Robert Brusca

Consumer prices in the Eurozone rose 1.8% in February from a year ago, the same as in January and 0.1% below December. In February 2006, the year-on-year change was 2.3%, boosted by strong energy gains. In the most recent months, [...]

U.S. PPI Surprise

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/070314d.jpg" width="353">
A notable catalyst for yesterday&#39;s stock market sell-off was the quarterly mortgage delinquency report from the Mortgage Bankers&#39; Association (MBA). It showed that 4.95% (seasonally adjusted) of all loans surveyed by MBA were past due on December 31, an increase from 4.67% in September and the highest since September 2002. The foreclosure process was started on 0.54% of all loans, 0.08% more than during the previous quarter and a record high rate for a single quarter; at the end of December, 1.19% of loans were in foreclosure, up from 1.05% at end-September and 0.99% at the end of 2005. These rates are calculated on a total base of more than 42 million mortgage loans.
The MBA gives data on several types of mortgages: conventional prime, conventional subprime, FHA and VA. Each of these is further broken down by fixed and adjustable rate. Haver maintains these series in its specialized database MBAMTG and individual series are available on HaverSelect. The database includes seasonally adjusted data for the country as a whole and the four Census regions as well as not seasonally adjusted data for those areas plus the nine Census divisions, the 50 States, District of Columbia and Puerto Rico.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070314e.jpg" width="353">
Delinquencies worsened for all major loan types. Conventional prime loans, which constitute 76.6% of the total market, had loan payments over due 30 days or more increase from 2.52% to 2.79% of the loans in that segment. Conventional subprime delinquencies rose from 12.95% to 14.27%. &quot;Conventional&quot; loans are those not insured by the federal government, such as FHA or VA. Conventional loans may be insured by private mortgage insurance or not insured at all. &quot;Subprime&quot; loans are those granted to borrowers with risky credit ratings or with excessively generous lending terms, such as loan-to-value ratios (&quot;LTV&quot;) near 100%, whereas &quot;prime&quot; mortgages typically see LTVs below 80% and average or higher credit quality in the borrower.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070314f.jpg" width="353">
Delinquencies on FHA-backed loans affected 14.43% of those loans and foreclosures were initiated on 0.96%. VA-insured loans had a delinquency rate of 7.43% and a foreclosure rate of 0.36%.
There are very large differences in delinquency experiences among the regions of the country. The Northeast had 4.58% of its loans past due in December, near the national average. But the Midwest and the South were both at about 5.7% and the West at 3.18%. So credit quality varies considerably around the nation. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Mortgage Delinquencies (SA, %)</th>
<th scope="col">Q4 2006</th>
<th scope="col">Q3 2006</th>
<th scope="col">Year Ago</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Loans Past Due</td>
<td>4.95</td>
<td>4.67</td>
<td>4.70</td>
<td>4.61</td>
<td>4.45</td>
<td>4.48</td>
<td>5.11</td>
</tr>
<tr>
<td class="firstcol">Foreclosures Started</td>
<td>0.54</td>
<td>0.46</td>
<td>0.42</td>
<td>1.86</td>
<td>1.63</td>
<td>1.73</td>
<td>1.80</td>
</tr>
<tr class="odd">
<td class="firstcol">Conventional Prime Loan Delinquencies</td>
<td>2.57</td>
<td>2.44</td>
<td>2.47</td>
<td>2.39</td>
<td>2.29</td>
<td>2.30</td>
<td>2.67</td>
</tr>
<tr>
<td class="firstcol">Conventional Subprime Loan Delinquencies</td>
<td>13.33</td>
<td>12.56</td>
<td>11.63</td>
<td>12.27</td>
<td>10.84</td>
<td>10.80</td>
<td>14.04</td>
</tr>
</tbody>
</table>
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A notable catalyst for yesterday's stock market sell-off was the quarterly mortgage delinquency report from the Mortgage Bankers' Association (MBA). It showed that 4.95% (seasonally adjusted) of all loans surveyed by MBA were past due [...]

Major Increase in Mortgage Delinquencies in Q4; Rate of Foreclosures Started Hits a Quarterly Record

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070314c.jpg" width="353">
Ex-petroleum import prices fell by 0.1% in February. Good news for core inflation trends. The 1Yr, 6-Mo, 3-mo progression of annualized inflation pressures also show that there is no pressure building. Yr/Yr non-petroleum import prices are up by 2.1%; looking over 3-mos annualized the gain is just 1.1%. Tame. Nonagricultural export prices show a bit more lift than that, partly aided by pressure from industrial supplies and materials, an export category that does contain some oil. 
Looking more directly at prices that feed into consumer prices (look at the import figures), we see a bit of lift for consumer prices excluding vehicles and for foods and beverages. Vehicle import prices are under wraps. For the most part it does not look like there is an inflation impulse leaking in for the international sector. 
The chart on the left shows some key consumer goods price relationships. We plot import prices for vehicles and for consumer goods excluding vehicles Vs the CPI core for goods and the PPI consumer goods core. The PPI tends to show the highest gains; this index measures price for core consumer goods produced in the US. The Core CPI for goods consists of these products taken to the next level of distribution, adding consumer goods imports. That results in a core goods CPI index that has showed lower inflation than most other indexes since about August 2002. Nonvehicle consumer prices were, at one time, the slowest inflators on the block, but that changed in August of 2002. While the two international indexes do not show much in the way of inflation it is also true that vehicle imports and nonvehicle consumer goods imports sport higher inflation rates that the core CPI by itself and have been so for about one year . And the consumer core of the PPI is &#145;ramping up&#146; albeit none of these yr/yr gains exceeds even 2% y/y yet. If it&#146;s inflation in the making, it is still quite mild. The trends maybe less than reassuring but the degree of inflation that is in train remains quite MILD.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Export and Import Price Trends
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td colspan="3"> Imports</td>
<td></td>
<td colspan="3"> Exports</td>
</tr>
<tr class="odd">
<td class="firstcol"> SAAR</td>
<td> All</td>
<td> Petrol</td>
<td> Excl Petrol</td>
<td> SAAR</td>
<td> All</td>
<td> Agric</td>
<td> NonAgric</td>
</tr>
<tr>
<td class="firstcol"> 3-MO</td>
<td>1.8%</td>
<td>-11.2%</td>
<td>1.1%</td>
<td> 3-MO</td>
<td>7.0%</td>
<td>22.9%</td>
<td>5.9%</td>
</tr>
<tr class="odd">
<td class="firstcol"> 6-MO</td>
<td>-7.4%</td>
<td>-38.8%</td>
<td>1.5%</td>
<td> 6-MO</td>
<td>2.9%</td>
<td>22.3%</td>
<td>1.4%</td>
</tr>
<tr>
<td class="firstcol"> Yr/Yr</td>
<td>1.3%</td>
<td>-5.5%</td>
<td>2.1%</td>
<td> Yr/Yr</td>
<td>4.7%</td>
<td>16.9%</td>
<td>3.7%</td>
</tr>
<tr class="odd">
<td class="firstcol"> 2-Yrs</td>
<td>4.1%</td>
<td>18.0%</td>
<td>1.9%</td>
<td> 2-Yrs</td>
<td>3.7%</td>
<td>10.6%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol"> MO/MO</td>
<td>0.2%</td>
<td>2.0%</td>
<td>-0.1%</td>
<td> MO/MO</td>
<td>0.7%</td>
<td>2.3%</td>
<td>0.6%</td>
</tr>
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<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
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Ex-petroleum import prices fell by 0.1% in February. Good news for core inflation trends. The 1Yr, 6-Mo, 3-mo progression of annualized inflation pressures also show that there is no pressure building. Yr/Yr non-petroleum import [...]

