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/060622e.jpg" width="353">
Total production of petroleum products has surged in the last several weeks, and refineries are operating at their highest capacity since before last September&#39;s hurricanes. These statements are based on weekly petroleum supply statistics provided by the Energy Information Administration of the Department of Energy; just in the last month, Haver Analytics has begun to seasonally adjust these data, using the same software routine used by the Fed for the money supply and other weekly data. The raw figures are contained in the OILWKLY and WEEKLY databases, and the seasonally adjusted data are in WEEKLY. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060622f.jpg" width="353">
Domestic crude oil production continues its long downtrend. It was 5.05 million barrels/day (mil B/D) last week, compared with 5.10 mil B/D the week before and 5.38 mil B/D in the comparable 2005 week. So far during 2006, it has averaged 4.95 mil B/D, off 10% from 5.41 mil B/D in 2004. Domestic oil, of course, isn&#39;t nearly enough to meet today&#39;s energy needs in the US, and crude oil imports ran to 10.7 mil B/D last week, up almost exactly 8.0% from a year earlier. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060622g.jpg" width="353">
US refiners are producing more gasoline than ever, 9.34 mil B/D in the June 16 week, up 3.5% just in one week. The seasonal adjustment process is especially helpful here in smoothing the late winter/early spring slowdown due to refinery maintenance and then adjusting out the consequent rebound. This highlights the import of the latest week&#39;s jump: it&#39;s not due to some standard late-spring advance in gasoline output. Underlying gains in refinery output are also more evident in the refinery capacity utilization data, which also benefit from the seasonal adjustment. Last week&#39;s seasonally adjusted usage rate was 89.85%, which, except for one week in January, is the highest since late September 2005, just before Hurricane Rita.So gradually refiners are getting their capacity back on-stream. A hopeful note for limiting capacity pressures on product prices is that there are still a couple of percentage points of slack compared to pre-2005 levels, which were running between 91% and 92%. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@w5/@W508/@W50802/@W50802.HTM">Thous B/D,&nbsp; Seasonally Adjusted*</a> </th>
<th scope="col">June 16, 2006 </th>
<th scope="col">June 9, 2006 </th>
<th scope="col">May 19, 2006 </th>
<th scope="col">June 17, 2005 </th>
<th scope="col">2005 </th>
<th scope="col">2004 </th>
<th scope="col">2003 </th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Domestic Crude Oil Production </td>
<td>5,052 </td>
<td>5,095 </td>
<td>4,937 </td>
<td>5,380 </td>
<td>4,861 </td>
<td>5,410 </td>
<td>5,640 </td>
</tr>
<tr>
<td class="firstcol">Crude Oil Imports </td>
<td>10,749 </td>
<td>10,267 </td>
<td>9,166 </td>
<td>9,929 </td>
<td>10,111 </td>
<td>10,044 </td>
<td>9,511 </td>
</tr>
<tr class="odd">
<td class="firstcol">Refinery Gasoline Production </td>
<td>9,343 </td>
<td>9,028 </td>
<td>8,991 </td>
<td>8,707 </td>
<td>8,662 </td>
<td>8,681 </td>
<td>8,471 </td>
</tr>
<tr>
<td class="firstcol">Refinery Capacity Utilization (%) </td>
<td>89.85 </td>
<td>88.45 </td>
<td>87.05 </td>
<td>91.49 </td>
<td>90.29 </td>
<td>82.24 </td>
<td>91.83 </td>
</tr>
</tbody>
</table>
</body>
</html>

Total production of petroleum products has surged in the last several weeks, and refineries are operating at their highest capacity since before last September's hurricanes. These statements are based on weekly petroleum supply [...]

Refinery Gasoline Production Reaches Record in New Seasonally Adjusted Weekly Data

