Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050721e.jpg" width="353">
The July Index of General Business Conditions in the manufacturing sector from the Philadelphia Fed recovered the prior month&#39;s drop and returned to positive territory. The 11.8 point m/m increase to 9.6 pulled the index to its highest since April. Consensus expectations had been for a reading of 9.0 in July.
During the last ten years there has been a 68% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 50% correlation with q/q growth in real GDP.
Improvement in shipments, unfilled orders and delivery lead times raised the July index. The orders index also did increase but just modestly while the index covering the number of employees fell to 3.4, the lowest since late 2003. During the last ten years there has been a 64% correlation between the employment index and the three month growth in factory payrolls.
The business conditions index reflects a separate survey question, not the sub indexes.
The separate index of expected business conditions in six months halved versus June. At 15.3 the index was at its lowest level since early 2001.
The prices paid index rose slightly to 26.5 but remained at half the level of one year ago. During the last ten years there has been a 75% correlation between the prices paid index and the three month growth in the intermediate goods PPI. The correlation with the finished goods PPI has been 50% and with the CPI it&#39;s been 43%.
The Philadelphia Fed index is based on a survey of 250 regional manufacturing firms, but these firms sell nationally and internationally.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos0705.html">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">July</th>
<th scope="col">June</th>
<th scope="col">July &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>9.6</td>
<td>-2.2</td>
<td>35.5</td>
<td>28.1</td>
<td>10.6</td>
<td>7.7</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>26.5</td>
<td>23.5</td>
<td>50.2</td>
<td>51.3</td>
<td>16.8</td>
<td>12.3</td>
</tr>
</tbody>
</table>
</body>
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The July Index of General Business Conditions in the manufacturing sector from the Philadelphia Fed recovered the prior month's drop and returned to positive territory. The 11.8 point m/m increase to 9.6 pulled the index to its [...]

Philadelphia Fed Activity Index Recovered, Expectations Dreary

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050721a.jpg" width="353">
Initial claims for unemployment insurance dropped a sharp 34,000 to 303,000 last week after a 16,000 increase the week earlier which was little revised. The latest figure is the lowest since mid-April. Consensus expectations had been for 328,000 claims.
The latest also covers the survey period for July nonfarm payrolls and fell 13,000 (4.1%) from the June period.
During the last ten years there has been a (negative) 75% correlation between the level of initial claims for unemployment insurance and the monthly change in payroll employment. There has been a (negative) 65% correlation with the level of continuing claims.
The four week moving average of initial claims dropped to 318,00 (-6.3% y/y), the lowest level since early March.
Continuing claims for unemployment insurance reversed about all of the prior week&#39;s increase with a 41,000 decline.
The insured unemployment rate fell back to the four year low of 2.0%.
Age and Education Effects on the Unemployment Rate from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2005/el2005-15.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">07/16/05</th>
<th scope="col">07/09/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>303</td>
<td>337</td>
<td>-11.9%</td>
<td>343</td>
<td>402</td>
<td>404</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,577</td>
<td>-8.8%</td>
<td>2,926</td>
<td>3,531</td>
<td>3,570</td>
</tr>
</tbody>
</table>
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Initial claims for unemployment insurance dropped a sharp 34,000 to 303,000 last week after a 16,000 increase the week earlier which was little revised. The latest figure is the lowest since mid-April. Consensus expectations had been [...]

