Carol Stone, CBE

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The Philadelphia Federal Reserve Bank reported that its monthly survey of manufacturers saw its Current Activity Diffusion Index at -10.4% in May, an improvement from the -31.3% reading in April.  While obviously still negative, the monthly move was sizable and even larger than the expectation of a move to -20.0% in the Action Economics Forecast Survey.  The Philly Fed survey responses were collected from May 8 to May 15.

The ISM-Adjusted Composite Index, calculated by Haver Analytics from the survey results, was 46.4 in May, up from 42.2 in April.  The May result still showed net contraction in activity, but was less weak than the April value.

Changes in the component series were mixed.  New orders were still negative, at -8.9%, but less so than April’s -22.7%.  In May, 27.4% of respondents reported an increase in new orders while 33.6% had no change in new orders and 36.3% had decreasing new order amounts.  Shipments had a relative improvement, with a 4.7% net decline, representing an increase at 21.4% of respondent versus a decrease at 26.1%.  These compare to increasing shipments in April at 20.4% of companies and a decrease at 27.7%.  Unfilled orders actually had a slightly positive reading in May, 0.8%, up from -11.1% in April; the May result was the first positive reading since May 2022.  Inventories turned back positive in the May data, at +6.4% versus -17.9% in April; the share of companies with increases was 18.5% in May after just 2.9% in April, while the share with decreasing inventories was 12.1% in May, less than April’s 20.8%.

Employment conditions remained negative in May, at -8.6% after April’s marginal -0.2%.  The number of employees increased at 6.6% of firms in May while they decreased at 15.1%.  

Prices paid were slightly stronger in May, at a net of 10.9% after April’s 8.2%.  This was composed of increases at 25.5% of respondents and decreases at 14.6%.  In April, prices paid had risen at a relatively moderate 18.5% of firms, the smallest since mid-2020, and they declined in April at 10.3%.

Prices received in May had the weakest net reading since the pandemic era in the spring of 2020, as they registered a net index of -7.0%.  This reflected the largest share of firms with price reductions, 22.0%, since 25.4% in July 2009.  Prices had fallen at just 10.4% of firms in April 2023.  Prices rose in May at 14.9% of firms after rising in April at 7.1% of firms.

Expectations for business conditions in the next six months had a -10.3% May reading, notably weaker than April’s -1.5%.  The May survey showed weaker net expectations for new orders, at -2.3% after +9.8% in April, shipments at +4.5% after +13.3% and delivery times at -31.0% after -28.1%.  Readings in the May survey for expectations of the number of employees were stronger, though, at +12.6% after +3.8% in April and there were also firmer readings for both prices paid and prices received.

The diffusion indexes represent the percentage of respondents indicating an increase minus the percentage indicating a decrease. The Philadelphia Fed data can be found in Haver's **SURVEYS** database. The expectations forecast figures are from the Action Economics Forecast Survey in **AS1REPNA**.


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-	Index at -10.4%, markedly less weak than April’s -31.3%.
-	New orders & shipments still negative, but less than month before.
-	Prices received weaker in May, but prices paid were stronger.


Philadelphia Fed Manufacturing Survey Still Negative in May, but Less Weak than in April

Robert Brusca

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The sequential growth rates show exports moving from 6% growth over 12-months to falling at a 10% pace over 6-months and then reversing to post a substantial 23.6% annual rate increase over 3-months. Imports grow by only 0.1% over 12 months, fall at a 30% annual rate over 6-months and then trim that to a decline of 13.6% at an annual rate over 3-months.  Both exports and imports show improvement over 3-months compared to 6-months but exports transition to a strong, positive, growth rate while imports better than half their rate of decline. 

The exchange rate against the dollar has fallen on balance over 12 months by 5.6%, over 6-months it rises at a 17.6% pace but then over 3-months it's off at a 9.6% annual rate. The table lists average exchange rates over 12-months, 6-months, and 3-months but it calculates percentage changes on a point-to-point basis on those horizons. The average yen change rate has improved slightly over 3-months compared to 12 months moving up to a level of 133 from a level of 136 on its twelve-month average.

The broad-yen has fared somewhat similarly; this exchange rate measures the yen’s value against its trading partners on a trade weighted basis. The broad yen is lower by 2.7% over 12-months, strengthening at a 9.5% pace over 6-months, and weakening at a 7.7% annual rate pace over 3-months.

Export and import prices show very different behavior and on the price front we see that there's been a lot more weakness in import prices while export prices have generally clung to small positive gains. Export prices are up 1.7% over 12-months and up at a 1.6% pace over 3-months. Import prices fall by 2.9% over 12 months and fall at an 18.5% annual rate over 3-months.

As a result of these extreme price moves - and very different price moves between exports and imports - real exports and real imports behave very differently. Real exports, that are exports adjusted for inflation, rise 4.2% over 12-months, are flat over 6-months and are rising at a 21.6% annual rate over 3-months. Real imports rise 3.2% over 12-months fall at a 1.2% pace over 6-months and then rise at a 6.1% annual rate over 3-months. Exports are still much stronger than imports over 3-months but real imports over 3-months are growing at a 6.1% pace not falling at a13.5% as the nominal flow shows. Accounting for inflation changes everything.

