Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221k.jpg" width="353">
The Philadelphia Federal Reserve Bank&#39;s Index of General Business Conditions in the manufacturing sector fell and was negative for the third month in the last four. The December reading of -4.3 was the lowest since early 2003 and compared to Consensus expectations for just a slight decline to +3.5.
During the last ten years there has been a 65% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 43% correlation with q/q growth in real GDP.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221l.jpg" width="353">
The sub indexes for unfilled orders, delivery times and inventories accounted for much of the total&#39;s decline. New orders improved to a less negative reading and shipments surged. The employment index also improved. During the last ten years there has been a 75% correlation between the employment index and the three month growth in factory payrolls.
The business conditions index reflects a separate survey question, not the sub indexes.
The prices paid index fell to the lowest level since March. During the last ten years there has been a 76% correlation between the prices paid index and the three month growth in the intermediate goods PPI. There has been an 85% correlation with the change in core intermediate goods prices.
The separate index of expected business conditions in six months nearly halved m/m and fell to the lowest level since August.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos1206.html">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">Dec. &#39;05</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
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<td class="firstcol">General Activity Index</td>
<td>-4.3</td>
<td>5.1</td>
<td>10.9</td>
<td>8.0</td>
<td>12.4</td>
<td>28.0</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>20.6</td>
<td>26.7</td>
<td>47.1</td>
<td>36.6</td>
<td>43.5</td>
<td>51.2</td>
</tr>
</tbody>
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The Philadelphia Federal Reserve Bank's Index of General Business Conditions in the manufacturing sector fell and was negative for the third month in the last four. The December reading of -4.3 was the lowest since early 2003 and [...]

Philadelphia Fed Index Fell Unexpectedly

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221i.jpg" width="353">
The number of mass layoff events rose 3.2% in November for the fifth increase in the last six months. That was enough to lift the number of layoff events to the highest level of 2006.
During the last ten years there has been a (negative) 85% correlation between the three month average level of layoff announcements and the y/y change in payroll employment.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221j.jpg" width="353">
The number of persons affected last month by mass layoffs surged 20.0% m/m, also to the highest level of the year. Nevertheless, the number of persons affected by mass layoffs during the first eleven months of this year fell 17.6% from the first eleven months of 2005.
Increased layoffs in construction (10.4% y/y) and manufacturing (15.6% y/y) accounted for much of the recent increase while the number of layoff events in retail (-11.5% y/y) and information (-4.8% y/y) fell.
The Mass Layoff Statistics (MLS) program collects reports on mass layoff actions that result in workers being separated from their jobs. Monthly mass layoff numbers are from establishments which have at least 50 initial claims for unemployment insurance (UI) filed against them during a 5-week period.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Mass Layoffs</a></th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
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<td class="firstcol">All US Industries (# Events, SA)</td>
<td>1,208</td>
<td>1,171</td>
<td>0.2%</td>
<td>15,699</td>
<td>15,926</td>
<td>19,220</td>
</tr>
<tr>
<td class="firstcol">Total (# Persons, SA)</td>
<td>135,415</td>
<td>113,724</td>
<td>12.9%</td>
<td>1,722,452</td>
<td>1,591,081</td>
<td>1,946,548</td>
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The number of mass layoff events rose 3.2% in November for the fifth increase in the last six months. That was enough to lift the number of layoff events to the highest level of 2006. During the last ten years there has been a [...]

Mass Layoffs Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221h.jpg" width="353">
The National Activity Index (CFNAI) from the Federal Reserve Bank of Chicago remained negative in November at -0.26. The figure was negative for the fifth month in the last seven. The three-month moving average of the CFNAI fell to -0.32, its lowest level since 2003.
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.
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_November2006.pdf">here</a>.
The latest Survey of Professional Forecasters from the Federal Reserve Bank of Philadelphia is available <a href="http://www.philadelphiafed.org/files/spf/survq406.html">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S503/@S503.HTM">Chicago Fed</a></th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">November &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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<td class="firstcol">CFNAI</td>
<td>-0.26</td>
<td>-0.30</td>
<td>0.88</td>
<td>0.21</td>
<td>0.30</td>
<td>-0.17</td>
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The National Activity Index (CFNAI) from the Federal Reserve Bank of Chicago remained negative in November at -0.26. The figure was negative for the fifth month in the last seven. The three-month moving average of the CFNAI fell to [...]

