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/070622e.jpg" width="353">
The South African economy is moving ahead vigorously, according to Q1 GDP data released yesterday by the South African Reserve Bank. Growth actually slowed to &quot;just&quot; 4.7% from Q4 at an annual rate, following 5.6%. Year-on-year growth was 5.4%. The trend has hovered around a 5% pace since 2004, a pick-up from about 3-1/2% in the previous four years. In the first graph, we show GDP and consumption since 1980, along with recession shading for South African business cycles. Recent GDP growth has been lower than in some periods, but much more consistent, so that highs are not soon offset by lows. The last recession ended in late 1998. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070622f.jpg" width="353">
Investment has been the driving force over the last couple of years and expanded at nearly a 22% annual rate in Q1. Further detail (see second graph) shows substantial increases in nonresidential buildings and infrastructure, and additional detail on these expenditures by industry indicates that they are in transportation, communication and utilities. Some of these are coming off a low base, but expanding very rapidly, a sign of the vigor of development efforts in South Africa. Gross value added in the construction industry parallels this growth.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070622g.jpg" width="353">
Consumer spending is hardly weak, either, with gains across the last five quarter exceeding 7% and even 8%. These are concentrated in goods, with spending on services less rapid. If there&#39;s a problem in South Africa&#39;s spending mix, it&#39;s in net exports. Exports themselves are fairly strong; they declined a bit in Q1 from Q4, but are still up 16.2% on the year-ago period. Imports are even stronger, though, with four-quarter growth right at 20%. Obviously much of the consumer and investment spending is sourced from foreign goods and services. A quick look at trade data shows marked growth in imports of metals, machinery, textiles, chemicals and even food products. As the South African economy moves ahead, we&#39;d guess that this dependence on foreign goods would diminish. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">SOUTH AFRICA</th>
<th scope="col">Q1 2007*</th>
<th scope="col">Q4 2006*</th>
<th scope="col">Q3 2006*</th>
<th scope="col">Q1 2006 Yr/Yr</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">Real GDP</td>
<td>4.7</td>
<td>5.6</td>
<td>4.5</td>
<td>5.4</td>
<td>5.0</td>
<td>5.1</td>
<td>4.8</td>
</tr>
<tr>
<td class="firstcol">Private Consumption</td>
<td>7.4</td>
<td>7.8</td>
<td>7.6</td>
<td>7.6</td>
<td>7.3</td>
<td>6.6</td>
<td>6.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Fixed Investment</td>
<td>21.8</td>
<td>16.4</td>
<td>14.0</td>
<td>15.6</td>
<td>12.7</td>
<td>9.6</td>
<td>8.9</td>
</tr>
<tr>
<td class="firstcol">Net Exports (Bil.Rand)</td>
<td>-100.3</td>
<td>-95.8</td>
<td>-75.1</td>
<td>-72.5</td>
<td>-81.8</td>
<td>-36.9</td>
<td>-26.6</td>
</tr>
<tr class="odd">
<td class="firstcol">GVA: Construction</td>
<td>21.3</td>
<td>16.5</td>
<td>16.1</td>
<td>16.6</td>
<td>13.7</td>
<td>11.9</td>
<td>11.1</td>
</tr>
<tr>
<td class="firstcol">Manufacturing</td>
<td>4.7</td>
<td>8.3</td>
<td>4.7</td>
<td>5.7</td>
<td>4.8</td>
<td>5.0</td>
<td>4.7</td>
</tr>
</tbody>
</table>
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The South African economy is moving ahead vigorously, according to Q1 GDP data released yesterday by the South African Reserve Bank. Growth actually slowed to "just" 4.7% from Q4 at an annual rate, following 5.6%. Year-on-year growth [...]

