Tom Moeller

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The Federal Open Market Committee voted unanimously at
today's meeting to increase the federal funds rate target by 25 basis points to
a range between 2.25% and 2.50%. It was the ninth increase since December 2015.
The action was expected in the Action Economics Forecast Survey.

Most FOMC members indicated an
inclination to raise interest rates in the future. The Fed also indicated that
global economic &amp; financial developments will be monitored closely, while
assessing their implications for the economic outlook, a reference it previously did not make.

As indicated at the last meeting, the FOMC noted &quot;that
the labor market has continued to strengthen and that economic activity has been
rising at a strong rate. Meanwhile, &quot;overall inflation and inflation less food &amp; energy remain near 2
percent. Indicators of longer-term inflation expectations are little changed, on balance.&quot;

Consumer price inflation, both overall and excluding food
&amp; energy, continued to be seen at 2% through 2021. Longer-term inflation
expectations were seen as steady.

The Fed indicated that &quot;risks to the economic outlook
are roughly balanced.&quot;

Updated economic projections were offered at this meeting.
Projections included real GDP growth of 3.0% this year, revised from 3.1%, 2.3%
in 2019, revised from 2.5% and unrevised expectations of 2.0% in 2020 and 1.8%
in 2021. The expected core PCE inflation rate was 1.9% this year and 2.0%
thereafter, revised from 2.1%. The civilian unemployment was seen at 3.7% this
year, followed by 3.5% in 2019, 3.6% in 2020 and 3.8% in 2021, revised from 3.7%.

The press release for today's FOMC meeting can be
found <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20181219a.htm">here</a>.

The Action Economics Forecast Survey can be found in the AS1REPNA
database. Haver's SURVEYS database contains the economic projections from the FOMC.

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	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" ></th>
 <th scope="col" >Current</th>
 <th scope="col" >Last</th>
 <th scope="col" >2018</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd">
 <td class="firstcol" >Federal Funds Rate Target</td>
 <td >2.25% - 2.50%</td>
 <td >2.00% - 2.25%</td>
 <td >1.82%</td>
 <td >1.00%</td>
 <td >0.40%</td>
 <td >0.13%</td>
 </tr>
 </tbody>
 </table>
 
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The Federal Open Market Committee voted unanimously at today's meeting to increase the federal funds rate target by 25 basis points to a range between 2.25% and 2.50%. It was the ninth increase since December 2015. The action was [...]

FOMC Hikes Interest Rates

Robert Brusca

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Japan's trade trends continue to sour with a widening deficit, weakening exports and strong imports. Year-on-year goods exports are only technically rising with a ‘gain' of 0.2% over 12 months, hardly more than zero. Imports of goods, however, are up by 13.4% over 12 months. These trends, of course, are expanding Japan's trade deficit again.

This is mainly an issue of fading global growth and strong commodity prices as changes in competitiveness and in exchange rates have been small. The yen vs. the dollar has fallen by 0.5% over 12 months, a negligible change in value. The broad yen (the yen's value assessed and trade weighted vs. a large basket of currencies) has risen by 1.5%, also a negligible change over 12 months.

Japan's exports are stuck because global demand is weak and weakening. Japan's two main markets are the United States and China. China is slowing and being affected by the U.S.-China trade war even though that ‘war' has been put on hold. The U.S. is growing better than China (at least relative to its trend), but the U.S. has also showed signs of slowing down.

Not only have overall Japan trade flows become skewed, but Japan's imports of motor vehicles have sped up and its exports of motor vehicles have slowed and are declining. This is a new trend since over the previous 12 months Japan's exports of vehicles showed expansion but its imports are now at high growth rates for two years running.

Prices and volumes 
Underlying these nominal trade flows are some interesting trends in prices and trade volumes. Over the past year, Japan's export prices are up by 0.5% while export volumes are off by 0.3%. On the face of it, that looks like weak demand. Demand is weak in volume terms and so weak that substantial price gains are not sustainable. It contrasts sharply with imports where prices are up by 9.4% over 12 months and import volumes are up by 3.7%. And we know that demand in Japan has not picked up substantially on this period. But energy prices have been high and only recently have begun to weaken. Japan's trade picture should improve as weaker prices for energy imports filter through the trade process.

U.S. rate hike and beyond 
Japan like other countries has ‘skin in the game' over the U.S. monetary policy decision today. If the Fed does go ahead with a rate hike, there could be several effects in train as a result. Higher rates will act (moderately) to slow growth; they could help to push the dollar to a stronger level and that could reduce commodity prices that in turn could bring pressure to bear on developing economies that depend on the export of commodities to earn foreign exchange. So a rate hike from the Fed could work its way through various sources and have a chilling impact on global growth. Add to that any fallout from trade wars or from the Brexit process which is looking clearly like a case of the best laid plans and attention gone to pot.

Global trends 
Global growth is being challenged in many ways. The U.S. is stirring the pot trying to create better opportunities for itself rather than to allow old Post-War relationships to govern trade relations some 60 to 70 years on. Preferences that the U.S. accorded to trade partners in the Post-War period are no longer suitable to the economics of the day. Germany gets preferences, and has a security blanket thrown over it at mostly a cost to the U.S. tax payer. Meanwhile, the U.S. runs large fiscal deficits and has a structural current account deficit while Germany has a fiscal surplus and the highest ratio of current account surplus to GDP among major trading nations. Clearly, circumstances have evolved that are out of step with the times.