Chicago Fed Nat'l Activity Index Negative

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221g.jpg" width="353">
According to the Conference Board, the composite index of leading economic indicators edged up 0.1% last month, the same as during October which was downwardly revised. The increase in November marked the third consecutive monthly increase, the first string of three months gain since the Spring of 2005. Consensus expectations for November had been for no change.
During the last ten years there has been a 59% correlation between the y/y change in the leading indicators and the lagged change in real GDP.
The breadth of one month gain amongst the 10 components of the leading index reversed the prior month&#39;s improvement and fell to 40%, but over the last six months 55% of the component series rose.
A rising money supply, improved vendor performance and higher capital goods orders accounted for much of last month&#39;s gain in the leading index. That was offset by lower building permits, higher claims for jobless insurance and easier consumer expectations.
The method of calculating the contribution to the leading index from the spread between 10 year Treasury securities and the Fed funds rate has been revised. A negative contribution will now occur only when the spread inverts rather than when declining as in the past. More details can be found <a href="http://www.conference-board.org/pdf_free/economics/bci/lei0705.pdf">here</a>.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221f.jpg" width="353">
The leading index is based on eight previously reported economic data series. Two series, orders for consumer goods and orders for capital goods, are estimated.
The coincident indicators increased 0.2% after an upwardly revised 0.2% increase during October. Over the last ten years there has been a 91% correlation between the y/y change in the coincident indicators and real GDP growth.
The lagging indicators rose a solid 0.5%, the largest increase since June. The ratio of coincident to lagging indicators, which is a measure of actual economic performance versus excess, was unchanged. The ratio has been stuck at the current level since since July.
Visit the Conference Board&#39;s <a href="http://www.conference-board.org">site</a> for coverage of leading indicator series from around the world.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM">Business Cycle Indicators</a></th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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</thead>
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<td class="firstcol">Leading</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.0%</td>
<td>2.3%</td>
<td>7.4%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.3%</td>
<td>2.2%</td>
<td>2.5%</td>
<td>0.4%</td>
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According to the Conference Board, the composite index of leading economic indicators edged up 0.1% last month, the same as during October which was downwardly revised. The increase in November marked the third consecutive monthly [...]

U.S. Leading Economic Indicators Edged Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221d.jpg" width="353">
Initial unemployment insurance claims increased 9,000 last week to 315,000 and reversed half of the revised decline during the prior week. The increase matched Consensus expectations.
The latest figure covers the December survey period for nonfarm payrolls and claims fell 8,000 (-2.5%) from the November period.
During the last ten years there has been a (negative) 77% correlation between the level of initial claims and the m/m change in nonfarm payroll employment.
The four-week moving average of initial claims fell to 325,750 (+2.9% y/y).
Continuing claims for unemployment insurance rose 45,000 and reversed all of the prior week&#39;s decline.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221e.jpg" width="353">
The insured rate of unemployment remained at 1.9% for the seventh consecutive week and equaled the average rate since February.
Interest Rates, Carry Trades, and Exchange Rate Movements from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-31.pdf"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">12/16/06</th>
<th scope="col">12/09/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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</thead>
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<td class="firstcol">Initial Claims</td>
<td>315</td>
<td>306</td>
<td>1.0%</td>
<td>332</td>
<td>343</td>
<td>403</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Continuing Claims</td>
<td>--</td>
<td>2,520</td>
<td>-3.7%</td>
<td>2,662</td>
<td>2,924</td>
<td>3,532</td>
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Initial unemployment insurance claims increased 9,000 last week to 315,000 and reversed half of the revised decline during the prior week. The increase matched Consensus expectations. The latest figure covers the December survey [...]