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060622c.jpg" width="353">
The May Composite Index of Leading Economic Indicators fell 0.6% last month after an unrevised 0.1% dip during April, reported the Conference Board. Consensus expectations had been for a 0.4% decline and it was the third drop in the last four months.
Six month growth in the leaders fell to -0.4%, its weakest since early 2001. During the last ten years there has been a 43% correlation between the six-month change in the leading indicators and quarterly growth in real GDP.
The breadth of one month gain amongst the 10 components of the leading index fell to 30% in May but over a six month span 50% of the index components rose, the weakest breadth of six month gain in a year. The only positive contributions to the May index were from higher orders for consumer goods and for capital goods as well as a more positive interest rate spread.
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/060622d.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 ticked up 0.1% following four consecutive months of 0.2% gain. Of the four component series, 75% rose last month after two months when all the components rose. During the last six months all of the coincident series rose and over the last ten years there has been a 69% correlation between the change in the coincident indicators and real GDP growth.
The lagging indicators rose 0.2% for the third consecutive month. During May, 64.3% of the series&#39; components rose and during the last six months 42.9% rose. The ratio of coincident to lagging indicators, a measure of actual economic performance versus excess, fell slightly.
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.
Transparency, Expectations, and Forecasts from the Federal Reserve Bank of Atlanta is available <a href="http://www.frbatlanta.org/filelegacydocs/erq106_bauer.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM">Business Cycle Indicators</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">6 Month Chg., AR</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Leading</td>
<td>-0.6%</td>
<td>-0.1%</td>
<td>2.9%</td>
<td>2.3%</td>
<td>7.4%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.1%</td>
<td>0.2%</td>
<td>3.5%</td>
<td>2.2%</td>
<td>2.5%</td>
<td>0.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>0.2%</td>
<td>0.2%</td>
<td>1.6%</td>
<td>3.5%</td>
<td>0.0%</td>
<td>-0.0%</td>
</tr>
</tbody>
</table>
</body>
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The May Composite Index of Leading Economic Indicators fell 0.6% last month after an unrevised 0.1% dip during April, reported the Conference Board. Consensus expectations had been for a 0.4% decline and it was the third drop in the [...]

Leading Economic Indicators Down Third Month in Four

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060622a.jpg" width="353">
Initial unemployment insurance claims increased 11,000 to 308,000 last week. The rise followed a decline of 6,000 the week prior that was slightly shallower than initially estimated and about matched Consensus expectations for 309,000 claims.
The latest figure covers the survey period for June nonfarm payrolls and claims fell 36,000 (-10.5%) from the May period.
During the last ten years there has been a 78% (negative) correlation between the level of initial claims and the m/m change in payroll employment.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060622b.jpg" width="353">
The four-week moving average of initial claims dropped to 311,250 (-6.7% y/y).
Continuing claims for unemployment insurance rose 18,000 following a downwardly revised 11,000 increase the previous week.
The insured rate of unemployment remained stable at 1.9% for the fifth consecutive week.
Ups and Downs: How Wages Change Over the Business Cycle from the Federal Reserve Bank of Philadelphia is available <a href="http://www.philadelphiafed.org/files/br/br_q2-2006-1_ups-and-downs.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">06/17/06</th>
<th scope="col">06/10/06</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>
<tr>
<td class="firstcol">Initial Claims</td>
<td>308</td>
<td>297</td>
<td>-4.3%</td>
<td>332</td>
<td>343</td>
<td>403</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Continuing Claims</td>
<td>--</td>
<td>2,439</td>
<td>-6.8%</td>
<td>2,663</td>
<td>2,923</td>
<td>3,530</td>
</tr>
</tbody>
</table>
</body>
</html>

Initial unemployment insurance claims increased 11,000 to 308,000 last week. The rise followed a decline of 6,000 the week prior that was slightly shallower than initially estimated and about matched Consensus expectations for 309,000 [...]

