Robert Brusca

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070518a.jpg" width="353">
The chart on the left shows that many patterns for current conditions and expectations precede the economy&#146;s slip into recession. As we evaluate this year&#146;s pattern nothing is very telling. Current conditions are holding up, basically stabilizing in April and this month after a minor slide from a local peak reached in January. Consumer sentiment is up this month and has a saw-tooth pattern in the recovery. Sentiment is at levels more reminiscent of the 1982 recovery that of the 1991 recovery. Indeed if you remove the last set of recession bands from the chart the slide in expectations appears to be one ongoing episode of irregularly sliding expectations dating back to the lofty levels reached in 2000 ahead of the recession.
Current conditions have a more normal-looking recession pattern. What we cannot tell is if we are at a point like in 1996 when current conditions, after softening, rose sharply or if we are at a point like May 2000 where a series of slips and rebounds eventually gave way to a recession. One thing seems clear and that is we are apt to learn more from watching current conditions than by watching expectations since the later seem to range so widely and have been cyclically unruly. In that regard we are wary of the slippage in current conditions reported this month. 
The table below shows us that the major components of the U of M index are still quite firm in their recovery zone. Still the current conditions index is only in the 58th percentile of its recovery range of values. Expectations have dropped to the 43rd percentile. These are firm readings; not declining readings but the economy still has lost a lot of its momentum.
The problem with understanding these measures is that they hold in ranges until the &#146;bad event&#146; of recession kicks in then they fall sharply. So finding that each has lost a lot of ground within its respective range means we have to be somewhat wary of these readings. Certainly, the economy is getting hit with another series of shocks from oil prices. The rebound in sentiment is only somewhat reassuring, but it has a rising stock market to help it out. Keep your eye on current conditions; it&#146;s the measure that must respond positively in coming months if the growth is going to continue.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
 Univ of Michingan Consumer Sentiment-Preliminary
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">&nbsp;</td>
<td> Sentiment</td>
<td> Current</td>
<td> Expectations</td>
</tr>
<tr class="grey3">
<td class="firstcol">Prelim</td>
<td>88.7</td>
<td>103.8</td>
<td>79.0</td>
</tr>
<tr class="grey3">
<td class="firstcol">Last Month</td>
<td>87.1</td>
<td>104.6</td>
<td>75.9</td>
</tr>
<tr class="grey3">
<td class="firstcol">Mo/Mo %</td>
<td>1.8%</td>
<td>-0.8%</td>
<td>4.1%</td>
</tr>
<tr class="grey3">
<td class="firstcol">2-Mos</td>
<td>0.3%</td>
<td>0.3%</td>
<td>0.4%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Yr/Yr%</td>
<td>12.1%</td>
<td>8.0%</td>
<td>15.8%</td>
</tr>
<tr class="grey2">
<td colspan="4"> In Recovery: Max,Min, Avg &amp; Percentile</td>
</tr>
<tr class="grey3">
<td class="firstcol">Max</td>
<td>103.8</td>
<td>113.5</td>
<td>100.1</td>
</tr>
<tr class="grey3">
<td class="firstcol">Min</td>
<td>74.2</td>
<td>90.0</td>
<td>63.2</td>
</tr>
<tr class="grey3">
<td class="firstcol">Average</td>
<td>89.7</td>
<td>102.5</td>
<td>81.5</td>
</tr>
<tr class="grey1">
<td class="firstcol"> percentile</td>
<td> 49.0%</td>
<td> 58.7%</td>
<td> 42.8%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Cycle peak</td>
<td> 103.8</td>
<td> 113.5</td>
<td> 100.1</td>
</tr>
<tr class="grey3">
<td class="firstcol">% of Peak</td>
<td>85.5</td>
<td>91.5</td>
<td>78.9</td>
</tr>
</tbody>
</table>
Gasoline Price Hits New Record, as Springtime Inventories Are Low 
by <a href="/comment/Stone.html">Carol Stone</a> May 18, 2007


<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070518b.jpg">
Gasoline prices in the US hit a record high last week (ended May 14), $3.103 a gallon for regular grade, according to the Department of Energy, up 4.9 cents from the week before. And the main summer driving season hasn&#39;t started yet.<img align="right" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070518c.jpg">
Oddly, it seems, the price of gasoline has risen more than proportionately with crude oil prices. This is readily apparent in the first graph, which includes regular gasoline and two crudes, West Texas Intermediate and UK Brent Blend. We see there that in the last two years of dramatically higher petroleum prices, gasoline prices have fallen more sharply in the winter and risen more in the spring. The extremity of the up-move this year is greater than last year. In the second graph, it is evident that demand for gasoline did not fall as much over the winter as in any recent year. Consequently, gasoline inventories are lower now than usual in the spring, seen in graph 3, so prices are rising more rapidly.<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070518d.jpg">
The other feature of the energy markets that continues to fascinate us is the growth of demand for petroleum generally in emerging market countries and in China. The last graph -- another illustration of the new multiple-series and calculation features of the upcoming version of DLXVG3 software -- shows that Europe has decreased markedly as a share of world petroleum demand. The US is up slightly in the most recent few months, touching almost exactly 25% in April; but this is still modestly lower than the range that prevailed before 2004. China, in sharp contrast, is expanding rapidly, basically doubling its share since 1995 and raising its use by 60% in the last 5 years.<img align="right" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070518e.jpg">
The data here on prices and US inventories are in the OILWKLY database, and those on international demand comparisons are in the OMI database, which is provided by Haver&#39;s partner in energy information, Energy Intelligence. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">&nbsp;</th>
<th scope="col">May 14</th>
<th scope="col">May 7</th>
<th scope="col">Apr 2007</th>
<th scope="col">Yr-Ago Week</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Gasoline, US Regular Grade (cents/gal)</td>
<td>310.3</td>
<td>305.4</td>
<td>284.5</td>
<td>294.7</td>
<td>257.2</td>
<td>227.0</td>
<td>148.4</td>
</tr>
<tr>
<td class="firstcol">Crude Oil, UK Brent ($/barrel)</td>
<td>May 11</td>
<td>May 4</td>
<td>67.58</td>
<td>70.47</td>
<td>65.19</td>
<td>54.58</td>
<td>28.53</td>
</tr>
<tr class="odd">
<td class="firstcol">66.92</td>
<td>66.92</td>
</tr>
<tr>
<td class="firstcol">West Texas Intermed</td>
<td>61.90</td>
<td>63.79</td>
<td>63.91</td>
<td>71.60</td>
<td>66.13</td>
<td>56.50</td>
<td>30.36</td>
</tr>
</tbody>
</table>
</body>
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The chart on the left shows that many patterns for current conditions and expectations precede the economys slip into recession. As we evaluate this years pattern nothing is very telling. Current conditions are holding up, basically [...]