Initial Unemployment Insurance Claims Rose

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221a.jpg" width="353">
U.S. real GDP growth last quarter was revised down to 2.0% (AR). The estimate had started at 1.6% then was raised to 2.2% last month and compared to Consensus expectations for no change at 2.2%. The rise in GDP last quarter was the second slowest quarterly growth rate since 1Q 2003.
Expectations for growth this quarter call for further slowdown then improvement to 3.0% GDP growth next year. Economic forecasts from Macroeconomic Advisors are available in the Haver DLX database MA4CAST. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221b.jpg" width="353">
Growth in corporate profitability was revised slightly lower to still-firm 3.9% (30.6% y/y) from the 4.2% gain estimated initially. (The comparison versus last year is exaggerated by the losses suffered due to Hurricane Katrina.) The downward revision was due to a lowered figure for profits earned by US financial corporations which fell 1.9% (+60.4% y/y) and a deepened decline in profits earned by foreign entities which fell 2.2% (+5.0% y/y). U.S. nonfinancial corporate profitability was revised up slightly to 8.7% (26.4% y/y).
Less inventory accumulation contributed to the downward GDP revision for 3Q and it added 0.1 percentage points to GDP rather than the 0.2 point add estimated last month.
Overall growth in final sales to domestic purchasers was reduced slightly to 2.0%. Growth in personal consumption was reduced slightly to 2.8% (2.7% y/y) and nonresidential fixed investment growth was held steady at 10.0% (8.3% y/y). <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221c.jpg" width="353">
Residential investment was even weaker than indicated earlier and the 3Q estimate was revised slightly down to -18.6% (AR, -8.1% y/y). It was the fourth consecutive decline, the largest since 1991 and pulled 1.2 percentage points from 3Q GDP growth. That subtraction was the largest by housing since 1981.
Deterioration in the net export deficit was left unchanged at a 0.2 percentage point subtraction from GDP growth. Export growth was upwardly revised slightly to 6.8% (9.1% y/y) and import growth also was revised up slightly to 5.6% (7.2% y/y).
The GDP chain price index was revised up slightly to 1.9%, its weakest quarterly advance in over three years. The PCE chain price index grew an unrevised 2.4% (2.8% y/y). Less food &amp; energy the PCE chain price index grew 2.3% (2.4% y/y).
Milton Freidman on Inflation from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/publications/mt/20070101/cover.pdf"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM">Chained 2000$, % AR</a></th>
<th scope="col">3Q &#39;06 (Final)</th>
<th scope="col">3Q &#39;06 (Prelim.)</th>
<th scope="col">2Q &#39;06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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<td class="firstcol">GDP</td>
<td>2.0%</td>
<td>2.2%</td>
<td>2.6%</td>
<td>3.0%</td>
<td>3.2%</td>
<td>3.9%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Inventory Effect</td>
<td>0.1%</td>
<td>0.2%</td>
<td>0.4%</td>
<td>0.7%</td>
<td>-0.3%</td>
<td>0.4%</td>
<td>0.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Final Sales</td>
<td>1.9%</td>
<td>2.1%</td>
<td>2.1%</td>
<td>2.3%</td>
<td>3.5%</td>
<td>3.5%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Foreign Trade Effect</td>
<td>-0.2%</td>
<td>-0.2%</td>
<td>0.4%</td>
<td>-0.1%</td>
<td>-0.1%</td>
<td>-0.5%</td>
<td>-0.3%</td>
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<tr class="odd">
<td class="firstcol">Domestic Final Demand</td>
<td>2.0%</td>
<td>2.1%</td>
<td>1.6%</td>
<td>2.4%</td>
<td>3.6%</td>
<td>4.0%</td>
<td>2.8%</td>
</tr>
<tr>
<td class="firstcol">Chained GDP Price Index</td>
<td>1.9%</td>
<td>1.8%</td>
<td>3.3%</td>
<td>2.9%</td>
<td>3.0%</td>
<td>2.8%</td>
<td>2.1%</td>
</tr>
</tbody>
</table>


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U.S. real GDP growth last quarter was revised down to 2.0% (AR). The estimate had started at 1.6% then was raised to 2.2% last month and compared to Consensus expectations for no change at 2.2%. The rise in GDP last quarter was the [...]