Initial Unemployment Insurance Claims At Four Month Low

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050721b.jpg" width="353">
The June Composite Index of Leading Economic Indicators reported by the Conference Board rose 0.9%. Revisions to the prior two months raised May to no change from a 0.5% decline reported initially and April to plus 0.2% from no change. Six-month growth in the leaders improved to 0.6%.
The method of calculating the contribution to the index from the interest rate yield spread was revised. A negative contribution will now occur only when the spread inverts rather than when declining as in the past. More details could be found <a href="http://www.conference-board.org/pdf_free/economics/bci/lei0705.pdf">here</a>.
Amongst the 10 components of the leading index the breadth of one month gain improved markedly to 80%, the highest since October 2003. In June, only a decline in new orders for nondefense capital goods made a negative contribution.
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 rose by 0.2% (2.8% y/y), continuing the steady up trend in place since early 2003.
The June lagging indicators rose 0.3% and the prior month&#39;s gain was revised up to 0.4%.
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.
Monetary Policy Report to the Congress from the US Federal Reserve Board is available <a href="http://www.federalreserve.gov/boarddocs/hh/2005/july/fullreport.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">June</th>
<th scope="col">May</th>
<th scope="col">6-Month Chg</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Leading</td>
<td>0.9%</td>
<td>0.0%</td>
<td>1.2%</td>
<td>7.7%</td>
<td>5.1%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.2%</td>
<td>0.1%</td>
<td>0.3%</td>
<td>2.7%</td>
<td>0.4%</td>
<td>-0.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>0.3%</td>
<td>0.4%</td>
<td>5.8%</td>
<td>-0.1%</td>
<td>-0.1%</td>
<td>-0.7%</td>
</tr>
</tbody>
</table>
</body>
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The June Composite Index of Leading Economic Indicators reported by the Conference Board rose 0.9%. Revisions to the prior two months raised May to no change from a 0.5% decline reported initially and April to plus 0.2% from no [...]