South Africa Maintains 5% GDP Growth Trend, with 20% Gains in Fixed Investment

Robert Brusca

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<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070622h.jpg">
Germany&#39;s IFO index fell sharply in June from 108.6 to 107. It stood at 108.6 for two months in a row and peaked in this cycle back in December 2006 at 108.7. No wonder the IFO says that levels are still high and that the economy is still strong. But looked at another way, all this ebullience misses the point. The IFO survey has been weakening for some time. And here I refer to weakening in terms of its rate of growth. The IFO Climate headline hit a growth peak in June 2006, at just a tic higher than the pace it posted in November, a month before it hit its numeric peak for the index level. The index growth rate had been trapped in a narrow range around 16%. IFO growth had been strong and stayed in a narrow band from April to December of 2006. But, since then, the rate of growth has been dropping - sometimes sharply - as the chart above shows. 
Both current conditions and expectations have lopped digits off their growth rates over this period. Expectations fell first dropping from a growth rate of 12.4% in April 2006 to below zero by October of the same year. Since April expectations growth has been waffling around the unchanged line. Current conditions growth, however, has continued to erode at a more or less steady pace. From March to May that erosion took a pause but in June current conditions are sharply lower again and the decline in the rate of growth is &#145;back on&#146; track and has fallen to zero from over 14% in June of 2006. 
The drop in the overall climate reading spreads across main sectors as the IFO sector diffusion readings tell us. Readings are still &#39;high valued&#146; as the percentage of range figures tell us at the far right of the table. Diffusion readings of climate peaked in April 2007; confidence peaked in December 2006, expectations peaked in March 2006. Still the month to month drop in June was sharp for most sectors; the decline in services was moderate.
And although IFO Chief Economist Gernot Nerb says he is not worried about exports and says that the export readings in the IFO survey are strong the truth is that those conditions have eroded dramatically across industry groups.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Summary of IFO Sector Diffusion readings
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">CLIMATE Sum</td>
<td>Current</td>
<td>Last Mo</td>
<td colspan="6">Since Jan 1991*</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td>Jun-07</td>
<td>May-07</td>
<td>average</td>
<td>Median</td>
<td>Max</td>
<td>Min</td>
<td>range</td>
<td>% range</td>
</tr>
<tr class="odd">
<td class="firstcol">All Sectors</td>
<td>13.2</td>
<td>16.3</td>
<td>-8.8</td>
<td>-9.5</td>
<td>16.6</td>
<td>-30.6</td>
<td>47.2</td>
<td>92.8%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; MFG</td>
<td>23.9</td>
<td>27.5</td>
<td>-1.1</td>
<td>0.3</td>
<td>27.5</td>
<td>-35.5</td>
<td>63.0</td>
<td>94.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Construction</td>
<td>-16.0</td>
<td>-14.6</td>
<td>-29.2</td>
<td>-32.2</td>
<td>0.3</td>
<td>-50.7</td>
<td>51.0</td>
<td>68.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale</td>
<td>14.3</td>
<td>18.3</td>
<td>-14.8</td>
<td>-16.5</td>
<td>23.3</td>
<td>-39.6</td>
<td>62.9</td>
<td>85.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Retail</td>
<td>-5.0</td>
<td>-3.2</td>
<td>-14.8</td>
<td>-14.8</td>
<td>25.3</td>
<td>-40.3</td>
<td>65.6</td>
<td>53.8%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Services</td>
<td>26.0</td>
<td>26.5</td>
<td>8.2</td>
<td>7.8</td>
<td>28.5</td>
<td>-15.7</td>
<td>44.2</td>
<td>94.3%</td>
</tr>
<tr class="odd">
<td colspan="4">* May 2001 for Services</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
</tbody>
</table>
</body>
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Germany's IFO index fell sharply in June from 108.6 to 107. It stood at 108.6 for two months in a row and peaked in this cycle back in December 2006 at 108.7. No wonder the IFO says that levels are still high and that the economy is [...]

