Robert Brusca

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070726g.jpg" width="353">
Business confidence in Italy is still at a reasonably strong reading. The index fell this month to 93.3 from 95.9. The month&#146;s drop is relatively sharp. The chart pattern for the index is much more ominous than for most EMU members. Italy has been the weakest of the large EMU countries for some time. We maintain that the place to look for vulnerability to the strong euro value is not in the EMU&#146;s strongest economy, Germany, but in some of its weaker members. Italy is a case in point.
Percentile readings of the ISAE survey components are mostly in the 60 to 70 percentile range. But residing in the 61.4 percentile of their range, foreign orders are one of the weaker categories. This is a reading that would be expected to get weak if Italy developed competitiveness problems. Consumer goods reading are among the weakest by industry group with percentile readings that fall out of the 60th percentile in the 50s. But the loss in momentum is greater for investment goods than for consumer goods even though the consumer goods raw readings are weaker in absolute terms.
On balance, Italy appears to have lost a lot of momentum. Its readings are reassuring and are nonetheless still solid. We would start to get more worried about Italy and the hint of the loss in competitiveness if the drop in the index we see this month extends itself in the coming months. For now, it is just a warning and possibly a bit of mid-summer volatility...but also possibly something more.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Italy ISAE Business Sentiment
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="4">&nbsp;</td>
<td colspan="2">Since January 1999</td>
<td>4COLSPAN</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Jul-07</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Percentile</td>
<td>Rank</td>
<td>Max</td>
<td>Min</td>
<td>Range</td>
<td>Mean</td>
</tr>
<tr>
<td class="firstcol">Biz Confidence</td>
<td>93.3</td>
<td>95.9</td>
<td>96</td>
<td>97.9</td>
<td>60.3</td>
<td>35</td>
<td>102</td>
<td>80</td>
<td>21</td>
<td>92</td>
</tr>
<tr class="odd">
<td class="firstcol">TOTAL INDUSTRY</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Order books &amp; Demand</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Total</td>
<td>-3</td>
<td>2</td>
<td>2</td>
<td>3</td>
<td>60.0</td>
<td>29</td>
<td>13</td>
<td>-27</td>
<td>40</td>
<td>-10</td>
</tr>
<tr>
<td class="firstcol">Domestic</td>
<td>-2</td>
<td>0</td>
<td>0</td>
<td>2</td>
<td>68.3</td>
<td>17</td>
<td>11</td>
<td>-30</td>
<td>41</td>
<td>-12</td>
</tr>
<tr>
<td class="firstcol">Foreign</td>
<td>-6</td>
<td>-1</td>
<td>1</td>
<td>-3</td>
<td>61.4</td>
<td>32</td>
<td>11</td>
<td>-33</td>
<td>44</td>
<td>-14</td>
</tr>
<tr>
<td class="firstcol">Inventories</td>
<td>8</td>
<td>5</td>
<td>5</td>
<td>5</td>
<td>79.2</td>
<td>20</td>
<td>13</td>
<td>-11</td>
<td>24</td>
<td>4</td>
</tr>
<tr>
<td class="firstcol">Production</td>
<td>7</td>
<td>9</td>
<td>6</td>
<td>5</td>
<td>69.4</td>
<td>11</td>
<td>22</td>
<td>-27</td>
<td>49</td>
<td>-6</td>
</tr>
<tr class="odd">
<td class="firstcol">INTERMEDIATE</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Order books &amp; Demand</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Total</td>