Initial Claims for Unemployment Insurance Up Slightly

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060622a.jpg" width="353">
Initial unemployment insurance claims increased 11,000 to 308,000 last week. The rise followed a decline of 6,000 the week prior that was slightly shallower than initially estimated and about matched Consensus expectations for 309,000 claims.
The latest figure covers the survey period for June nonfarm payrolls and claims fell 36,000 (-10.5%) from the May period.
During the last ten years there has been a 78% (negative) correlation between the level of initial claims and the m/m change in payroll employment.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060622b.jpg" width="353">
The four-week moving average of initial claims dropped to 311,250 (-6.7% y/y).
Continuing claims for unemployment insurance rose 18,000 following a downwardly revised 11,000 increase the previous week.
The insured rate of unemployment remained stable at 1.9% for the fifth consecutive week.
Ups and Downs: How Wages Change Over the Business Cycle from the Federal Reserve Bank of Philadelphia is available <a href="http://www.philadelphiafed.org/files/br/br_q2-2006-1_ups-and-downs.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">06/17/06</th>
<th scope="col">06/10/06</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>
<tr>
<td class="firstcol">Initial Claims</td>
<td>308</td>
<td>297</td>
<td>-4.3%</td>
<td>332</td>
<td>343</td>
<td>403</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Continuing Claims</td>
<td>--</td>
<td>2,439</td>
<td>-6.8%</td>
<td>2,663</td>
<td>2,923</td>
<td>3,530</td>
</tr>
</tbody>
</table>
Leading Economic Indicators Down Third Month in Four 
by <a href="/comment/Moeller.html">Tom Moeller</a> June 22, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060622c.jpg" width="353">
The May Composite Index of Leading Economic Indicators fell 0.6% last month after an unrevised 0.1% dip during April, reported the Conference Board. Consensus expectations had been for a 0.4% decline and it was the third drop in the last four months.
Six month growth in the leaders fell to -0.4%, its weakest since early 2001. During the last ten years there has been a 43% correlation between the six-month change in the leading indicators and quarterly growth in real GDP.
The breadth of one month gain amongst the 10 components of the leading index fell to 30% in May but over a six month span 50% of the index components rose, the weakest breadth of six month gain in a year. The only positive contributions to the May index were from higher orders for consumer goods and for capital goods as well as a more positive interest rate spread.
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/060622d.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 ticked up 0.1% following four consecutive months of 0.2% gain. Of the four component series, 75% rose last month after two months when all the components rose. During the last six months all of the coincident series rose and over the last ten years there has been a 69% correlation between the change in the coincident indicators and real GDP growth.
The lagging indicators rose 0.2% for the third consecutive month. During May, 64.3% of the series&#39; components rose and during the last six months 42.9% rose. The ratio of coincident to lagging indicators, a measure of actual economic performance versus excess, fell slightly.
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.
Transparency, Expectations, and Forecasts from the Federal Reserve Bank of Atlanta is available <a href="http://www.frbatlanta.org/filelegacydocs/erq106_bauer.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM">Business Cycle Indicators</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">6 Month Chg., AR</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Leading</td>
<td>-0.6%</td>
<td>-0.1%</td>
<td>2.9%</td>
<td>2.3%</td>
<td>7.4%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.1%</td>
<td>0.2%</td>
<td>3.5%</td>
<td>2.2%</td>
<td>2.5%</td>
<td>0.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>0.2%</td>
<td>0.2%</td>
<td>1.6%</td>
<td>3.5%</td>
<td>0.0%</td>
<td>-0.0%</td>
</tr>
</tbody>
</table>
Refinery Gasoline Production Reaches Record in New Seasonally Adjusted Weekly Data 
by <a href="/comment/Stone.html">Carol Stone</a> June 22, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060622e.jpg" width="353">
Total production of petroleum products has surged in the last several weeks, and refineries are operating at their highest capacity since before last September&#39;s hurricanes. These statements are based on weekly petroleum supply statistics provided by the Energy Information Administration of the Department of Energy; just in the last month, Haver Analytics has begun to seasonally adjust these data, using the same software routine used by the Fed for the money supply and other weekly data. The raw figures are contained in the OILWKLY and WEEKLY databases, and the seasonally adjusted data are in WEEKLY. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060622f.jpg" width="353">
Domestic crude oil production continues its long downtrend. It was 5.05 million barrels/day (mil B/D) last week, compared with 5.10 mil B/D the week before and 5.38 mil B/D in the comparable 2005 week. So far during 2006, it has averaged 4.95 mil B/D, off 10% from 5.41 mil B/D in 2004. Domestic oil, of course, isn&#39;t nearly enough to meet today&#39;s energy needs in the US, and crude oil imports ran to 10.7 mil B/D last week, up almost exactly 8.0% from a year earlier. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060622g.jpg" width="353">
US refiners are producing more gasoline than ever, 9.34 mil B/D in the June 16 week, up 3.5% just in one week. The seasonal adjustment process is especially helpful here in smoothing the late winter/early spring slowdown due to refinery maintenance and then adjusting out the consequent rebound. This highlights the import of the latest week&#39;s jump: it&#39;s not due to some standard late-spring advance in gasoline output. Underlying gains in refinery output are also more evident in the refinery capacity utilization data, which also benefit from the seasonal adjustment. Last week&#39;s seasonally adjusted usage rate was 89.85%, which, except for one week in January, is the highest since late September 2005, just before Hurricane Rita.So gradually refiners are getting their capacity back on-stream. A hopeful note for limiting capacity pressures on product prices is that there are still a couple of percentage points of slack compared to pre-2005 levels, which were running between 91% and 92%. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@w5/@W508/@W50802/@W50802.HTM">Thous B/D,&nbsp; Seasonally Adjusted*</a> </th>
<th scope="col">June 16, 2006 </th>
<th scope="col">June 9, 2006 </th>
<th scope="col">May 19, 2006 </th>
<th scope="col">June 17, 2005 </th>
<th scope="col">2005 </th>
<th scope="col">2004 </th>
<th scope="col">2003 </th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Domestic Crude Oil Production </td>
<td>5,052 </td>
<td>5,095 </td>
<td>4,937 </td>
<td>5,380 </td>
<td>4,861 </td>
<td>5,410 </td>
<td>5,640 </td>
</tr>
<tr>
<td class="firstcol">Crude Oil Imports </td>
<td>10,749 </td>
<td>10,267 </td>
<td>9,166 </td>
<td>9,929 </td>
<td>10,111 </td>
<td>10,044 </td>
<td>9,511 </td>
</tr>
<tr class="odd">
<td class="firstcol">Refinery Gasoline Production </td>
<td>9,343 </td>
<td>9,028 </td>
<td>8,991 </td>
<td>8,707 </td>
<td>8,662 </td>
<td>8,681 </td>
<td>8,471 </td>
</tr>
<tr>
<td class="firstcol">Refinery Capacity Utilization (%) </td>
<td>89.85 </td>
<td>88.45 </td>
<td>87.05 </td>
<td>91.49 </td>
<td>90.29 </td>
<td>82.24 </td>
<td>91.83 </td>
</tr>
</tbody>
</table>
</body>
</html>