June Leading Indicators Up, Revisions Suggest Improved Prospects

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050721e.jpg" width="353">
The July Index of General Business Conditions in the manufacturing sector from the Philadelphia Fed recovered the prior month&#39;s drop and returned to positive territory. The 11.8 point m/m increase to 9.6 pulled the index to its highest since April. Consensus expectations had been for a reading of 9.0 in July.
During the last ten years there has been a 68% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 50% correlation with q/q growth in real GDP.
Improvement in shipments, unfilled orders and delivery lead times raised the July index. The orders index also did increase but just modestly while the index covering the number of employees fell to 3.4, the lowest since late 2003. During the last ten years there has been a 64% correlation between the employment index and the three month growth in factory payrolls.
The business conditions index reflects a separate survey question, not the sub indexes.
The separate index of expected business conditions in six months halved versus June. At 15.3 the index was at its lowest level since early 2001.
The prices paid index rose slightly to 26.5 but remained at half the level of one year ago. During the last ten years there has been a 75% correlation between the prices paid index and the three month growth in the intermediate goods PPI. The correlation with the finished goods PPI has been 50% and with the CPI it&#39;s been 43%.
The Philadelphia Fed index is based on a survey of 250 regional manufacturing firms, but these firms sell nationally and internationally.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos0705.html">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">July</th>
<th scope="col">June</th>
<th scope="col">July &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>9.6</td>
<td>-2.2</td>
<td>35.5</td>
<td>28.1</td>
<td>10.6</td>
<td>7.7</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>26.5</td>
<td>23.5</td>
<td>50.2</td>
<td>51.3</td>
<td>16.8</td>
<td>12.3</td>
</tr>
</tbody>
</table>
June Leading Indicators Up, Revisions Suggest Improved Prospects 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 21, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050721b.jpg" width="353">
The June Composite Index of Leading Economic Indicators reported by the Conference Board rose 0.9%. Revisions to the prior two months raised May to no change from a 0.5% decline reported initially and April to plus 0.2% from no change. Six-month growth in the leaders improved to 0.6%.
The method of calculating the contribution to the index from the interest rate yield spread was revised. A negative contribution will now occur only when the spread inverts rather than when declining as in the past. More details could be found <a href="http://www.conference-board.org/pdf_free/economics/bci/lei0705.pdf">here</a>.
Amongst the 10 components of the leading index the breadth of one month gain improved markedly to 80%, the highest since October 2003. In June, only a decline in new orders for nondefense capital goods made a negative contribution.
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 rose by 0.2% (2.8% y/y), continuing the steady up trend in place since early 2003.
The June lagging indicators rose 0.3% and the prior month&#39;s gain was revised up to 0.4%.
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.
Monetary Policy Report to the Congress from the US Federal Reserve Board is available <a href="http://www.federalreserve.gov/boarddocs/hh/2005/july/fullreport.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">June</th>
<th scope="col">May</th>
<th scope="col">6-Month Chg</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Leading</td>
<td>0.9%</td>
<td>0.0%</td>
<td>1.2%</td>
<td>7.7%</td>
<td>5.1%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.2%</td>
<td>0.1%</td>
<td>0.3%</td>
<td>2.7%</td>
<td>0.4%</td>
<td>-0.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>0.3%</td>
<td>0.4%</td>
<td>5.8%</td>
<td>-0.1%</td>
<td>-0.1%</td>
<td>-0.7%</td>
</tr>
</tbody>
</table>
Initial Unemployment Insurance Claims At Four Month Low 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 21, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050721a.jpg" width="353">
Initial claims for unemployment insurance dropped a sharp 34,000 to 303,000 last week after a 16,000 increase the week earlier which was little revised. The latest figure is the lowest since mid-April. Consensus expectations had been for 328,000 claims.
The latest also covers the survey period for July nonfarm payrolls and fell 13,000 (4.1%) from the June period.
During the last ten years there has been a (negative) 75% correlation between the level of initial claims for unemployment insurance and the monthly change in payroll employment. There has been a (negative) 65% correlation with the level of continuing claims.
The four week moving average of initial claims dropped to 318,00 (-6.3% y/y), the lowest level since early March.
Continuing claims for unemployment insurance reversed about all of the prior week&#39;s increase with a 41,000 decline.
The insured unemployment rate fell back to the four year low of 2.0%.
Age and Education Effects on the Unemployment Rate from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2005/el2005-15.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">07/16/05</th>
<th scope="col">07/09/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>303</td>
<td>337</td>
<td>-11.9%</td>
<td>343</td>
<td>402</td>
<td>404</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,577</td>
<td>-8.8%</td>
<td>2,926</td>
<td>3,531</td>
<td>3,570</td>
</tr>
</tbody>
</table>
China Lets Yuan "Float" as Its Exports Comprise Bigger and Bigger Shares of World Trade 
by <a href="/comment/Stone.html">Carol Stone</a> Revised Commentary July 21, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050721c.jpg" width="353">
After pegging its currency to the US dollar (a policy not without some irony) for almost exactly 10 years, the People&#39;s Bank of China announced this morning that it would allow the yuan to float against &quot;a basket of currencies&quot;. It immediately reduced the exchange rate with the dollar from 8.28 to 8.11; inverted, this means a single yuan, formerly worth 12.1&cent;, is now worth 12.3&cent;, an increase of 2.1%. The float will be &quot;managed&quot;, so presumably abrupt, large increases will be discouraged through intervention. This change took effect at 7:00PM in Beijing, after the close of Chinese markets. Importantly, the yuan is traded only in China, during China&#39;s trading hours. It does not trade in Western markets. So the &quot;official&quot; rate governing transactions in goods and services that take place in Western markets which are priced for value July 21 remains 8.2765. This is the rate that appears, for example, on the New York Fed&#39;s schedule of &quot;Noon Buying Rates&quot; that is dated today, July 21. The new rate will appear on quote sheets for tomorrow, July 22. Each day, the People&#39;s Bank of China will announce a rate at the close of Chinese trading which will apply for the following Chinese business day, a practice similar to the form of this announcement.
News stories cited pressure from governments in some major regions of the world as a reason the Chinese chose to act. The share of Chinese goods in world markets is growing rapidly, and there have already been efforts toward protectionism. The US, for one, continues to struggle to form a policy over Chinese textiles. The rapid inroads being made by Chinese goods are readily apparent in the table below.
It is perhaps no coincidence that the Chinese action was taken on the same day as the release of June trade data by Japan. Japan&#39;s trade surplus shrank to &yen;873 million from &yen;1.141 billion in June 2004. Some 45% of the deterioration involved trade with China. Chinese imports are now 21.0% of total Japanese imports, up a percentage point in market share over the past year and up 2.7 percentage points from the average for 2002.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050721d.jpg" width="353">
Other markets feel the same kind of penetration: in the US, imports from China were 14.1% of the total in May, up 1.4 percentage points from a year ago. In the Euro-Zone, the gain in share was 1.2 percentage points. Both of these regions are seeing a steep uptrend in the inflow of Chinese goods.
This has not been all bad. As we&#39;ve noted here earlier this week, one of the offsets to rising energy costs has been falling textile and clothing prices. Clothing has been ever more cheaper in many parts of the world, a boon to lower-income nations as well as those that are better off. Hopefully, this will not all disappear with this action, but the policy change should help rebalance global trade. Further, perhaps the Chinese believe that this will help them with the politics that are involved in their recently proposed direct investment transactions in the US and elsewhere.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Imports from China</th>
<th scope="col">June 2005</th>
<th scope="col">May 2005</th>
<th scope="col">Year Ago</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Japan: Bil &yen;, NSA</td>
<td>4606.8</td>
<td>4502.1</td>
<td>4148.6</td>
<td>4101.4</td>
<td>3696.8</td>
<td>3519.0</td>
</tr>
<tr>
<td class="firstcol">&nbsp; China</td>
<td>967.9</td>
<td>907.7</td>
<td>831.2</td>
<td>849.9</td>
<td>727.6</td>
<td>644.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Share (%)</td>
<td>21.0</td>
<td>20.2</td>
<td>20.0</td>
<td>20.6</td>
<td>19.7</td>
<td>18.3</td>
</tr>
<tr>
<td class="firstcol">US: Bil $, NSA</td>
<td>--</td>
<td>135.5</td>
<td>118.3</td>
<td>122.5</td>
<td>104.8</td>
<td>96.8</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; China</td>
<td>--</td>
<td>19.1</td>
<td>15.1</td>
<td>16.4</td>
<td>12.7</td>
<td>10.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Share (%)</td>
<td>--</td>
<td>14.1</td>
<td>12.7</td>
<td>13.3</td>
<td>12.1</td>
<td>10.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Euro-Zone: Bil &#128;, SA</td>
<td>--</td>
<td>97.5</td>
<td>86.9</td>
<td>89.4</td>
<td>82.4</td>
<td>82.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; China</td>
<td>--</td>
<td>9.3</td>
<td>7.3</td>
<td>7.7</td>
<td>6.2</td>
<td>5.2</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Share (%)</td>
<td>--</td>
<td>9.6</td>
<td>8.4</td>
<td>8.3</td>
<td>7.5</td>
<td>6.3</td>
</tr>
</tbody>
</table>
</body>
</html>