U.S. Consumer Sentiment Bounced Back but Current Conditions Slip

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/070517a.jpg" width="353">
Japanese GDP grew at a 2.4% annual rate in Q1, less than Q4&#39;s 5.0% and less than market expectations of 2.7%. Q4 was also revised downward from 5.5% reported in mid-March.
The slower growth was due to a contraction in investment, and Q4&#39;s investment amount was also reduced from prior reports. So total fixed capital formation fell at a 2.8% rate, following growth of 10.6% in Q4. Residential was off 1.3% in Q1 and nonresidential plant and equipment at a 3.7% rate. The revision to Q4 was small for residential but nonresidential was cut from 13.2% to 9.4% growth. Even so, plant &amp; equipment expenditures for 2006 as a whole came in at 11.0%. Thus, the decrease in Q1 came on the heels of quite strong gains during last year. Further, new depreciation rules went into effect with the new fiscal year in April, and the accounting change would have discouraged major capital spending just before that.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070517b.jpg" width="353">
By contrast, consumption did well. In Q1, it grew at a 3.5% annual rate, following 4.3% in Q4. These two quarters are a considerable pick-up from last year&#39;s overall tepid performance. And Q4 was even revised a bit higher. Net exports also added to overall growth, as exports themselves grew 13.9%, annualized, in Q1 after 3.4% in Q4. This latter figure was also revised upward for Q4, which previously had shown 2.4% growth. Partially offsetting, imports switched from their declining pattern in Q3 (-1.5%) and Q4 2006 (-0.5%) to a moderate gain of 3.8% in Q1. The amount in Q4 was revised upward marginally.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070517c.jpg" width="353">
The transitory accounting-rule factors on capital spending can well mean that it will turn back up soon. And the nice back-to-back growth in consumer spending is encouraging. Prices do persist in their decline. We calculated a deflator from the seasonally adjusted GDP figures, and it fell 1.2% in Q1, although it had risen 0.4% in Q4. The &quot;official&quot; deflator based on not seasonally adjusted data was off just 0.2% year-on-year in Q1. Government officials assert that Japan is on the verge of breaking out of deflation, and these recent patterns suggest that is an apt description. In this space on Monday, Louise Curley noted the role of its vibrant Asian neighbors in boosting the Japanese economy. So there look to be a number of positive forces in the outlook. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">JAPAN (% Chg, SAAR*)</th>
<th scope="col">Q1 2007</th>
<th scope="col">Q4 2006</th>
<th scope="col">Q3 2006</th>
<th scope="col">Year/ Year</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Real GDP</td>
<td>2.4</td>
<td>5.0</td>
<td>0.3</td>
<td>2.0</td>
<td>2.4</td>
<td>2.8</td>
<td>1.1</td>
</tr>
<tr>
<td class="firstcol">Private Consumption</td>
<td>3.5</td>
<td>4.3</td>
<td>-4.0</td>
<td>1.6</td>
<td>0.5</td>
<td>2.7</td>
<td>0.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Government Consumption</td>
<td>-0.3</td>
<td>0.3</td>
<td>2.5</td>
<td>1.2</td>
<td>1.3</td>
<td>0.8</td>
<td>1.3</td>
</tr>
<tr>
<td class="firstcol">GFCF**</td>
<td>-2.8</td>
<td>10.6</td>
<td>-1.2</td>
<td>1.7</td>
<td>5.3</td>
<td>2.5</td>
<td>-0.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Private Residential</td>
<td>-1.3</td>
<td>8.9</td>
<td>-1.0</td>
<td>-0.2</td>
<td>1.0</td>
<td>-0.5</td>
<td>2.6</td>
</tr>
<tr>
<td class="firstcol">Plant &amp; Equipment</td>
<td>-3.7</td>
<td>9.4</td>
<td>3.8</td>
<td>4.7</td>
<td>11.0</td>
<td>4.2</td>
<td>2.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Public Investment</td>
<td>-0.6</td>
<td>17.0</td>
<td>-17.6</td>
<td>-6.8</td>
<td>-8.0</td>
<td>0.5</td>
<td>-5.4</td>
</tr>
<tr>
<td class="firstcol">Exports</td>
<td>13.9</td>
<td>3.4</td>
<td>9.6</td>
<td>7.4</td>
<td>6.3</td>
<td>10.4</td>
<td>10.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports</td>
<td>3.8</td>
<td>-0.5</td>
<td>-1.5</td>
<td>2.0</td>
<td>2.8</td>
<td>4.4</td>
<td>9.5</td>
</tr>
</tbody>
</table>
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Japanese GDP grew at a 2.4% annual rate in Q1, less than Q4's 5.0% and less than market expectations of 2.7%. Q4 was also revised downward from 5.5% reported in mid-March. The slower growth was due to a contraction in investment, and [...]

Japan's Growth a Bit Slower than Expected, but Encouraging Forces in Place

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070517e.jpg" width="353">
The LEI is increasing its year/year pace of decline and is now falling by 0.7% year/year. However, a brief look at history shows that the current combination of a weak LEI and weak coincident index is not producing a weakening at a pace that signals recession. They are weakening more like they did in 1995, but not even as severely as that&#133;and there is less weakening power in the pipeline that it seems.
Periods in which the coincident index is growing more slowing than the leading index do tend to be slowdown periods. But not all of them become recession periods. Some of them are extended periods that eventually transition into recession. Only the aftermath of the 1995 episode left a good solid period of growth in its wake.
While the LEI has dropped to a weaker growth rate on year/year measures, this is not a period with increased downward momentum in general. The 3-month and 6-month rates of growth are not getting progressively lower. The six month rate speeded up but the three-month rate is the one that has fallen sharply. Over the same recent three-months the coincident index has speeded up slightly. The LEI has been very flat so that there is really little in the way for further declines in the pipeline from one-year ago. May of 2006 was weaker than April of that year implying that the year/year LEI will be lower by only 0.2% year/year unless it falls further in May. Even the three-month growth rate (annualized) is not set for further weakness despite its relatively sharp drop in April. If the LEI is unchanged next month it will rise in May over the next three-month period, not fall. 
Apart from these technical considerations there are the economic data that have begun to show a bit more strength.
The LEI is falling. Its rate of decline has accelerated this month. But there does not appear to be an ongoing process here nor does the rate of descent appear to be particularly disturbing.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Leading Economic Indicators
</tr>
</thead>
<tbody>
<tr class="grey6">
<td class="firstcol">&nbsp;</td>
<td>LEADING</td>
<td>COINCIDENT</td>
<td>LAGGING</td>
</tr>
<tr class="grey5">
<td colspan="4">Month-to-month</td>
</tr>
<tr class="grey4">
<td class="firstcol">Apr-07</td>
<td>-0.5%</td>
<td>0.2%</td>
<td>0.2%</td>
</tr>
<tr class="grey4">
<td class="firstcol">Mar-07</td>
<td>0.6%</td>
<td>0.1%</td>
<td>0.0%</td>
</tr>
<tr class="grey4">
<td class="firstcol">Feb-07</td>
<td>-0.6%</td>
<td>0.2%</td>
<td>0.2%</td>
</tr>
<tr class="grey4">
<td class="firstcol">Jan-07</td>
<td>-0.3%</td>
<td>-0.1%</td>
<td>-0.1%</td>
</tr>
<tr class="grey5">
<td colspan="4">SAAR</td>
</tr>
<tr class="grey3">
<td class="firstcol">3-Mos</td>
<td>-2.0%</td>
<td>1.6%</td>
<td>1.6%</td>
</tr>
<tr class="grey2">
<td class="firstcol">6-Mos</td>
<td>-0.4%</td>
<td>1.3%</td>
<td>3.7%</td>
</tr>
<tr class="grey1">
<td class="firstcol">12-Mos</td>
<td>-0.7%</td>
<td>1.7%</td>
<td>3.3%</td>
</tr>
</tbody>
</table>
</body>
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The LEI is increasing its year/year pace of decline and is now falling by 0.7% year/year. However, a brief look at history shows that the current combination of a weak LEI and weak coincident index is not producing a weakening at a [...]