US Export and Import Prices Show Their Soft Side

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<td><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070314b.jpg" width="353">The US current account deficit is one of the most intriguing phenomena about the US economy. To understand the account is both very simple and extremely complicated. It is therefore easy to think you know nothing about it or everything at the same time! &nbsp; The 2006Q4 current account deficit shrank sharply to $195.8bln from $229.4bln in Q3. It also shrank compared to its $223.1bln level in 2005-Q4. And a shrinkage in the deficit over four quarters ago is unusual. (see chart on the left).&nbsp; Such improvement generally was induced by recession (1990, 2001, 1981,198) but also can be occasioned by significant slowdowns (1995) and the sharp dollar depreciation from its pre-Plaza Accord peak was behind the persisting improvement in the late 1980s ahead of the onset of recession. The current account is simple to understand because it is the just the difference between the value of the goods services we sell Vs the ones we buy plus a few transfer items. The US has a small positive and essentially stable balance on its services account. The trade account is the problem. Its deficit is large and persistently growing larger (see chart below on the right).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070314a.jpg" width="353"> That&#146;s the part of the current account that is easy. Now comes the hard part&#133;understanding WHY&#133;The &#145;why&#146; it is difficult because some of the concepts are esoteric and also because there are different identities that describe the deficit circumstance and they have seemingly different root causes.&nbsp; Let me explain.One identity is that (at least conceptually) the world current account deficits across countries must balance. So if the US has a deficit at least one other country has a surplus. And, conceptually, in a world of no lags and the same accounting principles the US deficit would be the same size as the surplus for the rest of the world in total. Another is that the US current account surplus must be funded by net capital inflows of the same magnitude &#150; this is the double entry accounting that accompanies the US balance of payments. &nbsp;The current account plus the capital flows that fund it are what the term &#145;balance of payments&#146; refers to. The US has a current account deficit and an equal and opposite capital account surplus.&nbsp; &nbsp;That&#146;s a bit more complicated framework, but still not impossible. Here is where the immovable object meets the unstoppable force:&nbsp; Economists argue about where the forces come from that drive the deficit. We ask, do the forces stem mostly from the current account itself or from the capital account? Does one push the other into deficit or the other push the one into surplus?&nbsp; Is it the current account the active mover, as profligate US consumers are overspending, or is it that miserly foreign consumer/savers under-spend and over save?&nbsp; Or do the main forces work though the capital account because the US is too dependent on foreign capital or is it the opposite, that foreign investors are too addicted to US investments?&nbsp;Here are the questions.(1) Is it US credit demand that is so huge that is draws in international capital keeping the dollar strong, hurting US competitiveness and ballooning the current account deficit as a result?(2) Is it US demand for goods that is so strong we simply consume too much and live beyond our means leading to a huge current account deficit?(3) Is it that foreign economies consume too little and do not buy enough in general and from the US in particular helping to balloon the US deficit? The flip side of low consumption is the high savings rate. Do foreigners simply save too much (Bernanke&#146;s saving glut argument)?(4) Is the demand by foreigners for US investments so high that they push capital into the US and keep the dollar from falling so that US competitiveness is undermined and the current account deficit balloons?That&#146;s quite a list.&nbsp; AND you may notice that the various arguments draw the dollar in as well.We will not solve these issues today. In any event we know that the deficit is a combination of the above points. We also know that not having a mechanism to create currency adjustment, as there was under Bretton Woods, means that deficits may not be self correcting in any timely way. Notice that despite the US deficit contraction in Q4 2006 compared to Q4 2005 the average for the year is still worsening; that is the deficit for all of 2006 was for a quarterly average of $214.2bln compared to $197.9bln in 2005. This is a full year deficit of $856.8bln for 2006 &#150; over three quarters of a trillion dollars IN ONE YEAR in case you are counting.And if 2007 worsens as much as 2006 did our deficit will top $1trln per year in 2007. How much is one trillion? Well suppose you were to try to &#145;sing the deficit down to zero&#146; and did so singing the tune &#145;100 bottles of beer on the wall&#146;, using the lyric &#145;1trln dollars of deficit today,1trln dollars today, take one down what have you got? 999,999,999,999 dollars of deficit today&#146;. Now assume you can sing that in 10 seconds &#150;each verse. That&#146;s 10 trillion seconds of singing. It would take you more than 300 years to get the current account into balance. If George Washington had started singing that song, and were he blessed with extraordinary long life, he would still being singing today...and going strong with his work still cut out for him. .&nbsp;Slower US growth especially on the back of reduced inventory demand helped to contain imports in 2006; that was aided by lower oil prices as well by year end. Stronger foreign growth played a role as US exports expanded briskly at a 14.5% pace against the weak nominal import gain of 4.5%. Looking ahead to 2007 the fate of the dollar is still a matter of speculation. US growth should pick up from its weak Q4 pace. Inventories should rebuild, thereby boosting imports. Overseas growth is expected to be &#145;about the same to a bit stronger&#146;. The real question is whether US exports can keep up the good work in 2007, or was 2006 some flash in the pan of good news? Imports will rise faster in 2007 than in 2006. That could make it impossible to make trade deficit reduction a reality in 2007 either.</td>
</tr>
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<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
 US Current Account
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol"> Balances:</td>
<td> Q4-06</td>
<td> Q3-06</td>
<td> Q2-06</td>
<td> 4Qtr-Avg</td>
<td> Prev4Qtr</td>
</tr>
<tr class="odd">
<td class="firstcol"> Current Account</td>
<td>-195.8</td>
<td>-229.4</td>
<td>-217.7</td>
<td>-214.2</td>
<td>-197.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Trade</td>
<td>-197.9</td>
<td>-218.9</td>
<td>-210.9</td>
<td>-209.0</td>
<td>-195.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Services</td>
<td>22.4</td>
<td>12.0</td>
<td>15.0</td>
<td>15.9</td>
<td>19.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Transfers</td>
<td>-20.2</td>
<td>-22.5</td>
<td>-21.9</td>
<td>-21.0</td>
<td>-21.5</td>
</tr>
<tr>
<td class="firstcol"> Growth Rates</td>
<td colspan="3"> Quarterly SAAR</td>
<td colspan="2">4-Qtr % for Yr Ended:</td>
</tr>
<tr>
<td class="firstcol">Merchandise</td>
<td> Q4-06</td>
<td> Q3-06</td>
<td> Q2-06</td>
<td> Q4-06</td>
<td> Q4-06</td>
</tr>
<tr class="odd">
<td class="firstcol">Exports</td>
<td>8.4%</td>
<td>15.5%</td>
<td>14.4%</td>
<td>14.5%</td>
<td>11.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports</td>
<td>-12.4%</td>
<td>15.7%</td>
<td>10.1%</td>
<td>4.3%</td>
<td>13.9%</td>
</tr>
<tr>
<td class="firstcol">Services</td>
<td> Q4-06</td>
<td> Q3-06</td>
<td> Q2-06</td>
<td> Q4-06</td>
<td> Q4-06</td>
</tr>
<tr class="odd">
<td class="firstcol">Exports</td>
<td>12.9%</td>
<td>3.0%</td>
<td>13.4%</td>
<td>8.7%</td>
<td>8.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports</td>
<td>6.3%</td>
<td>2.5%</td>
<td>12.7%</td>
<td>8.6%</td>
<td>5.9%</td>
</tr>
<tr class="odd">
<td class="firstcol"> memo: ($-Blns)</td>
<td> Q4-06</td>
<td> Q3-06</td>
<td> Q2-06</td>
<td> 4Qtr-Avg</td>
<td> Prev4Qtr</td>
</tr>
<tr class="odd">
<td class="firstcol">Offical Gov&#39;t Securities Purchased</td>
<td>78.0</td>
<td>78.0</td>
<td>21.6</td>
<td>60.9</td>
<td>39.1</td>
</tr>
</tbody>
</table>
 



<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070314c.jpg" width="353">
Ex-petroleum import prices fell by 0.1% in February. Good news for core inflation trends. The 1Yr, 6-Mo, 3-mo progression of annualized inflation pressures also show that there is no pressure building. Yr/Yr non-petroleum import prices are up by 2.1%; looking over 3-mos annualized the gain is just 1.1%. Tame. Nonagricultural export prices show a bit more lift than that, partly aided by pressure from industrial supplies and materials, an export category that does contain some oil. 
Looking more directly at prices that feed into consumer prices (look at the import figures), we see a bit of lift for consumer prices excluding vehicles and for foods and beverages. Vehicle import prices are under wraps. For the most part it does not look like there is an inflation impulse leaking in for the international sector. 
The chart on the left shows some key consumer goods price relationships. We plot import prices for vehicles and for consumer goods excluding vehicles Vs the CPI core for goods and the PPI consumer goods core. The PPI tends to show the highest gains; this index measures price for core consumer goods produced in the US. The Core CPI for goods consists of these products taken to the next level of distribution, adding consumer goods imports. That results in a core goods CPI index that has showed lower inflation than most other indexes since about August 2002. Nonvehicle consumer prices were, at one time, the slowest inflators on the block, but that changed in August of 2002. While the two international indexes do not show much in the way of inflation it is also true that vehicle imports and nonvehicle consumer goods imports sport higher inflation rates that the core CPI by itself and have been so for about one year . And the consumer core of the PPI is &#145;ramping up&#146; albeit none of these yr/yr gains exceeds even 2% y/y yet. If it&#146;s inflation in the making, it is still quite mild. The trends maybe less than reassuring but the degree of inflation that is in train remains quite MILD.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Export and Import Price Trends
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td colspan="3"> Imports</td>
<td></td>
<td colspan="3"> Exports</td>
</tr>
<tr class="odd">
<td class="firstcol"> SAAR</td>
<td> All</td>
<td> Petrol</td>
<td> Excl Petrol</td>
<td> SAAR</td>
<td> All</td>
<td> Agric</td>
<td> NonAgric</td>
</tr>
<tr>
<td class="firstcol"> 3-MO</td>
<td>1.8%</td>
<td>-11.2%</td>
<td>1.1%</td>
<td> 3-MO</td>
<td>7.0%</td>
<td>22.9%</td>
<td>5.9%</td>
</tr>
<tr class="odd">
<td class="firstcol"> 6-MO</td>
<td>-7.4%</td>
<td>-38.8%</td>
<td>1.5%</td>
<td> 6-MO</td>
<td>2.9%</td>
<td>22.3%</td>
<td>1.4%</td>
</tr>
<tr>
<td class="firstcol"> Yr/Yr</td>
<td>1.3%</td>
<td>-5.5%</td>
<td>2.1%</td>
<td> Yr/Yr</td>
<td>4.7%</td>
<td>16.9%</td>
<td>3.7%</td>
</tr>
<tr class="odd">
<td class="firstcol"> 2-Yrs</td>
<td>4.1%</td>
<td>18.0%</td>
<td>1.9%</td>
<td> 2-Yrs</td>
<td>3.7%</td>
<td>10.6%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol"> MO/MO</td>
<td>0.2%</td>
<td>2.0%</td>
<td>-0.1%</td>
<td> MO/MO</td>
<td>0.7%</td>
<td>2.3%</td>
<td>0.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
</tbody>
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<table border="0" cellspacing="0" width="100%">

