3%</td>
<td>9.0%</td>
<td>6.4%</td>
<td>-0.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Excluding Transportation</td>
<td>-1.1%</td>
<td>3.5%</td>
<td>10.3%</td>
<td>9.4%</td>
<td>7.6%</td>
<td>-1.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Nondefense Capital Goods</td>
<td>-6.0%</td>
<td>11.9%</td>
<td>18.6%</td>
<td>21.4%</td>
<td>5.6%</td>
<td>-3.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Excluding Aircraft</td>
<td>-1.7%</td>
<td>3.6%</td>
<td>9.4%</td>
<td>12.3%</td>
<td>2.8%</td>
<td>-2.0%</td>
</tr>
</tbody>
</table>
</body>
</html>

New orders for durable goods fell 4.8% last month, giving back much of the upwardly revised 6.6% March increase. Nevertheless, durable orders in April remained up 11.3% versus last year and for the first four months of this year [...]

New Orders for U.S. Durable Goods Fell

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060524a.jpg" width="353">
New orders for durable goods fell 4.8% last month, giving back much of the upwardly revised 6.6% March increase. Nevertheless, durable orders in April remained up 11.3% versus last year and for the first four months of this year orders also were 11.2% ahead of 2005. Consensus expectations had been for a 0.5% April decline.
During the last ten years there has been a 69% correlation between the y/y change in durable goods orders and the change in output of durable goods.
A 32.2% (+99.5% y/y) drop in orders for nondefense aircraft &amp; parts led last month&#39;s decline in total orders. In addition, new orders for motor vehicles &amp; parts dropped 1.6% (+2.1% y/y).
Less the transportation sector altogether, durable goods orders fell 1.1% and gave back a piece of the upwardly revised March gain.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060524b.jpg" width="353">
Orders for computers &amp; electronic products gave back all of an upwardly revised March gain and fell 10.4% (+10.0% y/y). Machinery orders, however, fell just 0.2% (+12.1% y/y) after a 5.7% April increase that was little revised. Electrical equipment orders rose for the first month in three, up 5.2% (15.7% y/y), while orders for primary metals jumped 3.2% (16.6% y/y).
Orders for nondefense capital goods gave back half of the prior month&#39;s surge with a 6.0% drop while orders less aircraft fell 1.7% but remained 9.4% ahead of the year ago level. During the last ten years there has been an 86% correlation between the y/y change in capital goods orders less aircraft and the y/y change in business fixed investment in equipment &amp; software from the GDP accounts.
Shipments of durable goods fell 0.9% (+6.0% y/y) following two months of 0.3% gain. Less the transportation sector shipments fell 0.1% (+8.1% y/y) for the second consecutive month. During the last ten years there has been an 82% correlation between the y/y change in durable goods shipments and the change in industrial production of durable goods.
Order backlogs jumped 1.5% (23.0% y/y), again reflecting a surge in nondefense aircraft &amp; parts (75.1% y/y). Less transportation backlogs were strong again and posted a 1.1% (13.7% y/y) rise. The ratio of backlogs to shipments outside of transportation jumped to the highest level in two years.
Durable inventories increased 0.8% (2.9% y/y). Less transportation inventories also rose 0.8% (3.3% y/y) and the inventory to sales ratio outside of the transportation sector rose for the second month.

<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/@ED0101.HTM">NAICS Classification</a></th>
<th scope="col">April</th>
<th scope="col">Mar</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Durable Goods Orders</td>
<td>-4.8%</td>
<td>6.6%</td>
<td>11.3%</td>
<td>9.0%</td>
<td>6.4%</td>
<td>-0.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Excluding Transportation</td>
<td>-1.1%</td>
<td>3.5%</td>
<td>10.3%</td>
<td>9.4%</td>
<td>7.6%</td>
<td>-1.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Nondefense Capital Goods</td>
<td>-6.0%</td>
<td>11.9%</td>
<td>18.6%</td>
<td>21.4%</td>
<td>5.6%</td>
<td>-3.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Excluding Aircraft</td>
<td>-1.7%</td>
<td>3.6%</td>
<td>9.4%</td>
<td>12.3%</td>
<td>2.8%</td>
<td>-2.0%</td>
</tr>
</tbody>
</table>
New Home Sales Again Rose Unexpectedly 
by <a href="/comment/Moeller.html">Tom Moeller</a> May 24, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060524c.jpg" width="353">
New home sales during April again posted an unexpected gain. The 4.9% m/m increase to 1.198 million (SAAR) followed a revised 12.0% rise during March which was revised down slightly. The increased contrasted to Consensus expectations for 1.15M sales.
The latest sales level was 12.4% below last July&#39;s peak and sales so far this year were 11.5% below the 2005 average.
April sales in the Northeast rose 8.2% (-33.3% y/y) and in the West sales rose 2.0% (-12.6% y/y). Sales down South (+6.7% y/y) were notably strong with a 7.8% m/m gain but sales in the Midwest fell 1.1% (-16.9% y/y).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060524d.jpg" width="353">
The number of homes for sale surged for the second month by 2.4% (27.0% y/y). Again in the Northeast the number of homes for sale jumped, by 1.9% (63.6% y/y).
The median sales price of a new home recovered 2.8% (0.9% y/y) following a 6.2% March decline.