US 3Q GDP Growth Revised Lower

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/061220c.jpg" width="353">
UK institutional investors added a record amount to their asset portfolios in Q3, according to the &quot;First Release&quot; of the widely followed &quot;MQ5&quot; report, which was issued this morning by the Office of National Statistics. Insurance companies, pension funds and trusts (mutual funds) acquired a net of &pound;27.8 billion in UK and overseas securities, cash, and real estate and other assets, compared with &pound;23.6 billion in Q2 and a previous record of &pound;27.7 billion in Q1 2001. Further, the sum of the first three quarters of 2006 is &pound;67.7 billion, just &pound;1.8 billion shy of the largest investment amount in any previous YEAR, which was &pound;69.5 billion in 2000.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061220d.jpg" width="353">
Investment patterns have been quite interesting this year as well. In both Q2 and Q3 the firms have concentrated on additions to short-term holdings. See in the table below that such &quot;cash and equivalents&quot; are a large proportion of net investment, indeed, about 42% in Q3. In Q2 they were 40% of the total. This looks at a glance to reflect the negative yield curve in the UK -- and elsewhere, for that matter. In the second graph, we show net investment in short-term assets against the yield curve, measured as the spread between the 10-year nominal par yield on gilts and the 1-month sterling inter-bank rate. There appears to be a rough negative relationship, and indeed, why would investors put their money out long when short instruments pay more?<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061220e.jpg" width="353">
A second development of interest is the net liquidations of company shares, which are evident in our table. These groups of institutions have been net sellers of shares continuously since the spring of 2003, and off-and-on since 1999. It is important to notice here that these figures are the net of acquisitions and what in the UK are known as &quot;realisations&quot;. They are NOT net changes in market value. In fact, the latter have been positive, as seen in the third graph, which also shows the trend in stock prices. The market value of stock holdings has continued to rise, even as this important UK investor group has been selling. It&#39;s an intriguing situation.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/UK/@U1/@U109/@U109.HTM">UK: MQ5 Net Investment</a><a href="http://www.haverselect.com/dlx/UK/@U1/@U109/@U109.HTM">,</a> &nbsp; &pound; Millions</th>
<th scope="col">Q3 2006</th>
<th scope="col">Q2 2006</th>
<th scope="col">Q3 2005</th>
Quarterly Averages
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</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">Total Identified Assets</td>
<td>27,776</td>
<td>23,552</td>
<td>8,898</td>
<td>15,183</td>
<td>15,250</td>
<td>14,048</td>
</tr>
<tr class="odd">
<td class="firstcol">Short-Term</td>
<td>11,699</td>
<td>9,395</td>
<td>439</td>
<td>4,357</td>
<td>3,103</td>
<td>157</td>
</tr>
<tr>
<td class="firstcol">British Govt Securities</td>
<td>6,035</td>
<td>4,804</td>
<td>3,042</td>
<td>2,450</td>
<td>4,150</td>
<td>4,974</td>
</tr>
<tr class="odd">
<td class="firstcol">UK Company Shares</td>
<td>-8,203</td>
<td>-8,460</td>
<td>-6,044</td>
<td>-5,507</td>
<td>-5,209</td>
<td>-1,293</td>
</tr>
<tr>
<td class="firstcol">Other UK Company Securities</td>
<td>3,178</td>
<td>5,517</td>
<td>3,111</td>
<td>3,545</td>
<td>5,126</td>
<td>6,445</td>
</tr>
<tr class="odd">
<td class="firstcol">Overseas Company Shares</td>
<td>3,021</td>
<td>-1,832</td>
<td>3,253</td>
<td>3,289</td>
<td>3,594</td>
<td>924</td>
</tr>
<tr>
<td class="firstcol">Other Overseas Company Securities</td>
<td>5,530</td>
<td>6,671</td>
<td>-495</td>
<td>1,891</td>
<td>2,435</td>
<td>1,742</td>
</tr>
<tr class="odd">
<td class="firstcol">Overseas Govt Securities</td>
<td>2,266</td>
<td>2,219</td>
<td>-596</td>
<td>89</td>
<td>-1,011</td>
<td>-859</td>
</tr>
</tbody>
</table>
</body>
</html>

UK institutional investors added a record amount to their asset portfolios in Q3, according to the "First Release" of the widely followed "MQ5" report, which was issued this morning by the Office of National Statistics. Insurance [...]