IFO Index Drops to 107 from 108.6

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070622d.jpg" width="353">
European orders fell by 0.4% in April, less than expected, as bulk orders rose and boosted the headline. And while bulk orders do &#145;count&#146; they can often blur the trend and mask changes. That is probably the effect right now as European industrial orders are headed for a fall while everyone is ignoring that FACT. That&#146;s right, not an opinion, but a FACT of history. The trend for orders GROWTH is already lower and orders GROWTH follows closely movements in the euro exchange rate and follows that inversely. The EURO &#150; broadly defined, weighted by trade and inflation adjusted - has been rising and still is. In terms of its level the EURO is VERY strong. Orders have showed some resiliency. But the chart on the left shows that there always are flares of countertrend movements that eventually prove to be not sustainable. AND orders, while on an upswing, are still contained within the confines of a descending channel much like a rally in a bear chart for bonds or stocks. 
For now order trends in the EU are still looking OK (see table). But MFG sales within the Euro area have slowed and slowed sharply for consumer goods and even have slowed for the nearly bullet-proof Capital Goods sector. Domestic orders have showed a sharper fall-off than foreign orders but foreign orders are still obeying the BIG PICTURE law that says with a strong euro they too must fall (it is this series that is plotted on the chart, but the overall series plots almost as well). For the moment two factors are supporting orders in EU. One is this short-term monthly bump up in bulk orders. This sort of thing comes and goes. We expect orders will bulk up from time to time but by smaller amounts moving forward. The other factor is the fact that a lot of the Euro area orders are to non-euro area or aspiring euro area countries that are close by, maintain a tight &#145;peg&#146; to the euro and where historic ties continue to confer advantages to EMU producers. The longer the Euro remains strong, the more likely that competition (apparently the new &#145;dirty word&#146; in the EU) will take hold in such places. Eurol exports to the US already have dropped very sharply. That is a function of slower US growth but also of the nose-bleed euro FX valuations. The strong euro is leaving plenty of &#145;fingerprints&#146; around. 
The table shows that on most measures orders growth over the past three months is still pretty strong. In April, however, there are three sizeable declines among the four largest economies in the EU. Of course one of the reasons that the three-month growth rates for these countries are still firm is that in one of the previous months each had a sizeable increase in orders. You cannot hang your hat on any monthly number as evidence of a trend change. Instead we appeal to the chart above. 
The chart plots the real broad (trade-weighted) euro VS foreign order performance in the euro area since March of 2000. The relationship is reasonably tight and quite clear: euro up orders down; euro down orders up. Any questions? The euro is up and orders are still in a downtrend although they &#145;flared&#146; to the top of their downward sloping channel this month. Betting that this relationship between orders and the euro will not repeat itself seems to be a grasp at a straw. 
Moreover, if we plot orders against the LEVEL of the real exchange rate you see another reason to be a pessimist on order/export strength. The LEVEL of the real FX rate is extremely high. If short term movements in the rate matter, the level surely must matter. Some of the euro&#146;s strength could have been seen in advance and hedged. But the longer the euro stays strong the more that profit margins are squeezed or eliminated and the less help that hedging can offer. We conclude that while it is volatile, the slowing trend in EMU orders is for real. Don&#146;t you?