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/050720b.jpg" width="353">
China&#39;s GDP remained strong in Q2, gaining 9.5% in real terms over Q2 2004, a pick-up from the 9.4% rate in Q1. Analysts in one leading forecast survey had looked for a slowing to 9.2%.
Manufacturing was a leading sector, as indicated in the advance in &quot;secondary industry&quot; shown in the table below, which similarly picked up in the quarter, rather than slowing down. It is not quite as vigorous as in 2003, but otherwise, factory and mining activity is maintaining the strongest trend since 1996. Data through May on nominal value added by industry indicate that so-called &quot;heavy&quot; industry is expanding at better than 35%, year-on-year, and &quot;light&quot; industry around 22% in recent months.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050720c.jpg" width="353">
Interestingly, by types of ownership, the fastest growing industrial firms are the &quot;share-holding enterprises&quot;, while value added by collectives and &quot;joint ventures&quot; actually decreased. State-owned and foreign-owned industrial firms are also showing sustained strength. A threshold of sorts was crossed in March 2004 when the value added by share-holding industrial enterprises surpassed that of state-owned firms; with a single exception. that has remained true every month since, and in May, the stock companies&#39; value added exceeded that of the state-owned firms by more than 22%.
Other economic sectors remain firm, but relatively less vigorous. Primary industry (mostly agriculture) is up 5.0% in Q2, more than the 4.6% in Q1, but noticeably below the 6.3% for all of 2004. Tertiary activity, that is, mostly services, grew 7.8% in Q2, basically the pace that has prevailed since 1995.