<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/@E9/@E904/@E904.HTM">U.S. New Homes</a></th>
<th scope="col">April</th>
<th scope="col">March</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Sales (AR, 000&#39;s)</td>
<td>1,198</td>
<td>1,142</td>
<td>-5.7%</td>
<td>1,280</td>
<td>1,201</td>
<td>1,091</td>
</tr>
<tr>
<td class="firstcol">Median Price (NSA)</td>
<td>$238,500</td>
<td>$232,000</td>
<td>0.9%</td>
<td>$234,208</td>
<td>$217,817</td>
<td>$191,383</td>
</tr>
</tbody>
</table>
Mortgage Applications Recovered 
by <a href="/comment/Moeller.html">Tom Moeller</a> May 24, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060524e.jpg" width="353">
The total number of mortgage applications fell a hard 6.0% last week and pulled the average level in May 1.0% below April.
Purchase applications cratered 7.1% w/w but in May remained 0.3% ahead of April which rose 1.1% versus March.
During the last ten years there has been a negative 80% correlation between the interest rate level on 30-year financing and purchase applications while during those years there has been a 54% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
Applications to refinance reversed about half of the prior week&#39;s rise with a 4.3% decline. The May level is 2.8% below the April average which fell 4.1% from March.
The effective interest rate on a conventional 30-year mortgage retraced all of the prior week&#39;s increase and fell back to 6.84% while the rate on 15-year financing fell to 6.52%. Rates have risen roughly 50 basis points since year end 2005. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities and during the last ten years there has been a (negative) 82% correlation between purchase applications and the effective rate on a 30-Year mortgage.
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>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">05/19/06</th>
<th scope="col">05/12/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>552.6</td>
<td>588.0</td>
<td>-24.3%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>396.4</td>
<td>426.7</td>
<td>-9.1%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,480.5</td>
<td>1,546.8</td>
<td>-31.7%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
UK and German Business Confidence Gains Pause in May; Export Demand Favorable 
by <a href="/comment/Stone.html">Carol Stone</a> May 24, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060524f.jpg" width="353">
Two widely followed industrial surveys in Europe showed a slight pause in their May results, following marked improvements in the prior couple of months. They also both indicated continuing firmness in export sectors, but some hesitation in domestic activity.
The UK&#39;s Confederation of British Industry (CBI) reports that the balance on total industry orders is -12 for May, down from April&#39;s -11, but obviously much better than anytime in the previous year. Within total orders, those for exports gained dramatically, reaching a neutral value for the first time since February 1996. Thus, the UK is seeing significant and persistent improvement in export demand, but this month&#39;s gain there, combined with the decline in the overall orders balance, shows that the domestic sector faltered. In total then, the progress in manufacturing remains tenuous.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060524g.jpg" width="353">
The German organization Ifo, which specializes in applied economic research, reports that in its latest survey, the overall Business Climate Index edged down to 105.6 this month from 105.9 in April (2000=100), corresponding to diffusion balance figures of +10.4% and +11.0%, respectively. As Louise Curley noted here a month ago, these are the best readings since the spring of 1991; manufacturing, despite a slight downtick this month, is experiencing the best readings in the total history of the survey.
Details are not yet available for the factors in the Ifo survey, but as shown in the table below, wholesale trade continues to gain, while retail trade has moderated. This suggests that as in the UK, domestic demand -- at least consumption -- remains fragile, while broader industry is still advancing. Businesses also report to Ifo that they are less confident about activity in the next six months; the business expectations index decreased 3 points from 13.4% in April to 10.4% in May, which also is the lowest since January. The business situation index, in contrast, continues to increase, showing that current activity is expanding at more and more firms.
We&#39;d guess that skepticism over the outlook is related to energy prices and to the recent surge in the euro. While the latter wouldn&#39;t correspond to assessments of better export performance, it also might foster more imports, to the detriment of local industry. So, despite the recent gains in both Germany and the UK, it&#39;s not hard to understand that business leaders remain cautious.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">% Balance, SA</th>
<th scope="col">May 2006</th>
<th scope="col">Apr 2006</th>
<th scope="col">Mar 2006</th>
<th scope="col">May 2005</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">UK CBI Total Orders</td>
<td>-12</td>
<td>-11</td>
<td>-16</td>
<td>-22</td>
<td>-21</td>
<td>-9</td>
<td>-29</td>
</tr>
<tr>
<td class="firstcol">Export Orders</td>
<td>0</td>
<td>-13</td>
<td>-12</td>
<td>-17</td>
<td>-21</td>
<td>-13</td>
<td>-33</td>
</tr>
<tr class="odd">
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">German Ifo Business Climate </td>
<td>10.4</td>
<td>11.0</td>
<td>10.0</td>
<td>-15.7</td>
<td>-9.7</td>
<td>-9.9</td>
<td>-17.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Manufacturing</td>
<td>19.4</td>
<td>20.7</td>
<td>19.2</td>
<td>-5.6</td>
<td>1.2</td>
<td>4.4</td>
<td>-7.9</td>
</tr>
<tr>
<td class="firstcol">Wholesale Trade</td>
<td>12.4</td>
<td>10.8</td>
<td>9.7</td>
<td>-16.6</td>
<td>-9.9</td>
<td>-16.6</td>
<td>-25.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Retail Trade</td>
<td>-5.7</td>
<td>-5.2</td>
<td>-1.8</td>
<td>-35.1</td>
<td>-28.0</td>
<td>-30.7</td>
<td>-22.5</td>
</tr>
<tr>
<td class="firstcol">Services*</td>
<td>22.5</td>
<td>23.5</td>
<td>21.0</td>
<td>4.0</td>
<td>8.1</td>
<td>6.5</td>
<td>-0.4</td>
</tr>
</tbody>
</table>
</body>
</html>