</table>
US Export and Import Prices Show Their Soft Side 
by <a href="/comment/Brusca.html">Robert A. Brusca</a> March 14, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070314d.jpg" width="353">
A notable catalyst for yesterday&#39;s stock market sell-off was the quarterly mortgage delinquency report from the Mortgage Bankers&#39; Association (MBA). It showed that 4.95% (seasonally adjusted) of all loans surveyed by MBA were past due on December 31, an increase from 4.67% in September and the highest since September 2002. The foreclosure process was started on 0.54% of all loans, 0.08% more than during the previous quarter and a record high rate for a single quarter; at the end of December, 1.19% of loans were in foreclosure, up from 1.05% at end-September and 0.99% at the end of 2005. These rates are calculated on a total base of more than 42 million mortgage loans.
The MBA gives data on several types of mortgages: conventional prime, conventional subprime, FHA and VA. Each of these is further broken down by fixed and adjustable rate. Haver maintains these series in its specialized database MBAMTG and individual series are available on HaverSelect. The database includes seasonally adjusted data for the country as a whole and the four Census regions as well as not seasonally adjusted data for those areas plus the nine Census divisions, the 50 States, District of Columbia and Puerto Rico.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070314e.jpg" width="353">
Delinquencies worsened for all major loan types. Conventional prime loans, which constitute 76.6% of the total market, had loan payments over due 30 days or more increase from 2.52% to 2.79% of the loans in that segment. Conventional subprime delinquencies rose from 12.95% to 14.27%. &quot;Conventional&quot; loans are those not insured by the federal government, such as FHA or VA. Conventional loans may be insured by private mortgage insurance or not insured at all. &quot;Subprime&quot; loans are those granted to borrowers with risky credit ratings or with excessively generous lending terms, such as loan-to-value ratios (&quot;LTV&quot;) near 100%, whereas &quot;prime&quot; mortgages typically see LTVs below 80% and average or higher credit quality in the borrower.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070314f.jpg" width="353">
Delinquencies on FHA-backed loans affected 14.43% of those loans and foreclosures were initiated on 0.96%. VA-insured loans had a delinquency rate of 7.43% and a foreclosure rate of 0.36%.
There are very large differences in delinquency experiences among the regions of the country. The Northeast had 4.58% of its loans past due in December, near the national average. But the Midwest and the South were both at about 5.7% and the West at 3.18%. So credit quality varies considerably around the nation. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Mortgage Delinquencies (SA, %)</th>
<th scope="col">Q4 2006</th>
<th scope="col">Q3 2006</th>
<th scope="col">Year Ago</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Loans Past Due</td>
<td>4.95</td>
<td>4.67</td>
<td>4.70</td>
<td>4.61</td>
<td>4.45</td>
<td>4.48</td>
<td>5.11</td>
</tr>
<tr>
<td class="firstcol">Foreclosures Started</td>
<td>0.54</td>
<td>0.46</td>
<td>0.42</td>
<td>1.86</td>
<td>1.63</td>
<td>1.73</td>
<td>1.80</td>
</tr>
<tr class="odd">
<td class="firstcol">Conventional Prime Loan Delinquencies</td>
<td>2.57</td>
<td>2.44</td>
<td>2.47</td>
<td>2.39</td>
<td>2.29</td>
<td>2.30</td>
<td>2.67</td>
</tr>
<tr>
<td class="firstcol">Conventional Subprime Loan Delinquencies</td>
<td>13.33</td>
<td>12.56</td>
<td>11.63</td>
<td>12.27</td>
<td>10.84</td>
<td>10.80</td>
<td>14.04</td>
</tr>
</tbody>
</table>
</body>
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U.S. Current Account Deficit Shrinks

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313c.jpg" width="353">
The ZEW Indicator of Economic Sentiment for Germany, which assesses the outlook in the next six months, based on the opinions of investors and analysts, rose 2.9 points in March to 5.8%. While the current level is a substantial improvement over the pessimism reached last November when pessimists exceeded optimists by 28.5%, it is well below the long term average of 33.2%. On the other hand, the fact that the participants became more positive during a survey period which included a sharp down turn in world stock markets and only a partial recovery, was in itself a pleasant surprise. Many observers had expected the indicator to decline.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313d.jpg" width="353">
The assessment of current conditions declined slightly to 69.2% from 70.9%, the first decline since June 2005. The indicators for the outlook and current conditions are shown in the first chart.
The ZEW Financial Markets Survey also asks its participants to report on the outlook and current conditions in the entire Euro Area. The assessment of the outlook for the entire Euro Area declined in March 5.1% from 6.8% in February and the appraisal of current conditions rose marginally from 66.7% in February to 66.9% in March. The indicators of current conditions and the outlook for the Euro Area are shown in the second chart.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313e.jpg" width="353">
The indicators for the Euro Area, of course, include those for Germany, but the differences between the indicators of the Euro Area and those of Germany can shed some light on the performance of Germany relative to the rest of the Euro Area. From the appraisal of current conditions in the total area and in Germany, we can infer that the participants had rated conditions in the Euro Area outside of Germany higher than those in Germany until November, 2006. Since then, the appraisal of current conditions in Germany has been higher than that for the whole region, as can be seen in the third chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313f.jpg" width="353"> Similar inferences can be derived from the appraisals of the outlook in the two series. The outlook for Germany was less positive than that for the whole area indicator until about mid 2005 when it became more positive than the whole area indicator. It remained more positive from then until June 2006. After that until this March of this year, the German outlook for the German economy appeared to be much less positive than that for the Euro Area as a whole. The divergence may have been due, in part perhaps, to the prospect of the January 1, 2007 increase in Germany&#39;s VAT. Since the effects of the higher VAT appear to have been less onerous than expected, optimism in the German outlook has has become modestly more positive relative to the whole area, as can be seen in the fourth chart. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">ZEW INDICATORS&nbsp; (% Balance)</th>
<th scope="col">Mar&nbsp; 06</th>
<th scope="col">Feb 06</th>
<th scope="col">Mar&nbsp; 05</th>
<th scope="col">M/M&nbsp; DIF</th>
<th scope="col">Y/Y&nbsp;&nbsp; DIF</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Germany</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp;Current Conditions</td>
<td>69.2</td>
<td>70.9</td>
<td>-8.4</td>
<td>-1.7</td>
<td>77.6</td>
<td>18.3</td>
<td>-61.8</td>
<td>-67.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Expectations 6 Months Ahead</td>
<td>5.8</td>
<td>2.9</td>
<td>63.4</td>
<td>2.9</td>
<td>-47.6</td>
<td>22.3</td>
<td>34.8</td>
<td>44.6</td>
</tr>
<tr>
<td class="firstcol"> Eurostat </td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Current Conditions</td>
<td>66.9</td>
<td>66.7</td>
<td>2.0</td>
<td>0.2</td>
<td>64.9</td>
<td>23.8</td>
<td>-28.7</td>
<td>-41.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Expectations 6 Months Ahead</td>
<td>5.1</td>
<td>6.8</td>
<td>61.1</td>
<td>-1.7</td>
<td>-56.0</td>
<td>26.6</td>
<td>32.3</td>
<td>52.1</td>
</tr>
</tbody>
</table>
</body>
</html>

The ZEW Indicator of Economic Sentiment for Germany, which assesses the outlook in the next six months, based on the opinions of investors and analysts, rose 2.9 points in March to 5.8%. While the current level is a substantial [...]