U.S. LEI Weakness in April… One Trick Pony

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070517d.jpg" width="353">
Pictured on the left is the Philadelphia barometer for its OUTLOOK index that looks 6-months ahead. The index has made a considerable rebound and is now closer to giving off a signal of normal growth for the future based on the position of this index in its range of values going back to 1968.
Few plot this index but I like it because it has been such a good and consistent harbinger of recessions and weakness and then of recovery (see chart). The index turned negative and before each recession since 1974. If you view a below zero reading as a signal for recession, it has given off some false ones, but it does give off weak signals when MFG is weak and its reports tend to be early-to-timely. Its &#145;false&#146; signals have tended to be more isolated or single weak readings. However, ahead of the 2001 recession this index did not give off a powerful series of negative readings it just gave off a few. But then it did emit strong signals of coming recovery &#150; and that was even though the recovery itself proved to be tepid. .
The signal for this index that is unimpeachable is that once it has been weak and rebounds it signals growth The only thing close to an exception to this result was that the cluster of recession-indicating weaker readings ahead of the 1991 recession was followed by a series of positive readings (none as strong as +20, however) before the recession actually occurred. The index had signaled recession ahead. But then there was a weak rise (weaker than what the barometer is signaling right now) and then recession kicked in. Once the recession started the outlook barometer dipped again, then moved up strongly near the end of recession to signal oncoming recovery.
Against that background the recovery signals from the Philly outlook are now impressively stronger and are coming off a set of weak readings that did not turn the barometer negative at any point. It may not be safe to assume anything but this index is something to encourage you to become more optimistic. It is signaling continued growth.
Its upbeat signal joins with the sharp March rise in industrial output and the recovery in the Empire State index for May. Jobless claims fell further below the 300k level this week in another upbeat sign. Economic signals remain mixed to be sure but a series of reports from this week (and I&#146;ll throw in the tentative sign of bottoming from housing starts) are reason to be more optimistic.
The table below grinds out relationships for the more conventionally watched Philadelphia current index. The various readings confirm that the current index is still quite weak but it has moved up with the key orders and shipments series as two of the best-advancing components. Employment has advanced sharply even if it has been at the cost of the length of the work week. Substituting full time workers for longer hours is usually a good sign for the economy.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Philadelphia Fed index in perspective: Since 1968
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Index:C</td>
<td>New Ord:C</td>
<td>Shipmnt:C</td>
<td>Deliv.</td>
<td>Inventory</td>
<td>Backlog</td>
<td>Pr:Pd</td>
<td>Pr:Rcd</td>
<td>Employ:C</td>
<td>Wrk Hrs</td>
</tr>
<tr>
<td class="firstcol">May-07</td>
<td>4.2</td>
<td>8.7</td>
<td>9.3</td>
<td>-8.2</td>
<td>-6.9</td>
<td>-9.1</td>
<td>32.3</td>
<td>2.2</td>
<td>12.9</td>
<td>-5.5</td>
</tr>
<tr>
<td class="firstcol">Apr-07</td>
<td>0.2</td>
<td>2.8</td>
<td>4.3</td>
<td>-11.9</td>
<td>-3.1</td>
<td>-13.7</td>
<td>24.3</td>
<td>5.2</td>
<td>2.5</td>
<td>5.5</td>
</tr>
<tr>
<td class="firstcol">Mar-07</td>
<td>0.2</td>
<td>1.9</td>
<td>6.8</td>
<td>-13.2</td>
<td>-3.7</td>
<td>-20.9</td>
<td>21.8</td>
<td>16.3</td>
<td>2.3</td>
<td>-4.9</td>
</tr>
<tr>
<td class="firstcol">Average</td>
<td>9.7</td>
<td>10.6</td>
<td>14.7</td>
<td>-3.4</td>
<td>-6.8</td>
<td>-5.8</td>
<td>29.8</td>
<td>11.3</td>
<td>-0.1</td>
<td>-1.1</td>
</tr>
<tr>
<td class="firstcol">Median</td>
<td>11.5</td>
<td>13.3</td>
<td>15.9</td>
<td>-2.5</td>
<td>-6.8</td>
<td>-4.3</td>
<td>26.7</td>
<td>8.9</td>
<td>2.1</td>
<td>0.0</td>
</tr>
<tr>
<td class="firstcol">max</td>
<td>58.9</td>
<td>56.2</td>
<td>48.3</td>
<td>19.9</td>
<td>27.6</td>
<td>44.6</td>
<td>91.0</td>
<td>63.8</td>
<td>24.4</td>
<td>22.7</td>
</tr>
<tr>
<td class="firstcol">Min</td>
<td>-57.9</td>
<td>-53.5</td>
<td>-32.2</td>
<td>-33.6</td>
<td>-50.7</td>
<td>-60.9</td>
<td>-16.4</td>
<td>-18.2</td>
<td>-40.0</td>
<td>-45.6</td>
</tr>
<tr class="odd">
<td colspan="11">% of Range reading</td>
</tr>
<tr>
<td class="firstcol">Current</td>
<td>53.2%</td>
<td>56.7%</td>
<td>51.6%</td>
<td>47.5%</td>
<td>55.9%</td>
<td>49.1%</td>
<td>45.3%</td>
<td>24.9%</td>
<td>82.1%</td>
<td>58.7%</td>
</tr>
<tr>
<td class="firstcol">Future</td>
<td>43.4%</td>
<td>56.7%</td>
<td>56.7%</td>
<td>51.7%</td>
<td>39.2%</td>
<td>41.5%</td>
<td>36.4%</td>
<td>34.7%</td>
<td>54.5%</td>
<td>52.7%</td>
</tr>
</tbody>
</table>
</body>
</html>

Pictured on the left is the Philadelphia barometer for its OUTLOOK index that looks 6-months ahead. The index has made a considerable rebound and is now closer to giving off a signal of normal growth for the future based on the [...]