<td>0</td>
<td>2</td>
<td>3</td>
<td>5</td>
<td>65.5</td>
<td>23</td>
<td>19</td>
<td>-36</td>
<td>55</td>
<td>-11</td>
</tr>
<tr>
<td class="firstcol">Domestic</td>
<td>-3</td>
<td>-1</td>
<td>1</td>
<td>4</td>
<td>60.4</td>
<td>20</td>
<td>16</td>
<td>-32</td>
<td>48</td>
<td>-13</td>
</tr>
<tr>
<td class="firstcol">Foreign</td>
<td>-1</td>
<td>1</td>
<td>3</td>
<td>-2</td>
<td>67.2</td>
<td>22</td>
<td>18</td>
<td>-40</td>
<td>58</td>
<td>-12</td>
</tr>
<tr>
<td class="firstcol">Inventories</td>
<td>7</td>
<td>5</td>
<td>2</td>
<td>4</td>
<td>75.9</td>
<td>12</td>
<td>14</td>
<td>-15</td>
<td>29</td>
<td>0</td>
</tr>
<tr>
<td class="firstcol">Production</td>
<td>4</td>
<td>6</td>
<td>8</td>
<td>9</td>
<td>60.3</td>
<td>19</td>
<td>27</td>
<td>-31</td>
<td>58</td>
<td>-7</td>
</tr>
<tr class="odd">
<td class="firstcol">INVESTMENT GOODS</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Order books &amp; Demand</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Total</td>
<td>12</td>
<td>19</td>
<td>17</td>
<td>20</td>
<td>70.1</td>
<td>16</td>
<td>32</td>
<td>-35</td>
<td>67</td>
<td>-6</td>
</tr>
<tr>
<td class="firstcol">Domestic</td>
<td>5</td>
<td>9</td>
<td>10</td>
<td>13</td>
<td>66.1</td>
<td>16</td>
<td>25</td>
<td>-34</td>
<td>59</td>
<td>-11</td>
</tr>
<tr>
<td class="firstcol">Foreign</td>
<td>3</td>
<td>8</td>
<td>13</td>
<td>9</td>
<td>64.3</td>
<td>26</td>
<td>23</td>
<td>-33</td>
<td>56</td>
<td>-8</td>
</tr>
<tr>
<td class="firstcol">Inventories</td>
<td>9</td>
<td>9</td>
<td>7</td>
<td>6</td>
<td>70.3</td>
<td>15</td>
<td>20</td>
<td>-17</td>
<td>37</td>
<td>1</td>
</tr>
<tr>
<td class="firstcol">Production</td>
<td>20</td>
<td>23</td>
<td>18</td>
<td>12</td>
<td>77.3</td>
<td>11</td>
<td>35</td>
<td>-31</td>
<td>66</td>
<td>-2</td>
</tr>
<tr class="odd">
<td class="firstcol">CONSUMER GOODS</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Order books &amp; Demand</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Total</td>
<td>-4</td>
<td>-2</td>
<td>-5</td>
<td>-8</td>
<td>56.8</td>
<td>24</td>
<td>15</td>
<td>-29</td>
<td>44</td>
<td>-10</td>
</tr>
<tr>
<td class="firstcol">Domestic</td>
<td>-7</td>
<td>-6</td>
<td>-10</td>
<td>-10</td>
<td>58.3</td>
<td>35</td>
<td>8</td>
<td>-28</td>
<td>36</td>
<td>-12</td>
</tr>
<tr>
<td class="firstcol">Foreign</td>
<td>-7</td>
<td>-7</td>
<td>-6</td>
<td>-12</td>
<td>59.6</td>
<td>20</td>
<td>12</td>
<td>-35</td>
<td>47</td>
<td>-15</td>
</tr>
<tr>
<td class="firstcol">Inventories</td>
<td>9</td>
<td>7</td>
<td>11</td>
<td>7</td>
<td>76.9</td>
<td>17</td>
<td>15</td>
<td>-11</td>
<td>26</td>
<td>4</td>
</tr>
<tr>
<td class="firstcol">Production</td>
<td>3</td>
<td>2</td>
<td>-5</td>
<td>-5</td>
<td>77.8</td>
<td>10</td>
<td>11</td>
<td>-25</td>
<td>36</td>
<td>-7</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td colspan="3">Total number of months:</td>
<td>100</td>
<td>6COLSPAN</td>
</tr>
</tbody>
</table>
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Business confidence in Italy is still at a reasonably strong reading. The index fell this month to 93.3 from 95.9. The months drop is relatively sharp. The chart pattern for the index is much more ominous than for most EMU members. [...]