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
E-zone and UK Industrial Orders &amp; Sales Trends
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">SAAR except m/m</td>
<td colspan="3">% m/m</td>
<td>Apr-07</td>
<td>Apr-07</td>
<td>Apr-07</td>
<td>Apr-06</td>
<td>Apr-05</td>
</tr>
<tr class="grey3">
<td class="firstcol">Euro area Detail</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>3-Mo</td>
<td>6-mo</td>
<td>12-mo</td>
<td>12-mo</td>
<td>12-mo</td>
</tr>
<tr class="grey3">
<td class="firstcol">MFG Orders</td>
<td>-0.4%</td>
<td>2.9%</td>
<td>-0.6%</td>
<td>7.2%</td>
<td>8.8%</td>
<td>9.0%</td>
<td>9.5%</td>
<td>4.0%</td>
</tr>
<tr class="grey2">
<td class="firstcol">MFG Sales</td>
<td>0.0%</td>
<td>0.3%</td>
<td>0.5%</td>
<td>3.3%</td>
<td>6.6%</td>
<td>6.3%</td>
<td>7.5%</td>
<td>2.9%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Consumer</td>
<td>0.0%</td>
<td>0.0%</td>
<td>0.1%</td>
<td>0.4%</td>
<td>2.1%</td>
<td>3.5%</td>
<td>7.5%</td>
<td>2.9%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Capital</td>
<td>0.4%</td>
<td>0.6%</td>
<td>0.7%</td>
<td>6.8%</td>
<td>8.2%</td>
<td>8.1%</td>
<td>4.0%</td>
<td>1.3%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Intermediate</td>
<td>0.3%</td>
<td>0.2%</td>
<td>0.4%</td>
<td>5.2%</td>
<td>5.7%</td>
<td>7.9%</td>
<td>7.1%</td>
<td>2.4%</td>
</tr>
<tr class="grey1">
<td class="firstcol">MFG Orders</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="grey3">
<td class="firstcol">Total Orders</td>
<td>-0.4%</td>
<td>2.9%</td>
<td>-0.6%</td>
<td>7.2%</td>
<td>8.8%</td>
<td>9.0%</td>
<td>9.5%</td>
<td>4.0%</td>
</tr>
<tr class="grey3">
<td class="firstcol">EA13 Domestic MFG orders</td>
<td>-0.7%</td>
<td>2.3%</td>
<td>-0.4%</td>
<td>5.2%</td>
<td>5.7%</td>
<td>7.9%</td>
<td>5.9%</td>
<td>0.2%</td>
</tr>
<tr class="grey3">
<td class="firstcol">EA13 Foreign MFG orders</td>
<td>-1.1%</td>
<td>4.4%</td>
<td>0.0%</td>
<td>13.4%</td>
<td>13.9%</td>
<td>11.0%</td>
<td>14.6%</td>
<td>3.1%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Countries:</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>3-Mo</td>
<td>6-mo</td>
<td>12-mo</td>
<td>12-mo</td>
<td>12-mo</td>
</tr>
<tr class="grey3">
<td class="firstcol">Germany</td>
<td>-1.0%</td>
<td>1.0%</td>
<td>4.2%</td>
<td>17.5%</td>
<td>11.3%</td>
<td>9.7%</td>
<td>14.5%</td>
<td>1.0%</td>
</tr>
<tr class="grey3">
<td class="firstcol">France</td>
<td>2.1%</td>
<td>5.2%</td>
<td>-7.8%</td>
<td>-3.9%</td>
<td>12.0%</td>
<td>18.3%</td>
<td>-0.1%</td>
<td>1.5%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Italy</td>
<td>-1.1%</td>
<td>4.8%</td>
<td>0.4%</td>
<td>17.2%</td>
<td>4.2%</td>
<td>2.3%</td>
<td>15.7%</td>
<td>2.0%</td>
</tr>
<tr class="grey3">
<td class="firstcol">UK</td>
<td>-5.6%</td>
<td>3.3%</td>
<td>9.9%</td>
<td>31.8%</td>
<td>11.0%</td>
<td>-0.6%</td>
<td>4.6%</td>
<td>3.3%</td>
</tr>
</tbody>
</table>
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European orders fell by 0.4% in April, less than expected, as bulk orders rose and boosted the headline. And while bulk orders do count they can often blur the trend and mask changes. That is probably the effect right now as [...]

European Orders Fall by 0.4% in April

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070622a.jpg" width="353">
The composite index of leading economic indicators rose an expected 0.3% last month and fully recouped a 0.3% decline during April. The May gain was only the second monthly increase this year, according to the Conference Board and left the leaders up just 0.3% y/y. 
During the last ten years there has been a 59% correlation between the y/y change in the leading indicators and the lagged change in real GDP.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070622c.jpg" width="353">
The breadth of one month gain amongst the 10 components of the leading index remained at a low 55% after a 30% rise amongst the leaders&#146; components&#146; during April.
Lower initial claims for unemployment insurance, higher building permits and higher stock prices accounted for most of the gain in the leading index last month. Capital goods orders and the money supply fell.
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="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070622b.jpg" width="353">
The leading index is based on eight previously reported economic data series. Two series, orders for consumer goods and orders for capital goods, are estimated.
The coincident indicators increased 0.2% after a 0.1% rise during May. Over the last ten years there has been a 91% correlation between the y/y change in the coincident indicators and real GDP growth.
The lagging index rose the same 0.2% as during May. As a result the ratio of coincident to lagging indicators (a measure of economic excess) fell during May following a slight decline the prior month. 
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.