Japan's economy in the first quarter surprised with its growth, rising by more than what had been expected. However, in the quarterly trade data it was clear that bold export and import flows were slowing down as we see in the big picture for this month. But, this month, there is an exception with exports showing a significant pickup over three months. We'll have to see if that is going to hold up when we get to the next quarter’s data. 

Globally, trade is also slowing down; the manufacturing sectors of economies show more weakness than the services sectors and that is playing out in terms of weaker trade flows. Inflation continues to be high throughout most of the global economy. Japan has less of a problem with this than other G-7 countries because it has been emerging from a past-period of deflation and while its current inflation rate is over the top of its target, it is not as excessive as the inflation has been in Europe and in the US. For the most part G-7 excessive inflation pressures linger and where central banks have been raising rates to combat inflation; Japan is an exception. Markets are beginning to brace for the Federal Reserve in the US to stop raising rates. They are beginning to look ahead to a period of rate cuts, that the Fed itself mostly denies... The ECB still has more rate hiking ahead of it because its inflation rate is still quite a bit excessive compared to its target although there is clear evidence of headline inflation decelerating there. And, in Japan, the outlook for policy continues to be unknown as the new central bank governor has been content to continue with the policies that are in place including yield curve control, but these policies have resulted in substantial purchases and ownership by the central bank of government bonds in Japan. 

Globally the inflation outlook is still unclear because the war in Ukraine continues and Russia's alliance with OPEC, in the OPEC-plus agreement, last decided to cut-back output to try to firm-up oil prices in the face of weakening global growth. So, we can't be quite sure what policies OPEC has planned for the future or what resolve it has to implement those policies. But with the US and with Europe still focused on ‘green’ policies it has been hard for them to unlock new sources of cheap energy to offset high prices from OPEC the risk to inflation from oil, as well as other sources,  remains in play.



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Japan

- The speed of export and import growth for Japan has steadily slowed with the exception of a pickup in export growth over the last three months. These trends have accompanied an improvement in Japan's trade deficit from 12-months to 6-months to 3-months.

- In April Japan's exports rose 2.5% after falling 0.7% in March and rising 3.6% in February. Imports rose by only 0.1% in April after falling in step with exports in March, by -0.7%, but also fell by 3% month-to-month in February. Over this stretch exports have clearly outpaced imports.



Japan's Trade Flow Momentum Shrinks...but so Does Its Deficit

Tom Moeller

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Initial claims for unemployment insurance fell to a seasonally adjusted 242,000 (+9.0% y/y) in the week ended May 13 after the prior week’s increase to an unrevised 264,000 from 242,000. A decline to 255,000 initial claims had been expected in the Action Economics Forecast Survey. The four-week moving average fell to 244,250 from 245,250, but remained above the late-January low of 199,500 initial claims.

The number of continued weeks claimed, “insured unemployment,” fell to 1.799 million (+25.5% y/y) in the week ended May 6 from 1.807 million in the prior week, revised from 1.813 million. The four-week moving average of continued weeks claimed fell to 1.813 million, the lowest level since late-March.

In the week of May 6, the insured unemployment rate was 1.2% for the third straight week. This rate has been between 1.2% and 1.3% since late January and compares with 0.9% in September and early October last year, which is the all-time low for this measure of unemployment.

In the week of April 29, the total number of continued weeks claimed in all unemployment insurance programs was 1.686 million. This was down from 1.715 million the prior week and compares to a recent high of 2.000 million the last week of February. This total includes federal employees, newly discharged veterans, extended benefits and other specialized programs and is not seasonally adjusted. Claims in the Pandemic Unemployment Assistance program and Pandemic Emergency Unemployment Compensation are no longer included in the main Labor Department press release.

The insured rates of unemployment in regular programs vary across states. The highest insured unemployment rates in the week ending April 29 were in California (2.38%), New Jersey (2.21%), Massachusetts (2.02%), Alaska (1.66%) and Minnesota (1.47%). The lowest rates were in South Dakota (0.24%), Nebraska (0.34%), Virginia (0.34%), Kansas (0.36%), and Tennessee (0.38%). Other large state rates include New York (1.61%), Illinois (1.57%), Pennsylvania (1.27%), Texas (0.98%) and Florida (0.40%). These state rates are not seasonally adjusted.

Data on weekly unemployment claims going back to 1967 are contained in Haver's **WEEKLY** database, and they are summarized monthly in **USECON.** Data for individual states are in **REGIONW**. The expectations figure is from the Action Economics Forecast Survey, carried in the **AS1REPNA** database.


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-	Upward trend remains in place. 
-	Continuing claims move lower.
-	Insured unemployment rate remains at 5-month low.



