Robert Brusca

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<div align="left"><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071025h.jpg" width="353">
France&#146;s industry survey from its statistical agency INSEE remains quite firm throwing off readings that are at the top one-third or higher of their respective ranges since 1990: Business climate, production, production trends, orders and demand - the whole lot of it remains firm. While the various readings have been slipping recently, in a broader sense, they have steadied at this top one-third of range mark, at a fairly firm level.
What is a touch less firm is INSEE&#146;s assessment of the French MFG sector. A similar survey of just MFG shows the outlook for production at its 64th percentile and its trend at the 60th percentile. These are slightly weaker readings than for overall industry. The recent and likely trends for IP get stronger marks at 68Th percentile and 77TH percentiles, respectively. Orders and demand come in with readings at the 69th and 66th percentiles. On balance the French surveys for Industry and MFG remain on the firm side. MFG shows a touch more slippage than the overall.
Of course, there has been a lot of criticism from France recently over the exchange rate. A report I produced earlier in the week showed that within EMU France had gained competitiveness Vs the general EMU level but was lagging Germany by a significant amount. As the euro remains strong or becomes stronger this positioning could be a factor in how the French economy performs.
The chart at the top reminds us of two things. The first is that the French index is off peak. The second is that the Yr/Yr gain in the index has dissipated almost entirely. That suggests that there is almost no further upward momentum to the growth rate, not that the industry or MFG growth rates themselves will not remain positive.</div>

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
<th colspan=11 scope="col">INSEE Industry Survey</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td colspan="2">Since Jan 1990</td>
<td colspan="4">Since Jan 1990</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Oct 07</td>
<td>Sep 07</td>
<td>Aug 07</td>
<td>Jul 07</td>
<td>%tile</td>
<td>Rank</td>
<td>Max</td>
<td>Min</td>
<td>Range</td>
<td>Mean</td>
</tr>
<tr>
<td class="firstcol">Climate</td>
<td>108</td>
<td>109</td>
<td>109</td>
<td>110</td>
<td>70.0</td>
<td>49</td>
<td>123</td>
<td>73</td>
<td>50</td>
<td>101</td>
</tr>
<tr class="odd">
<td class="firstcol" colspan=11>Production</td>

</tr>
<tr>
<td class="firstcol">Recent Trend</td>
<td>9</td>
<td>6</td>
<td>11</td>
<td>17</td>
<td>65.7</td>
<td>61</td>
<td>44</td>
<td>-58</td>
<td>102</td>
<td>-6</td>
</tr>
<tr>
<td class="firstcol">Likely Trend</td>
<td>33</td>
<td>32</td>
<td>33</td>
<td>31</td>
<td>68.8</td>
<td>18</td>
<td>63</td>
<td>-33</td>
<td>96</td>
<td>7</td>
</tr>
<tr class="odd">
<td class="firstcol" colspan=11>Orders/Demand</td>

</tr>
<tr>
<td class="firstcol">Orders &amp; Demand</td>
<td>-1</td>
<td>1</td>
<td>1</td>
<td>2</td>
<td>70.1</td>
<td>42</td>
<td>25</td>
<td>-62</td>
<td>87</td>
<td>-15</td>
</tr>
<tr>
<td class="firstcol">Fgn Orders &amp; Demand</td>
<td>4</td>
<td>10</td>
<td>8</td>
<td>6</td>
<td>69.7</td>
<td>51</td>
<td>31</td>
<td>-58</td>
<td>89</td>
<td>-11</td>
</tr>
<tr class="odd">
<td class="firstcol" colspan=11 >Prices</td>

</tr>
<tr>
<td class="firstcol">Likely Sales Prices Trend</td>
<td>9</td>
<td>13</td>
<td>11</td>
<td>9</td>
<td>68.1</td>
<td>30</td>
<td>24</td>
<td>-23</td>
<td>47</td>
<td>0</td>
</tr>
</tbody>
</table>
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Frances industry survey from its statistical agency INSEE remains quite firm throwing off readings that are at the top one-third or higher of their respective ranges since 1990: Business climate, production, production trends, orders [...]