<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">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">Leading</td>
<td>0.3%</td>
<td>-0.3%</td>
<td>0.3%</td>
<td>1.2%</td>
<td>2.5%</td>
<td>7.1%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.2%</td>
<td>0.1%</td>
<td>1.8%</td>
<td>2.5%</td>
<td>2.1%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>0.2%</td>
<td>0.2%</td>
<td>3.2%</td>
<td>3.0%</td>
<td>3.5%</td>
<td>0.6%</td>
</tr>
</tbody>
</table>


</html>

The composite index of leading economic indicators rose an expected 0.3% last month and fully recouped a 0.3% decline during April. The May gain was only the second monthly increase this year, according to the Conference Board and [...]

U.S. Leading Economic Indicators Up for Second Time This Year

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070621c.jpg" width="353">
Industrial activity in Europe and the UK is showing signs of picking up. Surveys for June released this morning by the Confederation of British Industry and NTC Economics both indicate improvements.
The report from NTC is a new one. This compiler of global purchasing manager data began today to issue a &quot;flash&quot; estimate for the total Euro-Zone. It covers 85-90% of the full NTC panel in those countries, and for the period since its compilation, beginning January 2006, most components have run very close to their full-month counterparts. So here&#39;s an advance tool for assessing the condition of industry in Europe.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070621d.jpg" width="353">
Numbers in this survey have not been weak, but they have edged gradually lower since the middle of last year. The overall index for manufacturing has run in the mid-50s, indicating net gains at slightly more than half of the responding firms. The gauge, though, has lost about 2-1/2 points since June 2006. In today&#39;s &quot;Flash&quot;, it turned up modestly, only the fourth positive monthly move since that time. In the service sector, the peak was also in June 2006; the index lost several points almost immediately and has hovered in a narrow band since last August. So this month, the &quot;Flash&quot; for service sector &quot;business activity&quot; was up almost 1-1/2 points, putting it at the highest level since July 2006. In total, output in manufacturing and services combined, the so-called &quot;composite output&quot; index, rose just over 1 point in June. This index had dipped in April and May, so what we&#39;re noticing here as a welcome rebound may just be a reaction to those lower figures. We can only wait to see if this is a new trend or just a blip in an otherwise stagnating pattern. The final June data will be reported July 2 for manufacturing and July 4 for services and the composite figure.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070621e.jpg" width="353">
In this context of a hesitant upturn on the Continent, the UK&#39;s Confederation of British Industry survey looks that it might be providing corroborating evidence of improvement. Respondents&#39; planned output over the coming 3 months has averaged +22 since February. This is the highest average over such a long period since mid-1995; the value for June alone was +25. More striking is the behavior of order books. These readings are generally well into negative territory, reaching as low as -48 in late 1998 and averaging lower than -20 for a whole year as recently as 2005 (-21). But this order book measure has been positive now also since February and in two of these months, March and June, it has been +8, the highest readings since May 1995.
We see in the final graph here that the movement in the CBI output series is not a bad indicator of actual industrial production. Indeed, the correlation of year-to-year % changes in total industrial production and the output measure itself is a substantial 67%. So it&#39;s worth paying attention to the favorable moves of these CBI measures in judging the condition of British industry, which just might be getting better.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070621f.jpg" width="353">
The NTC-PMI data are in Haver&#39;s PMI database, and the CBI Industrial Trends Survey is in the UK database, as well as INTSRVYS.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Business Surveys: UK &amp; Euro-Zone</th>
<th scope="col">June 2007</th>
<th scope="col">May 2007</th>
<th scope="col">Apr 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="odd">
<td class="firstcol">CBI: Order Book</td>
<td>8</td>
<td>5</td>
<td>2</td>
<td>-12</td>
<td>-13</td>
<td>-21</td>
<td>-9</td>
</tr>
<tr class="odd">
<td class="firstcol">Output Next 3 Mos</td>
<td>25</td>
<td>18</td>
<td>18</td>
<td>14</td>
<td>10</td>
<td>4</td>
<td>12</td>
</tr>
<tr class="odd">
<td class="firstcol">Selling Prices, Next 3 Mos</td>
<td>16</td>
<td>25</td>
<td>16</td>
<td>8</td>
<td>9</td>
<td>0</td>
<td>4</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">Euro-Zone PMI Output &quot;Flash&quot;*</td>
<td>57.66</td>
<td>56.62</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
</tbody>
</table>
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Industrial activity in Europe and the UK is showing signs of picking up. Surveys for June released this morning by the Confederation of British Industry and NTC Economics both indicate improvements. The report from NTC is a new one. [...]

