Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060920c.jpg" width="353">
After two weeks of respectable gain, the number of mortgage applications for purchase fell last week by 3.0%, according to the Mortgage Bankers Association. For the month so far, applications in September are 4.2% above the August average which fell 3.5% from July.
During the last ten years there has been a 58% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
Overall mortgage applications nevertheless rose 2.0% last week and the gain lifted the average level this month 4.3% above August.
Applications to refinance surged 9.5% after three weeks of slight decline. The average level of refis in September is up 4.2% from August which surged 13.3% m/m from July.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060920d.jpg" width="353">
The effective interest rate on a conventional 30-year mortgage rose to 6.59 from 6.53% the week earlier and has averaged 6.55% this month versus 6.64% in August. The peak for 30 year financing was 7.08% late in June. The rate on 15-year financing also rose w/w to 6.30% and the peak rate was 6.75%. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities.
During the last ten years there has been a (negative) 79% correlation between the level of applications for purchase and the effective interest rate on a 30-year mortgage.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">09/15/06</th>
<th scope="col">09/08/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>595.8</td>
<td>584.2</td>
<td>-22.8%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>397.9</td>
<td>410.2</td>
<td>-20.5%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,748.7</td>
<td>1,597.0</td>
<td>-25.7%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
</body>
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After two weeks of respectable gain, the number of mortgage applications for purchase fell last week by 3.0%, according to the Mortgage Bankers Association. For the month so far, applications in September are 4.2% above the August [...]

Mortgage Purchase Application Recovery Stalled

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060920b.jpg" width="353">
The net worth of the US household sector inched up just 0.1% last quarter versus 1Q&#39;06 to $53.3 trillion. The gain totaled, however, 7.9% versus the second quarter of last year.
On the asset side of the ledger, total assets of households and nonprofit organizations rose 8.4% y/y. Households&#39; ownership of real estate rose 10.5% in value to over $20 trillion. Mutual fund share holdings rose 18.0% though the value of corporate equities held directly by households fell 1.5%. The value of money market shares rose 14.6% after a 6.0% gain last year and Treasury security holdings rose 20.6% y/y in value after a 2.2% decline during 2005.
Credit market debt outstanding held by all sectors of the economy grew 8.9%, about steady with last year&#39;s pace. The federal government&#39;s debt grew 5.9% y/y but U.S. households increased their borrowing at nearly twice that rate, 11.0%. Home mortgage liabilities grew 12.6% y/y after 14% gains during the prior three years. Consumer credit increased 3.9% y/y, the same as last year&#39;s growth rate, but households&#39; obligations in the form of bank loans more than doubled versus 2Q of last year and also doubled during all of 2005.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060920a.jpg" width="353">
Borrowing by nonfinancial corporations continued strong, up 11.9%, following double digit growth during 2004 &amp; 2005. During the last forty years there has been a 40% correlation between the y/y growth in corporate borrowing and the growth in nonresidential fixed investment.
Foreign sector holdings of US assets continued to surge, by 13.3% y/y. That was stable with last year&#39;s growth rate but it raised foreigners&#39; ownership of U.S. credit outstanding to 14.1% versus 10.0% ten years ago.
Intangible Capital and Economic Growth from the Federal Reserve Board is available <a href="http://www.federalreserve.gov/pubs/feds/2006/200624/200624pap.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/FFUNDS/@F2/@F201/@F201.HTM">Flow of Funds</a> (Y/Y Chg.)</th>
<th scope="col">% of Total</th>
<th scope="col">2Q&#39;06</th>
<th scope="col">1Q&#39;06</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Credit Market Debt Outstanding</td>
<td></td>
<td>8.9%</td>
<td>9.2%</td>
<td>8.9%</td>
<td>8.9%</td>
<td>9.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Federal Government</td>
<td>12%</td>
<td>5.9%</td>
<td>6.5%</td>
<td>7.0%</td>
<td>9.0%</td>
<td>10.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Households</td>
<td>27%</td>
<td>11.0%</td>
<td>11.8%</td>
<td>11.7%</td>
<td>11.7%</td>
<td>11.8%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Nonfinancial Corporate Business</td>
<td>14%</td>
<td>6.8%</td>
<td>6.1%</td>
<td>5.5%</td>
<td>3.6%</td>
<td>2.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Financial Sectors</td>
<td>32%</td>
<td>9.1%</td>
<td>8.9%</td>
<td>8.2%</td>
<td>8.1%</td>
<td>9.9%</td>
</tr>
<tr>
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Net Worth: Households &amp; Nonprofit Organizations (Trillions)</td>
<td></td>
<td>$53.3</td>
<td>$53.3</td>
<td>$51.8</td>
<td>$48.0</td>
<td>$44.0</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Tangible Assets: Households</td>
<td></td>
<td>$26.3</td>
<td>$25.8</td>
<td>$25.2</td>
<td>$22.5</td>
<td>$20.4</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Financial Assets: Households</td>
<td></td>
<td>$39.8</td>
<td>$39.9</td>
<td>$38.8</td>
<td>$36.4</td>
<td>$33.5</td>
</tr>
</tbody>
</table>
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The net worth of the US household sector inched up just 0.1% last quarter versus 1Q'06 to $53.3 trillion. The gain totaled, however, 7.9% versus the second quarter of last year. On the asset side of the ledger, total assets of [...]

