Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060724c.jpg" width="353">
Earlier this month South Korea reported a seasonally adjusted deficit on foreign trade of 1.94 billion won in June compared with a surplus of 1,505 billion won in May. This was the first deficit since March, 2003 and was the result of a decline of 817 billion won in exports and an increase of 816 billion won in imports. Incidentally, in US dollar terms, there was a surplus of $3.78 million. This illustrates the point that one can&#39;t simply multiply the won value by the Won/Dollar rate to determine the value of the balance of trade in dollars. The correct procedure is first, to convert the won exports and imports into dollars and then the difference between the two is computed. In determining the dollar value of individual exports and imports, different exchange rates may be used depending on the timing of the exports or the imports. The difference between applying an average exchange rate to the won balance of trade and the more involved procedure is not great, but enough to turn a small deficit in won into a small surplus in dollars. In the first chart we show Korea&#39;s balance of trade in USD as reported by the Bank of Korea and the balance of trade computed by multiplying the Won value by the average exchange rate.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060724d.jpg" width="353">
Details of the composition of exports and imports and export and import prices for June were released today. Trade by country for June is yet to be published. The biggest increase among imports of commodities was crude material including inedible, ex fuel, which increased 351 billion Won in June. Surprisingly, the category including fuel, which has seen dramatic price increases, declined 45 billion Won in June but this decline followed a peak increase of 1,724 billion Won in May. The biggest decline among exports was in machinery and transport, which declined 705 billion Won in June. The month to month changes in the import of crude material including inedible, ex fuel and the export of machinery and transport are shown in the second chart.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060724e.jpg" width="353">
Since mid 2005, the spread between import and export prices, shown in the third chart, has been widening, with import prices rising, while export prices have tended to decline. As a result, the terms of trade for Korea have worsened steadily.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/EMERGEPR/@P2/@P2A/@P2A.HTM">South&nbsp; Korea</a></th>
<th scope="col">Jun&nbsp; 06</th>
<th scope="col">May 06</th>
<th scope="col">Jun 05</th>
<th scope="col">M/M Dif</th>
<th scope="col">Y/Y Dif&nbsp;</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Exports (Bil Won)&nbsp;</td>
<td>25810</td>
<td>26626</td>
<td>26753</td>
<td>-816</td>
<td>2057</td>
<td>291579</td>
<td>290419</td>
<td>230914</td>
</tr>
<tr>
<td class="firstcol">Imports (Bil Won)</td>
<td>25911</td>
<td>25123</td>
<td>23752</td>
<td>688</td>
<td>3489</td>
<td>267443</td>
<td>256741</td>
<td>213175</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance (Bil Won)</td>
<td>-1.94</td>
<td>1503.25</td>
<td>1399.90</td>
<td>-1505.18</td>
<td>-1401.94</td>
<td>24135</td>
<td>33678</td>
<td>17739</td>
</tr>
<tr>
<td class="firstcol">Exports &nbsp;(Mil USD)</td>
<td>26953</td>
<td>28279</td>
<td>23369</td>
<td>-1326</td>
<td>3584</td>
<td>284617</td>
<td>253845</td>
<td>193817</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports (Mil USD)</td>
<td>26950</td>
<td>26646</td>
<td>21998</td>
<td>304</td>
<td>4952</td>
<td>261091</td>
<td>224462</td>
<td>178827</td>
</tr>
<tr>
<td class="firstcol">Balance (Mil USD)</td>
<td>3.78</td>
<td>1634</td>
<td>1372</td>
<td>-1630</td>
<td>-1368</td>
<td>23526</td>
<td>29392</td>
<td>14990</td>
</tr>
<tr class="odd">
<td class="firstcol">Import: Crude Material, inedible ex fuels (Mil USD)&nbsp;</td>
<td>1718</td>
<td>1368</td>
<td>1377</td>
<td>350.97</td>
<td>341.44</td>
<td>15354</td>
<td>13535</td>
<td>10147</td>
</tr>
<tr>
<td class="firstcol">Export: Machinery &amp; Transport (Mil USD)</td>
<td>16085</td>
<td>16790</td>
<td>14024</td>
<td>-705.10</td>
<td>2060.81</td>
<td>173492</td>
<td>159994</td>
<td>121142</td>
</tr>
<tr class="odd">
<td class="firstcol">Terms of Trade (2000=100)</td>
<td>71.85</td>
<td>71.50</td>
<td>72.43</td>
<td>0.49*</td>
<td>-7.21*</td>
<td>77.56</td>
<td>85.34</td>
<td>88.85</td>
</tr>
<tr>
<td class="firstcol">Export Prices (2000=100)&nbsp;</td>
<td>87.45</td>
<td>85.16</td>
<td>86.32</td>
<td>2.69*</td>
<td>1.61*</td>
<td>86.74</td>
<td>92.93</td>
<td>87.51</td>
</tr>
<tr class="odd">
<td class="firstcol">Import Prices (2000=100</td>
<td>121.72</td>
<td>119.10</td>
<td>111.48</td>
<td>2.20*</td>
<td>9.19*</td>
<td>112.03</td>
<td>108.89</td>
<td>98.85</td>
</tr>
</tbody>
</table>
</body>
</html>

Earlier this month South Korea reported a seasonally adjusted deficit on foreign trade of 1.94 billion won in June compared with a surplus of 1,505 billion won in May. This was the first deficit since March, 2003 and was the result of [...]

