Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040108a.jpg" width="353">
Initial claims for jobless insurance rose a moderate 14,000 last week to 353,000 and reversed virtually all of the prior week&#39;s decline which was unrevised. Consensus expectations had been for claims of 350,000.
The four-week moving average of initial claims fell to 350,250 (-12.9% y/y).
Continuing claims for unemployment insurance fell 12,000 and the prior week&#39;s increase was revised lower to 51,000.
The insured rate of unemployment was unchanged at 2.6% for the seventh consecutive week.

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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">01/03/04</th>
<th scope="col">12/27/03</th>
<th scope="col">Y/Y</th>
<th scope="col"> 2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>353.0</td>
<td>339.0</td>
<td>-10.9%</td>
<td>403</td>
<td>404</td>
<td>406</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>3,273</td>
<td>-5.6%</td>
<td>3,535</td>
<td>3,575</td>
<td>3,022</td>
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</tbody>
</table>
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Initial claims for jobless insurance rose a moderate 14,000 last week to 353,000 and reversed virtually all of the prior week's decline which was unrevised. Consensus expectations had been for claims of 350,000. The four-week moving [...]

Jobless Insurance Claims Ticked Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040107a.jpg" width="353">
The index of mortgage applications compiled by the Mortgage Bankers Association last week recovered half of the prior week&#39;s 9.0% drop (-49.3% y/y).
Purchase applications rose 2.9% w/w (+6.7% y/y) following two weeks of sharp decline. Purchase applications started 2004 2.1% below the December average which fell 3.8% versus November.
During the last ten years there has been a 54% correlation between the y/y change in purchase applications and the change in new plus existing home sales.
Applications to refinance rose 6.8% w/w and gained back half of the prior week&#39;s decline (-70.1% y/y). Refis started 2004 5.1% below the December average which fell 16.3% versus November.
The effective interest rate on a conventional 30-Year mortgage rose to 6.10% versus 5.97% averaged last year. The effective rate on a 15-year mortgage also rose to 5.48% from 5.38% averaged during 2003.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">1/02/04</th>
<th scope="col">12/26/03</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>599.9</td>
<td>574.1</td>
<td>1,067.9</td>
<td>799.7</td>
<td>625.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>401.3</td>
<td>390.1</td>
<td>395.1</td>
<td>354.7</td>
<td>304.9</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,755.4</td>
<td>1,644.3</td>
<td>4,981.8</td>
<td>3,388.0</td>
<td>2,491.0</td>
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</tbody>
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The index of mortgage applications compiled by the Mortgage Bankers Association last week recovered half of the prior week's 9.0% drop (-49.3% y/y). Purchase applications rose 2.9% w/w (+6.7% y/y) following two weeks of sharp decline. [...]

Mortgage Applications Up Modestly

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040107b.jpg" width="353">
The Russian economy continues to show good growth. Although slightly below the pace of the first two quarters, gross domestic product in the third quarter of last year was 6.2% above the third quarter of 2002. Moreover, current indicators in October and November suggest the fourth quarter will be strong.
Russia publishes the monthly changes and the year over year changes in the output of five basic indicators: Agriculture, Construction, Industry, Retail Trade and Transportation Services. These indicators and industrial production frequently foreshadow changes in GDP. The sharp turn around in the increase in agriculture output, which went to positive changes in October and November from negative ones in two of the months of the third quarter, is significant. 