Philly Index Points Way Higher

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070517d.jpg" width="353">
Pictured on the left is the Philadelphia barometer for its OUTLOOK index that looks 6-months ahead. The index has made a considerable rebound and is now closer to giving off a signal of normal growth for the future based on the position of this index in its range of values going back to 1968.
Few plot this index but I like it because it has been such a good and consistent harbinger of recessions and weakness and then of recovery (see chart). The index turned negative and before each recession since 1974. If you view a below zero reading as a signal for recession, it has given off some false ones, but it does give off weak signals when MFG is weak and its reports tend to be early-to-timely. Its &#145;false&#146; signals have tended to be more isolated or single weak readings. However, ahead of the 2001 recession this index did not give off a powerful series of negative readings it just gave off a few. But then it did emit strong signals of coming recovery &#150; and that was even though the recovery itself proved to be tepid. .
The signal for this index that is unimpeachable is that once it has been weak and rebounds it signals growth The only thing close to an exception to this result was that the cluster of recession-indicating weaker readings ahead of the 1991 recession was followed by a series of positive readings (none as strong as +20, however) before the recession actually occurred. The index had signaled recession ahead. But then there was a weak rise (weaker than what the barometer is signaling right now) and then recession kicked in. Once the recession started the outlook barometer dipped again, then moved up strongly near the end of recession to signal oncoming recovery.
Against that background the recovery signals from the Philly outlook are now impressively stronger and are coming off a set of weak readings that did not turn the barometer negative at any point. It may not be safe to assume anything but this index is something to encourage you to become more optimistic. It is signaling continued growth.
Its upbeat signal joins with the sharp March rise in industrial output and the recovery in the Empire State index for May. Jobless claims fell further below the 300k level this week in another upbeat sign. Economic signals remain mixed to be sure but a series of reports from this week (and I&#146;ll throw in the tentative sign of bottoming from housing starts) are reason to be more optimistic.
The table below grinds out relationships for the more conventionally watched Philadelphia current index. The various readings confirm that the current index is still quite weak but it has moved up with the key orders and shipments series as two of the best-advancing components. Employment has advanced sharply even if it has been at the cost of the length of the work week. Substituting full time workers for longer hours is usually a good sign for the economy.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Philadelphia Fed index in perspective: Since 1968
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Index:C</td>
<td>New Ord:C</td>
<td>Shipmnt:C</td>
<td>Deliv.</td>
<td>Inventory</td>
<td>Backlog</td>
<td>Pr:Pd</td>
<td>Pr:Rcd</td>
<td>Employ:C</td>
<td>Wrk Hrs</td>
</tr>
<tr>
<td class="firstcol">May-07</td>
<td>4.2</td>
<td>8.7</td>
<td>9.3</td>
<td>-8.2</td>
<td>-6.9</td>
<td>-9.1</td>
<td>32.3</td>
<td>2.2</td>
<td>12.9</td>
<td>-5.5</td>
</tr>
<tr>
<td class="firstcol">Apr-07</td>
<td>0.2</td>
<td>2.8</td>
<td>4.3</td>
<td>-11.9</td>
<td>-3.1</td>
<td>-13.7</td>
<td>24.3</td>
<td>5.2</td>
<td>2.5</td>
<td>5.5</td>
</tr>
<tr>
<td class="firstcol">Mar-07</td>
<td>0.2</td>
<td>1.9</td>
<td>6.8</td>
<td>-13.2</td>
<td>-3.7</td>
<td>-20.9</td>
<td>21.8</td>
<td>16.3</td>
<td>2.3</td>
<td>-4.9</td>
</tr>
<tr>
<td class="firstcol">Average</td>
<td>9.7</td>
<td>10.6</td>
<td>14.7</td>
<td>-3.4</td>
<td>-6.8</td>
<td>-5.8</td>
<td>29.8</td>
<td>11.3</td>
<td>-0.1</td>
<td>-1.1</td>
</tr>
<tr>
<td class="firstcol">Median</td>
<td>11.5</td>
<td>13.3</td>
<td>15.9</td>
<td>-2.5</td>
<td>-6.8</td>
<td>-4.3</td>
<td>26.7</td>
<td>8.9</td>
<td>2.1</td>
<td>0.0</td>
</tr>
<tr>
<td class="firstcol">max</td>
<td>58.9</td>
<td>56.2</td>
<td>48.3</td>
<td>19.9</td>
<td>27.6</td>
<td>44.6</td>
<td>91.0</td>
<td>63.8</td>
<td>24.4</td>
<td>22.7</td>
</tr>
<tr>
<td class="firstcol">Min</td>
<td>-57.9</td>
<td>-53.5</td>
<td>-32.2</td>
<td>-33.6</td>
<td>-50.7</td>
<td>-60.9</td>
<td>-16.4</td>
<td>-18.2</td>
<td>-40.0</td>
<td>-45.6</td>
</tr>
<tr class="odd">
<td colspan="11">% of Range reading</td>
</tr>
<tr>
<td class="firstcol">Current</td>
<td>53.2%</td>
<td>56.7%</td>
<td>51.6%</td>
<td>47.5%</td>
<td>55.9%</td>
<td>49.1%</td>
<td>45.3%</td>
<td>24.9%</td>
<td>82.1%</td>
<td>58.7%</td>
</tr>
<tr>
<td class="firstcol">Future</td>
<td>43.4%</td>
<td>56.7%</td>
<td>56.7%</td>
<td>51.7%</td>
<td>39.2%</td>
<td>41.5%</td>
<td>36.4%</td>
<td>34.7%</td>
<td>54.5%</td>
<td>52.7%</td>
</tr>
</tbody>
</table>
U.S. LEI Weakness in April… One Trick Pony 
by <a href="/comment/Brusca.html">Robert Brusca</a> May 17, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070517e.jpg" width="353">
The LEI is increasing its year/year pace of decline and is now falling by 0.7% year/year. However, a brief look at history shows that the current combination of a weak LEI and weak coincident index is not producing a weakening at a pace that signals recession. They are weakening more like they did in 1995, but not even as severely as that&#133;and there is less weakening power in the pipeline that it seems.
Periods in which the coincident index is growing more slowing than the leading index do tend to be slowdown periods. But not all of them become recession periods. Some of them are extended periods that eventually transition into recession. Only the aftermath of the 1995 episode left a good solid period of growth in its wake.
While the LEI has dropped to a weaker growth rate on year/year measures, this is not a period with increased downward momentum in general. The 3-month and 6-month rates of growth are not getting progressively lower. The six month rate speeded up but the three-month rate is the one that has fallen sharply. Over the same recent three-months the coincident index has speeded up slightly. The LEI has been very flat so that there is really little in the way for further declines in the pipeline from one-year ago. May of 2006 was weaker than April of that year implying that the year/year LEI will be lower by only 0.2% year/year unless it falls further in May. Even the three-month growth rate (annualized) is not set for further weakness despite its relatively sharp drop in April. If the LEI is unchanged next month it will rise in May over the next three-month period, not fall. 
Apart from these technical considerations there are the economic data that have begun to show a bit more strength.
The LEI is falling. Its rate of decline has accelerated this month. But there does not appear to be an ongoing process here nor does the rate of descent appear to be particularly disturbing.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Leading Economic Indicators
</tr>
</thead>
<tbody>
<tr class="grey6">
<td class="firstcol">&nbsp;</td>
<td>LEADING</td>
<td>COINCIDENT</td>
<td>LAGGING</td>
</tr>
<tr class="grey5">
<td colspan="4">Month-to-month</td>
</tr>
<tr class="grey4">
<td class="firstcol">Apr-07</td>
<td>-0.5%</td>
<td>0.2%</td>
<td>0.2%</td>
</tr>
<tr class="grey4">
<td class="firstcol">Mar-07</td>
<td>0.6%</td>
<td>0.1%</td>
<td>0.0%</td>
</tr>
<tr class="grey4">
<td class="firstcol">Feb-07</td>
<td>-0.6%</td>
<td>0.2%</td>
<td>0.2%</td>
</tr>
<tr class="grey4">
<td class="firstcol">Jan-07</td>
<td>-0.3%</td>
<td>-0.1%</td>
<td>-0.1%</td>
</tr>
<tr class="grey5">
<td colspan="4">SAAR</td>
</tr>
<tr class="grey3">
<td class="firstcol">3-Mos</td>
<td>-2.0%</td>
<td>1.6%</td>
<td>1.6%</td>
</tr>
<tr class="grey2">
<td class="firstcol">6-Mos</td>
<td>-0.4%</td>
<td>1.3%</td>
<td>3.7%</td>
</tr>
<tr class="grey1">
<td class="firstcol">12-Mos</td>
<td>-0.7%</td>
<td>1.7%</td>
<td>3.3%</td>
</tr>