South Korea Trade in Goods: Small Deficit in Won Terms in June, Terms of Trade Continue Unfavorable

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060724a.jpg" width="353">
The weekly leading index of the US economy published by the Economic Cycle Research Institute (ECRI) was unchanged in the latest week, a performance which typifies the index&#39;s movement during 2006.
Versus its year end 2005 level, the leaders are up a scant 0.8% while the six month growth rate of 0.3% is down from this year&#39;s high of 4.8%.
During the last ten years there has been a 53% correlation between the change in the weekly leading index and US real GDP growth during the following quarter. The correlation has risen to 71% during the last five years.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060724b.jpg" width="353">
The slowdown mirrors the pattern of slower growth in the leading series of the US economy from the Conference Board and the OECD. Reduced economic liquidity as suggested by a flat interest rate yield curve and slower growth in the money supply, as well as lower housing market activity, account for much of the slowdowns.
Real GDP growth for the U.S. in 2Q is scheduled for release this coming Friday and it is generally expected at 3.0% (AR) versus 5.6% growth during 1Q.
Residential Investment over the Real Estate Cycle from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-15.html"> here</a>.
The daily liquidity effect from the Federal Reserve bank of St. Louis can be found <a href="http://research.stlouisfed.org/wp/2006/2006-020.pdf"> here</a>.
Visit the <a href="http://www.businesscycle.com/">Economic Cycle Research Institute</a> for analysis of US and international business cycles.

<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/@W8/@W801/@W801.HTM">Economic Cycle Research Institute</a>&nbsp;</th>
<th scope="col">7/14/06</th>
<th scope="col">12/30/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Weekly Leading Index</td>
<td>136.9</td>
<td>135.8</td>
<td>1.6%</td>
<td>134.6</td>
<td>132.6</td>
<td>124.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; 6 Month Growth Rate</td>
<td>0.3%</td>
<td>1.5%</td>
<td>&nbsp;</td>
<td>1.9%</td>
<td>4.2%</td>
<td>6.7%</td>
</tr>
</tbody>
</table>
</body>
</html>

The weekly leading index of the US economy published by the Economic Cycle Research Institute (ECRI) was unchanged in the latest week, a performance which typifies the index's movement during 2006. Versus its year end 2005 level, the [...]

ECRI Leading Index Flat During 2006

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060724a.jpg" width="353">
The weekly leading index of the US economy published by the Economic Cycle Research Institute (ECRI) was unchanged in the latest week, a performance which typifies the index&#39;s movement during 2006.
Versus its year end 2005 level, the leaders are up a scant 0.8% while the six month growth rate of 0.3% is down from this year&#39;s high of 4.8%.
During the last ten years there has been a 53% correlation between the change in the weekly leading index and US real GDP growth during the following quarter. The correlation has risen to 71% during the last five years.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060724b.jpg" width="353">
The slowdown mirrors the pattern of slower growth in the leading series of the US economy from the Conference Board and the OECD. Reduced economic liquidity as suggested by a flat interest rate yield curve and slower growth in the money supply, as well as lower housing market activity, account for much of the slowdowns.
Real GDP growth for the U.S. in 2Q is scheduled for release this coming Friday and it is generally expected at 3.0% (AR) versus 5.6% growth during 1Q.
Residential Investment over the Real Estate Cycle from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-15.html"> here</a>.
The daily liquidity effect from the Federal Reserve bank of St. Louis can be found <a href="http://research.stlouisfed.org/wp/2006/2006-020.pdf"> here</a>.
Visit the <a href="http://www.businesscycle.com/">Economic Cycle Research Institute</a> for analysis of US and international business cycles.