Post Post-War geopolitics 
Japan is feeling pressure from Russia that is taking a page out of ‘The Book of China' and is beefing up bases on islands that are claimed by both Russia and Japan. Japan sees threats around it from a more aggressive China as well as Russia and is planning to beef up its air force. In the Post-War period, both Japan and Germany benefited from a protective stance of the U.S. that freed their resources to be wholly devoted to the economy recovery and growth. The need for those special arrangements has passed, but there is no consensus over what happens next. As a result, geopolitical alliances are in flux. And these sorts of fundamental relationship shifts have also important economic consequences. I find it odd that the U.K. continues to provide military support to Europe despite the EU's stonewalling behavior and less than generous offer to the U.K. over Brexit.

The path ahead 
The U.S. and China are planning more trade talks early next year. The U.S. and the EU have talks percolating that we do not hear much about. There are still ways in which trade conflicts can be resolved or can pop up to become a second wave of problems that global growth will have to deal with again. A second wave would probably be more than global growth could bear up under. Trade policy remains something to watch very closely and to be kept right there on the front burner where it can be monitored.


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Japan's trade trends continue to sour with a widening deficit, weakening exports and strong imports. Year-on-year goods exports are only technically rising with a ‘gain' of 0.2% over 12 months, hardly more than zero. Imports of goods, [...]

Japan's Trade Trends Sour

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The National Association of Realtors reported that sales of
existing homes in November rose 1.9% to 5.320 million units (SAAR). The 7.0% y/y
decline was, however, the largest since May 2011. The latest increase followed
an unrevised 1.4% gain during October. The Action Economics Forecast Survey
expected sales of 5.20 million units.

The median price of all existing homes sold improved 1.0%
(4.2% y/y) last month to $257,700 following four straight months of decline.
Prices hit a record $273,800 in June but are 4.2% higher during the last twelve
months. The average sales price improved 1.1% (5.0% y/y) to $260,500.

The rise in November home sales spread through most of
the country. Sales in the Northeast strengthened 7.2% (-2.6% y/y) to 740,000
units, the highest level since December. Sales in the Midwest gained 5.5% (-4.3%
y/y) to 1.34 million units, the highest level in twelve months. In the South,
sales improved 2.3% (-5.6% y/y) to 2.22 million units. Wildfires may be
responsible for the 6.3% decline in sales in the West (-15.4% y/y) to 1.04
million units. Sales were 18.1% below the recent peak during February of this year.

Sales of existing single-family homes also rose 1.9% (-6.7%
y/y) to 4.71 million units. Sales sof condos and co-ops improved 1.7% (-9.0%
y/y) to 610,000 units, the highest level in five months.

The number of homes on the market fell for the fifth
consecutive month, but remained up 4.2% y/y. The months' supply of homes on the
market declined to 3.9, the least since March.

The data on existing home sales, prices and affordability are
compiled by the National Association of Realtors and can be found in Haver's USECON
database. The regional price, affordability and inventory data are available in
the REALTOR database. The expectations figure is from the Action
Economics Forecast Survey, reported in the AS1REPNA database.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >Existing Home Sales (SAAR,
 000s)</th>
 <th scope="col" >Nov</th>
 <th scope="col" >Oct</th>
 <th scope="col" >Sep</th>
 <th scope="col" >Y/Y %</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Total</td>
 <td >5,320</td>
 <td >5,220</td>
 <td >5,150</td>
 <td >-7.0</td>
 <td >5,536</td>
 <td >5,441</td>
 <td >5,228</td>
 </tr>
 <tr class="even">
 <td class="firstcol" >&nbsp;&nbsp; Northeast</td>
 <td >740</td>
 <td >690</td>
 <td >680</td>
 <td >-2.6</td>
 <td >737</td>
 <td >735</td>
 <td >684</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp; Midwest</td>
 <td >1,340</td>
 <td >1,270</td>
 <td >1,280</td>
 <td >-4.3</td>
 <td >1,304</td>
 <td >1,298</td>
 <td >1,231</td>
 </tr>
 <tr class="even">
 <td class="firstcol" >&nbsp;&nbsp; South</td>
 <td >2,200</td>
 <td >2,150</td>
 <td >2,110</td>
 <td >-5.6</td>
 <td >2,270</td>
 <td >2,217</td>
 <td >2,147</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp; West</td>
 <td >1,040</td>
 <td >1,110</td>
 <td >1,080</td>
 <td >-15.4</td>
 <td >1,225</td>
 <td >1,192</td>
 <td >1,167</td>
 </tr>
 <tr class="even">
 <td class="firstcol" >Single-Family</td>
 <td >4,710</td>
 <td >4,620</td>
 <td >4,580</td>
 <td >-6.7</td>
 <td >4,910</td>
 <td >4,825</td>
 <td >4,623</td>
 </tr>
 <tr>
 <td class="firstcol" >Median Price Total ($, NSA)</td>
 <td >257,700</td>
 <td >255,100</td>
 <td >256,900</td>
 <td >4.2</td>
 <td >245,950</td>
 <td >232,067</td>
 <td >219,867</td>
 </tr>
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The National Association of Realtors reported that sales of existing homes in November rose 1.9% to 5.320 million units (SAAR). The 7.0% y/y decline was, however, the largest since May 2011. The latest increase followed an unrevised [...]

