Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040923d.jpg" width="353">
The Chicago Fed National Activity Index (CFNAI) fell last month to 0.19 following a sharp improvement in July.
The three-month moving average of the CFNAI also fell to its lowest level of the year.
A zero value of the CFNAI indicates that the economy is expanding at its historical trend rate of growth.
During the last twenty years there has been a 74% correlation between the level of the CFNAI and q/q growth in real GDP.
The CFNAI is a weighted average of 85 indicators of economic activity. The indicators reflect activity in the following categories: production and income, the labor market, personal consumption and housing, manufacturing and trade sales, and inventories &amp; orders.
A recent speech by Fed Governor Edward M. Gramlich titled &quot;Oil Shocks and Monetary Policy&quot; is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2004/20040916/default.htm"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S503/@S503.HTM"> Chicago Fed</a></th>
<th scope="col">Aug</th>
<th scope="col">July</th>
<th scope="col">Aug &#39;03</th>
<th scope="col"> 2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">CFNAI</td>
<td>0.19</td>
<td>0.53</td>
<td>-0.44</td>
<td>-0.11</td>
<td>-0.40</td>
<td>-1.19</td>
</tr>
</tbody>
</table>
</body>
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The Chicago Fed National Activity Index (CFNAI) fell last month to 0.19 following a sharp improvement in July. The three-month moving average of the CFNAI also fell to its lowest level of the year. A zero value of the CFNAI indicates [...]

Chicago Fed Nat'l Activity Index Lower in August

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040923c.jpg" width="353">
The Conference Board reported that the Composite Index of Leading Economic Indicators for August fell 0.3%, the third consecutive monthly decline. A 0.1% decline had been the Consensus expectation and July&#39;s decline was unrevised.
Among the 10 components only 30% rose over a one month span. A narrowing of the yield curve and lower building permits had the largest negative influences. Over a six month span 70% of the leaders rose.
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.
A 1997 article from the Federal Reserve Bank of St. Louis titled &quot;Strengthening the Case for the Yield Curve as a Predictor of U.S. Recessions&quot; can be found <a href="http://research.stlouisfed.org/publications/review/97/03/9703md.pdf"> here</a>.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040923b.jpg" width="353">
The coincident indicators rose 0.2% and has not declined m/m since April of last year. During the last ten years there has been an 82% correlation between the six month growth in the coincident indicators and two quarter growth in real GDP.
The lagging indicators fell 0.1% and the ratio of the coincident to the lagging indicators, a measure of how the economy is performing relative to its excess, rose for the first month in three.
Visit the Conference Board&#39;s <a href="http://www.conference-board.org">site</a> for coverage of leading indicator series from around the world.

<table border="0" cellspacing="0" width="100%">
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<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM"> Business Cycle Indicators</a></th>
<th scope="col">Aug</th>
<th scope="col">July</th>
<th scope="col">6-Month Growth</th>
<th scope="col"> 2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Leading</td>
<td>-0.3%</td>
<td>-0.3%</td>
<td>2.8%</td>
<td>1.3%</td>
<td>2.2%</td>
<td>-0.8%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.4%</td>
<td>0.4%</td>
<td>-0.5%</td>
<td>-0.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>-0.1%</td>
<td>0.6%</td>
<td>-1.3%</td>
<td>-2.2%</td>
<td>-2.8%</td>
<td>-1.4%</td>
</tr>
</tbody>
</table>
</body>
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The Conference Board reported that the Composite Index of Leading Economic Indicators for August fell 0.3%, the third consecutive monthly decline. A 0.1% decline had been the Consensus expectation and July's decline was unrevised. [...]