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060523c.jpg" width="353">
Several confidence indicators were released today--consumer and business indicators for the Netherlands and Slovenia, consumer confidence for Italy and business confidence for France.
Consumer confidence rose in both the Netherlands and in Slovenia in May, but confidence remains weak in both countries.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060523e.jpg" width="353"> Pessimists continue to outweigh optimists. In the Netherlands the excess of pessimists declined from 6% to 4%, while in Slovenia, the comparable figures were 19% and 15%. The first chart shows consumer confidence in the Netherlands and Slovenia, expressed as the percent balance between pessimists and optimists. Consumers in Italy also were slightly more optimistic in May than in April. The ISAE (Instituto de Studie Analisi Economica) Index of consumer confidence rose from 106.0 in April (1980=100) to 107.6 in May. Once again, it is clear from the second chart that the overall mood of the Italian consumer is subdued.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060523d.jpg" width="353">
Both the Netherlands and Slovenia have also reported measures of business confidence. In both countries, those looking for improvement in the outlook have been greater than those looking for a deterioration since the last half of 2005. The percent balance, however, weakened in May. In the Netherlands the excess of optimists over pessimists fell from 6.1% in April to 3.3% in May. In Slovenia, the comparable figures were 7% and 6%. Business confidence measures in the two countries are shown in the third chart. In France, the INSEE (Institut de la Statistique et des Etudes Economiques) Monthly Business Survey also showed some weakness in business confidence. The percent balance of those responding to questions on the general outlook in manufacturing declined from 2% in April to 1% in May.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/JAPAN/@J5/@J5.HTM">Japan:</a></th>
<th scope="col">Mar 06</th>
<th scope="col">Feb 06</th>
<th scope="col">Mar 05</th>
<th scope="col">M/M DIF </th>
<th scope="col">Y/Y DIF</th>
<th scope="col">2005</th>
<th scope="col">2004&nbsp;</th>
<th scope="col">2003&nbsp;&nbsp;</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">The Netherlands (% Bal)</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp;Consumer Confidence</td>
<td>-4</td>
<td>-6</td>
<td>-22</td>
<td>2</td>
<td>18</td>
<td>-22</td>
<td>-25</td>
<td>-35</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Business Confidence</td>
<td>3.3</td>
<td>6.1</td>
<td>0.8</td>
<td>-2.8</td>
<td>2.5</td>
<td>0.6</td>
<td>-0.1</td>
<td>-5.6</td>
</tr>
<tr>
<td class="firstcol">Slovenia (% Bal)</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Consumer Confidence</td>
<td>-15</td>
<td>19</td>
<td>14</td>
<td>4 </td>
<td>-1</td>
<td>-20</td>
<td>-19</td>
<td>-20</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Business Confidence</td>
<td>6</td>
<td>7</td>
<td>-1</td>
<td>-1 </td>
<td>7</td>
<td>-0</td>
<td>1</td>
<td>-4</td>
</tr>
<tr class="odd">
<td class="firstcol">Italy (1980=100)</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp;Consumer Confidence</td>
<td>106.7</td>
<td>106.0</td>
<td>104.2</td>
<td>1.51* </td>
<td>3.26*</td>
<td>104.2</td>
<td>101.4</td>
<td>106.1</td>
</tr>
<tr class="odd">
<td class="firstcol">France&nbsp; (% Bal)</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp;Business Outlook&nbsp;</td>
<td>1</td>
<td>2</td>
<td>-23</td>
<td>-1</td>
<td>24</td>
<td>-12</td>
<td>5</td>
<td>-29</td>
</tr>
</tbody>
</table>
</body>
</html>

Several confidence indicators were released today--consumer and business indicators for the Netherlands and Slovenia, consumer confidence for Italy and business confidence for France. Consumer confidence rose in both the Netherlands [...]