U.S. Initial Unemployment Insurance Claims Reverse Earlier Gain

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Mortgage loan applications fell 5.7% (-32.7% y/y) in the week ended May 12, and reversed	 a 6.3% increase in the prior week. These data come from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey.

Applications for loans to purchase a home fell 4.8% (-26.5% y/y) in the latest week following a 4.8% increase in the prior week. Applications to refinance an existing loan declined 7.7% (-43.4% y/y) last week after a 10.0% rise the prior week.

The share of loans to refinance an existing mortgage in the week of May 12 was 27.4%, down from 28.0% in the prior week. The share of loans with an adjustable rate remained low at 6.5% versus 6.8% the week before.

The effective interest rate on a 30-year fixed rate loan was 6.74% in the week of May 12 versus 6.66% the week before. That rate was 7.02% in the March 3 week and 7.42% on October 21. The rate on a 15-year fixed-rate mortgage rose to 6.13% last week and reversed the decline in the prior week. The rate on a 30-year Jumbo loan rose to 6.57% last week from 6.48% the week before. For a 5-year ARM loan, the effective rate spiked to 6.12% from 5.64%. It was the highest level since early-November.

The average size of a mortgage loan fell 0.9% to $391,300 last week (+0.6% y/y) from $395,000 in the prior week. The average size of a purchase loan eased to $440,400 in the latest week, down 0.1% (-0.2% y/y) from $441,700 during the week before. Refinance loans averaged $261,300 in the week of May 12, down 6.0% (-7.7% y/y) from the prior week.

The Mortgage Bankers Survey covers 75% of all U.S. retail residential mortgage applications and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks, and thrifts. The base period and value for all indexes is March 16, 1990=100. The figures for weekly mortgage applications and interest rates are available in Haver's **SURVEYS** database.


-	Mortgage applications remain near cycle low.
-	Effective interest rate increases to two-month high.
-	Average loan size declines.


Mortgage Loan Applications Fall Sharply

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Total housing starts rose 2.2% (-22.3% y/y) during April to 1.401 million units (SAAR) from 1.371 in March, revised from 1.420 million. Earlier figures were revised. Starts were 22.3% below the April 2022 peak of 1.803 million units. The Action Economics Forecast Survey expected 1.40 million starts in April.

The rise in total starts last month was led by a 3.2% increase (-11.5% y/y) in multi-family starts to 555,000. The rise followed a 10.5% March decline. Single-family starts rose 1.6% (-28.1% y/y) to 846,000 after easing 0.2% in March. They remained 35.5% below the December 2020 peak.

Starts in the Midwest jumped 32.6% (-21.9% y/y) to 171,000, following a 31.0% March drop. Starts in the West improved 34.6% (-25.5% y/y) to 315,000 after falling 33.5% in March. To the downside, starts in the Northeast fell 23.4% in April (-2.2% y/y) to 131,000 after surging 62.9% in March. In the South, starts weakened 6.3% (23.7% y/y) to 784,000 following a 5.7% March rise.

Building permits fell 1.5% (-21.1% y/y) to 1.416 million from 1.437 million in March, revised from 1.413 million. Multi-family permits fell 7.7% (-21.0% y/y) to 561,000 after an 11.4% March decline. Single-family permits gained 3.1% (-21.2% y/y) to 855,000 after a 4.1% March increase.

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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-	Gain in multi-family starts outpaces single-family advance.
-	Starts are mixed across the country.
-	Decline in building permits dominated by multi-family.


U.S. Housing Starts Rise in April

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**Private consumption** in the first quarter rose at a 2.4% annual rate quarter-to-quarter, the strongest since the second quarter 2022. Public consumption was flat, presenting its weakest performance since the fourth quarter of 2021 when it fell.

**Gross fixed capital formation** rose at a 4.6% annual rate in the first quarter, after a decline at a 2.6% annual rate in Q4. Plant and equipment spending increased at a 3.8% annual rate quarter-to-quarter after falling at a 2.6% pace in the fourth quarter. Housing investment crept ahead at a 0.7% annual rate just slightly ahead of the 0.6% pace logged in the fourth quarter of 2022. Still, the last two quarters of residential investment represent reversals from a string of declines in previous quarters.

**GDP net exports deteriorated slightly** with the erosion in the deficit expanding slightly in the first quarter after rising slightly in the fourth quarter. Exports fell at a sharp 15.6% annual rate quarter-to-quarter while imports fell at a 9% annual rate in the quarter. With both flows declining, the decline in exports dominated the picture and resulted in the weaker trade performance overall. 

**Domestic demand** for Japan rose at a 2.8% annual rate in Q1 after declining at a 1.6% annual rate in the fourth quarter 2022.

**Year on Year trends**
Japanese year on year trends show capital investment driving GDP the most among components with gross fixed capital formation up at the 3.2% annual rate. Planted equipment spending was up at a 3.9% annual rate, although those two investment components are offset somewhat by residential investment where spending fell at a 1.9% annual rate.  Private consumption spending rose at a 2.5% annual rate while public consumption was up at a 0.9% annual rate, contributing less than it had in the fourth quarter of 2022.  Year-over-year the trade picture continued to deteriorate as it did on a quarterly basis, subtracting slightly from GDP. Year-on-year exports were up at a 1.7% annual rate, but imports were up at a stronger 4.1% annual rate, causing deterioration in the trade position.