UK Institutional Investors Invest Record Amount in Q3

Sticky services prices behind sticky overall PCE inflation

Flash April PMIs point to slower growth in the US but a pickup in Europe and Japan

Outlook strengthens for US while it weakens for other major economies

Crude petroleum prices are having a big impact on inflation expectations

Inflation surprising to upside in the US; by contrast to the downside in the euro area

 Gross Domestic Income is catching up with GDP

FOMC expects GDP growth above trend over the next three years

US core CPI inflation has begun to reaccelerate

Fiscal-policy aided factory building in the U.S. provided an unusually large boost to growth last year

US consumers much more optimistic than those in the Euro area and the UK

  Job openings take a step down in 2024

Fed's super core services inflation measure pushing up core rate

Blue Chip forecasters expect significant monetary easing this year except in Japan

Euro area economy stagnating while US grows above trend

Chinese and Japanese equity markets are diverging markedly

Chinese population declines in 2023 for second consecutive year

Outlook for US GDP growth on the rise; declining in euro area, Japan and China

There are still 1.4 job openings for every unemployed person in the US

US PCE inflation over the past six months has slowed to the Fed's 2% target

FOMC think rate hikes are done and looks for 75bps of decline in 2024

Weaker economic data surprises pushing down US interest rates

Recent disinflation has been widespread across Europe and North America

Recent decline in US inflation expectations helping to lower interest rates

China is losing its luster as foreign direct investment heads out

Blue Chip forecasters think Fed will be tighter for longer

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Nonfarm payrolls increased 175,000 (1.8% y/y) in April after rising 315,000 in March, revised from 303,000, and 236,000 in February, revised from 270,000. Expectations had been for a 250,000 rise in the Action Economics Forecast Survey. The three-month average change of 242,000 is the slowest since December of	 last year.

Average hourly earnings increased 0.2% in April after an unrevised 0.3% March gain and a 0.1% uptick in February, revised from 0.2%. The 3.9% y/y earnings increase remains below the 5.9% high in March 2022. It is the weakest rise since June 2021.

The unemployment rate, measured in the household survey, rose to 3.9% and reversed its decline to 3.8% in March. An unchanged 3.8% had been expected. Household employment rose 25,000 after increasing 498,000 in March. The labor force rose 87,000 after a 469,000 March gain. The overall unemployment rate, including workers who were marginally attached & working part-time for economic reasons edged up to 7.4%. It was the highest rate since November 2021.

The employment and earnings data are collected from surveys taken each month during the week containing the 12th day of the month. The labor market data are contained in Haver's **USECON** database. Detailed figures are in the **EMPL** and **LABOR** databases. The expectations figures are in the **AS1REPNA** database.

- Job increase slows to weakest in just over one year.
- Earnings increase moderates.
- Jobless rate moves up as employment increase is negligible.

U.S. Payroll Employment & Wage Growth Moderate in April; Jobless Rate Edges Up

Andrew Cates

**Consensus interest rate forecasts**
Despite heightened concerns about the potential for lower US interest rates in the coming months, recent forecasts still show a broad consensus that an easing cycle will unfold in the period ahead across most major economies. The latest Blue Chip Financial Forecasts survey, for instance, indicates that policy rate reductions of approximately 100 basis points are anticipated from the Fed over the next 12 months. Additionally, the European Central Bank and the Bank of England are expected to implement cumulative cuts of 166 and 111 basis points, respectively, during the same timeframe. In contrast, Japan is expected to see further rate hikes, specifically an increase of 17 basis points over the year ahead.

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**US data surprises and 2 year bond yields**
The anxiety in financial markets about the Fed’s scope to lower interest rates can be largely traced to the US economy’s resilience – and its tight labour market in particular – together with sticky inflation. The former, however, namely economic resilience, has arguably being challenged in recent days by some, though by no means all, US data releases. These include, for example, a weaker-than expected consumer confidence report and ISM survey of manufacturing. Citigroup’s US growth surprise index has, against that backdrop, turned sharply lower.

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**US and euro area data surprises versus the euro**
A corresponding trend has also unfolded in the FX market. While US data have been a little more disappointing this contrasts with euro area data, which have been more resilient. Yet, thanks to still-firm US/Europe yield differentials, the US dollar has remained fairly resilient versus the euro (see chart 3).