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060621c.jpg" width="353">
<span style="font-size:10.0pt;font-family:Verdana;
mso-fareast-font-family:&quot;MS Mincho&quot;;mso-bidi-font-family:&quot;Times New Roman&quot;;
mso-ansi-language:EN-US;mso-fareast-language:JA;mso-bidi-language:AR-SA">The recently instituted business survey by Japan&#39;s Ministry of Finance showed a distinct slowing in its second quarter results, reported today. The survey is just two years old, so there is obviously not much history. But these results hardly seem surprising with energy prices remaining high, and the Bank of Japan widely expected to engineer an increase in interest rates in the weeks ahead. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060621d.jpg" width="353">
The overall &quot;business conditions&quot; gauge dropped from 6.1% (balance, favorable less unfavorable) in Q1 to 1.8% in Q2. It had already retreated from 10.5% in Q4/2005. In the manufacturing sector, business conditions eased this quarter to 1.4% from 3.1% last period. 
In Q2, the responding firms assessed &quot;overseas demand&quot; as stronger than &quot;domestic demand&quot;. The domestic sector was rated positively for Q2 at a net +6.9% of firms, while overseas demand conditions stood at +9.5%. However, for the prior couple of quarters, the opposite was the case, as domestic activity was positive by double-digit amounts and higher than ratings on the foreign sector by 3 to 4 points. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060621e.jpg" width="353">
There is a hint in some of the associated detail, particularly sales, that Q2 may be subject to some seasonality; after companies rush to do business in the final quarter of their fiscal year, Q1 in Japan, the next quarter is something of a letdown. With so little history here, it&#39;s premature to make a conclusion about that, but it may help explain the Q2 slowdown. 
Meantime, one other aspect of the survey results really stood out. For the first time in this survey, selling prices had a positive reading. It&#39;s only +0.6%, but even so, it is still another sign that the deflationary period in Japan may have ended.Nonetheless, rising costs took a greater toll on profits, so after a couple of favorable quarters in that item, it dipped back into negative territory. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/JAPAN/@J8/@J8.HTM">JAPAN: Large Firms,</a> % Balance</th>
<th scope="col">Q2 2006 </th>
<th scope="col">Q1 2006 </th>
<th scope="col">Q4 2006 </th>
<th scope="col">Q2 2005 </th>
<th scope="col">Q2 2004 </th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Business Conditions </td>
<td>1.8</td>
<td>6.1</td>
<td>10.5</td>
<td>0.9</td>
<td>7.2</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Manufacturing </td>
<td>1.4</td>
<td>3.1</td>
<td>10.5</td>
<td>-2.4</td>
<td>8.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic Demand </td>
<td>6.9</td>
<td>11.5</td>
<td>14.2</td>
<td>1.4</td>
<td>8.7</td>
</tr>
<tr>
<td class="firstcol">Overseas Demand </td>
<td>9.5</td>
<td>8.0</td>
<td>10.2</td>
<td>4.1</td>
<td>12.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Selling Prices </td>
<td>0.6</td>
<td>-3.2</td>
<td>-2.2</td>
<td>-3.9</td>
<td>-5.8</td>
</tr>
</tbody>
</table>
</body>
</html>

The recently instituted business survey by Japan's Ministry of Finance showed a distinct slowing in its second quarter results, reported today. The survey is just two years old, so there is obviously not much history. But these [...]