French Biz Climate Indicator Holds Mostly Steady

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<img align="left" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071025g.jpg" width="353">
The IFO survey shows its various sectors to be well off peak. The overall index did slip again in October from +7.5 to +7.1. MFG, construction, wholesaling and services slipped on the month with only retailing getting a boost, but a big one, from -12.9 to -6.8. The all-sector index still resides at the door step of the top 20th percentile of the range. Among components only MFG is above the 80th percentile at 84.8%. Retail is the relative weakest sector at 56.4% of its range, followed by construction at 59.2% of its range. Wholesaling is at the edge of the top third of its range while the service sector is nearly in the top 25% of its range. The peaking of these indexes occurred around the end of the first quarter of this year. Retailing has hovered just short of neutral since that time. The ongoing rise in the Euro has cast a certain pall over the future.
On balance, these metrics are not bad at all. But they fall short of the strength the IFO report was exuding just a few short months ago&#133; Germany then thought it was on top of the world. And maybe it was, but the world has since rolled over, impacting Germany&#146;s relative position. /p>
The IFO Business climate index is near the top 20% of its range. The current situation is rated in the 82nd percentile (top 20 percent). But business expectations for the next six month are decidedly softer residing only in their 68th percentile.
Now all of these are above 50% and therefore above a point of neutrality. But they date from period back to 1992, a time span in which Germany did not do so well. So a finding of neutral, which would imply &#145;average&#146; for this period, would not be very reassuring. Germany needs to do better than this average.

Risks&#133; The hunter: captured by the game?The clear risk and problem at the moment is the ongoing rise of the euro. Some continue to warn of this current circumstance as putting the dollar at risk to a larger correction. We prefer to point out that the dollar cannot fall unless something else can rise. And the rise of the euro is already crimping German growth and its outlook along with that for other less competitive EMU members.
Let&#146;s remember that since the early 1970s it is the countries where prices and exchange rates went up not down that had the biggest troubles: OPEC (with rising oil prices) and then Japan with the rising yen and still lingering traces of deflation. We wonder if the real risk here is that the euro might rise, more than that the dollar might fall.
The dollar is already at a relative low point and at some point, if it moves lower, buying interest in dollars will develop. But Germany&#146;s economy will be hurt by a much stronger euro and that will prove a more troublesome issue for Germany and for the rest of the export oriented Europe. Whatever, they say, the cross border but within Euro area transactions (intra-union same currency exports and imports) are still vulnerable to international competition especially when the euro becomes overvalued. Germans may speak with the same currency as the French and Italians but their true language and culture is at least as different as is it is to that of Americans and Japanese. Cheap dollars or yen can get over any language barrier or common currency hurdle in a hurry. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr><th scope="col" colspan="9">Summary of IFO Sector Diffusion readings</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">CLIMATE Sum</td>
<td>Current</td>
<td>Last Mo</td>
<td colspan="6">Since Jan 1991*</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Oct-07</td>
<td>Sep-07</td>
<td>Average</td>
<td>Median</td>
<td>Max</td>
<td>Min</td>
<td>Range</td>
<td>% Range</td>
</tr>
<tr>
<td class="firstcol">All Sectors</td>
<td>7.1</td>
<td>7.5</td>
<td>-8.7</td>
<td>-9.5</td>
<td>16.6</td>
<td>-30.6</td>
<td>47.2</td>
<td>79.9%</td>
</tr>
<tr>
<td class="firstcol">MFG</td>
<td>17.9</td>
<td>18.1</td>
<td>-0.9</td>
<td>0.3</td>
<td>27.5</td>
<td>-35.5</td>
<td>63.0</td>
<td>84.8%</td>
</tr>
<tr>
<td class="firstcol">Construction</td>
<td>-20.5</td>
<td>-20.8</td>
<td>-29.5</td>
<td>-32.2</td>
<td>0.3</td>
<td>-50.7</td>
<td>51.0</td>
<td>59.2%</td>
</tr>
<tr>
<td class="firstcol">Wholesale</td>
<td>2.3</td>
<td>10.7</td>
<td>-14.8</td>
<td>-16.5</td>
<td>23.4</td>
<td>-39.5</td>
<td>62.9</td>
<td>66.5%</td>
</tr>
<tr>
<td class="firstcol">Retail</td>
<td>-6.8</td>
<td>-12.9</td>
<td>-15.3</td>
<td>-14.8</td>
<td>19.0</td>
<td>-40.2</td>
<td>59.2</td>
<td>56.4%</td>
</tr>
<tr>
<td class="firstcol">Services</td>
<td>17.2</td>
<td>20.8</td>
<td>8.7</td>
<td>8.2</td>
<td>28.5</td>
<td>-15.7</td>
<td>44.2</td>
<td>74.4%</td>
</tr>
<tr class="grey1">
<td colspan="9" class="firstcol">* May 2001 for Services</td>