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**Japan’s economy**
This week’s disappointing retail sales data from Japan could call into question the scope for further policy rate hikes from the Bank of Japan (BoJ) in the coming months. Retail sales specifically slowed to 1.2% y/y in March from 4.7% in February. That slowdown, moreover, was broadly-based, with reduced sales activity seen across various product categories.

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**Airport traffic in China**
The latest monthly dataflow from China have been a little more upbeat but that was not the message from this week’s official PMI surveys for April. Other less widely monitored data are also yielding sobering messages about the current economic environment. For instance, while aircraft movements at Beijing Airport have risen from their low points, they still remain well below pre-COVID pandemic levels (see chart 5). Similarly, specific data on cargo volumes and passenger traffic lead to the same conclusion.

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**Global warming and water levels**
Finally, on more structural matters, climate change continues to generate profound shifts in the economic landscape, influencing everything from agricultural productivity to energy markets and global supply chains. One manifestation of these shifts is low water levels in many areas and for example, in the Panama Canal. More specifically Gatun Lake has seen prolonged drought conditions, exacerbated by the El Niño phenomenon and broader climate change anomalies. The drought has resulted in lower-than-average rainfall and delayed rainy seasons, leading to reduced water availability not only for canal operations but also for over half of Panama's population relying on this water source. To that supply chain point above, the canal has also had to reduce the number of ships it can accommodate per day.

240502Z6.jpg

Lingering concerns about the US Fed's inclination to lower interest rates in coming months have continued to unsettle financial markets over the past few days. That said, comments from Fed Chair Powell after this week’s FOMC meeting have calmed some of those nerves. In our charts this week we delve into the latest Blue Chip consensus on policy rates across the world’s major economies (chart 1). We also compare market expectations for US policy rates, inferred from 2-year Treasury yields, with a trend toward more negative US data surprises in recent days (chart 2). In addition we contrast that more negative US growth trend with the relative resilience of the euro area dataflow and some recent downward pressure on the EUR/USD exchange rate (chart 3). Turning to Asia, we assess Japan's economy with a focus on some recent disappointing retail sales data (chart 4), and provide insights into China's economic activity through aircraft movements at Beijing Airport (chart 5). Finally, and with a nod to climate change and its impact, we look at reduced water levels on the Panama Canal and how these contrast with above-average land and sea temperatures over the past few years (chart 6).

<iframe style="border-radius:12px" src="https://open.spotify.com/embed/episode/1UGzrkribMM4URLI6yDhWG?utm_source=generator" width="100%" height="152" frameBorder="0" allowfullscreen="" allow="autoplay; clipboard-write; encrypted-media; fullscreen; picture-in-picture" loading="lazy"></iframe>

Charts of the Week: Policy Surprises Versus Data Surprises

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The U.S. trade deficit in goods and services (BOP basis) of $69.4 billion in March compared to a $69.5 billion in February, revised from $68.9 billion, and an unrevised $67.6 billion in January, according to the U.S. Census Bureau. The deficit remained nearly the largest since April 2023 which was $72.2 billion. A $69.1 billion deficit had been expected in the Action Economics Forecast Survey. Exports fell 2.0% and were roughly unchanged y/y, reversing a 2.2% February rise. Imports declined 1.6% (+3.1% y/y) in March, following three straight months of moderate gain.

The deficit in goods trade (BOP basis) increased to $92.5 billion in March from $91.7 billion in February. Goods exports fell 2.9% (-2.8% y/y) after rising 2.8% in February. Imports of goods declined 1.6% (+2.5% y/y) following three straight monthly increases. The services trade surplus increased to $23.1 billion in March from $22.2 billion in February but remained down from a peak surplus of $25.2 billion last August. Services exports eased 0.2% (+6.0% y/y) following four consecutive monthly increases. Services imports declined 1.7% (+5.4% y/y) after rising 4.7% in February.