German Financial Types Become a Little More Positive on the German Outlook, and a Little Less So for the Euro Area [...]

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313a.jpg" width="353">
With flat January retail sales and a 0.1% overall rise in February, retail sales have little lift in Q1. The February retail sales report, with no revisions to the main headlines over the past two months - an unusual development, leaves us with two months of a very flat consumer. This in turn raises questions about growth in the economy at large since it has been banking on continued consumer strength. 
With the huge drop in durable goods orders the outlook for capital spending is poor. Housing started off the quarter looking good but has since beaten a deep retreat. With GDP= C+I+G+(X-M) the question is: where is growth coming from? Take &#147;C&#148; for example, consumption: the retail sales portion is flat for two months running. Services spending, the half of consumption that always slips in under the radar, is probably still firm. But the &#147;I,&#148; for investment has three weak prongs: Business fixed investment is weak if capital goods orders are to be believed; inventories have been pared back (they are up slightly in January); residential investment is that well known story of the ongoing lethargy in housing or worse. Government is usually a GDP positive but is plodding. The X-M portion of GDP (called net exports, or the GDP version of the current account in real terms) has provided some stabilization to GDP growth since imports (M) have been weak due to weak domestic demand and exports have held up as foreign growth has been firm. That combination produces a push to GDP; since imports are a subtraction and weak imports aid US GDP growth. But it&#146;s clear that the economy will not grow for long on its international portion alone. While CEOs at the Round table last week expressed a desire for more capital spending, what we have in hand are weak trends. And that puts more of the focus back onto the consumer. 
Q1 Consumption Arithmetic. Fortunately Q4 growth was &#145;back-loaded,&#146; exporting momentum to Q1. Here&#146;s how that works. Since GDP is a quarterly variable we look at its components by quarter and play the game, &#145;what have you done for me lately?&#146; also known as &#145;what will GDP be this quarter?&#146; What matters for each component is its average for the quarter. Since consumer spending spiked at the end of Q4, it left a high level of spending in December 2006. Thus even with next to no growth in January and February the level of spending in February is still 4.5% above the Q4 average. So overall nominal retail sales are up at a 4.5% nominal pace in 2007-Q1 as a result of the high pace of growth in December of 2006. But that crutch is becoming overused with the February weakness. 
Cold weather did sucker-punch housing this months so we have a basis for believing there was a noticeable adverse weather effect in play. On top of that, as we know, housing is being battered by an ongoing retrenchment. We see both of these factors at work in the retail sales report in building materials where sales plunged by 1.4% in February alone. Sales also fell sharply for furniture and electronic goods. Motor vehicles sales were, however, strong with a rise of 1.0%. 
Nondurables limped to a gain of 0.1% in February and were actually weaker excluding gas station sales that jumped by 1.2% (-0.1% for retail non-durables sales excluding gas station sales). 
With the contribution in from the December sales spurt still in play, 3-mo sales trends are still reasonably firm (saar growth of 4.9%). But if monthly sales do not perk up soon the December effect will cease to help and retailing will then appear to be faltering. Come March, December&#146;s gain will play against three month growth since we will then be measuring growth from the elevated December base and December&#146;s strength will play against us - so far we have no lift from that point on. 
Still, a sag in the winter months is not decisive. December sales were very strong, leaving fewer goods to clear out in January and February. February is a short month with myriad holidays leaving a lot of the work to be done by seasonal factors. Complicating this is the cold snap in March. Winter this year has been backloaded. March has come in less like lion than like a Polar Bear, let hope by month&#146;s end we do not have bi-polar bear. 
All this complicates getting a good look at how the economy is really doing. To be sure with business investment surprisingly weak, a pick up from the consumer is essential or the economy bears are going make another run for the money. It sure complicates the Fed&#146;s job especially with poor trends in productivity, labor costs and labor compensation. For now we can only watch and wait and hope that the slow growth is a product of bad weather.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"></th>
<th scope="col">M/M</th>
Seasonally Adjusted Annual Rate
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Feb 2007</td>
<td>3-month</td>
<td>6-month</td>
<td>Yr/Yr</td>
<td>Yr Ago: Y/Y</td>
</tr>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/usecon/@ED/@ED04/@ED0401/@ED0401.HTM">Retail Sales &amp; Food Services</a></td>
<td>0.1%</td>
<td>4.9%</td>
<td>1.6%</td>
<td>3.2%</td>
<td>7.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Excluding MV &amp; Parts</td>
<td>-0.1%</td>
<td>4.9%</td>
<td>0.7%</td>
<td>3.1%</td>
<td>9.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Excluding MV &amp; Parts &amp; Gas</td>
<td>-0.3%</td>
<td>3.0%</td>
<td>3.0%</td>
<td>3.4%</td>
<td>8.4%</td>
</tr>
</tbody>
</table>
</body>
</html>

With flat January retail sales and a 0.1% overall rise in February, retail sales have little lift in Q1. The February retail sales report, with no revisions to the main headlines over the past two months - an unusual development, [...]