Japan's domestic demand rose by 1.7% year-over-year as GDP rose at a 1.3% pace year-on-year.

Japan's inflation continues to be slightly overcooked, however, after a long period of suffering through deflation, monetary officials are not concerned about it nor are they convinced inflation is going to remain heated. Japan’s inflation is significantly less than the inflation being faced in the US and in Europe. 

Japan's trade picture reflects the slowing in the global economy with its exports weaker both quarter-to-quarter and year-over-year. The gain in its GDP is blunted somewhat by stronger imports and the deterioration in net exports to which they contribute. Some of Japan’s stimulus leaks out to the global economy though its trade deterioration.  Overall, the quarter's performance is slightly better than expected. Annual growth rates in the post-Covid period continue to outperform the growth that Japan had been posting in the pre-Covid period.  Japan’s economy is doing slightly better and its flirtation with deflation has been put to an end.  But Japan still has a declining population, a large stock of public debt and a central bank that is still buying government bonds hand over fist. Japan still faces many policy challenges.





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- Japan's first quarter GDP beat expectations, rising 1.6% at an annual rate when a gain of less than one-half of 1% had been expected. However, the gain in the fourth quarter was revised to a slight decline taking some of the surprise value away from the first quarter reading.

- The annualized quarterly gain of 1.6% was the strongest growth since the second quarter of 2022 when GDP rose 4.7%. That second quarter growth rate is flanked by declines in the third quarter and in the first quarter just before it.


Japan's GDP Beats Expectations Even as Net Exports Are Weak

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Total business inventories eased 0.1% (6.4% y/y) in March following a 0.1% increase in February; the February number was revised downward from 0.2%.  The Informa Global Markets Survey expected March inventories to be unchanged from February.

Business sales fell in March by 1.2% (-0.6% /y) after a 0.2% decrease in February; that earlier reading was revised from a steady amount reported last month.  With the larger decrease in sales than in inventories, the resulting inventory-to-sales ratio rose slightly to 1.39 in March from 1.38 in February; the February ratio was revised from 1.36.

By type of distributor, retail inventories increased 0.7% (+8.2% y/y) in March after a modest 0.2% increase in February, which was revised from 0.7% reported before.  Excluding auto dealers, retail inventories rose 0.3% (+3.8% y/y) in March after a decrease of 0.2% in February; the February result is a marked downward revision to the 0.3% increase reported a month ago.   Motor vehicle & parts dealers reported a 1.6% increase in inventories for March after a 1.4% increase in February, which was revised from 1.6% reported last month.  Inventories at furniture, home furnishings, electronics and appliance dealers were unchanged in March after a 1.0% increase the month before while general merchandise stores saw inventories increase 1.2% after being unchanged in February.

Inventories at merchandise wholesalers were unchanged to down very slightly in March after being very slightly higher during February; The March inventories were up 9.1% y/y.  Manufacturers’ inventories in March were down 0.7% (+2.1% y/y) after edging down just 0.1% in February.

Retail sales (not including food services) fell 0.8% in March (+1.1% y/y) following a 0.4% decrease in February.  Retailers excluding motor vehicle dealers had a 0.6% decline in March sales (+1.2% y/y) after a 0.2% decrease in February.  Total sales in this grouping are equal to the more familiar retail sales total, just excluding motor vehicle and parts dealers.  

Wholesale sales declined 2.1% in March (-2.9% y/y) following a 0.4% increase in February.  Manufacturers’ shipments were down 0.5% in March (+0.5% y/y) following a 0.6% decline in February.

Given these developments for sales and inventories in each type of distributor, the I/S ratios did vary noticeably.  For retailers the I/S ratio was 1.30 in March, up from 1.28 in February.  For wholesalers, it was 1.40 for March, up from 1.37 in February and for manufacturers, the March reading was 1.48, down marginally from 1.49 for February.

The manufacturing and trade data are in Haver’s **USECON** database. The Informa Global Markets forecast is in the **MMSAMER** database.


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-	Total inventories ease by 0.1% in March.
-	Total business sales down 1.2%.
-	Retailers’ inventories rise 0.7%.


U.S. Business Inventories Down Slightly in March, but Mixed by Distributor

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**Inflation expectations**
Central banks clearly are focused on inflation, as inflation continues to run over the top of their targets and even after substantial rate hikes inflation has not gone down by very much in the United States or in Europe, generally. And the Euro-Area inflation expectations are hardly changed at a -81.9 reading in May after a -82.5 in April. In Germany the reading is -80.4 in May compared to -81.2 in April. And, in the US, the reading is -82.9 from -84.1 in April. The readings reflect the fact that inflation is very high and that, at this point, inflation broadly is expected to slow. However, the monthly changes are extremely small.  