US Flow of Funds: Households' Net Worth Stable

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060920b.jpg" width="353">
The net worth of the US household sector inched up just 0.1% last quarter versus 1Q&#39;06 to $53.3 trillion. The gain totaled, however, 7.9% versus the second quarter of last year.
On the asset side of the ledger, total assets of households and nonprofit organizations rose 8.4% y/y. Households&#39; ownership of real estate rose 10.5% in value to over $20 trillion. Mutual fund share holdings rose 18.0% though the value of corporate equities held directly by households fell 1.5%. The value of money market shares rose 14.6% after a 6.0% gain last year and Treasury security holdings rose 20.6% y/y in value after a 2.2% decline during 2005.
Credit market debt outstanding held by all sectors of the economy grew 8.9%, about steady with last year&#39;s pace. The federal government&#39;s debt grew 5.9% y/y but U.S. households increased their borrowing at nearly twice that rate, 11.0%. Home mortgage liabilities grew 12.6% y/y after 14% gains during the prior three years. Consumer credit increased 3.9% y/y, the same as last year&#39;s growth rate, but households&#39; obligations in the form of bank loans more than doubled versus 2Q of last year and also doubled during all of 2005.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060920a.jpg" width="353">
Borrowing by nonfinancial corporations continued strong, up 11.9%, following double digit growth during 2004 &amp; 2005. During the last forty years there has been a 40% correlation between the y/y growth in corporate borrowing and the growth in nonresidential fixed investment.
Foreign sector holdings of US assets continued to surge, by 13.3% y/y. That was stable with last year&#39;s growth rate but it raised foreigners&#39; ownership of U.S. credit outstanding to 14.1% versus 10.0% ten years ago.
Intangible Capital and Economic Growth from the Federal Reserve Board is available <a href="http://www.federalreserve.gov/pubs/feds/2006/200624/200624pap.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/FFUNDS/@F2/@F201/@F201.HTM">Flow of Funds</a> (Y/Y Chg.)</th>
<th scope="col">% of Total</th>
<th scope="col">2Q&#39;06</th>
<th scope="col">1Q&#39;06</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Credit Market Debt Outstanding</td>
<td></td>
<td>8.9%</td>
<td>9.2%</td>
<td>8.9%</td>
<td>8.9%</td>
<td>9.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Federal Government</td>
<td>12%</td>
<td>5.9%</td>
<td>6.5%</td>
<td>7.0%</td>
<td>9.0%</td>
<td>10.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Households</td>
<td>27%</td>
<td>11.0%</td>
<td>11.8%</td>
<td>11.7%</td>
<td>11.7%</td>
<td>11.8%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Nonfinancial Corporate Business</td>
<td>14%</td>
<td>6.8%</td>
<td>6.1%</td>
<td>5.5%</td>
<td>3.6%</td>
<td>2.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Financial Sectors</td>
<td>32%</td>
<td>9.1%</td>
<td>8.9%</td>
<td>8.2%</td>
<td>8.1%</td>
<td>9.9%</td>
</tr>
<tr>
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Net Worth: Households &amp; Nonprofit Organizations (Trillions)</td>
<td></td>
<td>$53.3</td>
<td>$53.3</td>
<td>$51.8</td>
<td>$48.0</td>
<td>$44.0</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Tangible Assets: Households</td>
<td></td>
<td>$26.3</td>
<td>$25.8</td>
<td>$25.2</td>
<td>$22.5</td>
<td>$20.4</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Financial Assets: Households</td>
<td></td>
<td>$39.8</td>
<td>$39.9</td>
<td>$38.8</td>
<td>$36.4</td>
<td>$33.5</td>
</tr>
</tbody>
</table>
Mortgage Purchase Application Recovery Stalled 
by <a href="/comment/Moeller.html">Tom Moeller</a> September 20, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060920c.jpg" width="353">
After two weeks of respectable gain, the number of mortgage applications for purchase fell last week by 3.0%, according to the Mortgage Bankers Association. For the month so far, applications in September are 4.2% above the August average which fell 3.5% from July.
During the last ten years there has been a 58% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
Overall mortgage applications nevertheless rose 2.0% last week and the gain lifted the average level this month 4.3% above August.
Applications to refinance surged 9.5% after three weeks of slight decline. The average level of refis in September is up 4.2% from August which surged 13.3% m/m from July.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060920d.jpg" width="353">
The effective interest rate on a conventional 30-year mortgage rose to 6.59 from 6.53% the week earlier and has averaged 6.55% this month versus 6.64% in August. The peak for 30 year financing was 7.08% late in June. The rate on 15-year financing also rose w/w to 6.30% and the peak rate was 6.75%. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities.
During the last ten years there has been a (negative) 79% correlation between the level of applications for purchase and the effective interest rate on a 30-year mortgage.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">09/15/06</th>
<th scope="col">09/08/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>595.8</td>
<td>584.2</td>
<td>-22.8%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>397.9</td>
<td>410.2</td>
<td>-20.5%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,748.7</td>
<td>1,597.0</td>
<td>-25.7%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
Federal Funds Rate Again Held at 5.25% 
by <a href="/comment/Moeller.html">Tom Moeller</a> September 20, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060920f.jpg" width="353">
The target interest rate for Federal funds was again held steady at 5.25% at today&#39;s meeting of the Federal Open Market Committee. Voting against the decision for the second time was Richmond Federal Reserve Bank President Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target.
The discount rate also was held steady at 6.25%.
Today&#39;s decision was widely expected by analysts.
The Fed&#39;s rationale for leaving rates unchanged indicated that &quot;The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market.&quot;
Need for further rate increases was stressed by the Fed. &quot;The extent and timing of any additional firming that may be needed to address these (inflation) risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.&quot;<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060920e.jpg" width="353">
For the complete text of the Fed&#39;s latest press release please follow this <a href="http://www.federalreserve.gov/boarddocs/press/monetary/2006/20060920/default.htm">link</a>.
The accompanying chart plots the U.S. economy&#39;s actual rate of growth during the last two quarters versus its so called &quot;potential&quot;, i.e., growth in the labor force plus the growth in labor productivity. The economy&#39;s potential for 4% growth was exceeded slightly in the first half due to the 5.6% surge in 1Q&#39;06 growth.
Knut Wicksell: The Birth of Modern Monetary Policy from the Federal Reserve Bank of Dallas can be found <a href="http://dallasfed.org/research/ei/ei0401.pdf">here</a>.
Modern Macroeconomics in Practice: How Theory is Shaping Policy from the Federal Reserve Bank of Minneapolis is available <a href="http://www.minneapolisfed.org/research/SR/SR376.pdf">here</a>.