Leading Indicators Down Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040923a.jpg" width="353">
Initial claims for unemployment insurance jumped 14,000 last week to 350,000 after an upwardly revised 18,000 gain the prior week. Consensus expectations had been for 335,000 claims.
The US Labor Department indicated that last week&#39;s claims number primarily reflected hurricanes Charley &amp; Frances. Hurricane Ivan has yet to be reflected in the claims figures.
The latest figure is for the September survey period for nonfarm payrolls and initial claims were 17,000 (5.1%) higher than in the August period.
The 4-week moving average of initial claims was stable at 341,000 (-15.5% y/y). During the last ten years there has been an 81% (negative) correlation between the monthly average of initial claims and the y/y change in payroll employment.
Continuing claims for unemployment insurance rose 5,000 following a deepened 9,000 decline the week prior.
The insured rate of unemployment remained at 2.3%, where it has hovered since the end of April.
&quot;Labor&#39;s Share&quot; from the Federal Reserve Bank of St. Louis can be found <a href="http://research.stlouisfed.org/publications/net/20040801/cover.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<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"> 09/18/04</th>
<th scope="col"> 09/11/04</th>
<th scope="col">Y/Y</th>
<th scope="col"> 2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>350</td>
<td>336</td>
<td>-9.6%</td>
<td>399</td>
<td>403</td>
<td>403</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,883</td>
<td>-19.2%</td>
<td>3,516</td>
<td>3,564</td>
<td>2974</td>
</tr>
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Initial claims for unemployment insurance jumped 14,000 last week to 350,000 after an upwardly revised 18,000 gain the prior week. Consensus expectations had been for 335,000 claims. The US Labor Department indicated that last week's [...]

Hurricanes Lifted Claims for Jobless Insurance

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040923a.jpg" width="353">
Initial claims for unemployment insurance jumped 14,000 last week to 350,000 after an upwardly revised 18,000 gain the prior week. Consensus expectations had been for 335,000 claims.
The US Labor Department indicated that last week&#39;s claims number primarily reflected hurricanes Charley &amp; Frances. Hurricane Ivan has yet to be reflected in the claims figures.
The latest figure is for the September survey period for nonfarm payrolls and initial claims were 17,000 (5.1%) higher than in the August period.
The 4-week moving average of initial claims was stable at 341,000 (-15.5% y/y). During the last ten years there has been an 81% (negative) correlation between the monthly average of initial claims and the y/y change in payroll employment.
Continuing claims for unemployment insurance rose 5,000 following a deepened 9,000 decline the week prior.
The insured rate of unemployment remained at 2.3%, where it has hovered since the end of April.
&quot;Labor&#39;s Share&quot; from the Federal Reserve Bank of St. Louis can be found <a href="http://research.stlouisfed.org/publications/net/20040801/cover.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<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"> 09/18/04</th>
<th scope="col"> 09/11/04</th>
<th scope="col">Y/Y</th>
<th scope="col"> 2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>350</td>
<td>336</td>
<td>-9.6%</td>
<td>399</td>
<td>403</td>
<td>403</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,883</td>
<td>-19.2%</td>
<td>3,516</td>
<td>3,564</td>
<td>2974</td>
</tr>
</tbody>
</table>
Leading Indicators Down Again 
by <a href="/comment/Moeller.html">Tom Moeller</a> September 23, 2004


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040923c.jpg" width="353">
The Conference Board reported that the Composite Index of Leading Economic Indicators for August fell 0.3%, the third consecutive monthly decline. A 0.1% decline had been the Consensus expectation and July&#39;s decline was unrevised.
Among the 10 components only 30% rose over a one month span. A narrowing of the yield curve and lower building permits had the largest negative influences. Over a six month span 70% of the leaders rose.
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.
A 1997 article from the Federal Reserve Bank of St. Louis titled &quot;Strengthening the Case for the Yield Curve as a Predictor of U.S. Recessions&quot; can be found <a href="http://research.stlouisfed.org/publications/review/97/03/9703md.pdf"> here</a>.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040923b.jpg" width="353">
The coincident indicators rose 0.2% and has not declined m/m since April of last year. During the last ten years there has been an 82% correlation between the six month growth in the coincident indicators and two quarter growth in real GDP.
The lagging indicators fell 0.1% and the ratio of the coincident to the lagging indicators, a measure of how the economy is performing relative to its excess, rose for the first month in three.
Visit the Conference Board&#39;s <a href="http://www.conference-board.org">site</a> for coverage of leading indicator series from around the world.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM"> Business Cycle Indicators</a></th>
<th scope="col">Aug</th>
<th scope="col">July</th>
<th scope="col">6-Month Growth</th>
<th scope="col"> 2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Leading</td>
<td>-0.3%</td>
<td>-0.3%</td>
<td>2.8%</td>
<td>1.3%</td>
<td>2.2%</td>
<td>-0.8%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.4%</td>
<td>0.4%</td>
<td>-0.5%</td>
<td>-0.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>-0.1%</td>
<td>0.6%</td>
<td>-1.3%</td>
<td>-2.2%</td>
<td>-2.8%</td>
<td>-1.4%</td>
</tr>
</tbody>
</table>
Chicago Fed Nat'l Activity Index Lower in August 
by <a href="/comment/Moeller.html">Tom Moeller</a> September 23, 2004