U.S. Retail Sales Pose a Dilemma

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313a.jpg" width="353">
With flat January retail sales and a 0.1% overall rise in February, retail sales have little lift in Q1. The February retail sales report, with no revisions to the main headlines over the past two months - an unusual development, leaves us with two months of a very flat consumer. This in turn raises questions about growth in the economy at large since it has been banking on continued consumer strength. 
With the huge drop in durable goods orders the outlook for capital spending is poor. Housing started off the quarter looking good but has since beaten a deep retreat. With GDP= C+I+G+(X-M) the question is: where is growth coming from? Take &#147;C&#148; for example, consumption: the retail sales portion is flat for two months running. Services spending, the half of consumption that always slips in under the radar, is probably still firm. But the &#147;I,&#148; for investment has three weak prongs: Business fixed investment is weak if capital goods orders are to be believed; inventories have been pared back (they are up slightly in January); residential investment is that well known story of the ongoing lethargy in housing or worse. Government is usually a GDP positive but is plodding. The X-M portion of GDP (called net exports, or the GDP version of the current account in real terms) has provided some stabilization to GDP growth since imports (M) have been weak due to weak domestic demand and exports have held up as foreign growth has been firm. That combination produces a push to GDP; since imports are a subtraction and weak imports aid US GDP growth. But it&#146;s clear that the economy will not grow for long on its international portion alone. While CEOs at the Round table last week expressed a desire for more capital spending, what we have in hand are weak trends. And that puts more of the focus back onto the consumer. 
Q1 Consumption Arithmetic. Fortunately Q4 growth was &#145;back-loaded,&#146; exporting momentum to Q1. Here&#146;s how that works. Since GDP is a quarterly variable we look at its components by quarter and play the game, &#145;what have you done for me lately?&#146; also known as &#145;what will GDP be this quarter?&#146; What matters for each component is its average for the quarter. Since consumer spending spiked at the end of Q4, it left a high level of spending in December 2006. Thus even with next to no growth in January and February the level of spending in February is still 4.5% above the Q4 average. So overall nominal retail sales are up at a 4.5% nominal pace in 2007-Q1 as a result of the high pace of growth in December of 2006. But that crutch is becoming overused with the February weakness. 
Cold weather did sucker-punch housing this months so we have a basis for believing there was a noticeable adverse weather effect in play. On top of that, as we know, housing is being battered by an ongoing retrenchment. We see both of these factors at work in the retail sales report in building materials where sales plunged by 1.4% in February alone. Sales also fell sharply for furniture and electronic goods. Motor vehicles sales were, however, strong with a rise of 1.0%. 
Nondurables limped to a gain of 0.1% in February and were actually weaker excluding gas station sales that jumped by 1.2% (-0.1% for retail non-durables sales excluding gas station sales). 
With the contribution in from the December sales spurt still in play, 3-mo sales trends are still reasonably firm (saar growth of 4.9%). But if monthly sales do not perk up soon the December effect will cease to help and retailing will then appear to be faltering. Come March, December&#146;s gain will play against three month growth since we will then be measuring growth from the elevated December base and December&#146;s strength will play against us - so far we have no lift from that point on. 
Still, a sag in the winter months is not decisive. December sales were very strong, leaving fewer goods to clear out in January and February. February is a short month with myriad holidays leaving a lot of the work to be done by seasonal factors. Complicating this is the cold snap in March. Winter this year has been backloaded. March has come in less like lion than like a Polar Bear, let hope by month&#146;s end we do not have bi-polar bear. 
All this complicates getting a good look at how the economy is really doing. To be sure with business investment surprisingly weak, a pick up from the consumer is essential or the economy bears are going make another run for the money. It sure complicates the Fed&#146;s job especially with poor trends in productivity, labor costs and labor compensation. For now we can only watch and wait and hope that the slow growth is a product of bad weather.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"></th>
<th scope="col">M/M</th>
Seasonally Adjusted Annual Rate
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Feb 2007</td>
<td>3-month</td>
<td>6-month</td>
<td>Yr/Yr</td>
<td>Yr Ago: Y/Y</td>
</tr>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/usecon/@ED/@ED04/@ED0401/@ED0401.HTM">Retail Sales &amp; Food Services</a></td>
<td>0.1%</td>
<td>4.9%</td>
<td>1.6%</td>
<td>3.2%</td>
<td>7.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Excluding MV &amp; Parts</td>
<td>-0.1%</td>
<td>4.9%</td>
<td>0.7%</td>
<td>3.1%</td>
<td>9.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Excluding MV &amp; Parts &amp; Gas</td>
<td>-0.3%</td>
<td>3.0%</td>
<td>3.0%</td>
<td>3.4%</td>
<td>8.4%</td>
</tr>
</tbody>
</table>
<table border="0" cellspacing="0" width="100%">
<tr>
<td><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313b.jpg" width="353">Inventories rose by a small amount in January 2007. The monthly rise of 0.2% was mostly accounted for by a sharp increase in wholesale inventories that rose by 0.7%. Retail inventories rose by 0.2% and manufacturing inventories fell by 0.2%. The first thing we see in inventory trends is that inventories have stopped the increase in their rate of growth. Inventories are still growing. But Yr/Yr growth rates have either stabilized or declined. For wholesalers the pace seems to have declined, whereas for manufacturers and retailers the pace of growth has been cut.&nbsp; This is largely because sales have slowed (see next chart).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313g.jpg" width="353"> In this chart we see Yr/Yr growth plots of sales by sector. Sales growth rates are sliding across all sectors but the slide has halted for wholesalers, who also have stopped cutting their growth rate for inventories, as we saw above.Adequacy of inventory growth. To assess inventories I like to look at a growth rates for inventories Vs sales. I will show some of the more conventional I:S ratios for retailing later, but as an overview the growth rates when paired are important way to get a fix on what is going on with the dynamic interplay between inventories and sales.&nbsp; I:S ratios only show a relationship that is static. While we can compare the static ratios of today to past static relationships it does not give any idea how inventories are shifting relative to sales. The chart above does that. It looks at different time horizons comparing by sectors inventory growth rates to sales growth rates. And while (as we saw already) Yr/Yr growth rates show all inventory rates of growth reside above their respective sales rates of growth, over the three month horizon, sales growth exceeds inventory growth &#150; as of January, at least. Over six-months, wholesale sales growth still exceeds wholesale inventory growth. And, while inventories in each sector outgrow sales Yr/Yr just a year before that (see table) the opposite was true. What this chart demonstrates is how the current inventory imbalance is probably minor. The Yr/Yr growth imbalances are worst for manufacturers where Yr/Yr sales are actually lower with inventories growing at 5.7% pace. And over the last three-months it is clear that &#150;whatever the I:S ratio&nbsp; -- the imbalance between inventories and sales is being repaired by relatively faster sales growth across the board.&nbsp;<img height="126" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/0703131.gif" v:shapes="_x0000_i1027" width="596"> Retailing.&nbsp; Here we present just the I:S table for retail sectors. To the right we show the position of the I:S ratio in its own range of values over the past 5 years, expressing the current value as a percentile of the range. A value of 100% would be the greatest I:S ratio of the period while 0 % would be the weakest. The low percentile readings suggest that retailers are by and large ready to rebuild inventories.&nbsp; Clothing is an exception and autos are mid-range. <img height="172" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/0703132.gif" v:shapes="_x0000_i1028" width="572">Supplement this chart with the dynamic retail growth chart on paired growth rates and we can be more constructive on the outlook&#133;&nbsp;&nbsp; <img height="174" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/0703133.gif" v:shapes="_x0000_i1029" width="660">The sector-paired growth rates show that for retailing in January, 3-month growth rates of sales generally exceed those for inventories. Over six months the trend is split. Over 12-months inventories are mostly growing faster, but not by large margins (clothing excepted). And again one year ago in January of 2006 sales outpaced inventories by a substantial margin across the board. That tells us the inventory overload is a recent and short term phenomenon.The question for inventories then is not &#145;Are they lean enough to call for rebuilding?&#148; Clearly they are. The real question is how retailers, wholesalers and manufacturers see sales prospects. The flat retail sales growth rates in January and February are a problem in that regard. If retailers judge the problem to be weather-related they may build stocks anyway. It&#146;s their call. That&#146;s why they get paid the Big Bucks.</td>
</tr>
</table>
U.S. Business Inventories Rise 
by <a href="/comment/Brusca.html">Robert A. Brusca</a> March 13, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313c.jpg" width="353">
The ZEW Indicator of Economic Sentiment for Germany, which assesses the outlook in the next six months, based on the opinions of investors and analysts, rose 2.9 points in March to 5.8%. While the current level is a substantial improvement over the pessimism reached last November when pessimists exceeded optimists by 28.5%, it is well below the long term average of 33.2%. On the other hand, the fact that the participants became more positive during a survey period which included a sharp down turn in world stock markets and only a partial recovery, was in itself a pleasant surprise. Many observers had expected the indicator to decline.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313d.jpg" width="353">
The assessment of current conditions declined slightly to 69.2% from 70.9%, the first decline since June 2005. The indicators for the outlook and current conditions are shown in the first chart.
The ZEW Financial Markets Survey also asks its participants to report on the outlook and current conditions in the entire Euro Area. The assessment of the outlook for the entire Euro Area declined in March 5.1% from 6.8% in February and the appraisal of current conditions rose marginally from 66.7% in February to 66.9% in March. The indicators of current conditions and the outlook for the Euro Area are shown in the second chart.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313e.jpg" width="353">
The indicators for the Euro Area, of course, include those for Germany, but the differences between the indicators of the Euro Area and those of Germany can shed some light on the performance of Germany relative to the rest of the Euro Area. From the appraisal of current conditions in the total area and in Germany, we can infer that the participants had rated conditions in the Euro Area outside of Germany higher than those in Germany until November, 2006. Since then, the appraisal of current conditions in Germany has been higher than that for the whole region, as can be seen in the third chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313f.jpg" width="353"> Similar inferences can be derived from the appraisals of the outlook in the two series. The outlook for Germany was less positive than that for the whole area indicator until about mid 2005 when it became more positive than the whole area indicator. It remained more positive from then until June 2006. After that until this March of this year, the German outlook for the German economy appeared to be much less positive than that for the Euro Area as a whole. The divergence may have been due, in part perhaps, to the prospect of the January 1, 2007 increase in Germany&#39;s VAT. Since the effects of the higher VAT appear to have been less onerous than expected, optimism in the German outlook has has become modestly more positive relative to the whole area, as can be seen in the fourth chart. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">ZEW INDICATORS&nbsp; (% Balance)</th>
<th scope="col">Mar&nbsp; 06</th>
<th scope="col">Feb 06</th>
<th scope="col">Mar&nbsp; 05</th>
<th scope="col">M/M&nbsp; DIF</th>
<th scope="col">Y/Y&nbsp;&nbsp; DIF</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Germany</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp;Current Conditions</td>
<td>69.2</td>
<td>70.9</td>
<td>-8.4</td>
<td>-1.7</td>
<td>77.6</td>
<td>18.3</td>
<td>-61.8</td>
<td>-67.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Expectations 6 Months Ahead</td>
<td>5.8</td>
<td>2.9</td>
<td>63.4</td>
<td>2.9</td>
<td>-47.6</td>
<td>22.3</td>
<td>34.8</td>
<td>44.6</td>
</tr>
<tr>
<td class="firstcol"> Eurostat </td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Current Conditions</td>
<td>66.9</td>
<td>66.7</td>
<td>2.0</td>
<td>0.2</td>
<td>64.9</td>
<td>23.8</td>
<td>-28.7</td>
<td>-41.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Expectations 6 Months Ahead</td>
<td>5.1</td>
<td>6.8</td>
<td>61.1</td>
<td>-1.7</td>
<td>-56.0</td>
<td>26.6</td>
<td>32.3</td>
<td>52.1</td>
</tr>
</tbody>
</table>
</body>
</html>