**Survey history for context**
Inflation expectations were high and positive through 2021. Toward the end of the year, they began to shift into negative territory, they flipped into positive readings in March and April of 2022, after the Federal Reserve in the US began to hike interest rates. Then, negative readings persisted in the -25% to -50% range through July, August, September, October, and November of 2022. In December of 2022 there was a shift as inflation expectations in the US and in Europe turned sharply to higher negative values in high -70s or in the -80-percentile range. The readings have stayed there with very little change for the last six-months. During this period inflation in the US has peaked and the headline has come down while core inflation rates in the US have been very stuck; the Euro-Area inflation rate also has peaked and started to come down except in France. The UK shows very stubborn inflation that doesn't show signs of decelerating.  The Zew inflation expectations data have become hard to interpret because the high negative numbers indicate that inflation is not expected to accelerate but is expected -strongly expected- to fall; that's not a surprise given how high inflation is. The question is how much deceleration they expect from inflation; high negative readings suggest ‘a lot.’  But the survey has had high negative readings for the last 6-months; they've had these high expectations for inflation to fall and they simply have not been met.

**The interest rate outlook**
Interest rate expectations also tell us something about what's expected from inflation in the Euro-Area. Short term expectations are higher in May at 75.6 up from 68.5 in April- further rate hiking is expected in the Euro-area. In the United States, however, a reduction in short term expectations progresses somewhat steadily although the fall; in May it is considerably more dramatic falling to a level of 19.3 from 44.7 in April.  In this case there seems to be an association between interest rate expectations and the banking sector crisis that has emerged. There continues to be uncertainty about how much that is going to affect inflation in the US, but rate expectations have shifted dramatically as the banking sector crisis has emerged. That's even as the Fed has vowed to return inflation to its 2% target and asserted that the banking sector is safe as well as promise to deliver no undue harm to the economy – a tall set of orders.

Long term expectations find slightly slower rates in Germany the level of 18.6 in May down from 21.8 in April and, in the US, long term rates are lower as well with their diffusion reading down to 2.8 in May after a reading of 9.2 and April; that itself is down from 18.6 in March. Once again, we're picking up the impact of the crisis in the US on the rate outlook.

**Stocks outlook cut**
Expectations for the stock markets (not shown) are weaker for the Euro-Area, for Germany, and for the US - all of which have turned negative from positive readings in the mid-teens in April.

**Complicated situation**
On balance it's a complicated picture. There are differences between Europe and the US and there are also some significant differences in the progress of expectations and the perception of events that are linked to causes that we can't clearly identify. For example, if people are just concerned about the banking sector and determined that the Fed will not raise rates anymore are there also expectations that piggyback on that about inflation being lower. Will the the banking sector crisis do that?  It's hard to know what the message is in markets.

**The queue standings are unambiguous and weak**
The queue standings that evaluate the diffusion readings relative to historical standards show that the economic situation is substandard in the Euro-Area, Germany and in the US with queue percentile standings below the 50% mark (50% identifies the median over a span of time back to the early 1990s). Expectations for growth are even weaker with an 18-percentile queue standing for Germany and a 14-percentile queue standing for the US. Inflation expectations, as noted above, are extremely low at the 1.2-percentilelevel for the Euro-Area, at 2.5% for Germany and at 1.1% in the United States. The Zew experts get a expect inflation to decelerate rather than accelerate but the key question here is how soon and by how much? We don't get too much guidance on that. Short term rate expectations in the Euro-Area are still much higher at an 87.7-percentile standing and lower in the US at a 37.3-percentile standing. The Federal Reserve has done a lot more rate hiking than the ECB has and given the prospects for growth there's relatively more anticipation that short term rates can be cut in the US. The short-term US rate expectations have been lowered sharply over the last two months. Long-term rate expectations are well below their medians for both Germany and the US at a 25-percentile queue standing in Germany and a 10-percentile queue standing in the US. Long-term rates are expected to continue to fall.  Stock market assessments have them extremely weak in the Euro-Area and in Germany and weak but not quite as weak in the United States as well.

**Summing up**
On balance this is not very upbeat outlook. Inflation remains stuck and we see inflation expectations continue to look for inflation to become unstuck and to fall but we've been hearing that broken record for about half a year from the Zew experts. Expectations for growth are weak as well. The perceptions for current growth are not quite as weak but they show growth is substandard and has been weakening. The clearest expectations are for interest rates: long-term rates are falling. And short-term rates will be moving in different directions, higher in the Euro-Area and lower in the US. Investors continue to worry about recession both in the US and in Europe. And inflation remains stuck with unclear prospects as to how central banks intend to act in the future. Central bankers all talk the talk but it's not clear if they're willing to walk the walk. Only time will tell.



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 - Economic expectations in Germany turned lower in May, with an up-minus-down net diffusion reading falling to -10.7 from +4.1 in April. The reading for the United States weakened as well to a reading of -29.6 in May from -23.3 in April. The deterioration in expectations comes, as inflation continues to linger high with central banks raising rates.  