Italy's Business Confidence Indicator Falls

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/070725g.jpg" width="353">
South Korea&#39;s GDP grew 1.7% in Q2, following 0.9% in the previous two quarters. This was the strongest quarterly increase since Q4 2003, 4-1/2 years ago. The year-to-year growth was 4.9%, up from 4.0% in Q1 and also in Q4.
The quarterly growth was led by the manufacturing sector, which rebounded sharply to a 3.6% quarterly increase from a 0.9% fall in Q1. This pushed the year-on-year rate to 5.9% from 3.9%. Data on industrial production suggest that Q2 started off stronger for electrical machinery, electronic components and motor vehicles. Service industries collectively slowed a bit in Q2, gaining 1.1% after 1.2% in Q1 and Q4. Construction activity declined outright, falling 1.8% after a 1.4% increase in Q1 and 0.6% in Q4. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725h.jpg" width="353">
The expenditure accounts show that the greater part of the pickup in GDP came from foreign demand. Exports surged 4.6% in Q2, their strongest quarterly advance in a year. Imports rose 4.7%, but this was less than Q1&#39;s 5.4%, and net exports widened to a surplus of KRW20.23 trillion from KRW19.48 trillion in Q1. Domestic demand, in contrast, slowed to 1.4% growth in Q2 from 1.8% in Q1. So net foreign demand added 0.3% to total GDP growth after cutting it by 0.9% in Q1. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725i.jpg" width="353">
These figures hardly mean, however, that domestic demand was &quot;weak&quot;. Private consumption was up 0.8% in the quarter and 4.1% from a year ago. Fixed investment also grew 0.8%, putting it a substantial 6.8% higher than the year-ago period. Within this latter category, what the Koreans call &quot;facilities investment&quot; led the way in Q2, with a gain of 3.5% following 4.4% the quarter before; encompassing machinery and transport equipment, this item was up 12.1% from a year ago, the strongest since radically higher growth during the tech boom of 1999/2000.
As these data might suggest, the Korean economy is showing steady, moderate growth, which it has sustained now since about 2002. In the 2000/2001 fall-out from the tech bust, it managed to avoid recession and has had just one negative quarter since then, in early 2003. According to Bloomberg news, Moody&#39;s rating service has been sufficiently impressed announce today a hike in the country&#39;s credit rating to A2 from A3, where it has been since early 2002. &quot;A2&quot; is Moody&#39;s sixth highest rating and in the middle of the &quot;investment grade&quot; spectrum. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Korea GDP, 2000 Won</th>
<th scope="col">2Q 2007*</th>
<th scope="col">1Q 2007*</th>
<th scope="col">4Q 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">Total</td>
<td>1.7</td>
<td>0.9</td>
<td>0.9</td>
<td>4.9</td>
<td>5.0</td>
<td>4.2</td>
<td>4.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Private Consumption</td>
<td>0.8</td>
<td>1.5</td>
<td>1.0</td>
<td>4.1</td>
<td>4.2</td>
<td>3.6</td>
<td>-0.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Gross Fixed Capital Formation</td>
<td>0.8</td>
<td>2.0</td>
<td>1.2</td>
<td>6.8</td>
<td>3.2</td>
<td>2.4</td>
<td>2.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Net Exports (Tril.2000.Won)</td>
<td>20.2</td>
<td>19.5</td>
<td>21.0</td>
<td>19.4</td>
<td>19.6</td>
<td>16.7</td>
<td>14.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Exports</td>
<td>4.6</td>
<td>3.1</td>
<td>0.5</td>
<td>10.7</td>
<td>12.4</td>
<td>8.5</td>
<td>19.6</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports</td>
<td>4.7</td>
<td>5.4</td>
<td>-0.6</td>
<td>12.2</td>
<td>11.3</td>
<td>7.3</td>
<td>13.9</td>
</tr>
<tr>
<td colspan="8">Industry Value Added</td>
</tr>
<tr class="odd">
<td class="firstcol">Manufacturing</td>
<td>3.6</td>
<td>-0.9</td>
<td>1.0</td>
<td>5.9</td>
<td>8.4</td>
<td>7.1</td>
<td>11.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Services</td>
<td>1.1</td>
<td>1.2</td>
<td>1.2</td>
<td>4.5</td>
<td>4.2</td>
<td>3.4</td>
<td>1.9</td>
</tr>
</tbody>
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South Korea's GDP grew 1.7% in Q2, following 0.9% in the previous two quarters. This was the strongest quarterly increase since Q4 2003, 4-1/2 years ago. The year-to-year growth was 4.9%, up from 4.0% in Q1 and also in Q4. The [...]

Korea GDP Up 1.7% in Q2; Maintaining 4-5% Annual Pace, Country Sees Its Credit Rating Raised