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040923d.jpg" width="353">
The Chicago Fed National Activity Index (CFNAI) fell last month to 0.19 following a sharp improvement in July.
The three-month moving average of the CFNAI also fell to its lowest level of the year.
A zero value of the CFNAI indicates that the economy is expanding at its historical trend rate of growth.
During the last twenty years there has been a 74% correlation between the level of the CFNAI and q/q growth in real GDP.
The CFNAI is a weighted average of 85 indicators of economic activity. The indicators reflect activity in the following categories: production and income, the labor market, personal consumption and housing, manufacturing and trade sales, and inventories &amp; orders.
A recent speech by Fed Governor Edward M. Gramlich titled &quot;Oil Shocks and Monetary Policy&quot; is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2004/20040916/default.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S503/@S503.HTM"> Chicago Fed</a></th>
<th scope="col">Aug</th>
<th scope="col">July</th>
<th scope="col">Aug &#39;03</th>
<th scope="col"> 2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">CFNAI</td>
<td>0.19</td>
<td>0.53</td>
<td>-0.44</td>
<td>-0.11</td>
<td>-0.40</td>
<td>-1.19</td>
</tr>
</tbody>
</table>
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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/040922c.jpg" width="353">
South Africa experienced its largest current account deficit ever and its first trade deficit in 22 years in the second quarter. Data reported today by the Reserve Bank of South Africa show the current account deficit at 49.3 billion Rand, equal to 3.8% of GDP. The trade accounts had a deficit of 5.5 billion Rand, the first since the second quarter of 1982. Gold is, of course, a major element in South Africa&#39;s exports, and the trade deficit excluding gold was 38.1 billion Rand. Trade deficits on this basis are frequent, but this was still the largest of those by far, compared with the previous record 25.0 billion Rand in Q4 1998.
South Africa also generally runs deficits in the services and income accounts, so such deficits in Q2 are not surprising. Transfers, however, were much more negative than normal as well, adding notably to the total current account shortfall.
The negative trade performance was not the fault of exports. These grew 8.1% in Q2, and those excluding gold were stronger still, with a 9.5% gain. But imports surged 18.6%. Commentary from the Reserve Bank of South Africa indicates that petroleum was the main culprit. The South African navy also acquired a new ship, an individual transaction large enough to impact the nation&#39;s overall trade picture, at least for this quarter.
At the same time, the accompanying capital flow data show that such a large current account was more than covered by portfolio and &quot;other&quot; net investment flows. Moreover, the trade deficit didn&#39;t seem to impart much harm to South Africa GDP. It grew 3.9% (annual rate) in Q2, faster than the 3.1% in Q1. A large component of that growth came in inventory; private consumption and capital investment also expanded. So this one-quarter plunge in the current account balance doesn&#39;t appear to suggest any fundamental deterioration in South Africa&#39;s general economic health. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Seasonally Adjusted Annual Rates -- Billions.Rand</th>
<th scope="col">Q2 2004</th>
<th scope="col">Q1 2004</th>
<th scope="col">Q4 2003</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Current Account Balance </td>
<td>-49.3</td>
<td>-14.4</td>
<td>-22.1</td>
<td>-10.1</td>
<td>+6.7</td>
<td>+0.3</td>
</tr>
<tr>
<td class="firstcol">&nbsp; % of GDP</td>
<td>-3.8</td>
<td>-1.1</td>
<td>-1.8</td>
<td>-0.8</td>
<td>+0.6</td>
<td>+0.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Exports -- % Chg</td>
<td>9.5</td>
<td>5.1</td>
<td>-5.4</td>
<td>-10.6</td>
<td>21.8</td>
<td>21.1</td>
</tr>
<tr>
<td class="firstcol">Imports -- % Chg</td>
<td>18.6</td>
<td>1.3</td>
<td>2.0</td>
<td>-6.4</td>
<td>26.9</td>
<td>16.8</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance on Goods</td>
<td>-5.5</td>
<td>+21.0</td>
<td>+14.3</td>
<td>+28.6</td>
<td>+48.9</td>
<td>+43.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; ex Net Gold Exports</td>
<td>-38.1</td>
<td>-12.5</td>
<td>-21.6</td>
<td>+6.7</td>
<td>+5.8</td>
<td>+14.0</td>
</tr>
</tbody>
</table>
</body>
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South Africa experienced its largest current account deficit ever and its first trade deficit in 22 years in the second quarter. Data reported today by the Reserve Bank of South Africa show the current account deficit at 49.3 billion [...]