<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/@W8/@W801/@W801.HTM">Economic Cycle Research Institute</a>&nbsp;</th>
<th scope="col">7/14/06</th>
<th scope="col">12/30/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Weekly Leading Index</td>
<td>136.9</td>
<td>135.8</td>
<td>1.6%</td>
<td>134.6</td>
<td>132.6</td>
<td>124.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; 6 Month Growth Rate</td>
<td>0.3%</td>
<td>1.5%</td>
<td>&nbsp;</td>
<td>1.9%</td>
<td>4.2%</td>
<td>6.7%</td>
</tr>
</tbody>
</table>
 South Korea Trade in Goods:  Small Deficit in Won Terms in June, Terms of Trade Continue Unfavorable  
by <a href="/comment/Curley.html">Louise Curley</a> July 24, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060724c.jpg" width="353">
Earlier this month South Korea reported a seasonally adjusted deficit on foreign trade of 1.94 billion won in June compared with a surplus of 1,505 billion won in May. This was the first deficit since March, 2003 and was the result of a decline of 817 billion won in exports and an increase of 816 billion won in imports. Incidentally, in US dollar terms, there was a surplus of $3.78 million. This illustrates the point that one can&#39;t simply multiply the won value by the Won/Dollar rate to determine the value of the balance of trade in dollars. The correct procedure is first, to convert the won exports and imports into dollars and then the difference between the two is computed. In determining the dollar value of individual exports and imports, different exchange rates may be used depending on the timing of the exports or the imports. The difference between applying an average exchange rate to the won balance of trade and the more involved procedure is not great, but enough to turn a small deficit in won into a small surplus in dollars. In the first chart we show Korea&#39;s balance of trade in USD as reported by the Bank of Korea and the balance of trade computed by multiplying the Won value by the average exchange rate.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060724d.jpg" width="353">
Details of the composition of exports and imports and export and import prices for June were released today. Trade by country for June is yet to be published. The biggest increase among imports of commodities was crude material including inedible, ex fuel, which increased 351 billion Won in June. Surprisingly, the category including fuel, which has seen dramatic price increases, declined 45 billion Won in June but this decline followed a peak increase of 1,724 billion Won in May. The biggest decline among exports was in machinery and transport, which declined 705 billion Won in June. The month to month changes in the import of crude material including inedible, ex fuel and the export of machinery and transport are shown in the second chart.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060724e.jpg" width="353">
Since mid 2005, the spread between import and export prices, shown in the third chart, has been widening, with import prices rising, while export prices have tended to decline. As a result, the terms of trade for Korea have worsened steadily.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/EMERGEPR/@P2/@P2A/@P2A.HTM">South&nbsp; Korea</a></th>
<th scope="col">Jun&nbsp; 06</th>
<th scope="col">May 06</th>
<th scope="col">Jun 05</th>
<th scope="col">M/M Dif</th>
<th scope="col">Y/Y Dif&nbsp;</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Exports (Bil Won)&nbsp;</td>
<td>25810</td>
<td>26626</td>
<td>26753</td>
<td>-816</td>
<td>2057</td>
<td>291579</td>
<td>290419</td>
<td>230914</td>
</tr>
<tr>
<td class="firstcol">Imports (Bil Won)</td>
<td>25911</td>
<td>25123</td>
<td>23752</td>
<td>688</td>
<td>3489</td>
<td>267443</td>
<td>256741</td>
<td>213175</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance (Bil Won)</td>
<td>-1.94</td>
<td>1503.25</td>
<td>1399.90</td>
<td>-1505.18</td>
<td>-1401.94</td>
<td>24135</td>
<td>33678</td>
<td>17739</td>
</tr>
<tr>
<td class="firstcol">Exports &nbsp;(Mil USD)</td>
<td>26953</td>
<td>28279</td>
<td>23369</td>
<td>-1326</td>
<td>3584</td>
<td>284617</td>
<td>253845</td>
<td>193817</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports (Mil USD)</td>
<td>26950</td>
<td>26646</td>
<td>21998</td>
<td>304</td>
<td>4952</td>
<td>261091</td>
<td>224462</td>
<td>178827</td>
</tr>
<tr>
<td class="firstcol">Balance (Mil USD)</td>
<td>3.78</td>
<td>1634</td>
<td>1372</td>
<td>-1630</td>
<td>-1368</td>
<td>23526</td>
<td>29392</td>
<td>14990</td>
</tr>
<tr class="odd">
<td class="firstcol">Import: Crude Material, inedible ex fuels (Mil USD)&nbsp;</td>
<td>1718</td>
<td>1368</td>
<td>1377</td>
<td>350.97</td>
<td>341.44</td>
<td>15354</td>
<td>13535</td>
<td>10147</td>
</tr>
<tr>
<td class="firstcol">Export: Machinery &amp; Transport (Mil USD)</td>
<td>16085</td>
<td>16790</td>
<td>14024</td>
<td>-705.10</td>
<td>2060.81</td>
<td>173492</td>
<td>159994</td>
<td>121142</td>
</tr>
<tr class="odd">
<td class="firstcol">Terms of Trade (2000=100)</td>
<td>71.85</td>
<td>71.50</td>
<td>72.43</td>
<td>0.49*</td>
<td>-7.21*</td>
<td>77.56</td>
<td>85.34</td>
<td>88.85</td>
</tr>
<tr>
<td class="firstcol">Export Prices (2000=100)&nbsp;</td>
<td>87.45</td>
<td>85.16</td>
<td>86.32</td>
<td>2.69*</td>
<td>1.61*</td>
<td>86.74</td>
<td>92.93</td>
<td>87.51</td>
</tr>
<tr class="odd">
<td class="firstcol">Import Prices (2000=100</td>
<td>121.72</td>
<td>119.10</td>
<td>111.48</td>
<td>2.20*</td>
<td>9.19*</td>
<td>112.03</td>
<td>108.89</td>
<td>98.85</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/060721d.jpg" width="353">
The Federal Reserve Bank of Richmond Mfg. Survey did improve in June, but the low reading of 4 still was down sharply from the highs reached earlier this year. The m/m rise reflected scant improvement in shipments &amp; new orders though the rise in the employment index did raise the 2Q level to its highest since 3Q04.
During the last ten years there has been a 39% correlation between the Richmond survey index level and the one month change in U.S. factory sector industrial production. The latest Richmond Fed Mfg. Survey is available <a href="http://www.richmondfed.org/research/regional_conditions/manufacturing_conditions/index.cfm">here</a>.
The Richmond Fed also publishes indexes of conditions in the service sector and the revenue measure remained firm in June at a reading of 14, much improved from the lows earlier in the year but below last year&#39;s highs. The companion index of service sector employment fell moderately. The latest Richmond Fed Service-Sector Survey is available <a href="http://www.richmondfed.org/research/regional_conditions/service_sector/index.cfm">here</a>.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721e.jpg" width="353">
The Chicago Federal Reserve Bank&#39;s Midwest manufacturing index fell 0.2% during May from April. It was the first m/m decline in over a year though earlier strong gains left the three month growth rate firm at 5.1%. Three month growth in the index peaked late last year at 9.4%. Declines in indexes covering the machinery &amp; resource sectors were the source of the May drop.
During the last ten years there has been a 95% correlation between the y/y change in Chicago&#39;s Midwest Mfg. index and the change in US factory sector industrial production. The May Chicago Fed Midwest Manufacturing Index can be found <a href="http://www.chicagofed.org/economic_research_and_data/files/cfmmi_may2006.pdf"> here</a>.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721f.jpg" width="353">
The Kansas City Fed&#39;s manufacturing survey included a production index which fell in June to 23 from 34 in May but the level remained quite firm versus last year. Though new orders also fell m/m the quarterly average reached its highest level since late 2003. The index covering the change in the number of employees was its strongest in just over two years. The prices received index also hit its highest level on record.
The Kansas City Fed survey dates back to 2001 and the June release covering manufacturing activity in the Tenth Federal Reserve District can be found <a href="http://www.kansascityfed.org/mfgsurv/pdf/2006Jun29mfg.pdf"> here</a>.
The data mentioned here is available in the Haver SURVEYS database.
The Supplier Industry in Transition - The New Geography of Auto Production from the Federal Reserve Bank of Chicago is available <a href="http://www.chicagofed.org/publications/fedletter/cflaugust2006_229b.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">