U.S. Existing Home Sales Increase

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The U.S. current account deficit widened to $124.8 billion
during Q3'18 from $101.2 billion in Q2. It was the largest quarterly deficit since
Q4'08 and compared to $123.4 billion expected in the Action Economics Forecast
Survey. As a percent of GDP, the deficit deepened to 2.4% from 2.0% in Q2.

The larger deficit last quarter was due to a record $227.0
billion shortfall on goods trade. Goods exports declined 1.8% (+8.8% y/y), while
goods imports increased 2.6% (11.0% y/y). It was the first quarterly decline in goods
exports since Q4'16.

The surplus on services trade held fairly steady at a record
$68.4 billion. Services exports rose 0.9% after a slight decline. Telecommunications, computer
&amp; information services exports gained 1.7% (0.7% y/y) after a 2.6%
shortfall. Exports of intellectual property rights rebounded 1.9% (2.3% y/y) after
declining 3.5% while travel exports improved a steady 0.3% (1.6% y/y). Services imports
gained 1.4%, following two quarters of decline. Charges for intellectual property rebounded 1.8% (1.1% y/y)
after a 6.3% decline and travel imports increased 1.5% (6.9% y/y).
Telecommunications, computer &amp; information services imports rose 0.4% (-1.9%
y/y) following two consecutive quarters of decline.

The surplus on primary income narrowed to $59.4 billion, off
modestly versus the record high reached in Q4'17. The deficit on secondary income
narrowed significantly to $25.6 billion and was the smallest since Q2'15.

From the capital account, the balance on foreign direct
investment improved to a surplus of $76.8 billion following two quarters of
deficit, which were unprecedented. Surpluses have been the norm.

Balance of Payments data are in Haver's USINT
database, with summaries available in USECON. The expectations figure is
in the AS1REPNA database.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >US Balance of Payments
 SA</th>
 <th scope="col" >Q3'18</th>
 <th scope="col" >Q2'18</th>
 <th scope="col" >Q1'18</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Current Account Balance ($ Billion)</td>
 <td >-124.8</td>
 <td >-101.2</td>
 <td >-121.7</td>
 <td >-449.1</td>
 <td >-432.9</td>
 <td >-409.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Deficit % of GDP</td>
 <td >-2.4</td>
 <td >-2.0</td>
 <td >-2.4</td>
 <td >-2.3</td>
 <td >-2.3</td>
 <td >-2.2</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Balance on Goods ($ Billion)</td>
 <td >-227.0</td>
 <td >-203.1</td>
 <td >-220.8</td>
 <td >-807.5</td>
 <td >-751.1</td>
 <td >-761.9</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Exports</td>
 <td >-1.8%</td>
 <td >4.4%</td>
 <td >2.4%</td>
 <td >6.6%</td>
 <td >-3.6%</td>
 <td >-7.6%</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Imports</td>
 <td >2.6%</td>
 <td >0.0%</td>
 <td >2.9%</td>
 <td >6.9%</td>
 <td >-2.9%</td>
 <td >-4.7%</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Balance on Services ($ Billion)</td>
 <td >68.4</td>
 <td >68.5</td>
 <td >66.8</td>
 <td >255.2</td>
 <td >249.1</td>
 <td >263.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Exports</td>
 <td >0.9%</td>
 <td >-0.1%</td>
 <td >1.0%</td>
 <td >5.1%</td>
 <td >0.5%</td>
 <td >1.9%</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Imports</td>
 <td >1.4%</td>
 <td >-1.3%</td>
 <td >-0.2%</td>
 <td >6.4%</td>
 <td >3.6%</td>
 <td >2.3%</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Balance on Primary Income ($
 Billion)</td>
 <td >59.4</td>
 <td >62.3</td>
 <td >61.2</td>
 <td >221.7</td>
 <td >193.0</td>
 <td >203.6</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Balance on Secondary Income ($
 Billion)</td>
 <td >-25.6</td>
 <td >-29.0</td>
 <td >-28.9</td>
 <td >-118.6</td>
 <td >-123.9</td>
 <td >-112.8</td>
 </tr>
 </tbody>
 </table>
 
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The U.S. current account deficit widened to $124.8 billion during Q3'18 from $101.2 billion in Q2. It was the largest quarterly deficit since Q4'08 and compared to $123.4 billion expected in the Action Economics Forecast Survey. As a [...]

U.S. Current Account Deficit Deepens

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	 Should We Worry? No...But Do Pay Attention
 
 
 
 

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The widely watched German IFO gauge weakened noticeably in December. Most IFO readings deteriorated. The exceptions are easier to denote than listing the ones that obeyed the rule. Construction overall and current conditions were flat or higher in December. And all three wholesaling metrics improved. Everything else crashed and burned in December.