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070312a.jpg" width="353">
China&#39;s trade surplus in February was $23.76 billion, marginally smaller than the record of $23.83 billion reached last October. The surplus was well above expectations. In order to eliminate some of the distortions resulting from the timing of the Chinese New Year, it may be useful to compare January and February of this year with those two months of 2006. Even so, the two month balance of 2007 was more than three times the two month balance of 2006. Total exports for the two months were up 41.7% over the two months of 2006 while imports were up 20.4%.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070312b.jpg" width="353">
February trade by country is available only for the United States. Exports to the U.S. in the two months of 2007 were up 35.8% and imports from the U. S. were up 19.2%. While China&#39;s surplus with the U.S. continues to grow, the net deficit with all other countries is declining. Prior to 2006 China&#39;s surplus with the U. S. exceeded the total surplus as can be seen in the first chart, suggesting that China had a net deficit with all other countries. In 2006, however, and continuing into 2007, the surplus on total trade is larger than the surplus with the U. S., suggesting that the net deficit with other countries is declining. One of the main reasons for the decline in China&#39;s net deficit with countries other than the U. S. is the growing increase in the surplus with Europe. In addition, China recorded a surplus with Latin America in 2006 after several years of deficits <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070312c.jpg" width="353"> These changes can be seen in the second and third charts, showing annual exports and imports between China and Europe and China and Latin America.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">CHINA: TRADE &nbsp;(Bil. USD)&nbsp;</th>
<th scope="col">Feb 07</th>
<th scope="col">Jan 07</th>
<th scope="col">Jan+Feb 07</th>
<th scope="col">Jan+Feb 06</th>
<th scope="col">Y/Y %</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Exports:</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp;Total&nbsp;</td>
<td>82.1</td>
<td>86.6</td>
<td>168.7</td>
<td>119.1</td>
<td>41.7</td>
<td>969.3</td>
<td>762.3</td>
<td>593.6</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; US.</td>
<td>16.3</td>
<td>18.2</td>
<td>34.5</td>
<td>25.4</td>
<td>35.8</td>
<td>203.5</td>
<td>162.9</td>
<td>125.0</td>
</tr>
<tr>
<td class="firstcol"> Imports: </td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Total&nbsp;</td>
<td>58.3</td>
<td>70.7</td>
<td>129.1</td>
<td>107.2</td>
<td>20.4</td>
<td>791.8</td>
<td>660.2</td>
<td>560.8</td>
</tr>
<tr>
<td class="firstcol">&nbsp; US.</td>
<td>4.1</td>
<td>5.2</td>
<td>9.3</td>
<td>7.8</td>
<td>19.2</td>
<td>59.2</td>
<td>48.7</td>
<td>44.7</td>
</tr>
<tr class="odd">
<td class="firstcol"> Balance: </td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp;Total&nbsp;</td>
<td>23.8</td>
<td>15.9</td>
<td>39.6</td>
<td>11.9</td>
<td>232.8</td>
<td>177.5</td>
<td>102.1</td>
<td>32.8</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; US.</td>
<td>12.2</td>
<td>12.9</td>
<td>25.3</td>
<td>17.6</td>
<td>43.8</td>
<td>144.3</td>
<td>114.1</td>
<td>80.3</td>
</tr>
</tbody>
</table>
</body>
</html>

China's trade surplus in February was $23.76 billion, marginally smaller than the record of $23.83 billion reached last October. The surplus was well above expectations. In order to eliminate some of the distortions resulting from the [...]

China's Surplus on Trade in Goods Reached $23.76 Billion in February Second Highest on Record

Renewed supply chain pressures point to a rebound in global inflation ahead

Apart from Japan, Blue Chip forecasters look for further significant monetary policy easing

Apart from the US, productivity is moribund

Financial market concerns ebb even though policy uncertainty continues to soar

US tariff revenues nearly doubled in April

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

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Tom Moeller

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The National Association for Business Economics expects that following a 2.8% gain in 2024, real GDP growth will slow to 1.3% this year, revised from 1.9% in the June survey and 1.4% in 2026, revised from 2.0%. Growth from Q4-to-Q4 is expected to slow to 0.7% in 2025 from 2.5% in 2024, then rise a minimally changed 1.9% next year. Quarterly GDP is expected to grow 0.6% in Q3’25 and 0.9% in Q4. In the first two quarters of 2026, real growth of 1.6% followed by 1.8% is expected, followed by 2.0% in both Q3’26 and Q4’26.

Real growth in personal consumption expenditures was reduced. Expected PCE growth in 2025 was shaved to 2.3% from 2.8%, and reduced to 1.4% from 2.8% in 2026. The projection for business fixed investment growth was little-changed at 1.6% this year followed by 0.9% in 2026. An expected 0.5% gain in residential fixed investment this year has been reduced from 1.1%, followed by 0.9% growth in 2026, reduced substantially from 2.4%. Government spending growth of 1.3% this year compares to 1.7% projected earlier, and 0.5% growth in 2026 lessened from 0.8%.

The net export deficit is expected to widen to $1.204 trillion in 2025, revised from $1.118, then narrow to $1.085 trillion in 2026, revised from $1.150 trillion expected earlier. Exports should increase 1.1% this year, revised from 2.3% expected earlier, then 1.6% in 2026, revised from 2.0%. Imports are projected to rise 4.7% in 2025, revised from 4.0%, then fall 0.9% in 2026, down sharply from up 1.7% as expected earlier. Inventory accumulation should rise this year to little-revised $55.0 from $39 billion in 2024, then ease to $40.0 billion in 2026, revised from $52.0 billion expected earlier.

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Housing starts are expected to steady at 1.36 million, then rise to 1.39 million in 2026, revised from 1.40 million. They have been trending lower since the 2021 peak of 1.60 million. Light vehicle sales should ease to 15.5 million units, revised from 16.0. then improve to 15.5 million next year, revised from 16.2 million. The average gain in payroll employment should soften to 91 million per month in the current year, revised from 115,000, then increase to 99,000 in 2026, revised from 125,000. Payrolls increased 216,000 in 2023. The unemployment rate in 2025 has been nudged up to 4.4% from 4.3% projected earlier. The jobless rate is now expected to rise to 4.7% in 2026, revised from 4.3%.

Inflation pressures are expected to eventually abate. After falling in 2024 to 2.7% (Q4/Q4), the increase in the CPI is forecast to first rise to 3.4% this year, revised from 3.0%, then fall to 2.6% in 2026, revised from 2.5% a 2.7%. These increases compare to a 7.1% rise in 2022. Price inflation, as measured by the PCE chain price index, is expected to rise to 3.1% in 2025, revised from 2.3%, then fall to an unrevised 2.3% in 2026. It hit 6.0% in 2022. The gain in the chain PCE price index excluding food & energy is projected to rise to 3.1% this year, revised from 2.8%, then fall to 2.4% in 2026. The index rose to its high of 5.2% in 2022. The projected cost of crude oil of $65 per barrel compares to $70 projected earlier. The $68 per barrel at the end of next year compares to $66 expected earlier, and $70 per barrel at the end of 2024.

Long-term interest rates are expected to ease. The forecast of 4.19% at the end of this year compares to 4.23% expected earlier, with 4.00% forecast at the end of next year compared to 4.06% previously projected. The Fed is expected to continue its easing of monetary policy. The Federal funds rate is forecast to decline to 3.88% at the end of 2025 from 4.37% at the end of 2024, then fall to an unrevised 3.38% by the end of 2026. After-tax corporate profits are predicted to rise 2.1% this year, revised from 2.7%, and a minimally-changed 3.3% next year.

The figures from the latest NABE report can be found in Haver's **SURVEYS** database.

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- Consumer spend growth is reduced.
- Business investment growth unchanged.
- Price inflation is forecast to pick up, then moderate.

NABE Forecasts Sharply Reduced Growth for 2025 & 2026

Winnie Tapasanun

250616J37.jpg

250616K37.jpg

The Empire State Manufacturing Index of General Business Conditions decreased to -16.0 in June, down from -9.2 in May and -8.1 in April, according to the Empire State Manufacturing Survey released by the Federal Reserve Bank of New York. A reading of -6.0 for June had been expected in the Action Economics Forecast Survey. The unexpected decrease in the June index indicated that the business activity in New York State contracted for the fifth time in six months and to the lowest level since March; it was also down from -7.7 in June 2024. The percentage of respondents reporting an increase in general business conditions was 16.9% in June, down from 28.3% in May; the percentage reporting a decrease was 32.9%, down from May’s 37.5%. The latest survey was conducted between June 2 and June 9.