Dutch, Slovene and Italian Consumers a Little More Confident: Dutch, Slovene, and French Business a Little Less So

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060523a.jpg" width="353">
Chain store sales dropped last week for the second week in the last three reported the International Council of Shopping Centers (ICSC)-UBS. The 0.8% w/w decline followed an unchanged level the prior period and a 0.4% dip to open the month. 
In May, sales on average are roughly even with the April average which rose 1.6% from March. During the last ten years there has been a 47% correlation between the y/y change in chain store sales and the change in nonauto retail sales less gasoline.
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.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060523b.jpg" width="353">
The latest leading indicator of chain chain store sales from ICSC-UBS fell for the fourth straight week. The 0.6% decline pulled the indicator down 2.7% versus one year ago and 4.5% from the recent peak in early January.
Lower chain store sales accompanied a six cent drop in retail gasoline prices to $2.88 per gallon. Nevertheless, average gasoline prices this month are up seventeen cents from April at $2.91 (34.8% y/y). Yesterday gasoline prices in the NY spot market recovered to the highest level in four days but spot prices this month have averaged roughly ten cents below the April level.
The NOAA: 2006 Atlantic Hurricane Outlook released yesterday can be found <a href="http://www.cpc.ncep.noaa.gov/products/outlooks/hurricane.shtml"> here</a>.
The latest Short-Term Energy Outlook from the US Energy Information Administration is available <a href="http://www.eia.doe.gov/emeu/steo/pub/contents.html">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">05/20/06</th>
<th scope="col">05/13/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>472.0</td>
<td>475.7</td>
<td>3.5%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>


</html>

Chain store sales dropped last week for the second week in the last three reported the International Council of Shopping Centers (ICSC)-UBS. The 0.8% w/w decline followed an unchanged level the prior period and a 0.4% dip to open the [...]