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<th scope="col" class="firstcol">Year over Year % Change</th>
<th scope="col">Nov 03&nbsp;</th>
<th scope="col">Oct 03</th>
<th scope="col">Sep 03</th>
<th scope="col">Aug 03</th>
<th scope="col"> July 03 </th>
</tr>
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<td class="firstcol">Industrial Production</td>
<td>7.08</td>
<td>7.09</td>
<td>7.75</td>
<td>5.19</td>
<td>6.87</td>
</tr>
<tr>
<td class="firstcol">Agriculture</td>
<td>8.0</td>
<td>13.1</td>
<td>7.9</td>
<td>-16.2</td>
<td>-11.2</td>
</tr>
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<td class="firstcol">Construction</td>
<td>11.6</td>
<td>14.6</td>
<td>14.7</td>
<td>14.3</td>
<td>15.0</td>
</tr>
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<td class="firstcol">Industry</td>
<td>7.1</td>
<td>7.2</td>
<td>8.0</td>
<td>5.5</td>
<td>7.1</td>
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<td class="firstcol">Retail Sales</td>
<td>7.0</td>
<td>7.1</td>
<td>7.0</td>
<td>6.1</td>
<td>7.9</td>
</tr>
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<td class="firstcol">Transportation Services</td>
<td>7.0</td>
<td>7.0</td>
<td>6.0</td>
<td>8.3</td>
<td>7.6</td>
</tr>
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The Russian economy continues to show good growth. Although slightly below the pace of the first two quarters, gross domestic product in the third quarter of last year was 6.2% above the third quarter of 2002. Moreover, current [...]

Russian Third Quarter 2003 Gross Domestic Product Is Up 6.2% 0ver a Year Ago

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<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040106a.jpg">
Light vehicle sales added 7.2% in December to the 7.7% November gain and rose to 18.06M, the second highest monthly selling rate for the year. Consensus expectations had been for sales of 17.0M.
For the year, light vehicle sales fell 0.6% versus 2002 to 16.71M. The peak for annual sales was in 2000 at 17.40M.
Cash rebates of up to $5,000 were successful in lifting sales of light trucks to 10.24M, up 12.9% m/m.
Car sales rose slightly in December to 7.82M. For 2003, sales fell for the third straight year to 7.64M. The peak for car sales was in 1986 at 11.41M.
Domestic light vehicle sales rose 10.3% m/m to 14.89M as truck sales jumped 15.4% m/m (3.8% y/y).
Imported vehicle sales fell 5.3% m/m to 3.16M (-6.4% y/y). Imports captured 17.5% of the US market for new vehicles in December and 19.8% for the year.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED09/@ED0901/@ED0901.HTM"> Light Vehicle Sales (SAAR, Mil.Units)</a></th>
<th scope="col"> Dec</th>
<th scope="col">Nov</th>
<th scope="col">Y/Y</th>
<th scope="col"> 2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
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<td class="firstcol">Total</td>
<td>18.06</td>
<td>16.84</td>
<td>-1.4%</td>
<td>16.71</td>
<td>16.81</td>
<td>17.26</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Autos</td>
<td>7.82</td>
<td>7.77</td>
<td>-7.1%</td>
<td>7.64</td>
<td>8.07</td>
<td>8.48</td>
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<tr class="odd">
<td class="firstcol">&nbsp; Light Trucks</td>
<td>10.24</td>
<td>9.07</td>
<td>3.4%</td>
<td>9.07</td>
<td>8.74</td>
<td>8.78</td>
</tr>
</tbody>
</table>
ISM Non-Manufacturing Index Fell Again 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 6, 2004


<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040106c.jpg">
The Business Activity Index for the non-manufacturing sector, reported by the Institute for Supply Management, fell in December to 58.6 versus 60.1 in November and 64.7 in October. Consensus expectations had been for little change at 60.5.
Since the series&#39; inception in 1997 there has been a 58% correlation between the level of the ISM non-manufacturing business activity index and the quarterly change in real GDP for services plus construction.
The employment index dipped modestly to 54.0 versus the strong reading of 54.9 in November.
Since the series&#39; inception in 1997 there has been a 64% correlation between the level of the ISM non-manufacturing employment index and the m/m change in payroll employment in the service producing and construction industries.
New orders improved to a reading of 61.2 versus 60.1 the prior month.
Business activity for the non-manufacturing sector is a question separate from the subgroups mentioned above. In contrast, the NAPM manufacturing sector composite index weights the components.
The seasonally adjusted prices index rose to 60.0 in December and for the year stood at the highest level since 2000.
ISM surveys more than 370 purchasing managers in more than 62 industries including construction, law firms, hospitals, government and retailers. The non-manufacturing survey dates only to July 1997, therefore its seasonal adjustment should be viewed tentatively. 