</tbody>
</table>
Japan's Growth a Bit Slower than Expected, but Encouraging Forces in Place 
by <a href="/comment/Stone.html">Carol Stone</a> May 17, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070517a.jpg" width="353">
Japanese GDP grew at a 2.4% annual rate in Q1, less than Q4&#39;s 5.0% and less than market expectations of 2.7%. Q4 was also revised downward from 5.5% reported in mid-March.
The slower growth was due to a contraction in investment, and Q4&#39;s investment amount was also reduced from prior reports. So total fixed capital formation fell at a 2.8% rate, following growth of 10.6% in Q4. Residential was off 1.3% in Q1 and nonresidential plant and equipment at a 3.7% rate. The revision to Q4 was small for residential but nonresidential was cut from 13.2% to 9.4% growth. Even so, plant &amp; equipment expenditures for 2006 as a whole came in at 11.0%. Thus, the decrease in Q1 came on the heels of quite strong gains during last year. Further, new depreciation rules went into effect with the new fiscal year in April, and the accounting change would have discouraged major capital spending just before that.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070517b.jpg" width="353">
By contrast, consumption did well. In Q1, it grew at a 3.5% annual rate, following 4.3% in Q4. These two quarters are a considerable pick-up from last year&#39;s overall tepid performance. And Q4 was even revised a bit higher. Net exports also added to overall growth, as exports themselves grew 13.9%, annualized, in Q1 after 3.4% in Q4. This latter figure was also revised upward for Q4, which previously had shown 2.4% growth. Partially offsetting, imports switched from their declining pattern in Q3 (-1.5%) and Q4 2006 (-0.5%) to a moderate gain of 3.8% in Q1. The amount in Q4 was revised upward marginally.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070517c.jpg" width="353">
The transitory accounting-rule factors on capital spending can well mean that it will turn back up soon. And the nice back-to-back growth in consumer spending is encouraging. Prices do persist in their decline. We calculated a deflator from the seasonally adjusted GDP figures, and it fell 1.2% in Q1, although it had risen 0.4% in Q4. The &quot;official&quot; deflator based on not seasonally adjusted data was off just 0.2% year-on-year in Q1. Government officials assert that Japan is on the verge of breaking out of deflation, and these recent patterns suggest that is an apt description. In this space on Monday, Louise Curley noted the role of its vibrant Asian neighbors in boosting the Japanese economy. So there look to be a number of positive forces in the outlook. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">JAPAN (% Chg, SAAR*)</th>
<th scope="col">Q1 2007</th>
<th scope="col">Q4 2006</th>
<th scope="col">Q3 2006</th>
<th scope="col">Year/ Year</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Real GDP</td>
<td>2.4</td>
<td>5.0</td>
<td>0.3</td>
<td>2.0</td>
<td>2.4</td>
<td>2.8</td>
<td>1.1</td>
</tr>
<tr>
<td class="firstcol">Private Consumption</td>
<td>3.5</td>
<td>4.3</td>
<td>-4.0</td>
<td>1.6</td>
<td>0.5</td>
<td>2.7</td>
<td>0.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Government Consumption</td>
<td>-0.3</td>
<td>0.3</td>
<td>2.5</td>
<td>1.2</td>
<td>1.3</td>
<td>0.8</td>
<td>1.3</td>
</tr>
<tr>
<td class="firstcol">GFCF**</td>
<td>-2.8</td>
<td>10.6</td>
<td>-1.2</td>
<td>1.7</td>
<td>5.3</td>
<td>2.5</td>
<td>-0.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Private Residential</td>
<td>-1.3</td>
<td>8.9</td>
<td>-1.0</td>
<td>-0.2</td>
<td>1.0</td>
<td>-0.5</td>
<td>2.6</td>
</tr>
<tr>
<td class="firstcol">Plant &amp; Equipment</td>
<td>-3.7</td>
<td>9.4</td>
<td>3.8</td>
<td>4.7</td>
<td>11.0</td>
<td>4.2</td>
<td>2.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Public Investment</td>
<td>-0.6</td>
<td>17.0</td>
<td>-17.6</td>
<td>-6.8</td>
<td>-8.0</td>
<td>0.5</td>
<td>-5.4</td>
</tr>
<tr>
<td class="firstcol">Exports</td>
<td>13.9</td>
<td>3.4</td>
<td>9.6</td>
<td>7.4</td>
<td>6.3</td>
<td>10.4</td>
<td>10.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports</td>
<td>3.8</td>
<td>-0.5</td>
<td>-1.5</td>
<td>2.0</td>
<td>2.8</td>
<td>4.4</td>
<td>9.5</td>
</tr>
</tbody>
</table>
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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070516d.jpg" width="353">
Employment in the UK fell by 1,000 in the February period, a third successive monthly decrease in this 3-month moving average. Over the last three months (the style of comparison that the UK&#39;s Office for National Statistics [ONS] generally emphasizes) employment was down by 55,000 and reached the lowest monthly level since last June. Notably, though, full-time work has held virtually steady October, and it is part-time work that has been cut.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070516e.jpg" width="353">
The unemployment rate, measured by the ILO definition, has held flat at 5.5% since September, and in fact, with the exception of a 5.6% reading last August, has been 5.5% since last May, again using a 3-month moving average. The number unemployed has hovered close around 1.7 million. At the same time, the more popular unemployment gauge in the UK, the &quot;claimant count rate&quot;, has edged lower. In April, this rate, reported as a figure covering just a single month, was 2.8%, down from 2.9% in March and 3.0% during nearly all of 2006.The number of &quot;claimants&quot; for April was 890,000, the first dip below 900,000 since October 2005. At least one press report today argued that the improvement in these latter jobless statistics would give the Bank of England room to raise interest rates in coming months to keep inflation down. However, another press service noted a modest slowing in earnings growth, which would limit the Bank&#39;s need to act.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070516f.jpg" width="353">
Job vacancies suggest that the employment environment may do better. Reported vacancies amounted to 647,400 in April, up 20,000 from three months ago. The clearest gains appear in wholesale &amp; retail trade, hotels and restaurants and in public services, such as health care. The financial sector is also on a steady, but more gradual uptrend. Manufacturing even has seen some increase. Thus, despite the flat pattern in the broad employment measure, these vacancy data point toward some improvement. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">UK Labor Force Survey &amp; Related Labor Data</th>
<th scope="col">Jan 2007</th>
<th scope="col">Dec 2006</th>
<th scope="col">Nov 2006</th>
<th scope="col">Oct 2006</th>
<th scope="col">Year Ago</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Employment* &nbsp; (3Mo Avg, SA, Thous)</td>
<td>--</td>
<td>--</td>
<td>28,981</td>
<td>28,982</td>
<td>28,887</td>
<td>28,960</td>
<td>28,730</td>
<td>28,465</td>
</tr>
<tr>
<td class="firstcol">Chg from 1 &amp; 3 Months Ago</td>
<td>--</td>
<td>--</td>
<td>-1/-44</td>
<td>-40/-47</td>
<td>+8&nbsp;&nbsp; (MoAvg)0.3% y/y</td>
<td>0.8%</td>
<td>0.9%</td>
<td>1.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment Rate* &nbsp; (3Mo Avg, SA, %)</td>
<td>--</td>
<td>--</td>
<td>5.5%</td>
<td>5.5%</td>
<td>5.2%</td>
<td>5.4%</td>
<td>4.8%</td>
<td>4.8%</td>
</tr>
<tr>
<td class="firstcol">Claimant Count &nbsp; (Monthly, Thous)</td>
<td>890.0</td>
<td>905.7</td>
<td>920.0</td>
<td>923.1</td>
<td>947.1</td>
<td>944.7</td>
<td>861.7</td>
<td>853.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Claimant Count Rate (SA, %)</td>
<td>2.8</td>
<td>2.9</td>
<td>2.9</td>
<td>2.9</td>
<td>3.0</td>
<td>3.0</td>
<td>2.7</td>
<td>2.7</td>
</tr>
<tr>
<td class="firstcol">Vacancies (Monthly, Thous)</td>
<td>637.7</td>
<td>602.8</td>
<td>590.7</td>
<td>619.1</td>
<td>598.8</td>
<td>599.4</td>
<td>618.6</td>
<td>631.9</td>
</tr>
</tbody>
</table>
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Employment in the UK fell by 1,000 in the February period, a third successive monthly decrease in this 3-month moving average. Over the last three months (the style of comparison that the UK's Office for National Statistics [ONS] [...]