Chain Store Sales Down Again With Gasoline Prices

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060523a.jpg" width="353">
Chain store sales dropped last week for the second week in the last three reported the International Council of Shopping Centers (ICSC)-UBS. The 0.8% w/w decline followed an unchanged level the prior period and a 0.4% dip to open the month. 
In May, sales on average are roughly even with the April average which rose 1.6% from March. During the last ten years there has been a 47% correlation between the y/y change in chain store sales and the change in nonauto retail sales less gasoline.
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.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060523b.jpg" width="353">
The latest leading indicator of chain chain store sales from ICSC-UBS fell for the fourth straight week. The 0.6% decline pulled the indicator down 2.7% versus one year ago and 4.5% from the recent peak in early January.
Lower chain store sales accompanied a six cent drop in retail gasoline prices to $2.88 per gallon. Nevertheless, average gasoline prices this month are up seventeen cents from April at $2.91 (34.8% y/y). Yesterday gasoline prices in the NY spot market recovered to the highest level in four days but spot prices this month have averaged roughly ten cents below the April level.
The NOAA: 2006 Atlantic Hurricane Outlook released yesterday can be found <a href="http://www.cpc.ncep.noaa.gov/products/outlooks/hurricane.shtml"> here</a>.
The latest Short-Term Energy Outlook from the US Energy Information Administration is available <a href="http://www.eia.doe.gov/emeu/steo/pub/contents.html">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">05/20/06</th>
<th scope="col">05/13/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>472.0</td>
<td>475.7</td>
<td>3.5%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>
Dutch, Slovene and Italian Consumers a Little More Confident: Dutch, Slovene, and French Business a Little Less So  
by <a href="/comment/Curley.html">Louise Curley</a> May 23, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060523c.jpg" width="353">
Several confidence indicators were released today--consumer and business indicators for the Netherlands and Slovenia, consumer confidence for Italy and business confidence for France.
Consumer confidence rose in both the Netherlands and in Slovenia in May, but confidence remains weak in both countries.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060523e.jpg" width="353"> Pessimists continue to outweigh optimists. In the Netherlands the excess of pessimists declined from 6% to 4%, while in Slovenia, the comparable figures were 19% and 15%. The first chart shows consumer confidence in the Netherlands and Slovenia, expressed as the percent balance between pessimists and optimists. Consumers in Italy also were slightly more optimistic in May than in April. The ISAE (Instituto de Studie Analisi Economica) Index of consumer confidence rose from 106.0 in April (1980=100) to 107.6 in May. Once again, it is clear from the second chart that the overall mood of the Italian consumer is subdued.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060523d.jpg" width="353">
Both the Netherlands and Slovenia have also reported measures of business confidence. In both countries, those looking for improvement in the outlook have been greater than those looking for a deterioration since the last half of 2005. The percent balance, however, weakened in May. In the Netherlands the excess of optimists over pessimists fell from 6.1% in April to 3.3% in May. In Slovenia, the comparable figures were 7% and 6%. Business confidence measures in the two countries are shown in the third chart. In France, the INSEE (Institut de la Statistique et des Etudes Economiques) Monthly Business Survey also showed some weakness in business confidence. The percent balance of those responding to questions on the general outlook in manufacturing declined from 2% in April to 1% in May.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/JAPAN/@J5/@J5.HTM">Japan:</a></th>
<th scope="col">Mar 06</th>
<th scope="col">Feb 06</th>
<th scope="col">Mar 05</th>
<th scope="col">M/M DIF </th>
<th scope="col">Y/Y DIF</th>
<th scope="col">2005</th>
<th scope="col">2004&nbsp;</th>
<th scope="col">2003&nbsp;&nbsp;</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">The Netherlands (% Bal)</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp;Consumer Confidence</td>
<td>-4</td>
<td>-6</td>
<td>-22</td>
<td>2</td>
<td>18</td>
<td>-22</td>
<td>-25</td>
<td>-35</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Business Confidence</td>
<td>3.3</td>
<td>6.1</td>
<td>0.8</td>
<td>-2.8</td>
<td>2.5</td>
<td>0.6</td>
<td>-0.1</td>
<td>-5.6</td>
</tr>
<tr>
<td class="firstcol">Slovenia (% Bal)</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Consumer Confidence</td>
<td>-15</td>
<td>19</td>
<td>14</td>
<td>4 </td>
<td>-1</td>
<td>-20</td>
<td>-19</td>
<td>-20</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Business Confidence</td>
<td>6</td>
<td>7</td>
<td>-1</td>
<td>-1 </td>
<td>7</td>
<td>-0</td>
<td>1</td>
<td>-4</td>
</tr>
<tr class="odd">
<td class="firstcol">Italy (1980=100)</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp;Consumer Confidence</td>
<td>106.7</td>
<td>106.0</td>
<td>104.2</td>
<td>1.51* </td>
<td>3.26*</td>
<td>104.2</td>
<td>101.4</td>
<td>106.1</td>
</tr>
<tr class="odd">
<td class="firstcol">France&nbsp; (% Bal)</td>
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<td class="firstcol">&nbsp;Business Outlook&nbsp;</td>
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<td>-23</td>
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USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

Wage growth slowing in the US and Euro area; elevated and sticky in the UK

Stagflation-lite: Blue Chip forecasts below-trend growth and elevated inflation

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

US and Japan ended 2024 on solid ground in contrast to Europe

US economy expected to outperform other major economies in 2025

Only modest evidence of AI-related surge in US productivity growth

Previous Trump tariffs fading. A boost from new tariffs ahead?

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

Underperforming German economy generating increased policy uncertainty relative to Europe and the US

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Andrew Cates

**China-US shipping activity** 
The economic fallout from escalating US-China trade tensions is becoming increasingly visible in the data. A clear example is the chart below, which highlights a sharp drop in vessel arrivals at the ports of Los Angeles and Long Beach, along with a notable decline in ships waiting offshore. These trends point to a tangible weakening in bilateral trade flows, as the effects of tit-for-tat tariffs imposed by both countries begin to bite. Given the outsized role the US and China play in global commerce, this slowdown is likely to reverberate through global supply chains, weighing on trade volumes, dampening demand, and curbing economic growth worldwide.

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**GDP growth in Q1**
Data this week showed that the US economy contracted, albeit modestly, in Q1 even as the euro area recorded a modest expansion—an unusual divergence. The contraction in US GDP can be largely attributed to a sharp increase in imports, as firms rushed to front-load purchases ahead of anticipated tariff hikes. In addition, domestic demand was subdued, with weaker contributions from both consumer spending and government consumption. This decoupling between the US and euro area economies is particularly striking given the current global focus on the US dollar. While the euro area has shown unexpected signs of resilience, the US downturn raises important questions about its underlying momentum, especially as trade dynamics and policy uncertainty continue to cloud the outlook.

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**The US dollar versus yield differentials**
Chart 3 below illustrates a sharp breakdown in the correlation between the US-Germany 10-year yield differential and the EUR/USD exchange rate. Historically, the dollar has moved closely with interest rate spreads, as yield-seeking capital flowed into US assets. But since early 2025—and more acutely following the April tariff actions—the dollar has weakened markedly even as the yield spread has narrowed only modestly. This decoupling underscores a critical shift: capital markets are reacting not just to monetary policy, but to rising trade and geopolitical uncertainty. In other words, the exchange rate is now being driven as much by risk sentiment as by interest rate arbitrage.