</tr>
</tbody>
</table>
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The IFO survey shows its various sectors to be well off peak. The overall index did slip again in October from +7.5 to +7.1. MFG, construction, wholesaling and services slipped on the month with only retailing getting a boost, but a [...]

IFO Survey Shows Weakness is Still in Train...but at Moderate Pace

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071025e.jpg" width="353">
New single family home sales rose 4.8% last month and recovered much of the prior month&#39;s 7.9% m/m decline. Nevertheless, sales during the latest three months averaged 41.6% below the peak hit in the middle of 2005.
New home sales in July &amp; August were revised down by roughly 8.0%.
In the West, sales recovered 37.7% last month after a 22.9% plunge during August. But the three month average is down an recessive 47.9% from the peak in mid-2005. Sales in the Northeast, which fell in September by 6.6%, are down 40.7% on average from the middle of 2005. Sales in the Midwest also fell in September by 19.5% and they actually led the pack with a 51.8% decline versus the 2005 peak. Sales in the South rose a small 0.5% in September and were off 43.9% from the 2005 peak.
According to CNN, David Seiders, chief economist for the home builders&#39; trade group, indicated Thursday that the latest report has some questionable readings, including a 38 percent rise in sales in the West, which he expects will be revised significantly lower in subsequent months. Without that reported increase, sales would have fallen from the already weak revised level in August.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071025f.jpg" width="353">
All this weakness in sales has done nothing for prices. They rose 2.5% in September but that only made half of the prior month&#39;s decline. It left prices down 9.4% from the peak earlier this year.
The number of homes for sale has surprisingly been falling of late, down 8.6% from the peak last year. But the number still is nearly double the level in early 2001. At the current sales rate, the months&#39; supply of homes on the market rose to 8.3, also about double the low rate in 2005. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">US New Homes</th>
<th scope="col">September</th>
<th scope="col">August</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>
<td class="firstcol">Total Sales (SAAR, 000s)</td>
<td>770</td>
<td>735</td>
<td>-23.3%</td>
<td>1,049</td>
<td>1,279</td>
<td>1,201</td>
</tr>
<tr>
<td class="firstcol">Median Price (NSA, $)</td>
<td>238,000</td>
<td>232,100</td>
<td>5.0%</td>
<td>243,067</td>
<td>234,208</td>
<td>217,817</td>
</tr>
</tbody>
</table>
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New single family home sales rose 4.8% last month and recovered much of the prior month's 7.9% m/m decline. Nevertheless, sales during the latest three months averaged 41.6% below the peak hit in the middle of 2005. New home sales in [...]