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725f.jpg" width="353">
 

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725f.jpg" width="353">
The INSEE Biz index for French industry is still in its impressive uptrend. Yet it is only in the 74th percentile of its range and it is about 10% above its mean value. The index is off peak and while the trend is technically still in place it is appropriate to wonder if the uptrend is abating. 
Orders and demand trends are still firm but so is the series &#145;likely price trend&#146;. The MFG portion of the survey shows a bit more of a loss in momentum. The Production trend reading fell off in July to 17 from 24 but still ranking in the mid-70s in terms of the percentile of its range of values - a firm result. The recent trend for production assessment ticked up in July; the likely trend assessment also rose to 15 from 14. MFG prices expected are only at a reading of 6 and reside in their 62nd percentile of their range, a more modest showing than for French industry overall. 
On balance, the readings from France are still solid and encouraging. Some of the inflation responses are, however, on the high side, and for overall industry, with a bit of momentum. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
 INSEE Industry Survey
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">&nbsp;</td>
<td colspan="4">&nbsp;</td>
<td colspan="2">Since Jan 1990</td>
<td colspan="4">Since Jan 1990</td>
</tr>
<tr class="grey3">
<td class="firstcol">&nbsp;</td>
<td> Jul-07</td>
<td> Jun-07</td>
<td> May-07</td>
<td> Apr-07</td>
<td> Percentile</td>
<td> Rank</td>
<td> Max</td>
<td> Min</td>
<td> Range</td>
<td> Mean</td>
</tr>
<tr class="grey2">
<td class="firstcol"> Climate</td>
<td>110</td>
<td>110</td>
<td>108</td>
<td>112</td>
<td> 74.0</td>
<td> 41</td>
<td> 123</td>
<td> 73</td>
<td> 50</td>
<td> 101</td>
</tr>
<tr class="grey1">
<td colspan="11"> Production</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Recent Trend</td>
<td>16</td>
<td>24</td>
<td>14</td>
<td>10</td>
<td>72.5</td>
<td>44</td>
<td>44</td>
<td>-58</td>
<td>102</td>
<td>-6</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Likely trend</td>
<td>31</td>
<td>27</td>
<td>22</td>
<td>21</td>
<td>66.7</td>
<td>20</td>
<td>63</td>
<td>-33</td>
<td>96</td>
<td>7</td>
</tr>
<tr class="grey1">
<td colspan="11"> Orders/Demand</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Orders&amp;Demand</td>
<td>2</td>
<td>4</td>
<td>3</td>
<td>5</td>
<td>73.6</td>
<td>33</td>
<td>25</td>
<td>-62</td>
<td>87</td>
<td>-15</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Foreign Orders &amp; Demand</td>
<td>5</td>
<td>4</td>
<td>6</td>
<td>10</td>
<td>70.8</td>
<td>46</td>
<td>31</td>
<td>-58</td>
<td>89</td>
<td>-11</td>
</tr>
<tr class="grey1">
<td colspan="11"> Prices</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Likely Sales Prices Trend</td>
<td>10</td>
<td>10</td>
<td>9</td>
<td>4</td>
<td>70.2</td>
<td>26</td>
<td>24</td>
<td>-23</td>
<td>47</td>
<td>0</td>
</tr>
</tbody>
</table>
</body>
</html>

The INSEE Biz index for French industry is still in its impressive uptrend. Yet it is only in the 74th percentile of its range and it is about 10% above its mean value. The index is off peak and while the trend is technically still in [...]

INSEE Biz Index Holds its Ground: Uptrend Intact

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725d.jpg" width="353">
Sales of existing homes fell again in June. The 3.8% to 5.750M units to the lowest level since November 2002. Sales were down 20.2% from the peak during September of 2005.
Sales of single family homes fell a sharper 3.5% last month after a 1.0% decline in May. Sales were 20.5% lower than during the peak month of September 2005.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725e.jpg" width="353">
By region, single family home sales fell 5.3% (-10.0% y/y) in the Northeast. Out West sales dropped 6.5% (-19.4% y/y) in June. Sales in the Midwest dropped 3.2% (-8.3% y/y) and down South sales fell 1.4% (-11.1% y/y).
The inventory of single family &quot;homes on the market&quot; dropped 2.7%. The decline was the only the first this year and inventories were up 12.7% from last year.
The median price of an existing single family home rose 3.8% but versus last year, the price of $230,300 was up just 0.1%.
The broad aggregate data on existing home sales are included in Haver&#39;s USECON database; details about prices by region and inventories are available in the REALTOR database. 
Comparing the prime and subprime mortgage markets from the Federal Reserve Bank of Chicago is available <a href="http://www.chicagofed.org/publications/fedletter/cflaugust2007_241.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Existing Home Sales (SAAR, 000s)</th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">Y/Y</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">Total Sales</td>
<td>5,750</td>
<td>5,980</td>
<td>-11.4%</td>
<td>6,510</td>
<td>7,065</td>
<td>6,727</td>
</tr>
<tr>
<td class="firstcol">Single-Family Sales</td>
<td>5,010</td>
<td>5,190</td>
<td>-12.1%</td>
<td>5,708</td>
<td>6,182</td>
<td>5,914</td>
</tr>
<tr class="odd">
<td class="firstcol">Median Single-Family Home Price (NSA,000s)</td>
<td>$230.3</td>
<td>$221.9</td>
<td>0.1%</td>
<td>$221.9</td>
<td>$217.5</td>
<td>$192.8</td>
</tr>
</tbody>
</table>


</html>

Sales of existing homes fell again in June. The 3.8% to 5.750M units to the lowest level since November 2002. Sales were down 20.2% from the peak during September of 2005. Sales of single family homes fell a sharper 3.5% last month [...]