Japanese Business Confidence Diminishes Ahead of Possible Rate Hike

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060621g.jpg" width="353">
Gold prices at $567.00 per ounce yesterday were more than 20% lower than their high during May. (Since 1980 there has been a 56% correlation between the level of gold prices and the y/y change in consumer prices.)
In addition, the price of WTI crude oil at $68.94 per barrel is off 8% from the May high. These declines, however, seem more attributable to an easing of political tensions (Iran) than to some bona fide drop in inflation pressure. Measured price inflation is up, industrial commodity price inflation is up, inflation expectations are higher as well.
Consumer prices YTD have risen at a 5.2% annual rate in 2006 versus last year&#39;s 3.4% gain. The 3.1% rate of advance in &quot;core&quot; consumer price inflation is up from 3.3% growth last year, the 3.8% gain in core services prices is up one percentage point from last year and even the soft 1.2% rise in core goods prices is up from 0.5%.
The JoC-ECRI Industrial Metals Prices Index is up 25.2% this year due to higher prices for aluminum (up 35.4%), copper scrap (up 65.5%) and stainless steel scrap (up 17.6%). High grade copper prices have eased quite a bit from the earlier high but remain up 44.1% since year end &#39;05.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060621f.jpg" width="353">
Growth in industrial production is behind these gains. U.S. output gains have wobbled in recent months but factory production is up at a 3.9% annual rate this year, the same rate growth as during all of 2005. Output in the OECD Major Seven countries also is firm at 3.2% y/y through March. That&#39;s comparable to growth during the prior three years but quite the improvement from a range of 0.8% to -3.0% during 2001-2003. During the last ten years there has been a 49% correlation between the level of industrial metals&#39; prices and the y/y change in OECD Big Seven industrial production.
Inflation expectations as measured in the University of Michigan survey slipped from the highs in the June survey but the trend is clearly up. And in the market for Treasury securities, the so called TIPPS spread is down as well, but the trend remains elevated.
The Fed&#39;s Inflation Objective from the Federal Reserve Bank of St. Louis can be found <a href="http://research.stlouisfed.org/publications/mt/20060701/cover.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W4/@W4.HTM">Weekly Prices</a></th>
<th scope="col">06/20/06</th>
<th scope="col">12/27/05</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>
<tr class="odd">
<td class="firstcol">Light Sweet Crude Oil, WTI&nbsp; (per bbl.)</td>
<td>$68.94</td>
<td>$58.16</td>
<td>21.1%</td>
<td>$58.16</td>
<td>$41.78</td>
<td>$32.78</td>
</tr>
<tr>
<td class="firstcol">U.S. Retail Gasoline (per gallon)</td>
<td>$2.87</td>
<td>$2.20</td>
<td>32.9%</td>
<td>$2.27</td>
<td>$1.85</td>
<td>$1.56</td>
</tr>
<tr class="odd">
<td class="firstcol">Gold: Handy &amp; Harmon (per Troy Oz., EOP)</td>
<td>$567.00</td>
<td>$507.40</td>
<td>30.3%</td>
<td>$507.40</td>
<td>$443.40</td>
<td>$416.25</td>
</tr>
<tr>
<td class="firstcol">High Grade Copper (Comex, /Lb., EOP)</td>
<td>$3.29</td>
<td>$2.28</td>
<td>94.9%</td>
<td>$2.28</td>
<td>$1.54</td>
<td>$1.04</td>
</tr>
<tr class="odd">
<td class="firstcol">Stainless Steel Scrap (/ton, EOP)</td>
<td>$2,158</td>
<td>$1,268</td>
<td>30.2%</td>
<td>$1,268</td>
<td>$1,558</td>
<td>$1,265</td>
</tr>
</tbody>
</table>
</body>
</html>

Gold prices at $567.00 per ounce yesterday were more than 20% lower than their high during May. (Since 1980 there has been a 56% correlation between the level of gold prices and the y/y change in consumer prices.) In addition, the [...]