Spain's Labor Costs Pick Up in Q2; Benefits Outstrip Wage Gains 
by <a href="/comment/Stone.html">Carol Stone</a> September 20, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060920g.jpg" width="353">
Spain&#39;s National Institute of Statistics (INE) reported on labor costs today for Q2 2006. These costs, measured as monthly compensation per worker, picked up to a 3.5% growth rate year-on-year from 3.4% in Q1 and at or near 3.0% for the previous two calendar years. The data are in a simple format: in Haver&#39;s SPAIN database, they are available in euros and an index of 2000=100, for three sectors of the economy, industry, construction and services, and for the total and two components, earnings and &quot;other&quot;. So there are 12 numbers in each quarterly report for each the euro amount and the index level. Could such a small array be interesting? Indeed.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060920h.jpg" width="353">
In Q2, while labor costs accelerated in total, they slowed in basic industry and construction and not by small increments. The industry sector increased 3.5% following 4.5% in Q1. Construction gained 3.9% in the latest quarter, after 4.3% in Q1. But the rapidly expanding service sector had 3.8% growth in Q2, well more than the 3.2% in Q1. So labor compensation in services gained visibly even as it slowed in more traditional sectors. However, this may have been a transitory shift, as the average annual gains over the prior five years had the reverse pattern: industry and construction both had vigorous increases, 4.1% annually for industry and 4.7% for construction, with services at 3.6%. So it&#39;s hard to tell if the old-line economy is moving to a slower trend or just pausing after sizable gains in earlier periods. In fact, if anything, these data show how consistent the service sector has been, hovering all the while in a range around 3-1/2% average yearly gains.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060920i.jpg" width="353">
Another significant point in this little array of data concerns the split between wages and &quot;other&quot; labor costs. Over the period 2000-2005, earnings grew at an average annual rate of 3.3%. But other labor compensation advanced at a 5.0% pace. These costs cover the same general items referred to in the US as &quot;supplements to wages and salaries&quot; or &quot;benefits&quot;: disability and unemployment, and also in Spain compensation for tools, uniforms and transportation, and similar job-related expenses. In both countries, these also cover employers&#39; payments into the social security system. And in Spain as in the US, to continue the parallel, these &quot;other&quot; costs are growing as a portion of total compensation: in 2000, &quot;other&quot; labor costs were 24.6% of compensation in Spain and by the first half of this year, they absorbed 26.7%. For the US, comparable shares were 16.5% in 2000 and 19.3% this year.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Spain: Monthly Labor Cost/ Worker (&#128;, NSA)</th>
<th scope="col">Q2 2006</th>
<th scope="col">Q1 2006</th>
<th scope="col">Q2 2005</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>2197</td>
<td>2114</td>
<td>2122</td>
<td>2110</td>
<td>2058</td>
<td>1992</td>
<td>1758</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Yr/Yr % Chg</td>
<td>3.5</td>
<td>3.4</td>
<td>3.4</td>
<td>2.9</td>
<td>3.0</td>
<td>4.2</td>
<td>3.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Earnings</td>
<td>1624</td>
<td>1538</td>
<td>1575</td>
<td>1560</td>
<td>1521</td>
<td>1480</td>
<td>1326</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Yr/Yr % Chg</td>
<td>3.1</td>
<td>3.0</td>
<td>3.4</td>
<td>2.6</td>
<td>2.8</td>
<td>3.8</td>
<td>3.3</td>
</tr>
<tr class="odd">
<td class="firstcol">&quot;Other&quot;</td>
<td>574</td>
<td>575</td>
<td>547</td>
<td>550</td>
<td>531</td>
<td>512</td>