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<th scope="col" class="firstcol"> <a href="http://www.haverselect.com/dlx/USECON/@EF/@EF03/@EF03.HTM">ISM Nonmanufacturing Survey</a></th>
<th scope="col">Dec</th>
<th scope="col">Nov</th>
<th scope="col">Y/Y</th>
<th scope="col"> 2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Business Activity Index</td>
<td>58.6</td>
<td>60.1</td>
<td>54.2</td>
<td>58.3</td>
<td>55.1</td>
<td>49.0</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>60.0</td>
<td>58.0</td>
<td>55.3</td>
<td>56.7</td>
<td>53.9</td>
<td>51.6</td>
</tr>
</tbody>
</table>
Challenger Layoffs Lower 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 6, 2004


<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040106d.jpg">
Announced job cuts in December fell 6.5% m/m and pulled the full year figure down 13.6% versus 2003 according to Challenger, Gray &amp; Christmas.
The three month moving average of job cut announcements again rose (-14.6% y/y) due to a spike in layoffs in October.
Announced layoffs fell the services (-16.0% in 2003), electronics (-18.5% in 2003), telecommunications (-58.6% in 2003) and transportation (-32.2% in 2003) industries. Job cut announcements rose m/m in the aerospace (-36.1% in 2003), apparel (+69.6% in 2003), automotive (-33.1% in 2003), chemical (+1.5% in 2003), computer (-52.6% in 2003), financial (-42.0% in 2003) and pharmaceutical (+148.3% in 2003) industries.
Job cut announcements differ from layoffs in that many are achieved through attrition or just never occur.
During the last ten years there has been an 83% (inverse) correlation between the three month average level of announced job cuts and the y/y percent change payroll employment.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S3/@S301/@S301.HTM"> Challenger, Gray &amp; Christmas</a></th>
<th scope="col">Dec</th>
<th scope="col">Nov</th>
<th scope="col">Y/Y</th>
<th scope="col"> 2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
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<td class="firstcol">Announced Job Cuts</td>
<td>93,020</td>
<td>99,452</td>
<td>0.1%</td>
<td>1,236,426</td>
<td>1,431,052</td>
<td>1,956,876</td>
</tr>
</tbody>
</table>
Chain Store Sales Slip 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 6, 2004


<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040106b.jpg">
Chain store sales slipped 0.1% the opening week of the New Year, according to the ICSC-UBS survey. The dip followed strong gains in the prior three weeks. For the year, weak pricing power pulled the rise in sales down to 2.9% versus a 3.6% gain in 2002.
December sales fell 0.3% versus the November average. In November, sales rose 0.5% versus the prior month.
During the last five years there has been a 61% correlation between the year-to-year percent change in the ICSC-UBS measure of chain store sales and the change in non-auto retail sales less gasoline.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM"> ICSC-UBS</a><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM"> (SA, 1977=100)</a></th>
<th scope="col">01/03/04</th>
<th scope="col">12/27/03</th>
<th scope="col">Y/Y</th>
<th scope="col"> 2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
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<td class="firstcol">Total Weekly Retail Chain Store Sales</td>
<td>430.9</td>
<td>431.4</td>
<td>5.6%</td>
<td>2.9%</td>
<td>3.6%</td>
<td>2.1%</td>
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</tbody>
</table>
Factory Orders and Inventories Fell 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 6, 2004


<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040106e.jpg">
Factory orders fell an expected 1.4% in November. The advance report of a 3.1% drop in durable goods orders was revised shallower to a 2.5% decline. Orders for computers fell 1.2% (+31.0% y/y) Non-durable goods orders fell 0.2% (+4.5% y/y).
A report titled &quot;Computer Use and Productivity Growth&quot; from the Federal Reserve Bank of St. Louis can be found <a href="http://research.stlouisfed.org/publications/net/20031201/cover.pdf"> here</a>.
Manufacturing inventories fell 0.2% following the slight increase in October. Excluding the defense industry inventories fell 0.2% (-1.7% y/y) and have fallen in each of the last nine months.
Factory shipments were unchanged. Shipments excluding transportation fell 0.3% (4.2% y/y).