South Africa Current Account Has Record Deficit in Q2

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040922a.jpg" width="353">
The index of mortgage applications compiled by the Mortgage Bankers Association rose 1.8% last week. So far in September mortgage applications are 5.9% ahead of August.
Last week&#39;s rise in applications was spurred by another sharp gain in applications to refinance which rose 4.1% and for September are 9.8% ahead of August.
The effective interest rate on a conventional 30-year mortgage ticked down to 5.92% from 5.95% the prior week and from 6.04% averaged in August. In May, 30-year financing averaged 6.53%. The effective rate on a 15-year mortgage fell to 5.35%, down from 5.97% averaged in May.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040922b.jpg" width="353">
Purchase applications ticked up 0.2% after a 4.3% decline the prior week. Purchase applications in September are 3.2% higher than in August. During the last ten years there has been a 60% correlation between the y/y change in purchase applications and the change in new plus existing home sales.
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>.

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</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/SURVEYW/@S5/@S5.HTM"> MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">09/17/04</th>
<th scope="col">09/10/04</th>
<th scope="col"> Y/Y</th>
<th scope="col"> 2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>690.7</td>
<td>678.2</td>
<td>-1.3%</td>
<td>1,067.9</td>
<td>799.7</td>
<td>625.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>456.6</td>
<td>455.7</td>
<td>13.6%</td>
<td>395.1</td>
<td>354.7</td>
<td>304.9</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>2,052.5</td>
<td>1,972.5</td>
<td>-15.5%</td>
<td>4,981.8</td>
<td>3,388.0</td>
<td>2,491.0</td>
</tr>
</tbody>
</table>
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The index of mortgage applications compiled by the Mortgage Bankers Association rose 1.8% last week. So far in September mortgage applications are 5.9% ahead of August. Last week's rise in applications was spurred by another sharp [...]

Lower Rates Spur Mortgage Refinancing

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040921g.jpg" width="353">
The Federal Open Market Committee raised the target rate for federal funds by 25 basis points to 1.75%, as expected. The discount rate also was raised 25 basis points to 2.75%.
The decision was unanimous.
Today&#39;s press release from the Fed again contained comments suggesting that rates could be raised again. &quot;The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity.&quot; These comments are identical to the Fed&#39;s last.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040921f.jpg" width="353">
The Fed&#39;s statement noted that the economy &quot;appears to have regained some traction&quot; after moderating in reaction to higher energy prices.
For the complete text of the Fed&#39;s latest press release please click <a href="http://www.federalreserve.gov/boarddocs/press/monetary/2004/20040921/default.htm">here</a>.
Today&#39;s action by the FOMC seems more to address market inflationary expectations rather than economic growth or inflation directly. As the accompanying chart indicates, price inflation during the last twenty years has not been very responsive to whether the US economy was operating above or below its potential.
The role of money in determining inflation is discussed <a href="http://www.rich.frb.org/pubs/economic_quarterly/pdfs/summer2004/hetzel.pdf"> here</a> by the Federal Reserve Bank of Richmond in a report titled &quot;How Do Central Banks Control Inflation?.&quot;
&quot;1994&quot;, a commentary on past FOMC action from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/publications/net/20040701/cover.pdf"> here.</a>

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The Federal Open Market Committee raised the target rate for federal funds by 25 basis points to 1.75%, as expected. The discount rate also was raised 25 basis points to 2.75%. The decision was unanimous. Today's press release from [...]

FOMC Raised Funds Rate for Third Time

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

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

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

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

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

US economy expected to outperform other major economies in 2025

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

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

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

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

Policy uncertainty has surged since the US national elections.

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

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

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

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

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

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

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Andrew Cates

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

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

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

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

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

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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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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: September 2004

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