<td>432</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Yr/Yr % Chg</td>
<td>4.9</td>
<td>4.4</td>
<td>3.5</td>
<td>3.6</td>
<td>3.6</td>
<td>5.4</td>
<td>5.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&quot;Other&quot; as % of Total</td>
<td>26.1</td>
<td>27.2</td>
<td>25.8</td>
<td>26.1</td>
<td>25.9</td>
<td>25.7</td>
<td>24.6</td>
</tr>
<tr>
<td class="firstcol">Memo: Similar US Share</td>
<td>19.3</td>
<td>19.3</td>
<td>19.4</td>
<td>19.4</td>
<td>19.1</td>
<td>19.0</td>
<td>16.5</td>
</tr>
</tbody>
</table>
</body>
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Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060919f.jpg" width="353">
More German investors and analysts participating in the ZEW surveys continue to attest to improved economic conditions, but have grave doubts concerning economic conditions six months ahead.
The balance between those saying current conditions were improving and those saying current conditions were deteriorating rose from 33.6% in August to 38.9% in September and was 92.0 percentage points above the -58.1% of September, 2005. It has only been since April of this year that more people believed that current conditions were improving than those who believed they were deteriorating. The current balance is close to the most recent peak of 45.8% in September, 2000 as can be seen n the first chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060919g.jpg" width="353">
While feeling better about the current situation, the participants in the September ZEW survey have become decidedly more wary about the future. The balance between optimists and pessimists went from -5.6% in August to -22.2% in September and was 60.8 percentage points lower than that of September, 2005 when the balance favored the optimists to the extent of 38.6%. The sharp decline in sentiment is probably a reflection of the increasing probability of a slowdown in the United States economy and hence a reduced demand for German exports, plus the likely negative effect on consumer spending with the three point scheduled increase on January 1, 2007 of the VAT, and the uncertainty of other reforms. The contrast between opinions of current conditions and the future are shown in the second chart.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060919h.jpg" width="353">
While the ZEW measure of expectations has often been an indicator of the future trend of the economy, it has not been a particularly good indicator of the magnitude of change in the economy. In the third chart we show the quarterly values of the expectations balances and the year to year change in real, seasonally unadjusted Gross National Product. As can be seen, there is only a small correlation (0.26) between the expectations balances and the year to year change in GDP. Moreover, the R2 suggests that only 6.76% of the change in the year to year GDP is accounted for by the expectations balance.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/GERMANY/@D8/@D82/@D82.HTM">Germany ZEW Survey</a></th>
<th scope="col">Sep&nbsp; 06</th>
<th scope="col">Aug 06</th>
<th scope="col">Sep 05</th>
<th scope="col">M/M&nbsp; dif&nbsp;</th>
<th scope="col">Y/Y&nbsp; dif &nbsp;&nbsp;</th>
<th scope="col">2005&nbsp;&nbsp;</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Balance on Current Situation (%)&nbsp;</td>
<td>38.9</td>
<td>33.6</td>
<td>-58.1</td>
<td>5.3</td>
<td>92.0</td>
<td>-34.8</td>
<td>44.6</td>
<td>38.4</td>
</tr>
<tr>
<td class="firstcol">Balance on Situation Six Months Ahead&nbsp;(%)</td>
<td>-22.2</td>
<td>-5.6</td>
<td>38.6</td>
<td>-16.6</td>
<td>-60.8</td>
<td>34.8</td>
<td>44.6</td>
<td>38.4</td>
</tr>
</tbody>
</table>
</body>
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More German investors and analysts participating in the ZEW surveys continue to attest to improved economic conditions, but have grave doubts concerning economic conditions six months ahead. The balance between those saying current [...]