Gold Prices Crater, Oil Off a Bit But Inflation Pressure Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060621a.jpg" width="353">
The total number of mortgage applications dipped 0.8% last week after the 7.0% recovery the prior week. Through early June, applications were just 0.6% below the May average but were 27.9% below the year ago level.
Applications to refinance fell 2.2% last week following the 10.6% surge during the week prior. Refis in June were 1.7% below the May average and 43.1% below the year earlier level.
Purchase applications were unchanged from the prior week of the heels of a 4.8% jump. As a result purchase applications in early June were about even with the May average, but were 13.5% below the year ago level.
During the last ten years there has been a negative 80% correlation between 30-year mortgage interest rates and purchase applications while during those years there has been a 54% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060621b.jpg" width="353">
The effective interest rate on a conventional 30-year mortgage increased thirteen basis points to 6.96%. The rate on 15-year financing also rose ten basis points to 6.65%, its highest since April 2002. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities and during the last ten years there has been a (negative) 82% correlation between purchase applications and the effective rate on a 30-Year mortgage.
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>.
During 2006 sales of new single family homes have fallen 11.5% from the average level during 2005, a decline very much heralded by what has been an 11.7% drop in purchase applications this year versus last year&#39;s average. But construction starts so far in 2006 are down only 2.5% from the 2005 average.
The mismatch between the decline in sales and the decline in starts has resulted in a 15% rise in the number of new single family houses for sale YTD vs. the 2005 average. Measuring the increase in unsold new homes y/y results in a 27.0% increase. Increases by region y/y break down as follows: Northeast, +63.6%; South, +36.5%; West, +26.7%; Midwest, -3.6%. These figures are available in Haver&#39;s USECON database.
The inventory of unsold existing single family homes has risen a slightly faster 33.2% y/y. Year to date that inventory is up 11.2% and the months&#39; supply on the market is 5.9 times the current sales rate, versus 3.7 times in early 2005.
Adjusting to the Next Stage of the Housing Cycle is a recent speech by Atlanta Federal Reserve Bank President Jack Guynn and it can be found <a href="http://www.frbatlanta.org/invoke.cfm?objectid=AF005747-5056-9F1A-E28D889DADF9B34D&amp;method=display"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">06/16/06</th>
<th scope="col">06/09/06</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>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>567.6</td>
<td>571.9</td>
<td>-27.9%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>414.8</td>
<td>414.6</td>
<td>-13.5%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,466.1</td>
<td>1,499.4</td>
<td>-43.1%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
</body>
</html>

The total number of mortgage applications dipped 0.8% last week after the 7.0% recovery the prior week. Through early June, applications were just 0.6% below the May average but were 27.9% below the year ago level. Applications to [...]