Business climate- still overcast 
The climate assessment is varied in December. While the rank standings on the longer timeline are mostly very firm-to-strong. There is an exception and that comes from overall expectations. The current business situation has a stunning 93rd percentile standing on the long timeline, but expectations have a disturbing 38th percentile standing on that same timeline. Switching gears to the shorter timeline since January 2014, we find that the all-sector assessment for climate falls to its 55th percentile from 84.8%. Manufacturing has a 38th percentile standing and retailing has a 28th percentile standing; both of these are unnerving. Wholesaling, with a 46.7 percentile standing, is below its median (for this period). Only construction is strong on the short timeline with a 93.3 percentile standing. Expectations on the short timeline are exceptionally low.

Outlook is shaky; divided: expectations 
Despite the improvement in wholesaling, the sector joins retailing, and manufacturing with a negative expectations reading. Only construction has a positive sector expectation reading; even so, the construction metric deteriorated in December. The queue standings or rank standing metrics for expectations show weak readings for everything except construction. On the full period (to December 1991), the all-sector ranking is in its 38th percentile. But evaluated vs. readings back to January 2014, the all-sector standing is in its 6.7 percentile, weaker less 7% of the time! To put this in context, the chart shows that the climate readings have mostly been rising during this shorter period; thus, making it a tougher standard for comparison. In particular, there are no low 'lows' since there is no recession since 2014.

Here we want to make both points. (1) That sector indexes are quite weak by the standards we have been used to since 2014- about the last five years and the period for which readily available PMI data from Markit can be assessed. However, on a broader timeline (back to December 1991), the readings are still modest but not nearly as worrisome- at least in most cases. The full period 38.5 percentile standing for all sectors is below its median (of 50) by quite a large mark. Manufacturing has a 30th percentile standing, also quite weak. But wholesaling, despite absolute weak diffusion readings, is still above its long-term median at a standing of 51.1%. And retailing, while below its median standing at its 47.3 percentile, is close to its median- putting it close to 'normal.' Still, most of this is not really good only the construction sector to have been good and stable, resisting for the most part weakness elsewhere in the shorter period. In the short period, all expectations ranking except for construction are below their 10th percentile.

Current conditions are 'firm' 
Current conditions show a differing dilemma with still quite strong and solid rank standings on the long period and much more modest conditions when compared to the environment since January 2014- modest but firm. Construction is still strong regardless of the timeline. But on the shorter timeline, sectors are all evaluated with standings somewhere in their respective 60th percentile decile (60% to 69.9%). And this is a moderate reading that is 10 to 20 percentile points above its median in terms of the standing, but not as solid as readings in the 70th percentile decile or as strong as readings in the 80th or 90th deciles. But it is not a threatening reading and is at some low point on the Goldilocks scale. Retailing and manufacturing, two very key sectors, have the weakest current standings (61.7%, both) but are still moderate.

RELAX!! 
The German data and EMU data have been weakening and they are only very weak by recent standards. There has been a substantial revival in the works and analysis must allow for growth to ebb and flow. Getting overly excited about every deceleration in growth and enamored of each acceleration is not a good idea. At some point, growth comes back to average because that's what 'average' is (the fancy term is 'mean reversion'). The two columns in red on the far right in the IFO table are meant to underscore just that. The mean since 2014 is one set of numbers for these indicators while the mean since 1991 is another set of numbers. And since these are based on diffusion metrics, there is no sense that there has been any shift in the underlying trends. Diffusion simply tells the proportion of respondents where activity is expanding vs. contracting (or expected to). The percentile standings I calculate simple resolve those data into rankings to make sense of them and to allow various diffusion readings to be compared.


Various IFO metrics – nearly all show backtracking 

<img border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/181218.png" width="660" height="620">


There is a German deceleration in place. And there are many risk factors in the outlook as we have enumerated in recent reports. Risk is in the air. So is slowdown. But it is because of market reactions falling stocks and a flattening U.S. yield curve that this 'slowdown' is accompanied also with concern. And there is the uncertainty of policy, especially on trade. I am not arguing to make the theme song 'Don't worry, be happy' just to put the risk and the evaluation of conditions in their proper perspective. I hope the rankings above help you to do just that.

In the U.S., the Fed is still data-dependent. Is the Fed prepared to do that? Is it prepared to put risks in their proper perspectives or is it on auto pilot?




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The widely watched German IFO gauge weakened noticeably in December. Most IFO readings deteriorated. The exceptions are easier to denote than listing the ones that obeyed the rule. Construction overall and current conditions were flat [...]

German IFO Gauge Is Weaker Than Expected in December

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Gasoline prices fell to an average $2.37 per gallon (-3.3%
y/y) from $2.42 last week. Prices have fallen from an average high of $2.90
early last month to currently the lowest level since August 2017. Haver
Analytics constructs factors to adjust for the marked seasonal variation in
prices. The seasonally-adjusted gasoline price fell three cents last week to $2.50 per gallon.

West Texas Intermediate crude oil prices eased to an
average of $51.53 per barrel (-9.9% y/y) after rising to $52.67 in the prior
week. Prices have declined steadily since the peak of $75.11 in early-October.
Yesterday, prices declined to $49.88 per barrel. Brent crude oil prices fell
last week to an average $60.34 per barrel (-1.5% y/y) from $61.47 during the
prior week. Yesterday, prices were $59.02 per barrel.