<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/CHINA/CHINA.HTM">China</a></th>
<th scope="col">Q2 2005</th>
<th scope="col">Q1 2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">GDP, Bil RMN</td>
<td>3610.3</td>
<td>3131.9</td>
<td>3421.9</td>
<td>2934.8</td>
<td>2926.3</td>
</tr>
<tr>
<td class="firstcol">Real Growth, Yr/Yr</td>
<td>9.5</td>
<td>9.4</td>
<td>9.5</td>
<td>9.5</td>
<td>8.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Secondary Industry, Bil RMN</td>
<td>2131.7</td>
<td>1831.8</td>
<td>1809.7</td>
<td>1531.8</td>
<td>1324.5</td>
</tr>
<tr>
<td class="firstcol">Real Growth, Yr/Yr</td>
<td>11.2</td>
<td>11.1</td>
<td>11.1</td>
<td>12.7</td>
<td>9.8</td>
</tr>
</tbody>
</table>
</body>
</html>

China's GDP remained strong in Q2, gaining 9.5% in real terms over Q2 2004, a pick-up from the 9.4% rate in Q1. Analysts in one leading forecast survey had looked for a slowing to 9.2%. Manufacturing was a leading sector, as indicated [...]

China GDP Strong at 9.5% Growth in Q2

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050720a.jpg" width="353">
Total mortgage applications inched up 1.2% last week but remained down nearly 10% from the weekly high in early June, according to the Mortgage Bankers Association. For July so far, applications remained 1.7% ahead of the June average which rose 9.9% versus May.
Applications to refinance rose 2.5% and have been moving irregularly sideways since early last month. So far in July applications to refinance are 1.7% ahead of June when they rose 21.2% versus May.
Purchase applications slipped 0.1% w/w and marked the fourth decline in the last five weeks. So far in July purchase applications are 1.6% above June due to the large 9.1% jump during the first week of the month. During the last ten years there has been a 49% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
The effective interest rate on a conventional 30-year mortgage rose to 5.94%, the highest level since mid-May. The effective rate on a 15-year mortgage also rose to 5.60%.
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>.
Today&#39;s Testimony of Fed Chairman Alan Greenspan, the semiannual Monetary Policy Report to the Congress, is available <a href="http://www.federalreserve.gov/boarddocs/hh/2005/july/testimony.htm"> 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">07/15/05</th>
<th scope="col">07/08/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>801.1</td>
<td>791.9</td>
<td>29.6%</td>
<td>735.1</td>
<td>1,067.9</td>
<td>799.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>488.7</td>
<td>489.0</td>
<td>11.0%</td>
<td>454.5</td>
<td>395.1</td>
<td>354.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>2,618.2</td>
<td>2,554.3</td>
<td>58.6%</td>
<td>2,366.8</td>
<td>4,981.8</td>
<td>3,388.0</td>
</tr>
</tbody>
</table>
</body>
</html>

Total mortgage applications inched up 1.2% last week but remained down nearly 10% from the weekly high in early June, according to the Mortgage Bankers Association. For July so far, applications remained 1.7% ahead of the June average [...]