The headline index reflects the answer to a single question concerning the state of economic activity. Haver Analytics calculates a composite index from the five major components, which is comparable to the ISM manufacturing index. This calculated index dropped to 48.6 in June, down from 51.1 in May and 49.3 in April, indicating contraction for the third month in four and to the lowest level since October. It was up from 48.5 in June 2024 and a low of 42.5 in January 2024; however, registering below 50, the breakeven point between expansion and contraction. The index is the average of five diffusion indexes: new orders, shipments, employment, supplier deliveries and inventories with equal weights (20% each).

In the latest survey, the new orders index dropped to -14.2 in June after a 15.8-point jump to 7.0 in May, indicating new orders contracted for the third month in four and to the lowest level since March; nevertheless, it was an improvement from a low of -35.0 in January 2024. The shipments index slid to a three-month-low -7.2 in June following a 6.4-point rise to 3.5 in May, but it was up from a low of -22.7 in April 2024. The unfilled orders index decreased to -8.3 in June after a 0.7-point increase to 4.8 in May, indicating unfilled orders contracted this month following two successive months of expansion; the index reached a low of -24.2 in January 2024. The inventories index fell to 0.9 in June after a 2.6-point decline to 4.8 in May, suggesting that inventories expanded at the slowest pace in eight straight months of expansion. Meanwhile, the delivery times index increased to 1.8 in June, the highest reading since February, from 1.0 in May, with 14.7% of respondents reporting higher delivery times and 12.8% of respondents reporting lower delivery times.

On the labor front, the number of employees index rebounded to a positive 4.7 in June after a 2.5-point decline to -5.1 in May, showing employment expanded for the first time since January and at the highest level since December 2022. The index was up from a low of -9.7 in December 2023. A higher 14.6% of respondents reported an increase in employment in June while a lessened 9.9% reported a decline. The average workweek index increased to -1.5 in June, the highest reading since February, from -3.4 in May; however, having remained in negative territory for the seventh consecutive month.

Inflation indicators were mixed this month. The prices paid index dropped to 46.8 in June, the lowest level since March, following an 8.2-point rise to 59.0 in May. The index was up from its recent low of 21.1 in December and a low of 16.7 in December 2023 but significantly down from a high of 86.4 in April 2022. A 49.5% of respondents reported higher prices paid in June while only 2.8% reported lower prices paid. The prices received index rose to 26.6 in June following a 5.8-point drop to 22.9 in May. The index was up from its recent low of 4.2 in December and a low of 3.9 in July 2023 but well below a peak of 56.1 in March 2022. An increased 29.4% of respondents reported higher prices received in June while a lessened 2.8% reported lower prices received.

Firms grew optimistic about the future business outlook in the latest survey. The index for future business conditions jumped to 21.2 in June, the highest reading since February, from -2.0 in May and a near-record-low -7.4 in April, with an increased 38.4% of respondents expecting business conditions to improve in the next six months. Future new orders (26.1 vs. -2.7) and shipments (23.0 vs. -3.4) expanded in June after contracting in May. Growth in employment (10.4 vs. 11.6) weakened slightly in June vs. May but still showed continued expansion. Capital spending plans remained soft, with expectations for capital spending falling to -7.3 in June, the lowest reading since May 2020, from -6.7 in May. Expected prices paid fell to 59.6 in June, the lowest level since March, from 66.7 in May, while expected prices received rebounded to 41.3 from May’s five-month-low 35.2.

The headline index reflects the answer to only one question concerning general business conditions and is not calculated from the components. The indexes in this report are diffusion indexes and measure the percentage of respondents indicating an increase minus the percentage indicating a decrease with zero separating expansion from contraction.

The New York Fed survey data are contained in Haver’s **SURVEYS** database. The expectations series is in Haver’s **AS1REPNA** database.

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- June General Business Conditions Index down 6.8 pts. to -16.0.
- Negative numbers for new orders (-14.2), shipments (-7.2), and unfilled orders (-8.3), but positive readings for employment (4.7, highest since Dec. ’22) and inventories (0.9).
- Current prices paid drops 12.2 pts. to a three-month-low 46.8.
- Firms are optimistic about the future business outlook, w/ Future Business Conditions Index up to a four-month-high 21.2 and future prices paid down to a three-month-low 59.6.

U.S. Empire State Manufacturing Index Unexpectedly Falls in June to a Three-Month Low

Tian Yong Woon

This week, we focus on India’s economic developments, which continue to demonstrate resilience amid persistent global headwinds. In Q1, GDP growth accelerated to its fastest pace in a year, surpassing expectations. Services remained the primary growth driver, bolstered by gains in construction and manufacturing (chart 1). Despite widespread global downgrades, the World Bank still expects India to be the fastest-growing major economy in 2025.

While services have long underpinned India’s growth, the country is gradually pivoting toward manufacturing, including higher-end, IP-intensive sectors. Progress has been made—such as attracting iPhone production—but manufacturing has yet to significantly shift the composition of GDP, which remains heavily weighted toward services (chart 2). India’s rising role as a “China Plus One” destination has enhanced its global appeal, though the shift has drawn criticism from former US President Trump, who favours bringing manufacturing back to the US.

India’s strategic ties with both the US and China require a careful balancing act. The US is India’s top export destination, with major exports including pharmaceuticals, jewellery, and smartphones (chart 3). At the same time, India relies heavily on China for critical inputs such as Key Starting Materials (KSMs) and Active Pharmaceutical Ingredients (APIs), both vital to its pharmaceutical sector (chart 4). As a result, India is seeking to deepen trade relations with the US while avoiding actions that might provoke China. Trade negotiations with the US are reportedly progressing, with an interim deal possible ahead of Trump’s July 9 tariff deadline.

On the monetary front, the Reserve Bank of India cut policy rates by 50 bps in June and announced a phased 100 bps reduction in the Cash Reserve Ratio (CRR), in response to falling inflation and risks of weaker demand (chart 5). As a partial consequence, the rupee has underperformed its Asian peers—though the primary pressures stem from persistent foreign outflows and narrower interest rate differentials (chart 6).

**India’s economic developments**
India’s economy grew faster than expected in calendar Q1, with growth accelerating to 7.4% y/y—exceeding economists’ expectations and marking the fastest growth rate in a year. By sector, and based on gross value added at basic prices, services remained the primary growth driver, as shown in chart 1. However, contributions from the construction and manufacturing sectors also improved. More broadly, many investors and economists continue to view India as one of the few economies expected to deliver robust growth this year. This remains a rare distinction, given the growth-dampening effects of US tariffs and the associated retaliatory actions. That said, recent US-China breakthroughs on trade-related agreements have eased much of this latent risk.

Despite enacting widespread forecast downgrades in its latest projections just last week, the World Bank still expects India to post the fastest growth among major economies in 2025. Nonetheless, India’s outlook has been somewhat dampened by weaker export potential and slowing investment amid rising global trade barriers. Similarly, panellists in our recent Blue Chip Economic Indicators survey continued to rank India as the top-growing major economy among those covered.


250616T1.jpg

Over the years, India has positioned itself as a services-oriented economy, a strategy that initially offered a degree of insulation from external shocks. More recently, however, the country has begun shifting its focus toward manufacturing—not only at the low- and mid-range levels but also in high-end, intellectual property (IP)-intensive sectors. In support of this pivot, India has been gradually improving its IP protection framework. Nonetheless, it remains on the US Trade Representative’s 2025 Priority Watch List, partly due to what has been described as “inconsistent” progress on IP protection and enforcement. In more traditional forms of manufacturing, India has made several high-profile strides, including securing production capacity for iPhones. However, despite such headline-grabbing developments, the shift has yet to meaningfully alter the structure of India’s GDP (chart 2), which remains heavily services-dependent—likely due to the limited scale of manufacturing gains thus far. 

India has also emerged as a key beneficiary of the “China Plus One” strategy, as global firms seek to diversify production away from China amid rising geopolitical tensions, particularly with the US. These concerns—recently reinforced by US policy actions—have helped position India as a partial but increasingly viable alternative. That said, the shift has not been without controversy. The redirection of US-linked manufacturing capacity toward India has drawn criticism from former President Donald Trump, who has advocated for bringing such production back to American soil—even though the current US manufacturing landscape may be ill-equipped to fully absorb it.