UK, Euro-Zone Industrial Surveys Show Improvement in June

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070621i.jpg" width="353">
The General Activity Index published by the Federal Reserve Bank of Philadelphia improved sharply this month to 18.0 versus a May reading of 4.2.
The average level of the index during the second quarter also improved to 7.5, the highest level in a year.
During the last twenty years there has been a 57% correlation between the level of the Philadelphia Fed Index and the quarterly change in real GDP. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070621h.jpg" width="353">
Improvement in the index of general business conditions was led by higher new orders and higher unfilled orders. The number of employees fell month to month after improvement in May while inventories fell sharply. 
The index of prices paid fell modestly after sharp gains during the prior four months. For 2Q the index of prices paid was at its highest in nearly one year but the index of prices received fell. 
Inflation Disconnect from the Federal Reserve Bank of St. Louis can be found <a href="http://research.stlouisfed.org/publications/mt/20070701/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/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">June &#39;06</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Business Conditions</td>
<td>18.0</td>
<td>4.2</td>
<td>0.48</td>
<td>8.1</td>
<td>11.5</td>
<td>28.1</td>
</tr>
</tbody>
</table>


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The General Activity Index published by the Federal Reserve Bank of Philadelphia improved sharply this month to 18.0 versus a May reading of 4.2. The average level of the index during the second quarter also improved to 7.5, the [...]

Philadelphia Fed Index Highest Since Early 2005

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070621g.jpg" width="353">
Italy&#146;s consumer confidence fell off after peaking in February 2002. It bottomed in May 2004 and has been on a moderate rising trend ever since. But since March of 2007 a new down trend has developed. 
The new weakness in Italy&#146;s consumer confidence could be as simple as high oil prices. The recent surge in oil prices has become a problem for consumers around the world. But it could also have other factors at work. The responses to ISAE&#146;s survey make me think that the latter broader scenario is the correct one. 
Overall consumer confidence in Italy is 39% of its peak relative to its trough, a weak showing. However consumers do not assess the past 12-months harshly. Their rating leaves it in the 66th percentile of its historic range. The household financial situation during that period however sank to a range position just 17% form the bottom. As a result, consumers rate their current savings as the highest of the period as they seem to have reacted by ramping up savings and spending less than they might have been able to afford. Major purchases are rated in the bottom third of their range currently. 
Ominously, for the period ahead, Italian consumers are very glum. They rate the overall conditions in the next 12 months in the bottom fifth of their range. Unemployment is rated in the top 20% of its range; consumers rate their own budget as the worst ever. They do not expect to be able to compensate and save as they rate future savings as in the bottom third of its range. 
The responses from the Italian consumers are striking for their equanimity in assessing the past 12 months which then morphs into outright pessimism for the period ahead. Italy&#146;s retail sales trends have reflected this sort of borderline angst for some time. Italy is of course one of the weaker large economies and seems to have trouble with its competitiveness. Italian industrial statistics including foreign orders have been afflicted with weakness, or at least a slowing trend. While unemployment has been dropping steadily in Italy it is clear that consumers do not extrapolate that success into the future. Is Italy alone in this, or is this sort of pessimism a harbinger of things to come in the rest of Europe?