Rise in Mortgage Applications Due To Refinancing

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050713c.jpg" width="353">
Total mortgage applications inched up 1.2% last week but remained down nearly 10% from the weekly high in early June, according to the Mortgage Bankers Association. For July so far, applications remained 1.7% ahead of the June average which rose 9.9% versus May.
Applications to refinance rose 2.5% and have been moving irregularly sideways since early last month. So far in July applications to refinance are 1.7% ahead of June when they rose 21.2% versus May.
Purchase applications slipped 0.1% w/w and marked the fourth decline in the last five weeks. So far in July purchase applications are 1.6% above June due to the large 9.1% jump during the first week of the month. During the last ten years there has been a 49% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
The effective interest rate on a conventional 30-year mortgage rose to 5.94%, the highest level since mid-May. The effective rate on a 15-year mortgage also rose to 5.60%.
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>.
Today&#39;s Testimony of Fed Chairman Alan Greenspan, the semiannual Monetary Policy Report to the Congress, is available <a href="http://www.federalreserve.gov/boarddocs/hh/2005/july/testimony.htm"> 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">07/15/05</th>
<th scope="col">07/08/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>801.1</td>
<td>791.9</td>
<td>29.6%</td>
<td>735.1</td>
<td>1,067.9</td>
<td>799.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>488.7</td>
<td>489.0</td>
<td>11.0%</td>
<td>454.5</td>
<td>395.1</td>
<td>354.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>2,618.2</td>
<td>2,554.3</td>
<td>58.6%</td>
<td>2,366.8</td>
<td>4,981.8</td>
<td>3,388.0</td>
</tr>
</tbody>
</table>
China GDP Strong at 9.5% Growth in Q2 
by <a href="/comment/Stone.html">Carol Stone</a> July 20, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050720b.jpg" width="353">
China&#39;s GDP remained strong in Q2, gaining 9.5% in real terms over Q2 2004, a pick-up from the 9.4% rate in Q1. Analysts in one leading forecast survey had looked for a slowing to 9.2%.
Manufacturing was a leading sector, as indicated in the advance in &quot;secondary industry&quot; shown in the table below, which similarly picked up in the quarter, rather than slowing down. It is not quite as vigorous as in 2003, but otherwise, factory and mining activity is maintaining the strongest trend since 1996. Data through May on nominal value added by industry indicate that so-called &quot;heavy&quot; industry is expanding at better than 35%, year-on-year, and &quot;light&quot; industry around 22% in recent months.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050720c.jpg" width="353">
Interestingly, by types of ownership, the fastest growing industrial firms are the &quot;share-holding enterprises&quot;, while value added by collectives and &quot;joint ventures&quot; actually decreased. State-owned and foreign-owned industrial firms are also showing sustained strength. A threshold of sorts was crossed in March 2004 when the value added by share-holding industrial enterprises surpassed that of state-owned firms; with a single exception. that has remained true every month since, and in May, the stock companies&#39; value added exceeded that of the state-owned firms by more than 22%.
Other economic sectors remain firm, but relatively less vigorous. Primary industry (mostly agriculture) is up 5.0% in Q2, more than the 4.6% in Q1, but noticeably below the 6.3% for all of 2004. Tertiary activity, that is, mostly services, grew 7.8% in Q2, basically the pace that has prevailed since 1995.