Existing Home Sales Fell Again in June, Lowest Since 2002

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725c.jpg" width="353">
The National Activity Index (CFNAI) from the Federal Reserve Bank of Chicago improved in June to 0.11 from negative values which had been sustained during four of the prior five months.
The categories of production, income, sales and orders made positive contributions while the employment, consumption and housing categories were negative.
The three-month moving average of the CFNAI also improved but only slightly to a still negative value of -0.15, up from its worst level of -0.47 last November.
A zero value of the CFNAI indicates that the economy is expanding at its historical trend rate of growth and during the last twenty years there has been a 68% correlation between the level of the CFNAI and q/q growth in real GDP.
All of the CFNAI components contributed to the January decline includingproduction, employment, consumption and housing.
The CFNAI is a weighted average of 85 indicators of economic activity. The indicators reflect activity in the following categories: production and income, the labor market, personal consumption and housing, manufacturing and trade sales, and inventories &amp; orders.
The complete CFNAI report is available <a href="http://www.chicagofed.org/economic_research_and_data/files/cfnai_February2007.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S503/@S503.HTM">Chicago Fed</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">June &#39;06</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">CFNAI</td>
<td>0.11</td>
<td>-0.32</td>
<td>0.32</td>
<td>0.04</td>
<td>0.25</td>
<td>0.31</td>
</tr>
</tbody>
</table>
</body>
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The National Activity Index (CFNAI) from the Federal Reserve Bank of Chicago improved in June to 0.11 from negative values which had been sustained during four of the prior five months. The categories of production, income, sales and [...]

Chicago Fed Nat'l Activity Index Improved

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725a.jpg" width="353">
The total number of mortgage applications fell 3.6% last week to the lowest level since last February, according to the Mortgage Bankers Association. The decline was to a level 11.8% below the recent peak in March. 
Purchase applications fell a hard 5.0%, the fourth decline in the last five weeks. The decline was to the lowest level since late April. 
During the last ten years there has been a 58% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725b.jpg" width="353">
Applications to refinance also fell but by a moderate 1.4% after the prior week&#146;s 4.9% advance.
The effective interest rate on a conventional 30-year mortgage fell slightly to 6.90% from 6.93% the prior week. Rates averaged 6.84% last month, up from 6.28% in December. The peak for 30 year financing was 7.08% late in June. Rates for 15-year financing similarly fell to 6.60% last week. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities.
During the last ten years there has been a (negative) 79% correlation between the level of applications for purchase and the effective interest rate on a 30-year mortgage.
The Mortgage Bankers Association surveys between 20 and 35 top lenders in the U.S. housing industry. Then it derives its refinance, purchase and market indexes. The weekly survey covers roughly 50% of all U.S. residential mortgage applications processed each week by mortgage banks, commercial banks and thrifts. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.
The Narrowing of the Male-Female Wage Gap from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2007/el2007-17.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100) </a> </th>
<th scope="col">7/20/07 </th>
<th scope="col">7/13/07 </th>
<th scope="col">Y/Y</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">Total Market Index</td>
<td>609.0</td>
<td>631.6</td>
<td>14.1%</td>
<td>584.2</td>
<td>708.6</td>
<td>735.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>424.2</td>
<td>446.5</td>
<td>9.0%</td>
<td>406.9 </td>
<td>470.9</td>
<td>454.5</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,692.9</td>
<td>1,717.4</td>
<td>22.2%</td>
<td>1,633.0</td>
<td>2,092.3</td>
<td>2,366.8</td>
</tr>
</tbody>
</table>


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The total number of mortgage applications fell 3.6% last week to the lowest level since last February, according to the Mortgage Bankers Association. The decline was to a level 11.8% below the recent peak in March. Purchase [...]