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**The US economy’s structural outperformance and the dollar**
A second dynamic, captured in the next chart, reveals a tight correlation between the US real effective exchange rate and the potential GDP growth differential between the US and euro area over the past 50-60 years. This raises the question: has dollar strength (until recently) merely been a reflection of US growth leadership—or are capital inflows themselves helping to sustain this growth outperformance? In effect, the tail may be wagging the dog. Global investors have long allocated capital to the US, attracted by its macroeconomic resilience, technological leadership, and deep, liquid financial markets. The danger now is that the US trade war may disrupt this equilibrium. A sharp or sustained reduction in capital inflows could undermine growth, weaken the dollar, and trigger broader financial instability. Moreover, reversing this dynamic is not straightforward—barring a credible structural resurgence in European (or Asian) growth, the global investment landscape remains tilted toward the US.

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**US competitiveness versus Europe, China and Japan** 
The next chart below examines relative unit labour costs across major economies since 2011. The US and China have seen a broadly similar trajectory, with steady increases in relative cost structures, while the euro area has remained flat and Japan has seen dramatic improvement. This suggests that, from a cost competitiveness standpoint, the US is not uniquely disadvantaged vis-à-vis China. However, as we discuss further below, this parallel erosion of cost competitiveness is occurring at much higher nominal wage levels in the US, which blunts its ability to regain export share through tariff-related shifts alone. The trade war strategy—absent a corresponding improvement in productivity or structural reforms—risks imposing costs without delivering material competitiveness gains.

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**Average wages in selected developed and developing economies**
This point is reinforced by the final chart, which shows estimates for average monthly wages across countries in 2024. US labour remains much more expensive than in peer or emerging economies. So even if China’s costs rise in tandem with the US, the global supply chain has ample alternatives. 'China plus one' strategies are accelerating, and the US remains structurally misaligned with low-cost production hubs. Tariffs aimed at reshoring supply chains are unlikely to deliver sustained gains unless accompanied by deep supply-side reforms, and risk further disincentivizing foreign direct investment if global firms perceive US trade policy as erratic or punitive.

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Financial markets found a measure of calm this week, buoyed by some subtle shifts in tone from US policymakers. A softening in the administration’s rhetoric around trade tariffs coupled with a less confrontational stance toward Federal Reserve Chair Jerome Powell, helped ease tensions that had roiled markets earlier in the month. Equities rebounded modestly, and volatility indicators edged lower, reflecting cautious optimism that the worst of the policy shocks may be behind us. But beneath the surface, significant downside risks persist. New shipping data point to a pronounced slowdown in US-China trade flows (chart 1), suggesting the damage from recent tariff escalations is already rippling through global supply chains. Meanwhile, incoming data for the US revealed an unexpected contraction in the economy in Q1 and further signs of weakness in the labour market (chart 2). The US dollar, in the meantime, while long supported by superior growth and yield differentials, has begun to decouple from traditional drivers (charts 3 and 4) suggesting growing pressure on capital flows. At the same time, structural imbalances are drawing renewed scrutiny: unit labour cost comparisons show the US steadily losing competitiveness (chart 5), while nominal wage disparities remain stark versus China and other Asian economies, further complicating any effort to restore trade balance without broader reforms (chart 6). In short, while markets may be drawing temporary comfort from a pause in tariff brinkmanship, the deeper economic and financial vulnerabilities exposed this month remain unresolved—and increasingly central to the global macro narrative.

Charts of the Week: Tariff Truce, Tenuous Trust

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Real GDP eased 0.3% SAAR (+2.1% y/y) during the first quarter of 2025 after increasing 2.4% in Q4’24 and 3.1% in Q3’24. A 0.4% increase had been expected in the Action Economics Forecast Survey. It was the first decline since Q1 2022.

Foreign trade subtracted 4.83 percentage points from growth last quarter as imports surged 41.3% (13.4% y/y) ahead of tariffs, which began to come into effect in the first quarter. The rise followed a 1.9% decline in Q4’24. Exports rose 1.8% (3.0% y/y) after easing 0.2% in Q4. Inventories added 2.25 percentage points to growth after subtracting 0.84 percentage point from Q4 growth.

Real final sales to domestic purchasers grew 2.3% (2.9% y/y) in Q1 after rising 3.0% in Q4. Personal consumption expenditures rose 1.8% (3.1% y/y) following a 4.0% gain. Durable goods spending fell 3.4% (+5.3% y/y) after surging 12.4% in Q4. Motor vehicle purchases declined 11.1% (+5.5% y/y) after strengthening 19.7% in Q4. Spending on home furnishings & appliances gained 1.5% (6.1% y/y) following a 5.4% rise. Recreational goods & vehicle outlays rose 2.5% (7.0% y/y) last quarter after a 13.9% Q4 increase.