Mortgage Applications Dip, # of Unsold Homes Soar

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060621a.jpg" width="353">
The total number of mortgage applications dipped 0.8% last week after the 7.0% recovery the prior week. Through early June, applications were just 0.6% below the May average but were 27.9% below the year ago level.
Applications to refinance fell 2.2% last week following the 10.6% surge during the week prior. Refis in June were 1.7% below the May average and 43.1% below the year earlier level.
Purchase applications were unchanged from the prior week of the heels of a 4.8% jump. As a result purchase applications in early June were about even with the May average, but were 13.5% below the year ago level.
During the last ten years there has been a negative 80% correlation between 30-year mortgage interest rates and purchase applications while during those years there has been a 54% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060621b.jpg" width="353">
The effective interest rate on a conventional 30-year mortgage increased thirteen basis points to 6.96%. The rate on 15-year financing also rose ten basis points to 6.65%, its highest since April 2002. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities and during the last ten years there has been a (negative) 82% correlation between purchase applications and the effective rate on a 30-Year mortgage.
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>.
During 2006 sales of new single family homes have fallen 11.5% from the average level during 2005, a decline very much heralded by what has been an 11.7% drop in purchase applications this year versus last year&#39;s average. But construction starts so far in 2006 are down only 2.5% from the 2005 average.
The mismatch between the decline in sales and the decline in starts has resulted in a 15% rise in the number of new single family houses for sale YTD vs. the 2005 average. Measuring the increase in unsold new homes y/y results in a 27.0% increase. Increases by region y/y break down as follows: Northeast, +63.6%; South, +36.5%; West, +26.7%; Midwest, -3.6%. These figures are available in Haver&#39;s USECON database.
The inventory of unsold existing single family homes has risen a slightly faster 33.2% y/y. Year to date that inventory is up 11.2% and the months&#39; supply on the market is 5.9 times the current sales rate, versus 3.7 times in early 2005.
Adjusting to the Next Stage of the Housing Cycle is a recent speech by Atlanta Federal Reserve Bank President Jack Guynn and it can be found <a href="http://www.frbatlanta.org/invoke.cfm?objectid=AF005747-5056-9F1A-E28D889DADF9B34D&amp;method=display"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">06/16/06</th>
<th scope="col">06/09/06</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>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>567.6</td>
<td>571.9</td>
<td>-27.9%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>414.8</td>
<td>414.6</td>
<td>-13.5%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,466.1</td>
<td>1,499.4</td>
<td>-43.1%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
Japanese Business Confidence Diminishes Ahead of Possible Rate Hike 
by <a href="/comment/Stone.html">Carol Stone</a> June 21, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060621c.jpg" width="353">
<span style="font-size:10.0pt;font-family:Verdana;
mso-fareast-font-family:&quot;MS Mincho&quot;;mso-bidi-font-family:&quot;Times New Roman&quot;;
mso-ansi-language:EN-US;mso-fareast-language:JA;mso-bidi-language:AR-SA">The recently instituted business survey by Japan&#39;s Ministry of Finance showed a distinct slowing in its second quarter results, reported today. The survey is just two years old, so there is obviously not much history. But these results hardly seem surprising with energy prices remaining high, and the Bank of Japan widely expected to engineer an increase in interest rates in the weeks ahead. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060621d.jpg" width="353">
The overall &quot;business conditions&quot; gauge dropped from 6.1% (balance, favorable less unfavorable) in Q1 to 1.8% in Q2. It had already retreated from 10.5% in Q4/2005. In the manufacturing sector, business conditions eased this quarter to 1.4% from 3.1% last period. 
In Q2, the responding firms assessed &quot;overseas demand&quot; as stronger than &quot;domestic demand&quot;. The domestic sector was rated positively for Q2 at a net +6.9% of firms, while overseas demand conditions stood at +9.5%. However, for the prior couple of quarters, the opposite was the case, as domestic activity was positive by double-digit amounts and higher than ratings on the foreign sector by 3 to 4 points. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060621e.jpg" width="353">
There is a hint in some of the associated detail, particularly sales, that Q2 may be subject to some seasonality; after companies rush to do business in the final quarter of their fiscal year, Q1 in Japan, the next quarter is something of a letdown. With so little history here, it&#39;s premature to make a conclusion about that, but it may help explain the Q2 slowdown. 
Meantime, one other aspect of the survey results really stood out. For the first time in this survey, selling prices had a positive reading. It&#39;s only +0.6%, but even so, it is still another sign that the deflationary period in Japan may have ended.Nonetheless, rising costs took a greater toll on profits, so after a couple of favorable quarters in that item, it dipped back into negative territory. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/JAPAN/@J8/@J8.HTM">JAPAN: Large Firms, </a> &nbsp;% Balance</th>
<th scope="col">Q2 2006 </th>
<th scope="col">Q1 2006 </th>
<th scope="col">Q4 2006 </th>
<th scope="col">Q2 2005 </th>
<th scope="col">Q2 2004 </th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Business Conditions </td>
<td>1.8</td>
<td>6.1</td>
<td>10.5</td>
<td>0.9</td>
<td>7.2</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Manufacturing </td>
<td>1.4</td>
<td>3.1</td>
<td>10.5</td>
<td>-2.4</td>
<td>8.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic Demand </td>
<td>6.9</td>
<td>11.5</td>
<td>14.2</td>
<td>1.4</td>
<td>8.7</td>
</tr>
<tr>
<td class="firstcol">Overseas Demand </td>
<td>9.5</td>
<td>8.0</td>
<td>10.2</td>
<td>4.1</td>
<td>12.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Selling Prices </td>
<td>0.6</td>