The real (inflation-adjusted) goods trade deficit (customs value; chained 2017 dollars), widened to $88.6 billion in March, the largest deficit since April of last year, from $87.4 billion in February. Real exports of goods declined 3.2% (-0.7% y/y) after rising 2.0% in February. Real imports of goods fell 1.5% (+2.5% y/y) after three straight monthly increases. In the first quarter of this year, a widening of the trade deficit (net exports) subtracted 0.86 percentage points from GDP growth after adding 0.25 percentage points to growth in Q4 2023.

The customs value goods trade deficit widened to $91.5 billion in March from $90.5 billion in February. The latest figure compared to a $91.8 billion deficit in the advance report released on April 25. Customs value exports fell 3.0% (-1.7% y/y) in March after a 2.8% February increase. Automotive vehicles, parts & engines rose 0.6% (-1.7% y/y) while nonfood consumer goods excluding autos declined 1.8% (-5.1% y/y). Capital goods exports excluding autos weakened 3.7% (+3.1% y/y) while exports of industrial supplies & materials fell 3.0% (-4.1% y/y). Foods, feeds & beverages exports were off 8.2% (-1.5% y/y).

Customs value imports of goods declined 1.6% (+2.6% y/y) in March after increasing for three straight months. Automotive vehicles, parts & engines imports fell 11.1% (+6.1% y/y) while capital goods imports excluding autos rose 0.1% (7.4% y/y). Foods, feeds & beverage imports declined 3.5% (+5.2% y/y). Imports of industrial supplies & materials fell 2.9% (-7.0% y/y) but nonfood consumer goods excluding autos rose 4.8% (4.1% y/y). Meanwhile, petroleum imports declined 2.5% and were unchanged y/y in March, following a 1.6% February rise. Nonpetroleum imports weakened 1.5% (+2.8% y/y) following three straight monthly increases.

The rise in services exports reflected a 0.7% increase (12.4% y/y) in personal, cultural & recreational services and a 1.3% decline (+24.9% y/y) in travel services exports. Exports of construction services declined 1.3% (+2.6% y/y) while government goods & services exports declined 0.9% (-23.0% y/y). The increase in services imports was due to construction services imports which rose 1.0% (35.1% y/y) but travel services imports fell 2.6% (+21.7% y/y). Imports of transport services declined 5.8% (-0.1% y/y) while charges for the use of intellectual property eased 0.1% (+3.2 y/y) in March.

The U.S. goods trade deficit with China widened to a seasonally adjusted $24.1 billion in March from $21.9 billion in February. Exports fell 3.6% (-10.3% y/y) while imports rose 4.8% (unchanged y/y). The goods trade deficit with the European Union deepened to $19.5 billion from $17.6 billion in February as exports fell 3.4% (-6.4% y/y), off for the third straight month, and imports rose 1.8% (4.2% y/y). The trade deficit with Japan narrowed to a seasonally adjusted $5.3 billion in March after narrowing to $6.2 billion in the previous month. Exports declined 1.9% (+3.0% y/y) while imports fell 8.7% (-2.2% y/y).

The international trade data, including relevant data on oil prices, can be found in Haver's **USECON** database. Detailed figures on international trade are available in the **USINT** database. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- Exports and imports both fall.
- Adjusted for inflation, goods trade deficit increases to eleven-month high.
- Goods trade deficits with China & Europe deepen.

U.S. Trade Deficit Deepens in March

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The Commerce Department reported that inventories in the factory sector remained unchanged (0.6% y/y) during March after a 0.2% February rise. Transportation equipment inventories held steady (6.9% y/y). Furniture inventories increased 0.3% (-4.4% y/y) while electrical equipment inventories dropped 0.4% (-0.5% y/y). Amongst nondurable goods industries, petroleum inventories were 0.5% higher (2.6% y/y) and plastics & rubber inventories rose 0.2% (-4.8% y/y). These changes were accompanied by a 0.5% rise (-1.7% y/y) in apparel. Basic chemical inventories were unchanged (-0.6% y/y) for a second consecutive month while paper product inventories gained 0.2% (-2.6% y/y).