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
 ITALY: ISAE CONSUMER CONFIDENCE
</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="4"> Since 1990</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>12-MO Avg</td>
<td> AVG</td>
<td> Max</td>
<td> Min</td>
<td> % Range</td>
</tr>
<tr class="odd">
<td class="firstcol"> CONSUMER CONFIDENCE</td>
<td> 107.2</td>
<td> 109.4</td>
<td> 107.8</td>
<td> -110</td>
<td> -112</td>
<td> 128</td>
<td> 94</td>
<td> 39.5%</td>
</tr>
<tr>
<td class="firstcol"> Last 12-Mos</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Overall Situation</td>
<td>-60</td>
<td>-52</td>
<td>-55</td>
<td>57</td>
<td>68</td>
<td>-17</td>
<td>-147</td>
<td>66.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Price Trends</td>
<td>-27.5</td>
<td>-24.5</td>
<td>-26.5</td>
<td>24</td>
<td>16</td>
<td>4</td>
<td>-34</td>
<td>17.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">HH Financial Situation</td>
<td>-40</td>
<td>-35</td>
<td>-38</td>
<td>36</td>
<td>27</td>
<td>0</td>
<td>-49</td>
<td>18.4%</td>
</tr>
<tr>
<td class="firstcol"> Current</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">HH Savings**</td>
<td>78</td>
<td>77</td>
<td>73</td>
<td>-71</td>
<td>-62</td>
<td>78</td>
<td>49</td>
<td>100.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Major Purchases**</td>
<td>25.5</td>
<td>23.5</td>
<td>23</td>
<td>-24</td>
<td>-28</td>
<td>41</td>
<td>18</td>
<td>34.8%</td>
</tr>
<tr>
<td class="firstcol"> Next 12 Months</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Overall Situation*</td>
<td>-22</td>
<td>-18</td>
<td>-17</td>
<td>17</td>
<td>11</td>
<td>24</td>
<td>-34</td>
<td>20.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Prices Trends</td>
<td>19</td>
<td>17.5</td>
<td>15.5</td>
<td>-16</td>
<td>-24</td>
<td>49</td>
<td>7</td>
<td>28.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment</td>
<td>2</td>
<td>-5</td>
<td>-5</td>
<td>5</td>
<td>5</td>
<td>9</td>
<td>-30</td>
<td>82.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Budget</td>
<td>-1</td>
<td>3</td>
<td>2</td>
<td>-7</td>
<td>-20</td>
<td>40</td>
<td>-1</td>
<td>0.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Purchases planned**</td>
<td>10.5</td>
<td>8.5</td>
<td>7.5</td>
<td>-10</td>
<td>-11</td>
<td>20</td>
<td>4</td>
<td>40.6%</td>
</tr>
<tr>
<td class="firstcol"> Future</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">**Savings</td>
<td>26.5</td>
<td>26.5</td>
<td>23</td>
<td>-27</td>
<td>-34</td>
<td>43</td>
<td>20</td>
<td>29.8%</td>
</tr>
<tr class="odd">
<td colspan="9">* Since Nov 1998, index is More +0.5 &#39;Probable&#39; or +0.5 &#39;same&#39; depending on category</td>
</tr>
</tbody>
</table>
</body>
</html>

Italys consumer confidence fell off after peaking in February 2002. It bottomed in May 2004 and has been on a moderate rising trend ever since. But since March of 2007 a new down trend has developed. The new weakness in Italys [...]

ISAE Consumer Confidence in Italy

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.

<iframe style="border-radius:12px" src="https://open.spotify.com/embed/episode/3PzXXKrkHcwtOLipohEdnB?utm_source=generator" width="100%" height="152" frameBorder="0" allowfullscreen="" allow="autoplay; clipboard-write; encrypted-media; fullscreen; picture-in-picture" loading="lazy"></iframe>

Charts of the Week: Tariff Truce, Tenuous Trust

250501J5.jpg

250501K5.jpg

The ISM Purchasing Managers Index of activity in the manufacturing sector slipped to 48.7 in April from 49.0 during March and 50.3 in February. It remained up from a low of 46.9 in October of last year. A level of 50 is the break-even point between a rising and falling level of activity. The Action Economics Forecast Survey expected a reading of 47.8 for April. The series reached a monthly high of 63.8 in March 2021.