- Current economic conditions are mixed in May. For the Euro-Area there was an improvement to -27.5 in May from -30.2 in April. Germany, however, shows deterioration to -34.8 from -32.5 in April. The US also shows deterioration, as its net reading swings from a + 4.1 net in April to a -3.4 diffusion marker in May.

Zew Macroeconomic Expectations Turn Lower 

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

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

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

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

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

US economy expected to outperform other major economies in 2025

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

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

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

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

Policy uncertainty has surged since the US national elections.

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

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

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

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

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

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

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Andrew Cates

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

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

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

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

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

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**Average wages in selected developed and developing economies**
This point is reinforced by the final chart, which shows estimates for average monthly wages across countries in 2024. US labour remains much more expensive than in peer or emerging economies. So even if China’s costs rise in tandem with the US, the global supply chain has ample alternatives. 'China plus one' strategies are accelerating, and the US remains structurally misaligned with low-cost production hubs. Tariffs aimed at reshoring supply chains are unlikely to deliver sustained gains unless accompanied by deep supply-side reforms, and risk further disincentivizing foreign direct investment if global firms perceive US trade policy as erratic or punitive.

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Financial markets found a measure of calm this week, buoyed by some subtle shifts in tone from US policymakers. A softening in the administration’s rhetoric around trade tariffs coupled with a less confrontational stance toward Federal Reserve Chair Jerome Powell, helped ease tensions that had roiled markets earlier in the month. Equities rebounded modestly, and volatility indicators edged lower, reflecting cautious optimism that the worst of the policy shocks may be behind us. But beneath the surface, significant downside risks persist. New shipping data point to a pronounced slowdown in US-China trade flows (chart 1), suggesting the damage from recent tariff escalations is already rippling through global supply chains. Meanwhile, incoming data for the US revealed an unexpected contraction in the economy in Q1 and further signs of weakness in the labour market (chart 2). The US dollar, in the meantime, while long supported by superior growth and yield differentials, has begun to decouple from traditional drivers (charts 3 and 4) suggesting growing pressure on capital flows. At the same time, structural imbalances are drawing renewed scrutiny: unit labour cost comparisons show the US steadily losing competitiveness (chart 5), while nominal wage disparities remain stark versus China and other Asian economies, further complicating any effort to restore trade balance without broader reforms (chart 6). In short, while markets may be drawing temporary comfort from a pause in tariff brinkmanship, the deeper economic and financial vulnerabilities exposed this month remain unresolved—and increasingly central to the global macro narrative.

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Charts of the Week: Tariff Truce, Tenuous Trust

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The ISM Purchasing Managers Index of activity in the manufacturing sector slipped to 48.7 in April from 49.0 during March and 50.3 in February. It remained up from a low of 46.9 in October of last year. A level of 50 is the break-even point between a rising and falling level of activity. The Action Economics Forecast Survey expected a reading of 47.8 for April. The series reached a monthly high of 63.8 in March 2021.

Two of the five component indexes weakened last month. The April production index fell to 44.0 after declining to 48.3 in March. It was the lowest level since May 2020. A lessened 19.8% (NSA) of respondents reported higher production while an increased 24.2% reported lower output. The inventories index declined to 50.8 last month from 53.4 in March. The index remained up from a low of 43.2 in October of last year.

Moving higher, the new orders index rose to 47.2 last month from 45.2 in March. The index remained below a January high of 55.1. Twenty-eight percent (NSA) of respondents reported higher new orders while 26.7% reported a decline. The employment index rose to 46.5 from 44.7 in March. It was below a high of 50.3 in January. A greater 13.1% (NSA) of respondents reported more hiring while a fewer 16.2% indicated less. The supplier delivery index rose to 55.2 from 53.5 in March. A higher 16.6% (NSA) of respondents reported slower delivery speeds while a fairly steady 6.2% reported a quickening.

The prices index, which is not part of the composite series, edged up to 69.8 (NSA) in April after increasing to 69.4 in March. It was the highest level since June 2022, up from a December 2022 low of 39.4. An increased 49.2% of respondents reported higher prices last month, up from 12.2% in November, while a higher 9.7% reported lower prices.

In other series, the export orders index plummeted to 43.1 in April from 49.6 during March. It was down from the high of 52.4 in January. The imports index fell sharply to 47.1 from 50.1 in March. It was the lowest reading since December 2023. The order backlog index dropped to 43.7 (NSA) last month from 44.5 in March. It was the lowest level in five months.

The ISM figures are based on responses from over 400 purchasing executives from 18 industries, which are weighted according to each industry’s contribution to GDP. These indexes are diffusion indexes where a reading above 50 indicates expansion and a reading below 50 points to contraction. The figures from the Institute for Supply Management can be found in Haver’s **USECON** database; further detail is found in the **SURVEYS** database. The expectations number is available in Haver’s **AS1REPNA** database.

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- Declines in last three months follow earlier improvement.
- Production & inventories account for m/m shortfall.
- Prices index edges up to another three-year high.