Natural gas prices fell last week at an average $4.33/mmbtu
(+56.3% y/y). Prices were up from a low of $2.52 last February. The price was $3.80 yesterday.

During the latest four weeks, gasoline demand held
steady y/y; total petroleum product demand rose 5.5% y/y. Gasoline
inventories increased 0.8% y/y, but inventories of all petroleum products
eased 1.1% y/y. Crude oil input to refineries rose 2.0% y/y in the last four weeks.

These data are reported by the U.S. Department of Energy. The
price data can be found in Haver's WEEKLY and DAILY databases.
Greater detail on prices, as well as the demand, production and inventory data,
along with regional breakdowns, are in OILWKLY.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >Weekly Energy Prices</th>
 <th scope="col" >12/17/18</th>
 <th scope="col" >12/10/18</th>
 <th scope="col" >12/03/18</th>
 <th scope="col" >Y/Y %</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd">
 <td class="firstcol" >Retail Gasoline ($ per Gallon Regular,
 Monday Price)</td>
 <td >2.37</td>
 <td >2.42</td>
 <td >2.45</td>
 <td >-3.3</td>
 <td >2.47</td>
 <td >2.31</td>
 <td >2.03</td>
 </tr>
 <tr>
 <td class="firstcol" >Light Sweet Crude Oil, WTI ($ per bbl,
 Previous Week's Average)</td>
 <td >51.53</td>
 <td >52.67</td>
 <td >51.09</td>
 <td >-9.9</td>
 <td >50.87</td>
 <td >43.22</td>
 <td >48.90</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Natural Gas ($/mmbtu, LA, Previous
 Week's Average)</td>
 <td >4.33</td>
 <td >4.49</td>
 <td >4.43</td>
 <td >56.3</td>
 <td >2.96</td>
 <td >2.49</td>
 <td >2.62</td>
 </tr>
 </tbody>
 </table>
 
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Gasoline prices fell to an average $2.37 per gallon (-3.3% y/y) from $2.42 last week. Prices have fallen from an average high of $2.90 early last month to currently the lowest level since August 2017. Haver Analytics constructs [...]

U.S. Energy Product Prices Ease

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Total housing starts rose 3.2% (-3.6% y/y) during November to
1.256 million (AR) from 1.217 million in October, revised from 1.228 million.
The level exceeded expectations for 1.230 million starts in the Action Economics Forecast Survey.

A 22.4% rise (21.7% y/y) in starts of multi-family units to
432,000 accounted for last month's gain in the total. It followed a 1.4%
decline. Starts of single-family units fell 4.6% (-13.1% y/y) to 824,000, down
for the third straight month.

Last month's increase in total starts reflected a roughly
one-third improvement, both m/m and y/y, in the Northeast to 124,000 units from
90,000. Starts in the South rose 15.1% (1.3% y/y) to 687,000, an 11-year high.
Countering these increases was a 19.2% decline (-12.4% y/y) in the Midwest to
156,000, which more-than-reversed the rise during October. Housing starts in the
West fell 14.2% (-18.4% y/y) to 289,000, the lowest level since July.

Building permits increased 5.0% (0.4% y/y) to 1.328 million
after a 0.4% slip. Single-family permits edged 0.1% higher (-1.9% y/y) to 848,000
following a 0.8% decline. Permits to build multi-family homes jumped 14.8% (4.6%
y/y) to 480,000 after a 0.5% rise.

The housing starts and permits figures can be found in
Haver's USECON database. The expectations figure is contained in the AS1REPNA database.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >Housing Starts (000s, SAAR)</th>
 <th scope="col" >Nov</th>
 <th scope="col" >Oct</th>
 <th scope="col" >Sep</th>
 <th scope="col" >Nov Y/Y %</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Total</td>
 <td >1,256</td>
 <td >1,217</td>
 <td >1,237</td>
 <td >-3.6</td>
 <td >1,208</td>
 <td >1,177</td>
 <td >1,107</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Single-Family</td>
 <td >824</td>
 <td >864</td>
 <td >879</td>
 <td >-13.1</td>
 <td >852</td>
 <td >785</td>
 <td >713</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Multi-Family&nbsp;</td>
 <td >432</td>
 <td >353</td>
 <td >358</td>
 <td >21.7</td>
 <td >356</td>
 <td >393</td>
 <td >394</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" colSpan="8" >Starts By Region</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Northeast</td>
 <td >124</td>
 <td >90</td>
 <td >141</td>
 <td >33.3</td>
 <td >111</td>
 <td >116</td>
 <td >135</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Midwest</td>
 <td >156</td>
 <td >193</td>
 <td >171</td>
 <td >-12.4</td>
 <td >180</td>
 <td >185</td>
 <td >150</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;South</td>
 <td >687</td>
 <td >597</td>
 <td >568</td>
 <td >1.3</td>
 <td >603</td>
 <td >585</td>
 <td >557</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;West</td>
 <td >289</td>
 <td >337</td>
 <td >357</td>
 <td >-18.4</td>
 <td >314</td>
 <td >292</td>
 <td >265</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Building Permits</td>
 <td >1,328</td>
 <td >1,265</td>
 <td >1,270</td>
 <td >0.4</td>
 <td >1,286</td>
 <td >1,206</td>
 <td >1,178</td>
</tr>
 </tbody>
 </table>
 
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Total housing starts rose 3.2% (-3.6% y/y) during November to 1.256 million (AR) from 1.217 million in October, revised from 1.228 million. The level exceeded expectations for 1.230 million starts in the Action Economics Forecast [...]