UK "Claimant"-Based Unemployment Down, but Total Employment Sagging

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070516c.jpg" width="353">
Industrial production is up strongly at the start of Q2 2007 and its lift is across the aboard. Vehicle output is strong. But output is strong apart from vehicles as well. Consumer product output is also strong and business equipment is strengthening sharply. All the signs of increased output are good except that domestic demand does not seem to be there to support it. Since inventories have been in a contracting/control mode (except in manufacturing where inventories have seemed to bloat further even as shipments have sagged). What does this surge in output really mean? Either the US is gaining trade competitiveness or the consumer will bail producers out by accelerating spending or what we see is evidence of more unneeded inventories being created. 
The big picture shows retail spending excluding autos correlates pretty well with industrial production excluding vehicles. Unfortunately both are showing declining trends even with this strong April output report factored in. 
We can also look at consumer spending and output separate from capital goods. When we go behind the scenes to that level of detail, we see some evidence of a correlation between consumer spending and the output of consumer goods. But we still see the consumer spending is declining year/year and so is the output of consumer goods despite this month&#146;s output surge. 
Turning to capital spending, capital spending by itself is still slowing (y/y) even with this month&#146;s strong rise in output. While durable goods orders (ex aircraft) are still very volatile, capital spending tracks its erratic trend with a lag. Both spending and orders are pointing to weaker performance ahead.Summing up&#133;on balance, the NEWS on industrial production is reassuring by itself. After all producers do the things they do for a reason. But, for the moment we do not know what that is. Year/year consumer trends are slowing and capital spending plans are slowing as well. The rise in output in April only boosts the year/year industrial production growth rate to the point that it stays in a withering trend. Unless the U.S. is benefiting from a surge in trade (exports) that is not yet present in data, the rise in output this month is mostly a mystery.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
At Annual Rates of Change
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>3-Month </td>
<td>6-Month</td>
<td>Year/Year</td>
<td>Y/Y Yr Ago</td>
</tr>
<tr class="odd">
<td class="firstcol">Industrial Output</td>
<td>% Change</td>
<td>% Change</td>
<td>% Change</td>
<td>% Change</td>
</tr>
<tr>
<td class="firstcol">All Prod&amp;Materials</td>
<td>4.7%</td>
<td>1.8%</td>
<td>1.9%</td>
<td>4.4%</td>
</tr>
<tr>
<td class="firstcol">All Products</td>
<td>5.4%</td>
<td>2.5%</td>
<td>2.2%</td>
<td>4.5%</td>
</tr>
<tr>
<td class="firstcol">Final Products</td>
<td>6.4%</td>
<td>3.7%</td>
<td>3.0%</td>
<td>4.7%</td>
</tr>
<tr>
<td class="firstcol">MFG-NAICS</td>
<td>4.5%</td>
<td>3.0%</td>
<td>2.0%</td>
<td>5.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; MFG-Durables</td>
<td>7.9%</td>
<td>4.0%</td>
<td>2.7%</td>
<td>9.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; MFG-Nondurables</td>
<td>0.7%</td>
<td>1.9%</td>
<td>1.3%</td>
<td>1.7%</td>
</tr>
<tr>
<td class="firstcol">Consumer Goods</td>
<td>7.1%</td>
<td>3.7%</td>
<td>2.3%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">Business Equipment</td>
<td>9.0%</td>
<td>5.1%</td>
<td>5.7%</td>
<td>12.7%</td>
</tr>
<tr>
<td class="firstcol">Materials</td>
<td>4.3%</td>
<td>0.9%</td>
<td>1.4%</td>
<td>4.4%</td>
</tr>
<tr>
<td class="firstcol">Capacity Use Level</td>
<td>81.5</td>
<td>81.4</td>
<td>81.7</td>
<td>80.7</td>
</tr>
</tbody>
</table>
</body>
</html>