U.S. ISM Manufacturing Index Indicates Contraction in April

Winnie Tapasanun

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The value of construction put in place unexpectedly fell 0.5% m/m in March after rises of 0.6% in February (+0.7% initially) and 0.1% in January (-0.5% previously), data from the U.S. Census Bureau showed. The March reading was the first m/m fall following five straight m/m gains. A 0.3% m/m March rise had been expected in the Action Economics Forecast Survey. The year-on-year rate of increase decelerated to 2.8% in March, the lowest since May 2019, after registering at 3.4% in February and January. The latest y/y figure was lower than 8.7% in March 2024; thus, having remained below its recent high of 9.8% in January 2024 and a peak of 18.6% in April 2022.

Private construction slid 0.6% (+2.3% y/y) in March, down for the first time since September, following increases of 0.7% in February (+0.9% initially) and 0.1% in January (-0.7% previously). Residential private construction fell 0.4% (+2.8% y/y) in March, the first m/m fall in six months, after an unrevised 1.3% gain in February. Home improvement building dropped 1.2% (+13.4% y/y), the first m/m decline since December, following a 2.3% February gain; it was 41.1% of the residential private construction. Single-family building edged up 0.1% (-0.8% y/y), the smallest of seven consecutive m/m increases, after a 0.8% February rise; it was 46.6% of the residential private construction. Meanwhile, multi-family building was essentially unchanged m/m (-12.1% y/y) in March following 15 straight m/m decreases; it was 12.3% of the residential private construction.

Nonresidential private construction fell 0.8% (+1.6% y/y) in March after a 0.1% increase in February (+0.4% initially) and a 0.1% easing in January (-0.2% previously). The March fall reflected m/m drops in the following nonresidential private constructions. These included religious (-2.9%; +16.4% y/y), health care (-2.2%; -5.2% y/y), office (-1.8%; +2.7% y/y), educational (-1.7%; -4.2% y/y), lodging (-1.6%; -1.0% y/y), commercial (-1.0%; -5.8% y/y), manufacturing (-0.4%; +3.6% y/y), communication (-0.3%; +2.2% y/y), and utilities (-0.1%; +7.0% y/y). In contrast, private constructions for amusement & recreation (1.5%; 7.0% y/y) and transportation (0.7%; 10.2% y/y) rose m/m in March.

The value of public construction declined 0.2% (+4.7% y/y) in March after holding steady in February (+0.2% initially), reflecting a 0.2% increase (-1.9% y/y) in residential public construction and a 0.2% easing (+4.8% y/y) in nonresidential public construction. The March decline reflected m/m drops in the following nonresidential public constructions. These included utilities (-4.8%; -12.8% y/y), commercial (-1.6%; +40.3% y/y), amusement & recreation (-1.0%; +19.1% y/y), educational (-0.6%; +7.6% y/y), sewage & waste disposal (-0.6%; +10.6% y/y), and health care (-0.4%; +13.0% y/y). Notably, spending on highways & streets, which made up 28.7% of public construction spending, fell 0.5% (-2.4% y/y) in March, the first m/m fall since October, following a 0.9% increase in February. To the upside, the following public constructions rose m/m in March: office (1.6%; 6.0% y/y), transportation (1.4%; 7.3% y/y), public safety (0.7%; 4.1% y/y), conservation & development (0.6%; 4.7% y/y), and water supply (0.6%; 12.2% y/y).

The construction figures can be found in Haver's **USECON** database. The expectations figure is from the Action Economics Forecast Survey in **AS1REPNA**.

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- March construction spending -0.5% m/m; +2.8% y/y, the lowest y/y rate since May ’19.
- Residential private construction -0.4% m/m, led by a 1.2% drop in home improvement building.
- Nonresidential private construction -0.8% m/m, down for the second month in three.
- Public sector construction -0.2% m/m, reflecting a 0.2% decline in nonresidential public building.

U.S. Construction Spending Unexpectedly Drops in March, the First M/M Fall Since September

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Initial claims for unemployment insurance rose 18,000 in the week ended April 26 to 241,000, seasonally adjusted.  This is higher by 16,000 than the Action Economics Forecast Survey amount of 225,000 and is the largest amount since the week of February 22. The previous week’s actual count was revised up by 1,000 to 223,000, from 222,000 reported initially.

The total number of unemployment insurance beneficiaries – also known as “continuing claims” – in the week ended April 19 was 1.916 million, up 83,000 from the prior week’s 1.833 million; that earlier amount was revised down by 8,000.

The insured unemployment rate, that is, the number of beneficiaries as a percentage of covered employment, was 1.3% in the April 19 week, following 1.2% continuously since the week of January 6, 2024.