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<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S5.htm"> Federal Reserve Surveys</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">Year Ago </th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Richmond Fed Mfg. Survey (Diffusion Index, 1-Mth. Chg.)</td>
<td>4</td>
<td>1</td>
<td>-3</td>
<td>3</td>
<td>10</td>
<td>-3</td>
</tr>
<tr>
<td class="firstcol">Chicago Fed Midwest Mfg. Index (2002 = 100)</td>
<td>n.a.</td>
<td>106.0</td>
<td>101.3</td>
<td>102.1</td>
<td>100.4</td>
<td>97.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Kansas City Fed Production (1-Mth. Diffusion Index, + = Econ Growth)</td>
<td>23</td>
<td>34</td>
<td>14</td>
<td>16</td>
<td>18</td>
<td>13</td>
</tr>
</tbody>
</table>
</body>
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The Federal Reserve Bank of Richmond Mfg. Survey did improve in June, but the low reading of 4 still was down sharply from the highs reached earlier this year. The m/m rise reflected scant improvement in shipments & new orders though [...]

Regional Fed Bank Surveys Indicate Slower Growth

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721d.jpg" width="353">
The Federal Reserve Bank of Richmond Mfg. Survey did improve in June, but the low reading of 4 still was down sharply from the highs reached earlier this year. The m/m rise reflected scant improvement in shipments &amp; new orders though the rise in the employment index did raise the 2Q level to its highest since 3Q04.
During the last ten years there has been a 39% correlation between the Richmond survey index level and the one month change in U.S. factory sector industrial production. The latest Richmond Fed Mfg. Survey is available <a href="http://www.richmondfed.org/research/regional_conditions/manufacturing_conditions/index.cfm">here</a>.
The Richmond Fed also publishes indexes of conditions in the service sector and the revenue measure remained firm in June at a reading of 14, much improved from the lows earlier in the year but below last year&#39;s highs. The companion index of service sector employment fell moderately. The latest Richmond Fed Service-Sector Survey is available <a href="http://www.richmondfed.org/research/regional_conditions/service_sector/index.cfm">here</a>.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721e.jpg" width="353">
The Chicago Federal Reserve Bank&#39;s Midwest manufacturing index fell 0.2% during May from April. It was the first m/m decline in over a year though earlier strong gains left the three month growth rate firm at 5.1%. Three month growth in the index peaked late last year at 9.4%. Declines in indexes covering the machinery &amp; resource sectors were the source of the May drop.
During the last ten years there has been a 95% correlation between the y/y change in Chicago&#39;s Midwest Mfg. index and the change in US factory sector industrial production. The May Chicago Fed Midwest Manufacturing Index can be found <a href="http://www.chicagofed.org/economic_research_and_data/files/cfmmi_may2006.pdf"> here</a>.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721f.jpg" width="353">
The Kansas City Fed&#39;s manufacturing survey included a production index which fell in June to 23 from 34 in May but the level remained quite firm versus last year. Though new orders also fell m/m the quarterly average reached its highest level since late 2003. The index covering the change in the number of employees was its strongest in just over two years. The prices received index also hit its highest level on record.
The Kansas City Fed survey dates back to 2001 and the June release covering manufacturing activity in the Tenth Federal Reserve District can be found <a href="http://www.kansascityfed.org/mfgsurv/pdf/2006Jun29mfg.pdf"> here</a>.
The data mentioned here is available in the Haver SURVEYS database.
The Supplier Industry in Transition - The New Geography of Auto Production from the Federal Reserve Bank of Chicago is available <a href="http://www.chicagofed.org/publications/fedletter/cflaugust2006_229b.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">