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED01/@ED0101/@ED01016/@ED01016.HTM"> Factory Survey</a> (NAICS)</th>
<th scope="col">Nov</th>
<th scope="col">Oct</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
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</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Inventories</td>
<td>-0.2%</td>
<td>0.1%</td>
<td>-1.0%</td>
<td>-1.8%</td>
<td>-6.1%</td>
<td>3.8%</td>
</tr>
<tr>
<td class="firstcol">New Orders</td>
<td>-1.4%</td>
<td>2.4%</td>
<td>6.0%</td>
<td>-1.9%</td>
<td>-6.7%</td>
<td>5.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Shipments</td>
<td>0.0%</td>
<td>0.7%</td>
<td>4.1%</td>
<td>-2.0%</td>
<td>-5.4%</td>
<td>4.2%</td>
</tr>
<tr>
<td class="firstcol">Unfilled Orders</td>
<td>0.7%</td>
<td>1.7%</td>
<td>3.4%</td>
<td>-6.1%</td>
<td>-5.9%</td>
<td>8.7%</td>
</tr>
</tbody>
</table>


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Light vehicle sales added 7.2% in December to the 7.7% November gain and rose to 18.06M, the second highest monthly selling rate for the year. Consensus expectations had been for sales of 17.0M. For the year, light vehicle sales fell [...]

Incentives Spur U.S. Light Vehicle Sales

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040105b.jpg" width="353">
Activity in German manufacturing showed a surprisingly large month-to-month increase in December according to the NTC Research Purchasing Managers Survey. ( NTC publishes diffusion indexes for purchasing managers surveys of manufacturing, service industries and construction for a number of countries. These diffusion indexes represent a balance that ranges from 0% to 100%, with numbers above 50 representing expansion and those below, representing contraction.)
The 3.58% rise in the German manufacturing index in December brought the index to 52.97, marking the fourth month the index was above the 50 mark and its highest level since early 2001. The level of the German index is now above those of the other major economies - France, Italy and Spain - economies that had preceded Germany into the expansionary phase.
Because of decline in the indexes for these three countries, the overall index for the Eurozone rose less than one-half of one percent in December.

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<th scope="col" class="firstcol">Manufacturing PMI</th>
<th scope="col">Dec 03</th>
<th scope="col">Nov 03</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Eurozone</td>
<td>52.40</td>
<td>52.15</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>52.97</td>
<td>51.14</td>
</tr>
<tr class="odd">
<td class="firstcol">France</td>
<td>51.90</td>
<td>52.70</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>51.88</td>
<td>52.34</td>
</tr>
<tr class="odd">
<td class="firstcol">Spain</td>
<td>51.83</td>
<td>52.63</td>
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</tbody>
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Activity in German manufacturing showed a surprisingly large month-to-month increase in December according to the NTC Research Purchasing Managers Survey. ( NTC publishes diffusion indexes for purchasing managers surveys of [...]