U.S. Housing Starts and Building Permits Recover

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The Composite Housing Market Index from the National
Association of Home Builders-Wells Fargo declined to 56 during December, its
lowest level since May 2015. The figure compared to the expansion high of 74 in
December of last year. For the year as a whole the index eased moderately.
Expectations for December had been for an index level of 60 in the Informa
Global Markets Survey. The NAHB figures are seasonally adjusted. During the last
ten years, there has been a 53% correlation between the y/y change in the home
builders index and the y/y change in new home sales.

The index of present sales conditions fell to 61 in December
from 67 during November. It remained down from its peak of 80 last December. The
index of expected conditions in the next six months weakened to 61 this month,
also a twelve-month low. The recent peak in this index was 80 in February.

The index of traffic of prospective buyers eased to 43, the
lowest level in just over three years. The index peaked at 58 in December last year.

Deterioration in the overall index reflected weakness
throughout the country. The index for the Northeast plummeted to 37 from 61 just
two months ago. The index for the Midwest declined to 52, the lowest level since
May 2015. For the South, the index fell to 61 and closed in on a two-year low.
The index for the West held steady m/m at 65 but also was well below the high
reached twelve months ago.

The NAHB has compiled the Housing Market Index since 1985. It
reflects survey questions asking builders to rate market conditions as
&quot;good,&quot; &quot;fair,&quot; &quot;poor&quot; or &quot;very high&quot; to
&quot;very low.&quot; The figure is thus a diffusion index with numerical
results six over 50 indicating a predominance of &quot;good&quot; readings. The
weights assigned to the individual index components are 0.5920 for single-family
detached sales, present time, 0.1358 for single-family detached sales, next
months and 0.2722 for traffic of prospective buyers. The results are included in
Haver's SURVEYS database. The expectations figure is available in Haver's
MMSAMER database.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >National Association of Home
 Builders</th>
 <th scope="col" >Dec</th>
 <th scope="col" >Nov</th>
 <th scope="col" >Oct</th>
 <th scope="col" >Dec '17</th>
 <th scope="col" >2018</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Composite Housing Market Index, SA (All
 Good=100)</td>
 <td >56</td>
 <td >60</td>
 <td >68</td>
 <td >74</td>
 <td >67</td>
 <td >68</td>
 <td >61</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Single-Family Sales: Present</td>
 <td >61</td>
 <td >67</td>
 <td >74</td>
 <td >80</td>
 <td >73</td>
 <td >74</td>
 <td >67</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Single-Family Sales: Next Six
 Months</td>
 <td >61</td>
 <td >65</td>
 <td >75</td>
 <td >79</td>
 <td >74</td>
 <td >76</td>
 <td >67</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Traffic of Prospective Buyers</td>
 <td >43</td>
 <td >45</td>
 <td >53</td>
 <td >58</td>
 <td >50</td>
 <td >50</td>
 <td >45</td>
 </tr>
 </tbody>
 </table>
 
</body></html>

The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo declined to 56 during December, its lowest level since May 2015. The figure compared to the expansion high of 74 in December of last year. [...]

U.S. Home Builder Index Weakens Considerably

Even with expected tariff-induced increases in inflation, BCFF forecasters look for a more aggressive round of monetary easing

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

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Nonfarm labor productivity fell 0.8% (SAAR) during Q1’25 after increasing 1.7% in Q4’24, revised from 1.5%. A 0.6% decline had been expected in the Action Economics Forecast Survey. It was the first productivity decline since Q2’22. The y/y increase during Q1 fell to 1.4% from 2.1% in Q4. It was below a 3.3% high in the first quarter of last year. Productivity fell as real value-added output dropped 0.3% last quarter (+2.2% y/y) after increasing 2.5% in Q4, and hours worked lengthened 0.6% (0.8% y/y) following a 0.8% gain.

Compensation per hour increased 4.8% last quarter following a 3.7% Q4 rise. Despite the strength of these last two increases, y/y growth decelerated to 2.7% from a 6.8% high one year earlier. Nevertheless, the productivity decline raised unit labor costs by 5.7% (1.3% y/y) in Q1 versus expectations for a 5.2% increase. It followed a 2.0% gain during Q4 and was the strongest quarterly increase in a year.

Factory sector productivity surged 4.5% (1.5% y/y) during Q1’25 following three consecutive increases of roughly 0.5%. This strength was accompanied by a 6.2% rise (2.2% y/y) in hourly compensation which came after two consecutive increases of approximately 4.1%. The strength in productivity lowered the rise in unit labor costs to 1.6% from 3.8% in Q4. The y/y gain fell to 0.7% from 2.0% in Q4 and stood below the 6.2% y/y increase in Q1’24.

The productivity and labor cost data are available in Haver’s **USECON** database. The Action Economics expectations figures are in the **AS1REPNA** database.