</table>
<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/@S5.htm"> Federal Reserve Surveys</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">Year Ago </th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Richmond Fed Mfg. Survey (Diffusion Index, 1-Mth. Chg.)</td>
<td>4</td>
<td>1</td>
<td>-3</td>
<td>3</td>
<td>10</td>
<td>-3</td>
</tr>
<tr>
<td class="firstcol">Chicago Fed Midwest Mfg. Index (2002 = 100)</td>
<td>n.a.</td>
<td>106.0</td>
<td>101.3</td>
<td>102.1</td>
<td>100.4</td>
<td>97.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Kansas City Fed Production (1-Mth. Diffusion Index, + = Econ Growth)</td>
<td>23</td>
<td>34</td>
<td>14</td>
<td>16</td>
<td>18</td>
<td>13</td>
</tr>
</tbody>
</table>
UK GDP: Unexpected Pick-Up in Q2 Growth 
by <a href="/comment/Stone.html">Carol Stone</a> July 20, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721a.jpg" width="353">
GDP growth in the UK ticked up to 0.8% in Q2 from 0.7% in Q1. The initial report of Q1 in late April was 0.6% so interim revisions were upward, with history also somewhat stronger than was thought at that time.
This &quot;preliminary&quot; estimate is compiled from industry data only. The full array of income and expenditure data will be published August 25. Among the sectors, today&#39;s report shows that, after a surge in Q1, production industries fell back by 0.1%. This was concentrated in the mining sector (including oil and gas extraction), where output was off 3.0% in the quarter and in energy supply, down 2.8%. However, manufacturing advanced 0.5%; although this was less than in Q1, it added enough to put that sector up 0.7% over a year ago, its first year-on-year increase since Q4 2004.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721b.jpg" width="353">
The real source of growth was the services, particularly business and financial services. Total services expanded 1.0%, with business services up 1.2%. This latter industry group is up 4.8% from a year ago. Consumer-oriented services, such as distribution, hotels &amp; restaurants and repairs also gained 1.2% in Q2, yielding 3.3% growth over the past year. Transportation and communications are up 3.0% on the year and government and &quot;other&quot;, 2.5%.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721c.jpg" width="353">
We are slightly surprised at this pick-up in UK growth. Just a little over a week ago, we wrote here about employment patterns that were no better than &quot;stable&quot;, accompanied by rising unemployment. News reports this morning indicated that forecasters in a widely watched survey had projected 0.7%, the same as Q1, suggesting that our qualitative judgment was hardly unique. The flatness in production was evident from previously available production data for April and May. Just yesterday, retail trade data for the quarter showed strength (2.1%), but that, of course, is only one industry. As we mentioned last quarter, growth in Q1 was widespread across industries, giving the benefits of diversity to the economy as a whole. So this period, when production industries and mining tailed off, service businesses kept up the total.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/UK/@U2/@U2.HTM">United Kingdom</a> &nbsp; (Chained, SA, 2002=100)</th>
<th scope="col">Q2 2006</th>
<th scope="col">Q1 2006</th>
<th scope="col">Q4 2005</th>
<th scope="col">Year/ Year</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">GDP*</td>
<td>0.8</td>
<td>0.7</td>
<td>0.7</td>
<td>2.6</td>
<td>1.9</td>
<td>3.3</td>
<td>2.7</td>
</tr>
<tr>
<td class="firstcol">Production Industries</td>
<td>-0.1</td>
<td>0.8</td>
<td>-0.6</td>
<td>-0.8</td>
<td>-1.8</td>
<td>0.7</td>
<td>-0.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Service Industries</td>
<td>1.0</td>
<td>0.7</td>
<td>1.1</td>
<td>3.6</td>
<td>2.8</td>
<td>3.9</td>
<td>3.1</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/060721a.jpg" width="353">
GDP growth in the UK ticked up to 0.8% in Q2 from 0.7% in Q1. The initial report of Q1 in late April was 0.6% so interim revisions were upward, with history also somewhat stronger than was thought at that time.
This &quot;preliminary&quot; estimate is compiled from industry data only. The full array of income and expenditure data will be published August 25. Among the sectors, today&#39;s report shows that, after a surge in Q1, production industries fell back by 0.1%. This was concentrated in the mining sector (including oil and gas extraction), where output was off 3.0% in the quarter and in energy supply, down 2.8%. However, manufacturing advanced 0.5%; although this was less than in Q1, it added enough to put that sector up 0.7% over a year ago, its first year-on-year increase since Q4 2004.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721b.jpg" width="353">
The real source of growth was the services, particularly business and financial services. Total services expanded 1.0%, with business services up 1.2%. This latter industry group is up 4.8% from a year ago. Consumer-oriented services, such as distribution, hotels &amp; restaurants and repairs also gained 1.2% in Q2, yielding 3.3% growth over the past year. Transportation and communications are up 3.0% on the year and government and &quot;other&quot;, 2.5%.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721c.jpg" width="353">
We are slightly surprised at this pick-up in UK growth. Just a little over a week ago, we wrote here about employment patterns that were no better than &quot;stable&quot;, accompanied by rising unemployment. News reports this morning indicated that forecasters in a widely watched survey had projected 0.7%, the same as Q1, suggesting that our qualitative judgment was hardly unique. The flatness in production was evident from previously available production data for April and May. Just yesterday, retail trade data for the quarter showed strength (2.1%), but that, of course, is only one industry. As we mentioned last quarter, growth in Q1 was widespread across industries, giving the benefits of diversity to the economy as a whole. So this period, when production industries and mining tailed off, service businesses kept up the total.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/UK/@U2/@U2.HTM">United Kingdom</a> &nbsp; (Chained, SA, 2002=100)</th>
<th scope="col">Q2 2006</th>
<th scope="col">Q1 2006</th>
<th scope="col">Q4 2005</th>
<th scope="col">Year/ Year</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">GDP*</td>
<td>0.8</td>
<td>0.7</td>
<td>0.7</td>
<td>2.6</td>
<td>1.9</td>
<td>3.3</td>
<td>2.7</td>
</tr>
<tr>
<td class="firstcol">Production Industries</td>
<td>-0.1</td>
<td>0.8</td>
<td>-0.6</td>
<td>-0.8</td>
<td>-1.8</td>
<td>0.7</td>
<td>-0.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Service Industries</td>
<td>1.0</td>
<td>0.7</td>
<td>1.1</td>
<td>3.6</td>
<td>2.8</td>
<td>3.9</td>
<td>3.1</td>
</tr>
</tbody>
</table>
</body>
</html>