Orders to all manufacturers improved 1.6% (1.7% y/y) in March following a 1.2% February rise. The gain was led by a 2.6% rise (1.2% y/y) in durable goods orders, as commercial aircraft surged 30.6% (-50.9% y/y) in. New orders excluding transportation gained 0.5% (1.6% y/y). Orders for nondurable goods (which equal shipments) rose 0.6% (2.1% y/y). The rise reflected a 1.5% increase (4.9% y/y) in shipments from oil refineries and a 0.7% gain (2.1% y/y) in basic chemicals. Orders for textile products declined 1.4% (-1.7% y/y) and apparel orders fell 0.2% (-1.9% y/y). Orders for food products rose 0.2% (-0.3% y/y). Paper product shipments held steady (-2.0% y/y).

Unfilled orders improved 0.4% in March (9.1% y/y) and, excluding the transportation sector, they eased 0.1% (-0.9% y/y). Backlogs of electrical equipment slipped 0.1% (+0.7% y/y). Unfilled orders in the machinery sector eased 0.3% (-3.9% y/y) and unfilled orders for transportation equipment rose 0.7% (15.5% y/y). Unfilled orders of furniture rose 0.6% (-5.6% y/) and fabricated metals backlogs were off 0.1%, unchanged y/y.

The factory sector figures are available in Haver's **USECON** database.

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- Inventories levels are flat.
- Order improvement led by aircraft.
- Unfilled orders rise.

U.S. Factory Inventories Hold Steady While Orders Rise in March

Kathleen Stephansen, CBE

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Nonfarm business sector productivity increased 0.3% (SAAR) during Q1’24, following upwardly revised gains of 3.5% in Q4’23 and 4.6% in Q3’23. The rises in productivity were originally reported as being 3.4% in Q4 and 4.4% in Q3. Expectations had been for a 0.8% rise in the Action Economics Forecast Survey. On a year-on-year comparison, Q1 productivity rose 2.9%, up from 2.7% in Q4 and 2.4% in Q3. The y/y gain was the quickest since 2020. Real value-added output rose 1.3% (SAAR) (3.2% y/y) in Q1 from a 3.8% (3.3% y/y) gain in Q4.

Hours-worked in the nonfarm business sector rose 1.0% (0.3% y/y) in Q1 from a 0.2% (0.6% y/y) rise in Q4. Nonfarm hourly compensation increased 5.0% (4.7% y/y) in Q1 from a 3.5% gain (5.2% y/y) in Q4. Adjusted for price inflation, real compensation per hour rose 1.1% (1.5% y/y) in Q1, following a 0.8% (1.9% y/y) rise in Q4.

Weaker productivity brought an acceleration in unit labor costs to 4.7% (1.8% y/y) in Q1 after a 0.0% (2.4%) rise in Q4. The Action Economics Forecast Survey called for a 2.3% quarterly rise in unit labor costs.

In the manufacturing sector, real output per hour slowed to a rise of 0.2% (1.2% y/y) last quarter after a gain of 2.4% (0.9% y/y) in Q4. Manufacturing output was unchanged over the quarter (-0.1% y/y) after declining 1.0% (-0.2% y/y) in Q4. Hours-worked declined 0.2% (-1.3% y/y) in Q1 after a drop of 3.3% (-1.1% y/y) in Q4.

Compensation per hour in manufacturing slowed to a gain of 3.4% (6.3% y/y) last quarter following a rise of 6.8% (6.7% y/y) in Q4. Real compensation declined 0.4% (3.0% y/y) in Q1, after a rise of 4.0% (3.4% y/y) in Q4. Unit labor costs in manufacturing slowed to a rise of 3.2% (5.0% y/y) in Q1 following a gain of 4.2% (5.8% y/y) the prior quarter.

The productivity and labor cost data are available in Haver’s **USECON** database. The Action Economics expectations figures are in the **AS1REPNA** database.

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- Productivity slows in Q1.
- Unit labor costs rise sharply.
- Slowdown in factory productivity and unit labor cost growth.

Economy in Brief: 2006

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Philadelphia Fed Index Fell Unexpectedly

Mass Layoffs Up

Chicago Fed Nat'l Activity Index Negative

U.S. Leading Economic Indicators Edged Up

Initial Unemployment Insurance Claims Rose

US 3Q GDP Growth Revised Lower

US 3Q GDP Growth Revised Lower

UK Institutional Investors Invest Record Amount in Q3