Economic conditions vary widely across states and territories.  In the week ended April 12, the highest unemployment rates were in New Jersey (2.39%), California (2.24%), Washington (2.19%), Rhode Island (2.17%) and Massachusetts (1.93%).  The lowest rates were in Florida (0.35%), South Dakota (0.40%), Alabama (0.41%), Virginia (0.45%) and Tennessee (0.48%).  Rates in other notable states include the Illinois (1.85%), New York (1.71%), Pennsylvania (1.54%) and Texas (1.09%). These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in U**SECON**. Data for individual states are in **REGIONW** back to December 1986. The expectations figure is from the Action Economics Forecast Survey in the **AS1REPNA** database.

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- Actual initial claims amount is 16,000 more than forecast.
- Total beneficiaries rose by 83,000.
- Insured unemployment rate ticked up to 1.3% after 15 months at 1.2%.

U.S. Initial Jobless Claims Rise Notably in April 28 Week

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Real GDP eased 0.3% SAAR (+2.1% y/y) during the first quarter of 2025 after increasing 2.4% in Q4’24 and 3.1% in Q3’24. A 0.4% increase had been expected in the Action Economics Forecast Survey. It was the first decline since Q1 2022.

Foreign trade subtracted 4.83 percentage points from growth last quarter as imports surged 41.3% (13.4% y/y) ahead of tariffs, which began to come into effect in the first quarter. The rise followed a 1.9% decline in Q4’24. Exports rose 1.8% (3.0% y/y) after easing 0.2% in Q4. Inventories added 2.25 percentage points to growth after subtracting 0.84 percentage point from Q4 growth.

Real final sales to domestic purchasers grew 2.3% (2.9% y/y) in Q1 after rising 3.0% in Q4. Personal consumption expenditures rose 1.8% (3.1% y/y) following a 4.0% gain. Durable goods spending fell 3.4% (+5.3% y/y) after surging 12.4% in Q4. Motor vehicle purchases declined 11.1% (+5.5% y/y) after strengthening 19.7% in Q4. Spending on home furnishings & appliances gained 1.5% (6.1% y/y) following a 5.4% rise. Recreational goods & vehicle outlays rose 2.5% (7.0% y/y) last quarter after a 13.9% Q4 increase.

Nondurable goods outlays rose 2.7% (3.0% y/y) following 3.1% growth in Q4. Apparel spending increased 6.7% (2.5% y/y) following a 5.0% rise. Food & beverage buying gained 2.5% (2.3% y/y) after a 1.8% increase. Gasoline & fuel oil purchases increased 4.6% (3.4% y/y) after falling 2.0% in Q4.

Spending on services increased 2.4% last quarter (2.7% y/y) after a 3.0% gain. Outlays on housing & utilities increased 3.4% (1.8% y/y) after rising 1.1% in Q4. Health care expenditures rose 4.0% (4.8% y/y) following a 4.7% strengthening. Transportation outlays increased 5.3% (4.6% y/y) after a 3.7% rise while recreation spending rose 4.7% (2.8% y/y) following a 4.5% rise. Restaurant & hotel expenditures declined 2.1% (+0.5% y/y) following a 2.8% rise. Financial services expenditures rose 1.9% (2.0% y/y) after a 3.1% Q4 increase.

Business fixed investment increased 9.8% (3.6% y/y) following a 3.0% decline in Q4. Expenditures on structures rose 0.4% (-0.4% y/y) after a 2.9% increase. Expenditures on producers’ durable equipment jumped 22.5% (8.0% y/y) after falling 8.7%.  Outlays on information processing equipment soared 69.3% (18.9% y/y) following a 7.3% decline. Industrial equipment investment fell 1.4% (-0.3% y/y) after easing 0.9%. Intellectual property product spending rose 4.1% (1.8% y/y) following a 0.5% decline. 

Residential structures investment increased 1.3% (-0.1% y/y) in Q1 after a 5.5% Q4 rise.

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Government spending fell 1.5% (+2.4% y/y) after a 3.1% Q4 rise. Federal government expenditures declined 5.1% (+2.9% y/y) after rising 4.0% in Q4. National defense expenditures declined 8.0% (+4.0% y/y) after increasing 4.8% in Q4. State & local government spending rose 0.8% (2.1% y/y) following a 2.5% rise.

The GDP price index rose 3.7% (2.6% y/y) after increasing 2.3% in Q4. It was the largest increase since Q4’22. A 2.4% increase had been expected. The PCE chain price index increased 3.6% (2.5% y/y) following a 2.4% rise. The PCE price index excluding food and energy rose 3.5% (2.8% y/y) after increasing 2.6% in Q4. The business fixed investment price index rose 0.4% (1.8% y/y) after 1.5% rise. The residential price index strengthened 3.9% (3.2% y/y) after a 1.9% rise while the government price index increased 4.7% (2.8% y/y) following a 2.1% rise.

The GDP data can be found in Haver’s **USECON** and **USNA** databases. **USNA** contains virtually all of the Bureau of Economic Analysis detail in the national accounts. The Action Economics consensus estimates can be found in **AS1REPNA**.

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- Decline in GDP is first in three years.
- Foreign trade subtracts substantially ahead of tariffs.
- Domestic final demand growth weakens.
- Price index strengthens with higher core PCE prices.

Economy in Brief: May 2023

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