250616T2.jpg

**India’s relationship with the US and China**
Amid ongoing US-China tensions, India finds itself in a complex—but potentially advantageous—position. On one hand, India is heavily reliant on the US as a key export market, with the US currently being its top export destination. On the other hand, India depends on China for critical inputs across several major sectors. Among India’s key exports to the US are pharmaceutical products, jewellery, and, more recently—as mentioned earlier—smartphones (see chart 3). Given this dual dependency, it is unsurprising that India is eager to maintain constructive trade relations with the US. India-US trade talks are reportedly progressing well, with an interim deal likely before President Trump’s 90-day tariff pause ends on July 9.

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At the same time, India remains highly dependent on China for low-level inputs, which may temper its willingness to appear too closely aligned with the US or to pursue a trade deal perceived as unfavourable to China. This strategic caution stems from India’s reliance on key material imports from China, including rare earth elements (REEs), recently spotlighted by China’s export restrictions. REEs are critical to several industries, notably automotive manufacturing. India is also heavily dependent on China for key starting materials (KSMs) and active pharmaceutical ingredients (APIs), both essential to its large and growing pharmaceutical export sector (see chart 4). As a result, India must carefully balance its strategic interests—deepening ties with the US while avoiding actions that could provoke a negative response from China amid rising geopolitical tensions.

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**India’s financial and monetary developments**
In response to the potentially demand-dampening effects of ongoing US tariffs, the Reserve Bank of India (RBI) cut policy rates by a larger-than-expected 50 bps at its June meeting. The move was supported by a sharp decline in CPI inflation, which fell well below the RBI’s 4% target amid easing commodity prices. However, the central bank warned that it now has “very limited” policy space left to support growth, a concern reflected in its shift in policy stance from “accommodative” to “neutral.” In addition, the RBI announced a 100 bps cut to the Cash Reserve Ratio (CRR), to be implemented in four tranches of 25 bps each from September to November, ultimately bringing the CRR down to 3%. This measure aims to release additional liquidity into the financial system.

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Lastly, we turn to the Indian rupee, which has underperformed relative to its Asian peers so far this year (see chart 6), despite the broad-based weakening of the US dollar. Weighing on the rupee have been persistent foreign equity outflows—substantial on a year-to-date basis—along with some net FDI outflows and other external pressures. The RBI’s recent interest rate cuts, though necessary to support the domestic economy, have also reduced the rupee’s appeal by narrowing interest rate differentials. Investor sentiment was further shaken during the previous wave of US-China tensions, prompting capital flight from emerging markets, including India. While some of that risk aversion has eased amid a temporary cooling in US-China rhetoric, caution remains warranted, as the US appears poised to announce a new round of unilateral tariffs in the coming weeks.

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Asia

Economic Letter from Asia: India Rising

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The National Association of Realtors' Fixed Rate Mortgage Housing Affordability Index (HAI) fell 2.3% (+6.2% y/y) in April to 101.0 after rising moderately in each of the prior four months. The recent high was 104.9 in September. The level of home affordability remained 12.3% higher than its low of 89.9 in October 2023. It remains 43.6% below the high of 179.2 in April 2020.

The decline in affordability in April occurred as the median price of an existing single-family home rose 2.6% (1.7% y/y) to $418,000, and mortgage rates rose to 6.81% from 6.73% in March. The price compared to the record $432,900 in June 2024. The rise in mortgage rates left them up from a recent low of 6.26% in September of last year and below a 7.70% high in October of 2023. It remained well above a December 2020 low of 2.73%. These changes raised the principal & interest payment by 3.5% (-1.0% y/y) to $2,182 per month. That was well above the most recent low of $984 in February 2020. Monthly mortgage payments averaged a higher 24.8% of income during April. They remained up from a low of 14.0% of income in April 2020.

The rise in housing costs in April was accompanied by improvement in median family income. It increased 1.0% (5.1% y/y) to a record $105,791 after rising 0.4% in each of the prior two months.

Housing affordability declined m/m across the country in April. The index fell 3.7% (+4.2% y/y) to 130.1 in the Midwest. It remains the most affordable region of the country. In the South, the index declined 1.1% (+8.3% y/y) to 105.6 and the affordability index in the Northeast declined 3.9% (+0.5% y/y) to 92.0. In the West, where homes are the least affordable, the index fell 1.1% (+7.7% y/y) to 71.0 in April.

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.

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**.

**Inflation Expectations** from the Federal Reserve Bank of Cleveland is available [here](https://www.clevelandfed.org/indicators-and-data/inflation-expectations).

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- Home prices & mortgage rates rise.
- Median income improves.
- Affordability falls across country.

U.S. Housing Affordability Declines in April

Andrew Cates

**The Blue Chip growth consensus**
Our first chart this week depicting shifts in consensus growth expectations highlights significant divergences in the economic outlook over the past six months and the more recent one-month period. Major downward revisions over the past six months have prominently affected economies such as South Korea, Mexico, Australia and Canada, indicating heightened vulnerability to external shocks, particularly from disruptions linked to intensified US trade policies. Conversely, China has shown a slight improvement, possibly due to an effective policy response. The recent one-month adjustments, however, exhibit much smaller and generally modest upward revisions, suggesting some stabilization or cautious optimism amid ongoing uncertainties.

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**The Blue Chip inflation consensus**
This next chart tracking consensus forecasts for CPI inflation in 2025 across the US, Euro area, and China reveals a striking divergence in inflation expectations. In the US, inflation projections rose steadily through late 2024 and early 2025, peaking above 3% before easing slightly. This upward drift likely reflects the lagged impact of the US economy's relative strength in 2024, including robust consumer demand and tight labour markets, rather than more recent tariff-related pressures. By contrast, Euro area forecasts have remained relatively low and stable, suggesting more subdued domestic dynamics and tighter policy. Meanwhile, China's CPI forecast has fallen sharply over the same period pointing to deepening demand-side weakness and lingering deflationary risks.

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**Supply chain pressures** 
Looking ahead, the tight correlation between the New York Fed’s Global Supply Chain Pressure Index and producer price inflation for advanced economies underscores the risks posed by US trade policies. As supply chain pressures potentially intensify—partly due to renewed protectionist measures—global producer price pressures could again escalate, creating renewed inflationary challenges and complicating central bank policy calibration.

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**US policy uncertainty**
As the chart below illustrates, US monetary policy uncertainty remains elevated, even as it has eased from its recent peaks. This persistent uncertainty continues to drive market volatility, reflecting investor unease over the Federal Reserve’s future policy path in the face of tariff-related disruptions and inflationary pressures. The chart specifically shows a potentially valuable tool for tracking this uncertainty – the Kansas City Fed’s measure of Policy Rate Uncertainty (KC PRU). This index is constructed from the prices of financial options linked to future short-term interest rates—rates that closely track the federal funds rate—and captures one-year-ahead uncertainty at a daily frequency dating back to the late 1980s.

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**The UK labour market** 
The UK labour market data released this week revealed a sharp deterioration, with substantial job losses indicated by payroll data alongside a rising unemployment rate. This surprising weakness not only signals immediate economic challenges but also complicates the BoE’s monetary policy response at a time when policymakers face persistent inflationary pressures and broader macroeconomic uncertainty.

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**Energy and growth**
Over the longer term, the strong historical correlation between primary energy consumption and GDP growth in advanced economies underscores the critical role of energy in sustaining economic stability. Persistently high real energy prices and complex energy transition processes present significant obstacles, particularly for energy-intensive economies like the UK, which seek sustainable growth trajectories amid heightened geopolitical and trade uncertainties.

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Financial markets have experienced considerable gyrations in recent weeks, reflecting substantial shifts in investor expectations and heightened uncertainty, largely driven by ongoing US tariff policies. Over the past six months, consensus growth forecasts have seen notable downward revisions across most major economies, though these have been partially offset by modest upward revisions in the past month (chart 1). Concurrently, consensus inflation projections have diverged significantly, with upward pressures in the US contrasting with deflationary risks in China (chart 2). Compounding these US issues, renewed protectionism appears to be pressuring global supply chains again, potentially increasing inflation risks and sustaining elevated monetary policy uncertainty (charts 3 and 4). This week's particularly weak UK employment data highlight immediate domestic economic fragility, while longer-term economic stability remains challenged by persistently high real energy prices and complexities surrounding the energy transition (charts 5 and 6).

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Economy in Brief: March 2007

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U.S. PPI Surprise

Major Increase in Mortgage Delinquencies in Q4; Rate of Foreclosures Started Hits a Quarterly Record

US Export and Import Prices Show Their Soft Side

U.S. Current Account Deficit Shrinks

German Financial Types Become a Little More Positive on the German Outlook, and a Little Less So for the Euro Area [...]

U.S. Retail Sales Pose a Dilemma

U.S. Retail Sales Pose a Dilemma

China's Surplus on Trade in Goods Reached $23.76 Billion in February Second Highest on Record