<td>-3.2</td>
<td>-2.2</td>
<td>-3.9</td>
<td>-5.8</td>
</tr>
</tbody>
</table>
Gold Prices Crater, Oil Off a Bit But Inflation Pressure Up 
by <a href="/comment/Moeller.html">Tom Moeller</a> June 21, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060621g.jpg" width="353">
Gold prices at $567.00 per ounce yesterday were more than 20% lower than their high during May. (Since 1980 there has been a 56% correlation between the level of gold prices and the y/y change in consumer prices.)
In addition, the price of WTI crude oil at $68.94 per barrel is off 8% from the May high. These declines, however, seem more attributable to an easing of political tensions (Iran) than to some bona fide drop in inflation pressure. Measured price inflation is up, industrial commodity price inflation is up, inflation expectations are higher as well.
Consumer prices YTD have risen at a 5.2% annual rate in 2006 versus last year&#39;s 3.4% gain. The 3.1% rate of advance in &quot;core&quot; consumer price inflation is up from 3.3% growth last year, the 3.8% gain in core services prices is up one percentage point from last year and even the soft 1.2% rise in core goods prices is up from 0.5%.
The JoC-ECRI Industrial Metals Prices Index is up 25.2% this year due to higher prices for aluminum (up 35.4%), copper scrap (up 65.5%) and stainless steel scrap (up 17.6%). High grade copper prices have eased quite a bit from the earlier high but remain up 44.1% since year end &#39;05.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060621f.jpg" width="353">
Growth in industrial production is behind these gains. U.S. output gains have wobbled in recent months but factory production is up at a 3.9% annual rate this year, the same rate growth as during all of 2005. Output in the OECD Major Seven countries also is firm at 3.2% y/y through March. That&#39;s comparable to growth during the prior three years but quite the improvement from a range of 0.8% to -3.0% during 2001-2003. During the last ten years there has been a 49% correlation between the level of industrial metals&#39; prices and the y/y change in OECD Big Seven industrial production.
Inflation expectations as measured in the University of Michigan survey slipped from the highs in the June survey but the trend is clearly up. And in the market for Treasury securities, the so called TIPPS spread is down as well, but the trend remains elevated.
The Fed&#39;s Inflation Objective from the Federal Reserve Bank of St. Louis can be found <a href="http://research.stlouisfed.org/publications/mt/20060701/cover.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W4/@W4.HTM">Weekly Prices</a></th>
<th scope="col">06/20/06</th>
<th scope="col">12/27/05</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>
<tr class="odd">
<td class="firstcol">Light Sweet Crude Oil, WTI&nbsp; (per bbl.)</td>
<td>$68.94</td>
<td>$58.16</td>
<td>21.1%</td>
<td>$58.16</td>
<td>$41.78</td>
<td>$32.78</td>
</tr>
<tr>
<td class="firstcol">U.S. Retail Gasoline (per gallon)</td>
<td>$2.87</td>
<td>$2.20</td>
<td>32.9%</td>
<td>$2.27</td>
<td>$1.85</td>
<td>$1.56</td>
</tr>
<tr class="odd">
<td class="firstcol">Gold: Handy &amp; Harmon (per Troy Oz., EOP)</td>
<td>$567.00</td>
<td>$507.40</td>
<td>30.3%</td>
<td>$507.40</td>
<td>$443.40</td>
<td>$416.25</td>
</tr>
<tr>
<td class="firstcol">High Grade Copper (Comex, /Lb., EOP)</td>
<td>$3.29</td>
<td>$2.28</td>
<td>94.9%</td>
<td>$2.28</td>
<td>$1.54</td>
<td>$1.04</td>
</tr>
<tr class="odd">
<td class="firstcol">Stainless Steel Scrap (/ton, EOP)</td>
<td>$2,158</td>
<td>$1,268</td>
<td>30.2%</td>
<td>$1,268</td>
<td>$1,558</td>
<td>$1,265</td>
</tr>
</tbody>
</table>
</body>
</html>

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

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

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

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

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

US economy expected to outperform other major economies in 2025

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

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

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

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

Policy uncertainty has surged since the US national elections.

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

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

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

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

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

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

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Andrew Cates

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

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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.

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**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.

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**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.

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**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.

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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

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250430B.jpg

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

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

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

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

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- Price pressure eases.
- Spending rebounds after two soft months.

Personal Income, Consumption, and Prices in March

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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

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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: June 2006

Jump to:

Refinery Gasoline Production Reaches Record in New Seasonally Adjusted Weekly Data

Leading Economic Indicators Down Third Month in Four

Initial Claims for Unemployment Insurance Up Slightly

Initial Claims for Unemployment Insurance Up Slightly

Japanese Business Confidence Diminishes Ahead of Possible Rate Hike

Gold Prices Crater, Oil Off a Bit But Inflation Pressure Up

Mortgage Applications Dip, # of Unsold Homes Soar

Mortgage Applications Dip, # of Unsold Homes Soar