Industrial production is up strongly at the start of Q2 2007 and its lift is across the aboard. Vehicle output is strong. But output is strong apart from vehicles as well. Consumer product output is also strong and business equipment [...]

U.S. Industrial Production Surges Across the Board - Turning Point?

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070516a.jpg" width="353">
Starts rise by 2.5% after downward revision of 1.8% still a net rise on month. 
Permits fall by 8.9% - drops in all regions.
Starts are off by 16.1% year/year compared to permits that are off by 28.1%.
Builders hack permits to get them in better alignment with starts. 
Permits fell across the board in April and fell sharply. But starts advanced, rising by 2.5% in the month after a downward revision to the prior month. Starts are much weaker year/year than are permits, pointing to a dampening in activity ahead. 
While the sharp drop in permits is disturbing, permits have little explanatory power for future starts. The chart shows a clear tendency for the level of starts to coalesce around current levels over the past seven months. It is unclear if the drop in permits in April is to arrest a stock pile of permits that had grown too large for builders or if there are real plans being cut back that affect actual starts even more in the months ahead. The chart speaks to a pause in the rate of descent. Both starts and permits have paused for the last several months now. Starts and permit trends are diverging - at least for one month.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070516b.jpg" width="353"> 
The regional patterns of housing starts are likewise rather docile. They show slow declines are in force with scattered evidence of some turbulence in the recent observations that create a path of stability around current levels in recent months. The Midwest has already bounced and showed some sense of trying to stabilize. The Northeast is also turning higher amid some considerable volatility. A more moderate &#145;sustained rise&#146; appears in train in the South. The West looks more like it has hit a two-month plateau or that it is in a very gradual upturn. The growth statistics over fixed horizons exaggerate or even dismiss some of these trends. On balance if the permits data are signaling new weakness it is coming out of the blue and is not tipped off by past trends in starts. The history of this time series does NOT suggest that that is the way it works. Permits are the slave, not the master. 
As builders became optimistic during the housing boom, they had acquired permits at a pace faster than starts. Evidence is therefore consistent with the notion that builders have plenty of slack in permits and are trying to reduce them more to coincide with the reasonable future levels of starts. In January the ratio of permits to starts was the fifth highest since January 1985. In Feb that slipped to the 49th rank (out of 266); in April the ranking is 222 out of 268, more appropriate for these times. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Trends In Housing Starts
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">Apr 2007</td>
<td colspan="3">% Change at Ann Rate</td>
</tr>
<tr class="odd">
<td class="firstcol">Regional Trends</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>1-Yr</td>
</tr>
<tr>
<td class="firstcol">Northeast</td>
<td>-34.0%</td>
<td>34.0%</td>
<td>-4.4%</td>
</tr>
<tr>
<td class="firstcol">Midwest</td>
<td>8.4%</td>
<td>-32.8%</td>
<td>-42.6%</td>
</tr>
<tr>
<td class="firstcol">South</td>
<td>36.6%</td>
<td>14.0%</td>
<td>-13.0%</td>
</tr>
<tr>
<td class="firstcol">West</td>
<td>89.6%</td>
<td>11.1%</td>
<td>-6.3%</td>
</tr>
</tbody>
</table>
U.S. Industrial Production Surges Across the Board - Turning Point? 
by <a href="/comment/Brusca.html">Robert Brusca</a> May 16, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070516c.jpg" width="353">
Industrial production is up strongly at the start of Q2 2007 and its lift is across the aboard. Vehicle output is strong. But output is strong apart from vehicles as well. Consumer product output is also strong and business equipment is strengthening sharply. All the signs of increased output are good except that domestic demand does not seem to be there to support it. Since inventories have been in a contracting/control mode (except in manufacturing where inventories have seemed to bloat further even as shipments have sagged). What does this surge in output really mean? Either the US is gaining trade competitiveness or the consumer will bail producers out by accelerating spending or what we see is evidence of more unneeded inventories being created. 
The big picture shows retail spending excluding autos correlates pretty well with industrial production excluding vehicles. Unfortunately both are showing declining trends even with this strong April output report factored in. 
We can also look at consumer spending and output separate from capital goods. When we go behind the scenes to that level of detail, we see some evidence of a correlation between consumer spending and the output of consumer goods. But we still see the consumer spending is declining year/year and so is the output of consumer goods despite this month&#146;s output surge. 
Turning to capital spending, capital spending by itself is still slowing (y/y) even with this month&#146;s strong rise in output. While durable goods orders (ex aircraft) are still very volatile, capital spending tracks its erratic trend with a lag. Both spending and orders are pointing to weaker performance ahead.Summing up&#133;on balance, the NEWS on industrial production is reassuring by itself. After all producers do the things they do for a reason. But, for the moment we do not know what that is. Year/year consumer trends are slowing and capital spending plans are slowing as well. The rise in output in April only boosts the year/year industrial production growth rate to the point that it stays in a withering trend. Unless the U.S. is benefiting from a surge in trade (exports) that is not yet present in data, the rise in output this month is mostly a mystery.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
At Annual Rates of Change
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>3-Month </td>
<td>6-Month</td>
<td>Year/Year</td>
<td>Y/Y Yr Ago</td>
</tr>
<tr class="odd">
<td class="firstcol">Industrial Output</td>
<td>% Change</td>
<td>% Change</td>
<td>% Change</td>
<td>% Change</td>
</tr>
<tr>
<td class="firstcol">All Prod&amp;Materials</td>
<td>4.7%</td>
<td>1.8%</td>
<td>1.9%</td>
<td>4.4%</td>
</tr>
<tr>
<td class="firstcol">All Products</td>
<td>5.4%</td>
<td>2.5%</td>
<td>2.2%</td>
<td>4.5%</td>
</tr>
<tr>
<td class="firstcol">Final Products</td>
<td>6.4%</td>
<td>3.7%</td>
<td>3.0%</td>
<td>4.7%</td>
</tr>
<tr>
<td class="firstcol">MFG-NAICS</td>
<td>4.5%</td>
<td>3.0%</td>
<td>2.0%</td>
<td>5.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; MFG-Durables</td>
<td>7.9%</td>
<td>4.0%</td>
<td>2.7%</td>
<td>9.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; MFG-Nondurables</td>
<td>0.7%</td>
<td>1.9%</td>
<td>1.3%</td>
<td>1.7%</td>
</tr>
<tr>
<td class="firstcol">Consumer Goods</td>
<td>7.1%</td>
<td>3.7%</td>
<td>2.3%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">Business Equipment</td>
<td>9.0%</td>
<td>5.1%</td>
<td>5.7%</td>
<td>12.7%</td>
</tr>
<tr>
<td class="firstcol">Materials</td>
<td>4.3%</td>
<td>0.9%</td>
<td>1.4%</td>
<td>4.4%</td>
</tr>
<tr>
<td class="firstcol">Capacity Use Level</td>
<td>81.5</td>
<td>81.4</td>
<td>81.7</td>
<td>80.7</td>
</tr>
</tbody>
</table>
</body>
</html>