GDP growth in the UK ticked up to 0.8% in Q2 from 0.7% in Q1. The initial report of Q1 in late April was 0.6% so interim revisions were upward, with history also somewhat stronger than was thought at that time. This "preliminary" [...]

UK GDP: Unexpected Pick-Up in Q2 Growth

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720h.jpg" width="353">
The Central Bank of Egypt today reported its balance of payments array for Q1 2006. The current account surplus increased to $934 million from $801 million in Q4 2005, although it was a bit smaller than Q1 2005 at $995 billion. For 2005 as a whole, Egypt had a current account surplus of $2.2 billion.
These numbers are small in absolute size. For instance, the balance on services in the US was $66.0 billion last year, nearly 9 times larger than Egypt&#39;s $7.6 billion. But some aspects of these Egyptian figures are quite fascinating and bear examination.
First, the current account itself shows a surplus. One frequently presumes that emerging market countries run perennial deficits and struggle constantly with debt and debt service issues. But presently, that situation is improving for Egypt. Its current account turned a surplus in its fiscal year 2002 (ended June 30, 2002) and has also achieved that every quarter since the quarterly data began in early 2004.
To be sure, the goods accounts are in deficit, which totaled $11.1 billion in calendar 2005 and continued with a $2.2 billion shortfall in Q1 2006. But Egypt has some oil and, as seen in the table below, is benefiting from the high prices with an increasing surplus in petroleum. This, of course, limits the overall deficit in goods.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720i.jpg" width="353">
The services accounts are important for Egypt. It collected nearly $3.5 billion last year in tolls from the Suez Canal, a strategic and lucrative asset for that nation. Egypt is able, too, to benefit from its ancient history as a tourist attraction, bringing a net of more than $5 billion to the country last year in travel accounts.
Lastly among the current accounts, the country receives substantial amounts of transfers. We in the US look at our transfer item as a drain, but sizable amounts of income go to Egypt, apparently from individuals working abroad. Total net transfers were $5.7 billion in 2005, with the portion from private sources amounting to almost exactly $5.0 billion.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720j.jpg" width="353">
On the capital and financial account side, the most outstanding item is the recent huge increase in direct investment in Egypt. As seen below, capital inflows for investment projects more than doubled in 2005 to $5.3 billion from $2.0 billion in 2004. The Q1 amount continues the 2005 pace. Information from news sources indicates that these funds cover a wide variety of activities, including manufacturing and the rapidly growing tourism sector. Recently announced projects include a major expansion of port facilities at Suez, so these flows are likely to remain sizable for a considerable period. At the same time, bank lending patterns indicate a persistent net outflow of capital from that sector.
All told, Egypt&#39;s balance of payments accounts are running a positive overall balance, as services, transfers and some capital accounts more than offset a deficit on goods trade. As a result, Egypt&#39;s reserves are increasing, in Q1 by $713 million, following a substantial $6.3 billion in 2005.