Mortgage Applications Lowest Since February

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725a.jpg" width="353">
The total number of mortgage applications fell 3.6% last week to the lowest level since last February, according to the Mortgage Bankers Association. The decline was to a level 11.8% below the recent peak in March. 
Purchase applications fell a hard 5.0%, the fourth decline in the last five weeks. The decline was to the lowest level since late April. 
During the last ten years there has been a 58% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725b.jpg" width="353">
Applications to refinance also fell but by a moderate 1.4% after the prior week&#146;s 4.9% advance.
The effective interest rate on a conventional 30-year mortgage fell slightly to 6.90% from 6.93% the prior week. Rates averaged 6.84% last month, up from 6.28% in December. The peak for 30 year financing was 7.08% late in June. Rates for 15-year financing similarly fell to 6.60% last week. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities.
During the last ten years there has been a (negative) 79% correlation between the level of applications for purchase and the effective interest rate on a 30-year mortgage.
The Mortgage Bankers Association surveys between 20 and 35 top lenders in the U.S. housing industry. Then it derives its refinance, purchase and market indexes. The weekly survey covers roughly 50% of all U.S. residential mortgage applications processed each week by mortgage banks, commercial banks and thrifts. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.
The Narrowing of the Male-Female Wage Gap from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2007/el2007-17.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100) </a> </th>
<th scope="col">7/20/07 </th>
<th scope="col">7/13/07 </th>
<th scope="col">Y/Y</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">Total Market Index</td>
<td>609.0</td>
<td>631.6</td>
<td>14.1%</td>
<td>584.2</td>
<td>708.6</td>
<td>735.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>424.2</td>
<td>446.5</td>
<td>9.0%</td>
<td>406.9 </td>
<td>470.9</td>
<td>454.5</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,692.9</td>
<td>1,717.4</td>
<td>22.2%</td>
<td>1,633.0</td>
<td>2,092.3</td>
<td>2,366.8</td>
</tr>
</tbody>
</table>
Chicago Fed National Activity Index Improved 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 25, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725c.jpg" width="353">
The National Activity Index (CFNAI) from the Federal Reserve Bank of Chicago improved in June to 0.11 from negative values which had been sustained during four of the prior five months.
The categories of production, income, sales and orders made positive contributions while the employment, consumption and housing categories were negative.
The three-month moving average of the CFNAI also improved but only slightly to a still negative value of -0.15, up from its worst level of -0.47 last November.
A zero value of the CFNAI indicates that the economy is expanding at its historical trend rate of growth and during the last twenty years there has been a 68% correlation between the level of the CFNAI and q/q growth in real GDP.
All of the CFNAI components contributed to the January decline includingproduction, employment, consumption and housing.
The CFNAI is a weighted average of 85 indicators of economic activity. The indicators reflect activity in the following categories: production and income, the labor market, personal consumption and housing, manufacturing and trade sales, and inventories &amp; orders.
The complete CFNAI report is available <a href="http://www.chicagofed.org/economic_research_and_data/files/cfnai_February2007.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S503/@S503.HTM">Chicago Fed</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">June &#39;06</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">CFNAI</td>
<td>0.11</td>
<td>-0.32</td>
<td>0.32</td>
<td>0.04</td>
<td>0.25</td>
<td>0.31</td>
</tr>
</tbody>
</table>
Existing Home Sales Fell Again in June, Lowest Since 2002 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 25, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725d.jpg" width="353">
Sales of existing homes fell again in June. The 3.8% to 5.750M units to the lowest level since November 2002. Sales were down 20.2% from the peak during September of 2005.
Sales of single family homes fell a sharper 3.5% last month after a 1.0% decline in May. Sales were 20.5% lower than during the peak month of September 2005.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725e.jpg" width="353">
By region, single family home sales fell 5.3% (-10.0% y/y) in the Northeast. Out West sales dropped 6.5% (-19.4% y/y) in June. Sales in the Midwest dropped 3.2% (-8.3% y/y) and down South sales fell 1.4% (-11.1% y/y).
The inventory of single family &quot;homes on the market&quot; dropped 2.7%. The decline was the only the first this year and inventories were up 12.7% from last year.