250508P2.jpg

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- Productivity declines with lower output.
- Compensation surge exacerbates labor market stress.
- Factory sector productivity surge lessens cost pressure.

U.S. Productivity Declines in Q1’25; Unit Labor Costs Surge

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The National Association of Realtors' Fixed Rate Mortgage Housing Affordability Index (HAI) rose 0.6% (3.2% y/y) in March to 103.2 after rising 0.9% to 102.6 in February and rising 0.8% in January to 101.7. The level of home affordability has risen 14.8% from its low of 89.9 in October 2023. It remains 42.4% below the high of 179.2 in April 2020.

The rise in affordability in March occurred as the median price of an existing single-family home rose 1.8% (2.9% y/y) to $408,000 which was offset by a decline in mortgage rates to 6.73% from 6.92% in February. The price compared to the record $432,900 in June 2024. The decline in mortgage rates compared to a recent low of 6.26% in September of last year and a 7.70% high during October of 2023. It remained well above a December 2020 low of 2.73%. These changes lowered the principal & interest payment by 0.2% (+1.1% y/y) to $2,113 per month. That was well above the most recent low of $984 in February 2020. Monthly mortgage payments averaged a lessened 24.2% of income during March. They remained up from a low of 14.0% of income in April 2020.

The rise in housing costs in March was accompanied by improvement in median family income. It increased 0.4% (4.4% y/y) to a record $104,705 after rising 0.4% in February and 0.7% in January.

Housing affordability improved m/m across the country in March. The index edged 0.1% higher (2.8% y/y) to 134.5 in the Midwest. It remains the most affordable region of the country. In the South, the index 0.9% (5.4% y/y) to 106.6 and the affordability index in the Northeast increased 2.1% (-2.6% y/y) to 95.7. In the West, where homes are the least affordable, the index rose 0.8% (3.3% y/y) to 71.8 in March.

The Housing Affordability Index (HAI) equals 100 when a median-income borrower qualifies for an 80% mortgage on a median-priced existing single-family home. The HAI had exceeded 100 in each month since July 1990 and reached its all-time high of 213.3 in January 2013; since then, it fell below 100 for the first time in June 2022.

Data on Housing Affordability can be found in Haver’s **REALTOR** database. Median home sales prices are also available in **USECON**. Higher frequency interest rate data are found in **SURVEYS**, **WEEKLY**, and **DAILY**.

250508H0.jpg

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- Home prices rise but mortgage rates decline.
- Median income improves.
- Affordability increases across the country.

U.S. Housing Affordability Improves Slightly in March

Carol Stone, CBE

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Initial claims for unemployment insurance were 228,000 seasonally adjusted in the week ended May 3, down from 241,000 in the previous week, which was unrevised. For the latest week, the Action Economics Forecast Survey had expected a smaller decline to 233,000.

In the week ended April 26, the total number of unemployment insurance beneficiaries – also known as “continuing claims” – was 1.879 million, down from 1.908 million in the April 19 week.

The insured unemployment rate, that is, the number of beneficiaries as a percentage of covered employment, returned to its longstanding rate of 1.2% in the April 26 week; this rate has held that amount since continuously since the week of January 6, 2024, except for the prior week’s 1.3%.

As we do highlight in every week’s discussion, economic conditions vary widely across individual states and territories. In the week ended April 19, the highest unemployment rates were in New Jersey and Rhode Island (both at 2.48%), California (2.26%), Washington (2.14%) and New York (1.85%). The lowest were in Florida (0.36%), South Dakota (0.37%), Alabama (0.41%), Virginia (0.45%) and Nebraska (0.47%). Rates in other notable states include Illinois (1.78%), Pennsylvania (1.53%) and Texas (1.14%). 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 **USECON**. 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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- Continued claims for unemployment insurance decreased 29, 000 in the week ended April 26.
- Insured unemployment rate returns to longstanding 1.2%.
- Across the states, the insured unemployment rate ranges from 0.36% to 2.48%.

U.S. Initial Unemployment Insurance Claims Ease 13,000 in the May 3 Week

Andrew Cates

**The global business cycle** 
The recent sharp decline in the Future Output Balance in the global composite PMI survey reflects a sudden deterioration in global business expectations. The sweeping tariffs, introduced in April 2025, have generated heightened uncertainty around trade policy and sparked fears of retaliatory actions from key trading partners. As a result, businesses worldwide are scaling back their expectations for future output, wary of rising costs, disrupted demand flows, and a broader shift toward protectionism that could undermine global economic momentum.

250507Z1.jpg

Note: The extreme declines in the Future Output Balance that were recorded in the early months of 2020 (at the height of the COVID pandemic) have been removed from this chart.

**Global supply chain pressures**
Still, despite the marked deterioration in global business expectations, this second chart below provides a reassuring counterpoint: as of now, there is little evidence that global supply chain pressures have materially intensified. Both the New York Fed’s Global Supply Chain Pressure Index and the Baltic Exchange Dry Index remain relatively subdued, especially compared to the pandemic-era spikes of 2020–2022. While there has been heightened concern following the April 2025 US tariff announcements, these trade policy shifts have yet to translate into measurable physical disruption in logistics or freight rates. The stability of these indices suggests that although sentiment has taken a hit, global shipping networks and supply flows are, for now, absorbing the shock. However, this calm may prove fragile if the policy environment hardens further or retaliatory trade actions begin to compound the strain.