US Home Sales Stable at Lower Level, Revisions Down

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<div align="left"><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071025c.jpg" width="353">
Durables goods orders fell sharply in September by 1.7% following a 5.3% drop during in August. That was revised slightly deeper from the initial report. Much of series&#39; volatility is due to orders in the transportation sector. Excluding transportation (which still can be volatile), orders rose a slight 0.3% after an unrevised 1.8% decline during August. 
The very short term trend in the non-transportation series shows some improvement, but that is due to a 3.3% jump back in July for which the latest two months&#39; results can be viewed as a payback. But before that jump the longer term trend in orders growth was down, as was the trend in overall orders for durable goods. 
Weakness in orders for electrical equipment, appliances and components most assuredly reflects weakness in the consumer sector. That also is true of computers where the latest three month growth recovered to a bare 1.6%, up from negative growth in the prior two periods and down from the peak in orders growth of 15.3% early his year. 
To a limited degree, orders for nondefense capital goods less the very volatile aircraft component are holding up. These orders rose 0.4% last month after a 0.1% August decline. Three month growth of 0.4% is up from negative growth just recently and is a big recovery from the excessive declines between 1% and 2% early this year. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071025d.jpg" width="353">
Machinery orders led that relative strength and rose 4.3% last month and the three month average growth is 5.5%. Orders for primary metals rose 1.6% and the average rise over the last three months also is an average 1.6%, up from negative growth earlier 
Growth in shipments, however have weakened even more. Overall shipments growth is down to -0.0% on average over the last three months and less transportation it&#39;s +0.1%. That&#39;s versus growth rates over 1% earlier this year. </div><div align="left">
Inventories are lean. Average growth over the last three months totals only 0.1% versus average growth rates in excess of 1% late last year. 
Unfilled orders also have picked somewhat to a recent average growth rate of 0.9% but that&#39; down from 14.1% during all of 2006. </div> 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED01/@ED0101/@ED0101.HTM">NAICS Classification</a></th>
<th scope="col">September </th>
<th scope="col">August</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">Durable Goods Orders</td>
<td>-1.7%</td>
<td>-5.3%</td>
<td>-6.6%</td>
<td>6.3%</td>
<td>9.9%</td>
<td>5.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Excluding Transportation</td>
<td>0.3%</td>
<td>-1.8%</td>
<td>0.1%</td>
<td>7.6%</td>
<td>8.8%</td>
<td>7.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Nondefense Capital Goods</td>
<td>4.4%</td>
<td>-10.2%</td>
<td>-11.4%</td>
<td>10.6%</td>
<td>17.1%</td>
<td>5.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Excluding Aircraft</td>
<td>0.4%</td>
<td>-0.1%</td>
<td>.2%</td>
<td>8.5%</td>
<td>11.1%</td>
<td>3.2%</td>
</tr>
</tbody>
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Durables goods orders fell sharply in September by 1.7% following a 5.3% drop during in August. That was revised slightly deeper from the initial report. Much of series' volatility is due to orders in the transportation sector. [...]

U.S. Durable Goods Orders Down Big for Second Month

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071025a.jpg" width="353">
Initial claims for unemployment insurance remained high at 331,000 last week versus an upwardly revised level of 339,000 during the prior week.
The decline in claims last week fell short of Consensus expectations for a decline of 17,000 claims. The four week moving average of initial claims rose sharply to 324,750 (+5.0% y/y).
This month initial claims have averaged 326,000 per week, up 4.2% against an average of 313,000 during September.
A claims level below 400,000 typically has been associated with growth in nonfarm payrolls. During the last six years there has been a (negative) 78% correlation between the level of initial claims and the m/m change in nonfarm payroll employment.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071025b.jpg" width="353">
Continuing claims for unemployment insurance rose by 0.3% for second consecutive week. The increase during the prior week was downwardly revised.
The continuing claims numbers lag the initial claims figures by one week.
The insured rate of unemployment held steady at 1.9%, off the peaks in August of 2.0% which were reached for only two weeks during month-end. 