<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/CHINA/CHINA.HTM">China</a></th>
<th scope="col">Q2 2005</th>
<th scope="col">Q1 2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">GDP, Bil RMN</td>
<td>3610.3</td>
<td>3131.9</td>
<td>3421.9</td>
<td>2934.8</td>
<td>2926.3</td>
</tr>
<tr>
<td class="firstcol">Real Growth, Yr/Yr</td>
<td>9.5</td>
<td>9.4</td>
<td>9.5</td>
<td>9.5</td>
<td>8.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Secondary Industry, Bil RMN</td>
<td>2131.7</td>
<td>1831.8</td>
<td>1809.7</td>
<td>1531.8</td>
<td>1324.5</td>
</tr>
<tr>
<td class="firstcol">Real Growth, Yr/Yr</td>
<td>11.2</td>
<td>11.1</td>
<td>11.1</td>
<td>12.7</td>
<td>9.8</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/050719e.jpg" width="353">
The &quot;TIC&quot; data for May were reported yesterday by the US Treasury, showing some rebound in foreign purchases of securities in US markets after two slower months. &quot;TIC&quot; is an acronym for Treasury International Capital, a collection of monthly data on securities transactions and banking system assets and liabilities with foreign customers. The data show only the first transaction with a non-US resident, and may not indicate the nationality of the ultimate counterparty in the transaction. These data are contained in Haver&#39;s USINT database.
Last month (June 15), we noted that foreign net purchases of US securities were more modest in March and April than in prior months. May saw a somewhat larger figure, $60.0 billion, compared with $47.7 billion in April and $40.5 billion in March. In the weaker spring months, purchases of federal agency securities (&quot;GSEs&quot;) had been quite low, but they recouped nicely in May, to $22.7 billion from roundly $7 billion each in March and April. Treasuries, by contrast, have been fairly steady, with total foreign net purchases around $25 - $27 billion per month. Corporate bond purchases in May remained near their recent $20 billion amounts, but foreign investors made nearly offsetting purchases and sales of US stocks. Net foreign liquidation of foreign securities in US markets continued, with net sales of both bonds and stocks. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050719d.jpg" width="353">
Our table this month highlights several geographic areas, Japan, China, the UK and the Cayman Islands. Over the past year and in 2004, these four places accounted for just about 60% of foreigners&#39; net purchases in US markets. Japan remains active, but has slowed its purchases somewhat, reflected in reduced net buying of Treasuries; even so, it remains the largest foreign owner of Treasuries, according to other TIC data. China&#39;s purchases remain more modest both than Japan&#39;s and than the US bilateral trade position with China might imply. But in several months recently, China&#39;s buying has been larger than Japan&#39;s, and that could well continue. Also, these are transactions in long-term securities (maturity greater than 1 year) and still other TIC data show that China has increased its holdings of short-term Treasury securities.
<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">UK activity has been a bit slower in the last two months, but longer comparisons show consistent net buying that averages around $14 billion monthly. This may reflect London&#39;s status as a world financial center and ultimate owners in many of these transactions could well live elsewhere. The same is also very likely to be the case for the Cayman Islands. Net purchases through that &quot;offshore&quot; financial center were $12.4 billion in May and have averaged $7.9 billion over the last year. Buyers from the Caymans are fairly consistent in their purchases of corporate bonds, while their activity in the Treasury market varies widely from purchase to sale in individual months.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Net Foreign Purchases of Securities in US Markets (Billions US$) </th>
<th scope="col">May 2005 </th>
<th scope="col">Apr 2005 </th>
<th scope="col">Mar 2005 </th>
<th scope="col">Last 12 Months Average </th>
Monthly Average 
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2004 </td>
<td>2003 </td>
<td>2002 </td>
</tr>
<tr>
<td class="firstcol">Total </td>
<td>60.0 </td>
<td>47.7 </td>
<td>40.5 </td>
<td>62.7 </td>
<td>67.0 </td>
<td>54.4 </td>
<td>47.9 </td>
</tr>
<tr class="odd">
<td class="firstcol">Japan </td>
<td>6.5 </td>
<td>11.5</td>
<td>-4.0</td>
<td>9.5</td>
<td>18.9</td>
<td>11.6</td>
<td>6.8</td>
</tr>
<tr>
<td class="firstcol">China </td>
<td>8.1 </td>
<td>-0.1</td>
<td>3.6</td>
<td>5.6</td>
<td>4.2</td>
<td>5.7</td>
<td>5.2</td>
</tr>
<tr class="odd">
<td class="firstcol">United Kingdom </td>
<td>7.0 </td>
<td>7.8</td>
<td>14.2</td>
<td>13.9</td>
<td>12.5</td>
<td>12.5</td>
<td>16.0</td>
</tr>
<tr>
<td class="firstcol">Cayman Islands </td>
<td>12.4 </td>
<td>0.8</td>
<td>11.3</td>
<td>7.9</td>
<td>6.3</td>
<td>2.6</td>
<td>4.1</td>
</tr>
</tbody>
</table>
</body>
</html>

The "TIC" data for May were reported yesterday by the US Treasury, showing some rebound in foreign purchases of securities in US markets after two slower months. "TIC" is an acronym for Treasury International Capital, a collection of [...]

TIC Data Show Larger Foreign Purchases of US Securities in May

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.

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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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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.

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- 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

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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: July 2005

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Philadelphia Fed Activity Index Recovered, Expectations Dreary

Initial Unemployment Insurance Claims At Four Month Low

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Philadelphia Fed Activity Index Recovered, Expectations Dreary

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