German Investors and Analysts Confident of the Present but Wary of the Future

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060919e.jpg" width="353">
The International Council of Shopping Centers (ICSC)-UBS survey indicated that chain store sales fell a hard 1.1% last week. The second consecutive w/w drop pulled the average sales level in September about even with August.
During the last ten years there has been a 47% correlation between the y/y change in chain store sales and the change in nonauto retail sales less gasoline.
The retail price for a gallon of regular unleaded gasoline dropped twelve cents w/w to an average $2.50 (-10.4% y/y), the lowest level since early March.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.
The leading indicator of chain store sales from ICSC-UBS increased 0.8% (1.0% y/y) in the latest week and raised the y/y gain into positive territory for the first time since April.
Household Energy Expenditures, 1982-2005 from the Federal Reserve Bank of Chicago is available <a href="http://www.chicagofed.org/publications/fedletter/cfljune2006_227.pdf">here</a>
The latest Short-Term Energy Outlook from the U.S. Energy Information Administration is available <a href="http://www.eia.doe.gov/emeu/steo/pub/contents.html">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">09/16/06</th>
<th scope="col">09/09/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>466.8</td>
<td>471.8</td>
<td>4.9%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>


</html>

The International Council of Shopping Centers (ICSC)-UBS survey indicated that chain store sales fell a hard 1.1% last week. The second consecutive w/w drop pulled the average sales level in September about even with August.

Chain Store Sales Fell Hard Along With Gasoline Prices

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060919c.jpg" width="353">
Housing starts in August fell hard for the sixth month this year to 1.665M units. The 6.0% m/m decline outpaced Consensus expectations for a drop to 1.75M, lowered starts 19.8% below last August and left the latest level 26.5% below the series&#39; peak reached this past January.
Single-family starts fell 5.9% last month to 1.36M, off 25.0% from the January peak while multi family starts dropped 6.7% for the third straight monthly decline.
By region single family housing starts in the West fell 4.4% m/m (-33.4% y/y) and in the Midwest starts fell 12.9% (-28.7% y/y). Single family starts in the South also fell by 6.1% (-9.9% y/y) but in the Northeast starts rose for the second consecutive month after a one-third drop during June (-19.3% y/y).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060919d.jpg" width="353">
Building permits fell for the seventh consecutive month, off 2.3%. Permits to start singe family homes were even weaker and fell 3.5% (-25.0% y/y).
Beyond Neighborhood Revitalization from the Federal Reserve Bank of Boston can be found <a href="http://www.bos.frb.org/commdev/c&amp;b/2006/winter/beyond.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">