<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/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">10/20/07 </th>
<th scope="col">10/13/07 </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>
<td class="firstcol">Initial Claims</td>
<td>&nbsp;331</td>
<td>339</td>
<td>6.8%</td>
<td>313</td>
<td>331</td>
<td>343</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,530</td>
<td>3.9%</td>
<td>2,545</td>
<td>3.3%</td>
<td>2,459</td>
</tr>
</tbody>
</table>
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Initial claims for unemployment insurance remained high at 331,000 last week versus an upwardly revised level of 339,000 during the prior week. The decline in claims last week fell short of Consensus expectations for a decline of [...]

U.S. Initial Claims for Jobless Insurance Remained High

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/071024b.jpg" width="353">
Oh, my.
A month ago here, Robert Brusca made a fairly calm assessment of home sales in most of the country. &quot;...holding their year-to-year declines to less than 10%&quot; for instance. Only the drop in the West was nettlesome to him.
This month is different. Total existing home sales across the country fell 8.0% from August amounts. All regions had sharp declines, the smallest in the South, 6.0%. And the Northeast, which had held up pretty well, dropped the most, by 10.0%. All the regions now have quite substantial year-on-year declines, ranging from 16.9% in the Northeast to 31.4% in the West.
The National Association of Realtors counts these sales at time of closing. So the September transactions would have gone to contract in June mostly, with some from May or July and a few in other months. That is, the bulk of these sales reflect market conditions earlier in the summer, before the worst of July and August&#39;s financial market distresses. So possibly the reaction to that is yet to appear in these data. Alternatively, as some analysts suggest this morning, the reduced number of closed sales may also reflect an increase in the rate at which previously contracted sales fell through as market conditions worsened. The latter condition would actually be preferable going forward, since it would mean that some of the dislocations have already been absorbed. One can hope.
Meantime, of course, we can make numerous historically unattractive comparisons. Using single-family-home data, which has a far longer history than total existing home sales, we see that the current sales volume is the lowest since January of 1998; the not-seasonally- adjusted figures show the lowest September value, 356,000, since 1997 at 351,000. Sales have been down on a year-to-year basis for 19 months, the most protracted contraction in these data since the double-digit interest rate period in 1980-81. Home prices are presently down on a year-to-year basis for 14 consecutive months, a completely unprecedented situation in the nearly 40-year history of the series; the longest previous period of yearly price decline was two months at the end of 1990. Prices were sluggish during 1992 and late in 1994, but still dipped below year-earlier levels on only isolated occasions.
<img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071024c.jpg"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071024d.jpg">
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">&nbsp;</th>
<th colspan=3 scope="col">Sept 2007</th>
<th scope="col">Aug 2007</th>
<th scope="col">Year Ago</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td>&nbsp</td>
<td class="firstcol">Number</td>
<td>M/M%</td>
<td>Y/Y%</td>
<td colspan=5></td>
</tr>
<tr>
<td class="firstcol">Total Sales</td>
<td>5,040</td>
<td>-8.0</td>
<td>-22.7</td>
<td>5,480</td>
<td>6,230</td>
<td>6,478</td>
<td>7,076</td>
<td>6,778</td>
</tr>
<tr class="odd">
<td class="firstcol">Northeast</td>
<td>900</td>
<td>-10.0</td>
<td>-16.9</td>
<td>1,000</td>
<td>1,040</td>
<td>1,086</td>
<td>1,169</td>
<td>1,113</td>
</tr>
<tr>
<td class="firstcol">Midwest</td>
<td>1,190</td>
<td>-7.0</td>
<td>-20.2</td>
<td>1,280</td>
<td>1,420</td>
<td>1,483</td>
<td>1,588</td>
<td>1,550</td>
</tr>
<tr class="odd">
<td class="firstcol">South</td>
<td>2,050</td>
<td>-6.0</td>
<td>-22.4</td>
<td>2,180</td>
<td>2,520</td>
<td>2,563</td>
<td>2,702</td>
<td>2,540</td>
</tr>
<tr>
<td class="firstcol">West</td>
<td>910</td>
<td>-9.9</td>
<td>-31.4</td>
<td>1,010</td>
<td>1,260</td>
<td>1,346</td>
<td>1,617</td>
<td>1,575</td>
</tr>
<tr class="odd">
<td class="firstcol">Single-Family</td>
<td>4,380</td>
<td>-8.6</td>
<td>-22.9</td>
<td>4,790</td>
<td>5,460</td>
<td>5,677</td>
<td>6,180</td>
<td>5,958</td>
</tr>
<tr>
<td class="firstcol">Median Price, Total, $</td>
<td>211,700</td>
<td>n.m.</td>
<td>-4.9</td>
<td>224,400</td>
<td>220,900</td>
<td>222,000</td>
<td>218,217</td>
<td>193,233</td>
</tr>
</tbody>
</table>
</body>
</html>