Nondurable goods outlays rose 2.7% (3.0% y/y) following 3.1% growth in Q4. Apparel spending increased 6.7% (2.5% y/y) following a 5.0% rise. Food & beverage buying gained 2.5% (2.3% y/y) after a 1.8% increase. Gasoline & fuel oil purchases increased 4.6% (3.4% y/y) after falling 2.0% in Q4.

Spending on services increased 2.4% last quarter (2.7% y/y) after a 3.0% gain. Outlays on housing & utilities increased 3.4% (1.8% y/y) after rising 1.1% in Q4. Health care expenditures rose 4.0% (4.8% y/y) following a 4.7% strengthening. Transportation outlays increased 5.3% (4.6% y/y) after a 3.7% rise while recreation spending rose 4.7% (2.8% y/y) following a 4.5% rise. Restaurant & hotel expenditures declined 2.1% (+0.5% y/y) following a 2.8% rise. Financial services expenditures rose 1.9% (2.0% y/y) after a 3.1% Q4 increase.

Business fixed investment increased 9.8% (3.6% y/y) following a 3.0% decline in Q4. Expenditures on structures rose 0.4% (-0.4% y/y) after a 2.9% increase. Expenditures on producers’ durable equipment jumped 22.5% (8.0% y/y) after falling 8.7%.  Outlays on information processing equipment soared 69.3% (18.9% y/y) following a 7.3% decline. Industrial equipment investment fell 1.4% (-0.3% y/y) after easing 0.9%. Intellectual property product spending rose 4.1% (1.8% y/y) following a 0.5% decline. 

Residential structures investment increased 1.3% (-0.1% y/y) in Q1 after a 5.5% Q4 rise.

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Government spending fell 1.5% (+2.4% y/y) after a 3.1% Q4 rise. Federal government expenditures declined 5.1% (+2.9% y/y) after rising 4.0% in Q4. National defense expenditures declined 8.0% (+4.0% y/y) after increasing 4.8% in Q4. State & local government spending rose 0.8% (2.1% y/y) following a 2.5% rise.

The GDP price index rose 3.7% (2.6% y/y) after increasing 2.3% in Q4. It was the largest increase since Q4’22. A 2.4% increase had been expected. The PCE chain price index increased 3.6% (2.5% y/y) following a 2.4% rise. The PCE price index excluding food and energy rose 3.5% (2.8% y/y) after increasing 2.6% in Q4. The business fixed investment price index rose 0.4% (1.8% y/y) after 1.5% rise. The residential price index strengthened 3.9% (3.2% y/y) after a 1.9% rise while the government price index increased 4.7% (2.8% y/y) following a 2.1% rise.

The GDP data can be found in Haver’s **USECON** and **USNA** databases. **USNA** contains virtually all of the Bureau of Economic Analysis detail in the national accounts. The Action Economics consensus estimates can be found in **AS1REPNA**.

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- Decline in GDP is first in three years.
- Foreign trade subtracts substantially ahead of tariffs.
- Domestic final demand growth weakens.
- Price index strengthens with higher core PCE prices.

U.S. GDP Unexpectedly Declines in Q1’25; Prices Strengthen

Michael J. Moran

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High-side readings on the price indexes for personal consumption expenditures in January and February caused some concern about emerging price pressure, especially with some policies of the Trump administration possibly adding to the upward force. However, March brought notable relief, with the headline price index falling slightly (-0.04%). A marked decline in energy prices was helpful (-2.7%), but core prices also were subdued, increasing less than 0.1%.  Year-over-year changes were still above the Fed’s target of 2%, but only barely so for the headline measure (2.3%). The core index backed away from the reading of 3.0% in February, but the latest reading of 2.7% was in line with observations in the past year, and still uncomfortably above target.

Consumers roused from a winter slumber in March, with nominal outlays increasing 0.7%. With inflation restrained, real outlays also posted a gain of 0.7%. Spending on durable gods stood out, with real outlays advancing 3.2%. Real outlays for both nondurable goods and services rose 0.4%, a solid pace. Signs of life were certainly welcome after an average decline of 0.1% in January and February. The March rebound left growth of 1.8% (annual rate) in the first quarter.

The brisk increase in spending in March was supported by a solid gain in personal income (0.5% in both nominal and real terms). Growth in wage income was firm at 0.5%, while proprietors’ income was robust with a gain of 1.8% (not annualized!). The farm sector led the advance in proprietors’ income, but the nonfarm sector also was strong (0.6%).

The personal income and consumption figures are available in Haver’s **USECON** database with detail in the **USNA** database. The Action Economics forecasts are in **AS1REPNA**.

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- Price pressure eases.
- Spending rebounds after two soft months.