</table>
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<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E901/@E90101/@E90101.HTM">Housing Starts (000s, AR)</a> </th>
<th scope="col">August</th>
<th scope="col">July</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>1,665</td>
<td>1,772</td>
<td>-19.8%</td>
<td>2,073</td>
<td>1,950</td>
<td>1,854</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Single-family</td>
<td>1,360</td>
<td>1,445</td>
<td>-20.6%</td>
<td>1,719</td>
<td>1,604</td>
<td>1,505</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Multi-family</td>
<td>305</td>
<td>327</td>
<td>-15.7%</td>
<td>354</td>
<td>345</td>
<td>349</td>
</tr>
<tr>
<td class="firstcol">Building Permits</td>
<td>1,722</td>
<td>1,763</td>
<td>-21.9%</td>
<td>2,159</td>
<td>2,058</td>
<td>1,888</td>
</tr>
</tbody>
</table>
</body>
</html>

Housing starts in August fell hard for the sixth month this year to 1.665M units. The 6.0% m/m decline outpaced Consensus expectations for a drop to 1.75M, lowered starts 19.8% below last August and left the latest level 26.5% below [...]

Housing Starts Off 20% Y/Y

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060919a.jpg" width="353">
The finished goods producer price index increased 0.1% in August, the same as in July and below Consensus expectations for a 0.2% rise.Excluding food &amp; energy finished producer prices were similarly under control last month and unexpectedly fell 0.4% after a 0.3% drop in July. Expectations had been for a 0.2% increase in the core PPI. 
Finished consumer goods prices less food &amp; energy dropped 0.5% (+0.7% y/y) as passenger car prices dropped 2.6% (-5.4% y/y). Capital equipment prices also fell by 0.3% (+1.0% y/y) for the second consecutive monthly decline as light truck prices fell 3.4% (-7.5% y/y). Prices of pumps, compressors &amp; equipment were, however, strong and posted a 0.6% (3.7% y/y) increase. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060919b.jpg" width="353">
Finished energy goods prices posted a 0.3% (13.1% y/y) August gain as . residential natural gas prices rose 1.6% (5.2% y/y) and residential electric power costs increased 1.3% (7.4% y/y). Gasoline prices fell 2.2% (+20.9% y/y) though fuel oil prices rose 0.7% (25.1% y/y). 
Intermediate goods prices posted another strong increase and rose 0.4%. The gain reflected a like 0.4% rise in prices less food &amp; energy. 
The crude materials PPI again was strong posting a 2.2% increase led by a 15.7% (NSA, -9.2% y/y) gain in natural gas. Less food &amp; energy crude goods prices fell 2.8% led lower by a 14.7% (+20.1% y/y) drop in iron &amp; steel scrap prices. Aluminum base scrap prices also were weak last month and fell 4.6% (+30.1% y/y).
The Internationalization of the Dollar and Trade Balance Adjustment from the Federal Reserve Bank of New York is available <a href="http://www.newyorkfed.org/research/staff_reports/sr255.pdf"> here</a>. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E802/@E80201/@E80201.HTM">Producer Price Index</a></th>
<th scope="col">August</th>
<th scope="col">July</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Finished Goods</td>
<td>0.1%&nbsp;</td>
<td>0.1%</td>
<td>&nbsp; 3.6%&nbsp;</td>
<td>&nbsp;4.9%&nbsp;</td>
<td>3.6%&nbsp;</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>-0.4%</td>
<td>-0.3%</td>
<td>&nbsp;0.9%</td>
<td>2.4%</td>
<td>1.5%</td>
<td>0.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>0.4%</td>
<td>0.5%</td>
<td>8.7%</td>
<td>&nbsp;8.0%</td>
<td>6.6%</td>
<td>4.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.4%</td>
<td>0.7%</td>
<td>8.3%</td>
<td>&nbsp;5.5%</td>
<td>5.7%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Crude Goods</td>
<td>&nbsp;2.2%&nbsp;</td>
<td>3.1%</td>
<td>&nbsp;5.4%</td>
<td>14.6%</td>
<td>&nbsp;17.5%</td>
<td>25.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>-2.8%</td>
<td>1.3%</td>
<td>&nbsp;25.2%</td>
<td>4.8%</td>
<td>&nbsp;26.5%</td>
<td>12.4%</td>
</tr>
</tbody>
</table>
</body>
</html>

The finished goods producer price index increased 0.1% in August, the same as in July and below Consensus expectations for a 0.2% rise.Excluding food & energy finished producer prices were similarly under control last month and [...]