Two of the five component indexes weakened last month. The April production index fell to 44.0 after declining to 48.3 in March. It was the lowest level since May 2020. A lessened 19.8% (NSA) of respondents reported higher production while an increased 24.2% reported lower output. The inventories index declined to 50.8 last month from 53.4 in March. The index remained up from a low of 43.2 in October of last year.

Moving higher, the new orders index rose to 47.2 last month from 45.2 in March. The index remained below a January high of 55.1. Twenty-eight percent (NSA) of respondents reported higher new orders while 26.7% reported a decline. The employment index rose to 46.5 from 44.7 in March. It was below a high of 50.3 in January. A greater 13.1% (NSA) of respondents reported more hiring while a fewer 16.2% indicated less. The supplier delivery index rose to 55.2 from 53.5 in March. A higher 16.6% (NSA) of respondents reported slower delivery speeds while a fairly steady 6.2% reported a quickening.

The prices index, which is not part of the composite series, edged up to 69.8 (NSA) in April after increasing to 69.4 in March. It was the highest level since June 2022, up from a December 2022 low of 39.4. An increased 49.2% of respondents reported higher prices last month, up from 12.2% in November, while a higher 9.7% reported lower prices.

In other series, the export orders index plummeted to 43.1 in April from 49.6 during March. It was down from the high of 52.4 in January. The imports index fell sharply to 47.1 from 50.1 in March. It was the lowest reading since December 2023. The order backlog index dropped to 43.7 (NSA) last month from 44.5 in March. It was the lowest level in five months.

The ISM figures are based on responses from over 400 purchasing executives from 18 industries, which are weighted according to each industry’s contribution to GDP. These indexes are diffusion indexes where a reading above 50 indicates expansion and a reading below 50 points to contraction. The figures from the Institute for Supply Management can be found in Haver’s **USECON** database; further detail is found in the **SURVEYS** database. The expectations number is available in Haver’s **AS1REPNA** database.

250501L5.jpg

250501M5.jpg

- Declines in last three months follow earlier improvement.
- Production & inventories account for m/m shortfall.
- Prices index edges up to another three-year high.

U.S. ISM Manufacturing Index Indicates Contraction in April

250501A8.jpg

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Initial claims for unemployment insurance rose 18,000 in the week ended April 26 to 241,000, seasonally adjusted.  This is higher by 16,000 than the Action Economics Forecast Survey amount of 225,000 and is the largest amount since the week of February 22. The previous week’s actual count was revised up by 1,000, from 223,000 reported initially.

The total number of unemployment insurance beneficiaries – also known as “continuing claims” – in the week ended April 19 was 1.916 million, up 83,000 from the prior week’s 1.833 million; that earlier amount was revised down by 8,000.

The insured unemployment rate, that is, the number of beneficiaries as a percentage of covered employment, was 1.3% in the April 19 week, following 1.2% continuously since the week of January 6, 2024.

Economic conditions vary widely across states and territories.  In the week ended April 12, the highest unemployment rates were in New Jersey (2.39%), California (2.24%), Washington (2.19%), Rhode Island (2.17%) and Massachusetts (1.93%).  The lowest rates were in Florida (0.35%), South Dakota (0.40%), Alabama (0.41%), Virginia (0.45%) and Tennessee (0.48%).  Rates in other notable states include the Illinois (1.85%), New York (1.71%), Pennsylvania (1.54%) and Texas (1.09%). These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in U**SECON**. Data for individual states are in **REGIONW** back to December 1986. The expectations figure is from the Action Economics Forecast Survey in the **AS1REPNA** database.

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- Actual initial claims amount is 16,000 more than forecast.
- Total beneficiaries rose by 83,000.
- Insured unemployment rate ticked up to 1.3% after 15 months at 1.2%.

U.S. Initial Jobless Claims Rise Notably in April 28 Week

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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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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.

Economy in Brief: June 2007

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