The median price of an existing single family home rose 3.8% but versus last year, the price of $230,300 was up just 0.1%.
The broad aggregate data on existing home sales are included in Haver&#39;s USECON database; details about prices by region and inventories are available in the REALTOR database. 
Comparing the prime and subprime mortgage markets from the Federal Reserve Bank of Chicago is available <a href="http://www.chicagofed.org/publications/fedletter/cflaugust2007_241.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Existing Home Sales (SAAR, 000s)</th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">Y/Y</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">Total Sales</td>
<td>5,750</td>
<td>5,980</td>
<td>-11.4%</td>
<td>6,510</td>
<td>7,065</td>
<td>6,727</td>
</tr>
<tr>
<td class="firstcol">Single-Family Sales</td>
<td>5,010</td>
<td>5,190</td>
<td>-12.1%</td>
<td>5,708</td>
<td>6,182</td>
<td>5,914</td>
</tr>
<tr class="odd">
<td class="firstcol">Median Single-Family Home Price (NSA,000s)</td>
<td>$230.3</td>
<td>$221.9</td>
<td>0.1%</td>
<td>$221.9</td>
<td>$217.5</td>
<td>$192.8</td>
</tr>
</tbody>
</table>
INSEE Biz Index Holds its Ground: Uptrend Intact  
by <a href="/comment/Brusca.html">Robert Brusca</a> July 25, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725f.jpg" width="353">
The INSEE Biz index for French industry is still in its impressive uptrend. Yet it is only in the 74th percentile of its range and it is about 10% above its mean value. The index is off peak and while the trend is technically still in place it is appropriate to wonder if the uptrend is abating. 
Orders and demand trends are still firm but so is the series &#145;likely price trend&#146;. The MFG portion of the survey shows a bit more of a loss in momentum. The Production trend reading fell off in July to 17 from 24 but still ranking in the mid-70s in terms of the percentile of its range of values - a firm result. The recent trend for production assessment ticked up in July; the likely trend assessment also rose to 15 from 14. MFG prices expected are only at a reading of 6 and reside in their 62nd percentile of their range, a more modest showing than for French industry overall. 
On balance, the readings from France are still solid and encouraging. Some of the inflation responses are, however, on the high side, and for overall industry, with a bit of momentum. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
 INSEE Industry Survey
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">&nbsp;</td>
<td colspan="4">&nbsp;</td>
<td colspan="2">Since Jan 1990</td>
<td colspan="4">Since Jan 1990</td>
</tr>
<tr class="grey3">
<td class="firstcol">&nbsp;</td>
<td> Jul-07</td>
<td> Jun-07</td>
<td> May-07</td>
<td> Apr-07</td>
<td> Percentile</td>
<td> Rank</td>
<td> Max</td>
<td> Min</td>
<td> Range</td>
<td> Mean</td>
</tr>
<tr class="grey2">
<td class="firstcol"> Climate</td>
<td>110</td>
<td>110</td>
<td>108</td>
<td>112</td>
<td> 74.0</td>
<td> 41</td>
<td> 123</td>
<td> 73</td>
<td> 50</td>
<td> 101</td>
</tr>
<tr class="grey1">
<td colspan="11"> Production</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Recent Trend</td>
<td>16</td>
<td>24</td>
<td>14</td>
<td>10</td>
<td>72.5</td>
<td>44</td>
<td>44</td>
<td>-58</td>
<td>102</td>
<td>-6</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Likely trend</td>
<td>31</td>
<td>27</td>
<td>22</td>
<td>21</td>
<td>66.7</td>
<td>20</td>
<td>63</td>
<td>-33</td>
<td>96</td>
<td>7</td>
</tr>
<tr class="grey1">
<td colspan="11"> Orders/Demand</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Orders&amp;Demand</td>
<td>2</td>
<td>4</td>
<td>3</td>
<td>5</td>
<td>73.6</td>
<td>33</td>
<td>25</td>
<td>-62</td>
<td>87</td>
<td>-15</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Foreign Orders &amp; Demand</td>
<td>5</td>
<td>4</td>
<td>6</td>
<td>10</td>
<td>70.8</td>
<td>46</td>
<td>31</td>
<td>-58</td>
<td>89</td>
<td>-11</td>
</tr>
<tr class="grey1">
<td colspan="11"> Prices</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Likely Sales Prices Trend</td>
<td>10</td>
<td>10</td>
<td>9</td>
<td>4</td>
<td>70.2</td>
<td>26</td>
<td>24</td>
<td>-23</td>
<td>47</td>
<td>0</td>
</tr>
</tbody>
</table>
Korea GDP Up 1.7% in Q2; Maintaining 4-5% Annual Pace, Country Sees Its Credit Rating Raised 
by <a href="/comment/Stone.html">Carol Stone</a> July 25, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725g.jpg" width="353">
South Korea&#39;s GDP grew 1.7% in Q2, following 0.9% in the previous two quarters. This was the strongest quarterly increase since Q4 2003, 4-1/2 years ago. The year-to-year growth was 4.9%, up from 4.0% in Q1 and also in Q4.