PPI Up 0.1%, Core Prices Fell

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060919a.jpg" width="353">
The finished goods producer price index increased 0.1% in August, the same as in July and below Consensus expectations for a 0.2% rise.Excluding food &amp; energy finished producer prices were similarly under control last month and unexpectedly fell 0.4% after a 0.3% drop in July. Expectations had been for a 0.2% increase in the core PPI. 
Finished consumer goods prices less food &amp; energy dropped 0.5% (+0.7% y/y) as passenger car prices dropped 2.6% (-5.4% y/y). Capital equipment prices also fell by 0.3% (+1.0% y/y) for the second consecutive monthly decline as light truck prices fell 3.4% (-7.5% y/y). Prices of pumps, compressors &amp; equipment were, however, strong and posted a 0.6% (3.7% y/y) increase. 
Finished energy goods prices posted a 0.3% (13.1% y/y) August gain as . residential natural gas prices rose 1.6% (5.2% y/y) and residential electric power costs increased 1.3% (7.4% y/y). Gasoline prices fell 2.2% (+20.9% y/y) though fuel oil prices rose 0.7% (25.1% y/y). 
Intermediate goods prices posted another strong increase and rose 0.4%. The gain reflected a like 0.4% rise in prices less food &amp; energy. 
The crude materials PPI again was strong posting a 2.2% increase led by a 15.7% (NSA, -9.2% y/y) gain in natural gas. Less food &amp; energy crude goods prices fell 2.8% led lower by a 14.7% (+20.1% y/y) drop in iron &amp; steel scrap prices. Aluminum base scrap prices also were weak last month and fell 4.6% (+30.1% y/y).
The Internationalization of the Dollar and Trade Balance Adjustment from the Federal Reserve Bank of New York is available <a href="http://www.newyorkfed.org/research/staff_reports/sr255.pdf"> here</a>. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E802/@E80201/@E80201.HTM">Producer Price Index</a></th>
<th scope="col">August</th>
<th scope="col">July</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Finished Goods</td>
<td>0.1%&nbsp;</td>
<td>0.1%</td>
<td>&nbsp; 3.6%&nbsp;</td>
<td>&nbsp;4.9%&nbsp;</td>
<td>3.6%&nbsp;</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>-0.4%</td>
<td>-0.3%</td>
<td>&nbsp;0.9%</td>
<td>2.4%</td>
<td>1.5%</td>
<td>0.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>0.4%</td>
<td>0.5%</td>
<td>8.7%</td>
<td>&nbsp;8.0%</td>
<td>6.6%</td>
<td>4.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.4%</td>
<td>0.7%</td>
<td>8.3%</td>
<td>&nbsp;5.5%</td>
<td>5.7%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Crude Goods</td>
<td>&nbsp;2.2%&nbsp;</td>
<td>3.1%</td>
<td>&nbsp;5.4%</td>
<td>14.6%</td>
<td>&nbsp;17.5%</td>
<td>25.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>-2.8%</td>
<td>1.3%</td>
<td>&nbsp;25.2%</td>
<td>4.8%</td>
<td>&nbsp;26.5%</td>
<td>12.4%</td>
</tr>
</tbody>
</table>
Housing Starts Off 20% Y/Y 
by <a href="/comment/Moeller.html">Tom Moeller</a> September 19, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060919c.jpg" width="353">
Housing starts in August fell hard for the sixth month this year to 1.665M units. The 6.0% m/m decline outpaced Consensus expectations for a drop to 1.75M, lowered starts 19.8% below last August and left the latest level 26.5% below the series&#39; peak reached this past January.
Single-family starts fell 5.9% last month to 1.36M, off 25.0% from the January peak while multi family starts dropped 6.7% for the third straight monthly decline.
By region single family housing starts in the West fell 4.4% m/m (-33.4% y/y) and in the Midwest starts fell 12.9% (-28.7% y/y). Single family starts in the South also fell by 6.1% (-9.9% y/y) but in the Northeast starts rose for the second consecutive month after a one-third drop during June (-19.3% y/y).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060919d.jpg" width="353">
Building permits fell for the seventh consecutive month, off 2.3%. Permits to start singe family homes were even weaker and fell 3.5% (-25.0% y/y).
Beyond Neighborhood Revitalization from the Federal Reserve Bank of Boston can be found <a href="http://www.bos.frb.org/commdev/c&amp;b/2006/winter/beyond.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E901/@E90101/@E90101.HTM">Housing Starts (000s, AR)</a> </th>
<th scope="col">August</th>
<th scope="col">July</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>1,665</td>
<td>1,772</td>
<td>-19.8%</td>
<td>2,073</td>
<td>1,950</td>
<td>1,854</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Single-family</td>
<td>1,360</td>
<td>1,445</td>
<td>-20.6%</td>
<td>1,719</td>
<td>1,604</td>