250507Z2.jpg

**Expectations for central banks’ policy rates** 
Adding to the picture of mounting economic caution, the latest Blue Chip Financial Forecasts survey reveals that expectations for policy easing over the next 12 months have become even more pronounced than in previous months. While earlier surveys had already pointed to a further extension of the global rate-cutting cycle, the latest results suggest forecasters now anticipate a deeper and more aggressive round of monetary easing—most notably from the US Federal Reserve, which is now expected to deliver nearly a full percentage point in rate cuts over the next 12 months. The sharp deterioration in business sentiment is reshaping the macro narrative: central banks are no longer simply guiding inflation lower, but are instead preparing to confront the risk of a deeper, demand-driven slowdown.

250507Z3.jpg

**Energy prices and inflation** 
Adding further context to the growing expectations for policy easing, oil prices have dropped sharply in recent weeks—driven by mounting concerns over global growth, as reflected in weakening business sentiment and softer demand indicators. The chart below provides a longer-run perspective on why this matters: energy prices have historically played a central role in shaping the global inflation trajectory. The strong positive correlation (r = 0.83) between median world energy price inflation and median core consumer price inflation underscores the powerful pass-through effects energy costs can have on broader price dynamics. While core inflation tends to be stickier, this historical relationship makes clear that sustained declines in energy prices often foreshadow broader disinflationary trends.

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**Intangibles versus tangibles** 
Shifting focus from short-term cyclical risks to longer-term structural dynamics, the next chart below underscores a fundamental transformation in the composition of US investment: the economy has increasingly been built on intangibles. Over the past several decades, investment in intangible assets—such as software, intellectual property, R&D, and brand equity—has steadily climbed and, since the mid-2010s, has overtaken investment in both structures and equipment as a share of GDP. This shift reflects the rise of a knowledge-based, innovation-driven economy, but it also introduces new forms of vulnerability. Unlike physical capital, intangible assets rely heavily on trust, reputation, legal protections, and global openness. In this context, escalating trade frictions and a more confrontational US economic stance—as signalled by the recent tariff wave—risk eroding the goodwill and institutional credibility that underpin much of the value created by intangibles. If geopolitical uncertainty undermines the perceived reliability of US intellectual property protections or weakens global collaboration, it could pose a deeper structural challenge to future growth than any immediate cyclical downturn.

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**Investment in Artificial Intelligence**
The centrality of intangibles to the US growth model is nowhere more evident than in the explosion of private investment in artificial intelligence. As this chart illustrates, global AI investment has surged over the past decade—reaching new highs in 2024—and the United States has consistently accounted for the lion’s share of that spending. This reflects not only America’s previous leadership in frontier technologies but also its dependence on intangible capital, from algorithms and data infrastructure to human expertise and institutional trust. However, this dominance also underscores the strategic stakes of current policy choices. In an environment of rising trade tensions and potential fragmentation, the foundations of US leadership in AI—cross-border collaboration, data openness, and global market access—could be at risk.

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Financial market sentiment has rebounded in recent weeks, buoyed by signs of de-escalation in the US-led trade war and growing confidence that central banks—particularly the Federal Reserve—will step in with more rate cuts to cushion any fallout. Yet beneath the surface, a more sobering picture of the global economy persists. For example, latest PMI surveys reveal that global business expectations have slumped to their lowest levels since the pandemic, reflecting widespread unease about the growth outlook (chart 1). While supply chain pressures have so far remained contained, suggesting no repeat of the logistical chaos seen during the pandemic (chart 2), the latest Blue Chip Financial Forecasts survey reveals that forecasters are now pencilling in deeper and more widespread monetary easing than previously anticipated—an acknowledgment that demand is faltering (chart 3). Falling oil prices further reinforce this view: they are both a symptom of weakening global demand and a potential source of disinflation, reducing the urgency for central banks to maintain tight policy (chart 4). At the structural level, the US economy's increasing reliance on intangible assets—ranging from intellectual property to reputation—has made it more vulnerable to geopolitical frictions and the erosion of global trust (chart 5). This risk is compounded by America's dominant role in AI investment, a sector symbolic of both its economic strengths and its exposure to international perceptions (chart 6). The longer-term challenge, then, is not just navigating the current downturn, but ensuring that the institutional goodwill and cross-border openness that support the modern US economy are not sacrificed in a more fragmented and uncertain global order.

Charts of the Week: Relief Rally Meets Recession Risk

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At today’s meeting of the Federal Open Market Committee, the target range for the Fed funds rate was left unchanged at 4.25% to 4.50%. This followed reductions at three consecutive meetings in the fall of 2024. Rates remain below the high of 5.25% to 5.50% in place in mid-September. Today’s target range matched expectations in the Action Economics Forecast Survey.

The statement following the meeting indicated that, “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook has increased further. The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.”

“The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

The Fed continued, “The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage backed securities.”

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- FOMC holds funds rate target at late-December level.
- Risk assessments include higher unemployment & inflation.

Economy in Brief: 2018

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