Oh, my. A month ago here, Robert Brusca made a fairly calm assessment of home sales in most of the country. "...holding their year-to-year declines to less than 10%" for instance. Only the drop in the West was nettlesome to him. This [...]

Existing Home Sales Drop 8% in September; All Regions Feel the Pain

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071024e.jpg" width="353">
The NTC indexes are clear on the Euro area. It is weak. Manufacturing is showing progressively less lift. The service sector, hard hit in September, is up in October, but, were it not for the weak September this October reading would be the weakest on record (meaning since January &#145;06 of course). But the manufacturing PMI has much longer history. It is on its lows over the past 22 months but is in its 48Th percentile since its inception going back to 1997, a period that includes a recession. Seeing the manufacturing reading on a two year low and below its range midpoint over the long haul is unsettling. On top of that the manufacturing PMI level is at 51.47 barely above the neutral reading of 50. The current manufacturing level stands that reading at about 97% of its full sample average and median. The charts make it clear that slippage is in train. The rebound in October for services is not something to take to the bank with manufacturing losing momentum especially since the services index is still bearing a low reading. Expect the ECB to remain afraid and on hold after these reports.


<colgroup><col><col><col><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr><th colspan=11 scope="col">FLASH Readings</th>
</tr>
</thead>

<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="4">NTC PMIs for the Euro area 13</td>
<td colspan="3">Averages</td>
<td colspan="3">22-Month Range</td>
</tr>

<td class="firstcol">&nbsp;</td>
<td>Oct 07</td>
Sep 07
Aug 07
Jul 07
3Mo
6Mo
12Mo
High
Low
%Range

<tr>
<td class="firstcol">MFG</td>
<td>51.47</td>
<td>53.21</td>
<td>54.16</td>
<td>54.84</td>
<td>52.95</td>
<td>54.03</td>
<td>54.91</td>
<td>57.61</td>
<td>51.47</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Services</td>
<td>55.56</td>
<td>54.04</td>
<td>57.91</td>
<td>58.09</td>
<td>55.84</td>
<td>56.80</td>
<td>57.04</td>
<td>61.21</td>
<td>54.04</td>
<td>21.2%</td>
</tr>




</html>

The NTC indexes are clear on the Euro area. It is weak. Manufacturing is showing progressively less lift. The service sector, hard hit in September, is up in October, but, were it not for the weak September this October reading would [...]

NTC Indexes for the Euro area are Very Weak; MFG Signal is Fading

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.

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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: October 2007

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French Biz Climate Indicator Holds Mostly Steady

IFO Survey Shows Weakness is Still in Train...but at Moderate Pace

US Home Sales Stable at Lower Level, Revisions Down

U.S. Durable Goods Orders Down Big for Second Month

U.S. Initial Claims for Jobless Insurance Remained High

U.S. Initial Claims for Jobless Insurance Remained High

Existing Home Sales Drop 8% in September; All Regions Feel the Pain

NTC Indexes for the Euro area are Very Weak; MFG Signal is Fading