The quarterly growth was led by the manufacturing sector, which rebounded sharply to a 3.6% quarterly increase from a 0.9% fall in Q1. This pushed the year-on-year rate to 5.9% from 3.9%. Data on industrial production suggest that Q2 started off stronger for electrical machinery, electronic components and motor vehicles. Service industries collectively slowed a bit in Q2, gaining 1.1% after 1.2% in Q1 and Q4. Construction activity declined outright, falling 1.8% after a 1.4% increase in Q1 and 0.6% in Q4. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725h.jpg" width="353">
The expenditure accounts show that the greater part of the pickup in GDP came from foreign demand. Exports surged 4.6% in Q2, their strongest quarterly advance in a year. Imports rose 4.7%, but this was less than Q1&#39;s 5.4%, and net exports widened to a surplus of KRW20.23 trillion from KRW19.48 trillion in Q1. Domestic demand, in contrast, slowed to 1.4% growth in Q2 from 1.8% in Q1. So net foreign demand added 0.3% to total GDP growth after cutting it by 0.9% in Q1. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070725i.jpg" width="353">
These figures hardly mean, however, that domestic demand was &quot;weak&quot;. Private consumption was up 0.8% in the quarter and 4.1% from a year ago. Fixed investment also grew 0.8%, putting it a substantial 6.8% higher than the year-ago period. Within this latter category, what the Koreans call &quot;facilities investment&quot; led the way in Q2, with a gain of 3.5% following 4.4% the quarter before; encompassing machinery and transport equipment, this item was up 12.1% from a year ago, the strongest since radically higher growth during the tech boom of 1999/2000.
As these data might suggest, the Korean economy is showing steady, moderate growth, which it has sustained now since about 2002. In the 2000/2001 fall-out from the tech bust, it managed to avoid recession and has had just one negative quarter since then, in early 2003. According to Bloomberg news, Moody&#39;s rating service has been sufficiently impressed announce today a hike in the country&#39;s credit rating to A2 from A3, where it has been since early 2002. &quot;A2&quot; is Moody&#39;s sixth highest rating and in the middle of the &quot;investment grade&quot; spectrum. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Korea GDP, 2000 Won</th>
<th scope="col">2Q 2007*</th>
<th scope="col">1Q 2007*</th>
<th scope="col">4Q 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">Total</td>
<td>1.7</td>
<td>0.9</td>
<td>0.9</td>
<td>4.9</td>
<td>5.0</td>
<td>4.2</td>
<td>4.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Private Consumption</td>
<td>0.8</td>
<td>1.5</td>
<td>1.0</td>
<td>4.1</td>
<td>4.2</td>
<td>3.6</td>
<td>-0.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Gross Fixed Capital Formation</td>
<td>0.8</td>
<td>2.0</td>
<td>1.2</td>
<td>6.8</td>
<td>3.2</td>
<td>2.4</td>
<td>2.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Net Exports (Tril.2000.Won)</td>
<td>20.2</td>
<td>19.5</td>
<td>21.0</td>
<td>19.4</td>
<td>19.6</td>
<td>16.7</td>
<td>14.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Exports</td>
<td>4.6</td>
<td>3.1</td>
<td>0.5</td>
<td>10.7</td>
<td>12.4</td>
<td>8.5</td>
<td>19.6</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports</td>
<td>4.7</td>
<td>5.4</td>
<td>-0.6</td>
<td>12.2</td>
<td>11.3</td>
<td>7.3</td>
<td>13.9</td>
</tr>
<tr>
<td colspan="8">Industry Value Added</td>
</tr>
<tr class="odd">
<td class="firstcol">Manufacturing</td>
<td>3.6</td>
<td>-0.9</td>
<td>1.0</td>
<td>5.9</td>
<td>8.4</td>
<td>7.1</td>
<td>11.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Services</td>
<td>1.1</td>
<td>1.2</td>
<td>1.2</td>
<td>4.5</td>
<td>4.2</td>
<td>3.4</td>
<td>1.9</td>
</tr>
</tbody>
</table>


</html>

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.

250501Z1.jpg

**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.

250501Z2.jpg

**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.

250501Z3.jpg

**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.

250501Z4.jpg

**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.

250501Z5.jpg

**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.

250501Z6.jpg

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

250430N1.jpg

250430O1.jpg

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.

250430P1.jpg

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**.

250430R1.jpg

250430S1.jpg

- 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**.

250430C.jpg

250430D.jpg

- 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

250430F5.jpg

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.

250430H5.jpg

250430I5.jpg

- 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: July 2007

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Italy's Business Confidence Indicator Falls

Korea GDP Up 1.7% in Q2; Maintaining 4-5% Annual Pace, Country Sees Its Credit Rating Raised

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INSEE Biz Index Holds its Ground: Uptrend Intact

Existing Home Sales Fell Again in June, Lowest Since 2002

Chicago Fed Nat'l Activity Index Improved

Mortgage Applications Lowest Since February

Mortgage Applications Lowest Since February