Personal Income, Consumption, and Prices in March

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The Pending Home Sales Index, a forward-looking home sales measure based on contract signings, from the National Association of Realtors rose 6.1% to 76.5 (-0.6% y/y) during March after rising a little-revised 2.1% in February. These changes followed a 4.6% January decline.

The rise in March sales occurred as the rate on a 30-year mortgage eased to an average 6.65% from 6.84% in February. This rate was well above a low of 2.68% averaged in December 2020.

Pending home sales were up in most regions of the country. Sales in the Midwest rose 4.9% (1.4% y/y) last month after rising 1.8% in February. Sales in the South increased 9.8% (-0.4% y/y) following a 5.8% February rise. Sales in the West improved 4.8% (-2.0% y/y) after falling 3.0% in February. Sales in the Northeast were off 0.5% (-3.0% y/y) in March after falling 0.9% in February.

The pending home sales index measures sales at the time the contract for the purchase of an existing home is signed, similar to the Census Bureau's new home sales data. In contrast, the National Association of Realtors' existing home sales data are recorded when the sale is closed, which is usually a couple of months after the sales contract has been signed. In developing the pending home sales index, the NAR found that the level of monthly sales contract activity leads the level of closed existing home sales by about two months.

The series dates back to 2001 and are available in Haver's **PREALTOR** database. Weekly mortgage interest rates from the Mortgage Bankers Association can be found in the **WEEKLY** database.

- Sales rise to highest level in four months.
- Strength is evident throughout most of country.

U.S. Pending Home Sales Surge in March

Sandy Batten

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The employment cost index (ECI) for civilian workers, arguably the most accurate measure of labor compensation in the United States, rose 0.9% q/q (3.6% y/y) in Q1, the same quarterly increase as in last year’s Q4, according to the Bureau of Labor Statistics. The quarterly gains have fluctuated between 0.8% and 1.0% for the past six quarters. The Action Economics Forecast Survey had expected a 0.9% q/q increase and a 3.5% y/y gain.

Wages and salaries for civilian workers rose 0.8% q/q (3.5% y/y) in Q1, down from 1.0% q/q in Q4. This tied the Q3 2024 quarterly rise as the smallest increase since Q2 2021. It was also the smallest y/y increase since Q2 2021. Benefits increased by an outsized 1.2% q/q (3.9% y/y) in Q1 versus 0.8% q/q in Q4. This is the largest quarterly gain since Q2 2022. In general, employment cost gains remain above the pace observed prior to the pandemic but are slowing gradually.

Private industry workers’ compensation rose 0.8% q/q (3.4% y/y) in Q1, down from 0.9% q/q (3.6% y/y) in Q4. Wages and salaries for private industry workers increased 0.8% q/q (3.4% y/y) in Q1 versus 0.8% q/q (3.7% y/y) in Q4. The quarterly gain in Q1 tied that in Q3 2024 as the smallest increase since Q4 2020. Benefits for private industry workers jumped 1.2% q/q (3.6% y/y). the largest quarterly gain since Q2 2022. The acceleration in benefits in Q1 was primarily in service-producing industries.

Compensation in private goods-producing industries increased 1.0% q/q (3.2% y/y) in Q1, the largest quarterly gain in five quarters, versus a 0.7% q/q increase in Q4. Compensation in construction jumped 1.3% q/q, its largest quarterly increase since Q2 2022, up from a 0.6% q/q gain in Q4. Manufacturing compensation growth slowed to 0.7% q/q, its slowest quarterly advance since Q4 2020, from 0.8% q/q in Q4. Compensation in private service-producing industries increased 0.8% q/q (3.5% y/y), down slightly from a 0.9% q/q gain in Q4. Compensation in education and health services jumped 1.3% q/q, its largest quarterly gain since Q3 2023. In contrast, compensation in other services edged up 0.1% q/q in Q1, its smallest quarterly advance since before the pandemic.

The employment cost index measures the change in the cost of labor, free from the influence of employment shifts across occupations and industries. It is provided by the Bureau of Labor Statistics and is available in Haver’s **USECON** database. Consensus estimates from the Action Economics Forecast Survey are in Haver’s **AS1REPNA** database.

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- Compensation grew 0.9 q/q in Q1, the same pace as in Q4.
- Wage growth slowed to 0.8% q/q while benefits surged 1.2% q/q, their largest quarterly increase since Q2 2022.

Economy in Brief: May 2006

Jump to:

UK and German Business Confidence Gains Pause in May; Export Demand Favorable

Mortgage Applications Recovered

New Home Sales Again Rose Unexpectedly

New Orders for U.S. Durable Goods Fell

New Orders for U.S. Durable Goods Fell

Dutch, Slovene and Italian Consumers a Little More Confident: Dutch, Slovene, and French Business a Little Less So

Chain Store Sales Down Again With Gasoline Prices

Chain Store Sales Down Again With Gasoline Prices