<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/EMERGEMA/@M1/@M1.htm">Egypt: Mil. US$</a></th>
<th scope="col">Q1 2006</th>
<th scope="col">Q4 2005</th>
<th scope="col">Q3 2005</th>
<th scope="col">Q1 2005</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Current Account</td>
<td>934</td>
<td>801</td>
<td>327</td>
<td>995</td>
<td>2,207</td>
<td>3,236</td>
</tr>
<tr>
<td class="firstcol">Balance on Goods</td>
<td>-2,222</td>
<td>-2,663</td>
<td>-1,028</td>
<td>-2,128</td>
<td>-11,127</td>
<td>-9,312</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Petroleum</td>
<td>1,518</td>
<td>1,188</td>
<td>985</td>
<td>638</td>
<td>2,562</td>
<td>1,730</td>
</tr>
<tr>
<td class="firstcol">Balance on Services</td>
<td>1,780</td>
<td>2,074</td>
<td>2,170</td>
<td>1,530</td>
<td>7,586</td>
<td>7,982</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Suez Canal</td>
<td>862</td>
<td>891</td>
<td>871</td>
<td>847</td>
<td>3,467</td>
<td>3,076</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Travel (Net)</td>
<td>1,257</td>
<td>1,200</td>
<td>1,928</td>
<td>994</td>
<td>5,222</td>
<td>4,868</td>
</tr>
<tr class="odd">
<td class="firstcol">Net Transfers</td>
<td>1,376</td>
<td>1,390</td>
<td>1,355</td>
<td>1,593</td>
<td>5,748</td>
<td>4,567</td>
</tr>
<tr>
<td class="firstcol">Net Direct Investment</td>
<td>1,296</td>
<td>1,320</td>
<td>1,928</td>
<td>1,214</td>
<td>5,284</td>
<td>1,998</td>
</tr>
<tr class="odd">
<td class="firstcol">Change in Reserves</td>
<td>713</td>
<td>740</td>
<td>1,812</td>
<td>2,538</td>
<td>6,316</td>
<td>680</td>
</tr>
</tbody>
</table>
</body>
</html>

The Central Bank of Egypt today reported its balance of payments array for Q1 2006. The current account surplus increased to $934 million from $801 million in Q4 2005, although it was a bit smaller than Q1 2005 at $995 billion. For [...]

Egypt's Current Account Surplus Boosted by Large Canal Tolls, Tourism and Petroleum; Direct Investment Gains

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720f.jpg" width="353">
The Philadelphia Federal Reserve Bank&#39;s July Index of General Business Conditions in the manufacturing sector dropped to 6.0 from an unrevised 13.1 during June. The decline exceeded Consensus expectation for a drop to 12.4.
The July decline was to the lowest level since this past January.
During the last ten years there has been a 65% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 49% correlation with q/q growth in real GDP.
The lower index reflected declines in the sub indexes of new orders, shipments, unfilled orders and delivery times. Moving in the other direction, the employment index advanced to its highest level in three months. During the last ten years there has been a 75% 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.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720g.jpg" width="353">
The prices paid index rose moderately. During the last ten years there has been a 76% correlation between the prices paid index and the three month growth in the intermediate goods PPI. There has been an 85% correlation with the change in core intermediate goods prices.
The separate index of expected business conditions in six months about doubled m/m in July but at 15.4 remained below the 2Q average. Expectations for employment fell m/m and the index also was below the 2Q average.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos0706.html">here</a>.
The minutes to the latest Federal Open Market Committee meeting can be found <a href="http://www.federalreserve.gov/FOMC/MINUTES/20060629.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/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;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>6.0</td>
<td>13.1</td>
<td>9.6</td>
<td>12.4</td>
<td>28.0</td>
<td>10.5</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>50.3</td>
<td>48.7</td>
<td>31.8</td>
<td>43.5</td>
<td>51.2</td>
<td>16.8</td>
</tr>
</tbody>
</table>
</body>
</html>

The Philadelphia Federal Reserve Bank's July Index of General Business Conditions in the manufacturing sector dropped to 6.0 from an unrevised 13.1 during June. The decline exceeded Consensus expectation for a drop to 12.4. The July [...]

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

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Andrew Cates

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

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

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**The US dollar versus yield differentials**
Chart 3 below illustrates a sharp breakdown in the correlation between the US-Germany 10-year yield differential and the EUR/USD exchange rate. Historically, the dollar has moved closely with interest rate spreads, as yield-seeking capital flowed into US assets. But since early 2025—and more acutely following the April tariff actions—the dollar has weakened markedly even as the yield spread has narrowed only modestly. This decoupling underscores a critical shift: capital markets are reacting not just to monetary policy, but to rising trade and geopolitical uncertainty. In other words, the exchange rate is now being driven as much by risk sentiment as by interest rate arbitrage.

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**The US economy’s structural outperformance and the dollar**
A second dynamic, captured in the next chart, reveals a tight correlation between the US real effective exchange rate and the potential GDP growth differential between the US and euro area over the past 50-60 years. This raises the question: has dollar strength (until recently) merely been a reflection of US growth leadership—or are capital inflows themselves helping to sustain this growth outperformance? In effect, the tail may be wagging the dog. Global investors have long allocated capital to the US, attracted by its macroeconomic resilience, technological leadership, and deep, liquid financial markets. The danger now is that the US trade war may disrupt this equilibrium. A sharp or sustained reduction in capital inflows could undermine growth, weaken the dollar, and trigger broader financial instability. Moreover, reversing this dynamic is not straightforward—barring a credible structural resurgence in European (or Asian) growth, the global investment landscape remains tilted toward the US.