Starts rise by 2.5% after downward revision of 1.8% still a net rise on month. Permits fall by 8.9% - drops in all regions. Starts are off by 16.1% year/year compared to permits that are off by 28.1%. Builders hack permits to get them [...]

U.S. Housing Starts Rise, Permits Fall

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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Tom Moeller

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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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250430Q1.jpg

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

250430A.jpg

250430B.jpg

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

250430F20.jpg

250430G20.jpg

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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250430G5.jpg

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.

Employment Cost Growth Steady in Q1 2025

Kathleen Stephansen, CBE

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The ADP National Employment Report indicated that nonfarm private sector payrolls rose 62,000 (1.4% y/y) during April after increasing 147,000 (1.4% y/y) during March, revised from 155,000. A 124,000 April rise in ADP employment had been expected in the Action Economics Forecast Survey.

Growth in median annual pay for "job stayers" eased to 4.5% y/y during April, from 4.6% y/y in March and from 4.7% y/y in the prior two months. Manufacturing sector pay grew 4.6% y/y during April, down from 4.8% y/y in March. Construction sector pay was unchanged at 4.7% y/y. Natural resource & mining sector pay grew 4.4% y/y. Financial sector pay rose 5.1% y/y, while education & health services pay rose 4.7% y/y. Leisure & hospitality pay also increased 4.7% y/y. Professional & business service sector pay increased 4.3% y/y as did trade, transportation & utilities pay. Information pay rose 4.1% y/y. Median annual pay for “job changers” rose 6.9% y/y after 6.7% y/y in March.

Small business hiring (less than 50 employees) rose 11,000 (0.6% y/y) after rising 18,000 (0.6% y/y) in March, revised down from 52,000. Employment at medium-sized firms (50-499,000 employees) rose 40,000 (1.1% y/y) after rising 43,000 (1.1% y/y). Large business hiring (500+ employees) rose 12,000 (3.4% y/y) in April, after rising 61,000 (3.6% y/y) in March, revised from 59,000.

Goods-producing employment rose 26,000 (1.3% y/y) in April, after rising 16,000 (1.3% y/y) during March, revised from 24,000. Manufacturing jobs rose 4,000 (-0.2% y/y) after rising 17,000 (-0.3% y/y) in March. The number of construction sector jobs rose 16,000 (3.4% y/y) in April, following a 2,000 (3.6% y/y) March increase, revised from 6,000. Natural resources & mining jobs rose 6,000 (2.8% y/y) in April after falling 3,000 (+1.9% y/y) in March.

The number of service-producing jobs rose 34,000 (1.4% y/y) during April, following a rise of 131,000 (1.4% y/y) in March. Professional & business services employment fell 2,000 (0.6% y/y) after rising 46,000 (0.7% y/y) in the prior month, revised from 57,000. Employment in the financial industry rose 20,000 (2.1% y/y) in April, after rising 38,000 (2.0% y/y) in March. Leisure and hospitality employment increased 27,000 (3.0% y/y), following a 23,000 (2.9% y/y) March increase, revised from 17,000. The number of education & health care jobs fell 23,000 (1.6% y/y) in April, following a 15,000 (1.8% y/y) rise in March, revised from 12,000. Information sector employment fell 8,000 (-0.1% y/y) after a rise of 3,000 (0.2% y/y) in March. The number of jobs in trade, transportation & utilities rose 21,000 (0.4% y/y) in April, after falling 4,000 (+0.4% y/y) in March, revised from a 6,000 fall. Employment in “other” services rose fell 1,000 (+3.2% y/y) following a 10,000 (3.4% y/y) rise in March, revised from 11,000.

By region, employment in the Northeast increased 10,000 (1.9% y/y) in April, following an increase of 95,000 (2.0% y/y) in March, revised from 89,000. Employment in the Midwest rose 42,000 (1.5% y/y) after a gain of 84,000 (1.4% y/y) in March, revised from 81,000. In the South, employment rose 3,000 (1.3% y/y) during April, after rising 10,000 (1.4% y/y) in March, revised from 27,000. In the West, employment rose 9,000 (0.6% y/y) after declining 43,000 (+0.6% y/y), revised from a 41,000 decline in March.

The ADP National Employment Report and Pay Insights data can be found in Haver's **USECON** database. Historical figures date back to January 2010 for private employment. Pay data date back to October 2020. The expectation figure is available in Haver's **AS1REPNA** database.

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- Employment increase is modest in both services & factory sectors.
- Wage growth for “job stayers” moderates.
- Small and medium-sized business employment slows.

Economy in Brief: May 2007

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