Activity in German Manufacturing Shows Strength

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040105a.jpg" width="353">
The value of total construction put in place jumped 1.2% (7.4% y/y) in November. A 0.5% rise was expected. On average, construction spending has risen 1.2% in each of the last six months.
Private residential building activity surged 2.0%. Single family home building spurted 2.9% in November (20.0% y/y).
Commercial construction managed a 0.4% gain following two months of sharp decline (+1.4% y/y but education spending fell 0.8% (-2.1% y/y). Office construction, up 1.3%, posted the fourth strong consecutive monthly gain (-4.2% y/y).
These more detailed categories represent the Census Bureau&#146;s reclassification of construction activity into end-use groups. Finer detail is available for many of the categories; for instance, commercial construction is shown for Automotive sales and parking facilities, drugstores, building supply stores, and both commercial warehouses and mini-storage facilities. Note that start dates vary for some seasonally adjusted line items in 2000 and 2002 and that constant-dollar data are no longer computed.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E907/@E90701/@E90701.HTM"> Construction Put-in-place</a></th>
<th scope="col"> Nov</th>
<th scope="col">Oct</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>1.2%</td>
<td>1.1%</td>
<td>7.4%</td>
<td>1.1%</td>
<td>2.7%</td>
<td>8.3%</td>
</tr>
<tr>
<td class="firstcol">Private</td>
<td>1.2%</td>
<td>1.4%</td>
<td>8.3%</td>
<td>-0.2%</td>
<td>1.4%</td>
<td>8.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Residential</td>
<td>2.0%</td>
<td>2.2%</td>
<td>14.1%</td>
<td>8.6%</td>
<td>3.3%</td>
<td>7.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Nonresidential</td>
<td>-2.1%</td>
<td>1.6%</td>
<td>-3.6%</td>
<td>-13.0%</td>
<td>-1.3%</td>
<td>8.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Public</td>
<td>1.2%</td>
<td>0.8%</td>
<td>6.6%</td>
<td>5.3%</td>
<td>7.4%</td>
<td>9.5%</td>
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The value of total construction put in place jumped 1.2% (7.4% y/y) in November. A 0.5% rise was expected. On average, construction spending has risen 1.2% in each of the last six months. Private residential building activity surged [...]

U.S. Construction Spending Strong

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The Purchasing Managers&#146; Composite Index (PMI) released by the Institute of Supply Management rose to 66.2 in December from 62.8 in November. It was the highest level for the Composite Index since December 1983. Consensus expectations were for a reading of 61.0.
During the last twenty years there has been a 72% correlation between the level of the PMI index and the three month growth in factory sector industrial production. There has been a 58% correlation between the level of the PMI Composite Index and quarterly growth in real GDP.
The new orders index rose to 77.6, the highest level since July 1950. The production index also jumped to 73.0, the highest level since December 1983.
The employment index at 55.5 has risen nearly 10 points during the last three months. There has been a 72% correlation during the last ten years between the ISM employment index and the one-month change in factory sector payrolls.
The inventory index fell to 47.3 and reversed half of the prior month&#39;s gain.
The prices paid index rose last month to 66.0, the highest level since May 2000. There has been a 28% correlation between the prices paid index and the y/y change in the finished goods PPI over the last ten years. The correlation with the intermediate materials PPI has been a higher 63%.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF02/@EF02.HTM"> ISM Manufacturing Survey</a></th>
<th scope="col"> Dec</th>
<th scope="col">Nov</th>
<th scope="col">Dec &#39;02</th>
<th scope="col"> 2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
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<td class="firstcol">Composite Index</td>
<td>66.2</td>
<td>62.8</td>
<td>55.2</td>
<td>53.5</td>
<td>52.4</td>
<td>44.0</td>
</tr>
<tr>
<td class="firstcol">&nbsp; New Orders Index</td>
<td>77.6</td>
<td>73.7</td>
<td>62.9</td>
<td>58.3</td>
<td>56.7</td>
<td>46.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Prices Paid Index (NSA)</td>
<td>66.0</td>
<td>64.0</td>
<td>55.0</td>
<td>59.6</td>
<td>57.6</td>
<td>42.9</td>
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The Purchasing Managers Composite Index (PMI) released by the Institute of Supply Management rose to 66.2 in December from 62.8 in November. It was the highest level for the Composite Index since December 1983. Consensus expectations [...]

ISM Factory Index Up Further

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

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

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

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

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

US economy expected to outperform other major economies in 2025

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

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

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

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

Policy uncertainty has surged since the US national elections.

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

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

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

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

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

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

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Andrew Cates

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

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

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.

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Charts of the Week: Tariff Truce, Tenuous Trust

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

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

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

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

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

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

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

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**.

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

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

Michael J. Moran

250430A.jpg

250430B.jpg

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

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

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

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

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.

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

Economy in Brief: January 2004