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**US competitiveness versus Europe, China and Japan** 
The next chart below examines relative unit labour costs across major economies since 2011. The US and China have seen a broadly similar trajectory, with steady increases in relative cost structures, while the euro area has remained flat and Japan has seen dramatic improvement. This suggests that, from a cost competitiveness standpoint, the US is not uniquely disadvantaged vis-à-vis China. However, as we discuss further below, this parallel erosion of cost competitiveness is occurring at much higher nominal wage levels in the US, which blunts its ability to regain export share through tariff-related shifts alone. The trade war strategy—absent a corresponding improvement in productivity or structural reforms—risks imposing costs without delivering material competitiveness gains.

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**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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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.

Personal Income, Consumption, and Prices in March

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The Pending Home Sales Index, a forward-looking home sales measure based on contract signings, from the National Association of Realtors rose 6.1% to 76.5 (-0.6% y/y) during March after rising a little-revised 2.1% in February. These changes followed a 4.6% January decline.

The rise in March sales occurred as the rate on a 30-year mortgage eased to an average 6.65% from 6.84% in February. This rate was well above a low of 2.68% averaged in December 2020.

Pending home sales were up in most regions of the country. Sales in the Midwest rose 4.9% (1.4% y/y) last month after rising 1.8% in February. Sales in the South increased 9.8% (-0.4% y/y) following a 5.8% February rise. Sales in the West improved 4.8% (-2.0% y/y) after falling 3.0% in February. Sales in the Northeast were off 0.5% (-3.0% y/y) in March after falling 0.9% in February.

The pending home sales index measures sales at the time the contract for the purchase of an existing home is signed, similar to the Census Bureau's new home sales data. In contrast, the National Association of Realtors' existing home sales data are recorded when the sale is closed, which is usually a couple of months after the sales contract has been signed. In developing the pending home sales index, the NAR found that the level of monthly sales contract activity leads the level of closed existing home sales by about two months.

The series dates back to 2001 and are available in Haver's **PREALTOR** database. Weekly mortgage interest rates from the Mortgage Bankers Association can be found in the **WEEKLY** database.

- Sales rise to highest level in four months.
- Strength is evident throughout most of country.

U.S. Pending Home Sales Surge in March

Sandy Batten

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The employment cost index (ECI) for civilian workers, arguably the most accurate measure of labor compensation in the United States, rose 0.9% q/q (3.6% y/y) in Q1, the same quarterly increase as in last year’s Q4, according to the Bureau of Labor Statistics. The quarterly gains have fluctuated between 0.8% and 1.0% for the past six quarters. The Action Economics Forecast Survey had expected a 0.9% q/q increase and a 3.5% y/y gain.

Wages and salaries for civilian workers rose 0.8% q/q (3.5% y/y) in Q1, down from 1.0% q/q in Q4. This tied the Q3 2024 quarterly rise as the smallest increase since Q2 2021. It was also the smallest y/y increase since Q2 2021. Benefits increased by an outsized 1.2% q/q (3.9% y/y) in Q1 versus 0.8% q/q in Q4. This is the largest quarterly gain since Q2 2022. In general, employment cost gains remain above the pace observed prior to the pandemic but are slowing gradually.

Private industry workers’ compensation rose 0.8% q/q (3.4% y/y) in Q1, down from 0.9% q/q (3.6% y/y) in Q4. Wages and salaries for private industry workers increased 0.8% q/q (3.4% y/y) in Q1 versus 0.8% q/q (3.7% y/y) in Q4. The quarterly gain in Q1 tied that in Q3 2024 as the smallest increase since Q4 2020. Benefits for private industry workers jumped 1.2% q/q (3.6% y/y). the largest quarterly gain since Q2 2022. The acceleration in benefits in Q1 was primarily in service-producing industries.

Compensation in private goods-producing industries increased 1.0% q/q (3.2% y/y) in Q1, the largest quarterly gain in five quarters, versus a 0.7% q/q increase in Q4. Compensation in construction jumped 1.3% q/q, its largest quarterly increase since Q2 2022, up from a 0.6% q/q gain in Q4. Manufacturing compensation growth slowed to 0.7% q/q, its slowest quarterly advance since Q4 2020, from 0.8% q/q in Q4. Compensation in private service-producing industries increased 0.8% q/q (3.5% y/y), down slightly from a 0.9% q/q gain in Q4. Compensation in education and health services jumped 1.3% q/q, its largest quarterly gain since Q3 2023. In contrast, compensation in other services edged up 0.1% q/q in Q1, its smallest quarterly advance since before the pandemic.

The employment cost index measures the change in the cost of labor, free from the influence of employment shifts across occupations and industries. It is provided by the Bureau of Labor Statistics and is available in Haver’s **USECON** database. Consensus estimates from the Action Economics Forecast Survey are in Haver’s **AS1REPNA** database.

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

Economy in Brief: July 2006

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