<td>1,505</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Multi-family</td>
<td>305</td>
<td>327</td>
<td>-15.7%</td>
<td>354</td>
<td>345</td>
<td>349</td>
</tr>
<tr>
<td class="firstcol">Building Permits</td>
<td>1,722</td>
<td>1,763</td>
<td>-21.9%</td>
<td>2,159</td>
<td>2,058</td>
<td>1,888</td>
</tr>
</tbody>
</table>
Chain Store Sales Fell Hard Along With Gasoline Prices 
by <a href="/comment/Moeller.html">Tom Moeller</a> September 19, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060919e.jpg" width="353">
The International Council of Shopping Centers (ICSC)-UBS survey indicated that chain store sales fell a hard 1.1% last week. The second consecutive w/w drop pulled the average sales level in September about even with August.
During the last ten years there has been a 47% correlation between the y/y change in chain store sales and the change in nonauto retail sales less gasoline.
The retail price for a gallon of regular unleaded gasoline dropped twelve cents w/w to an average $2.50 (-10.4% y/y), the lowest level since early March.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.
The leading indicator of chain store sales from ICSC-UBS increased 0.8% (1.0% y/y) in the latest week and raised the y/y gain into positive territory for the first time since April.
Household Energy Expenditures, 1982-2005 from the Federal Reserve Bank of Chicago is available <a href="http://www.chicagofed.org/publications/fedletter/cfljune2006_227.pdf">here</a>
The latest Short-Term Energy Outlook from the U.S. Energy Information Administration is available <a href="http://www.eia.doe.gov/emeu/steo/pub/contents.html">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">09/16/06</th>
<th scope="col">09/09/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>466.8</td>
<td>471.8</td>
<td>4.9%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>
German Investors and Analysts Confident of the Present but Wary of the Future 
by <a href="/comment/Curley.html">Louise Curley</a> September 19, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060919f.jpg" width="353">
More German investors and analysts participating in the ZEW surveys continue to attest to improved economic conditions, but have grave doubts concerning economic conditions six months ahead.
The balance between those saying current conditions were improving and those saying current conditions were deteriorating rose from 33.6% in August to 38.9% in September and was 92.0 percentage points above the -58.1% of September, 2005. It has only been since April of this year that more people believed that current conditions were improving than those who believed they were deteriorating. The current balance is close to the most recent peak of 45.8% in September, 2000 as can be seen n the first chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060919g.jpg" width="353">
While feeling better about the current situation, the participants in the September ZEW survey have become decidedly more wary about the future. The balance between optimists and pessimists went from -5.6% in August to -22.2% in September and was 60.8 percentage points lower than that of September, 2005 when the balance favored the optimists to the extent of 38.6%. The sharp decline in sentiment is probably a reflection of the increasing probability of a slowdown in the United States economy and hence a reduced demand for German exports, plus the likely negative effect on consumer spending with the three point scheduled increase on January 1, 2007 of the VAT, and the uncertainty of other reforms. The contrast between opinions of current conditions and the future are shown in the second chart.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060919h.jpg" width="353">
While the ZEW measure of expectations has often been an indicator of the future trend of the economy, it has not been a particularly good indicator of the magnitude of change in the economy. In the third chart we show the quarterly values of the expectations balances and the year to year change in real, seasonally unadjusted Gross National Product. As can be seen, there is only a small correlation (0.26) between the expectations balances and the year to year change in GDP. Moreover, the R2 suggests that only 6.76% of the change in the year to year GDP is accounted for by the expectations balance.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/GERMANY/@D8/@D82/@D82.HTM">Germany ZEW Survey</a></th>
<th scope="col">Sep&nbsp; 06</th>
<th scope="col">Aug 06</th>
<th scope="col">Sep 05</th>
<th scope="col">M/M&nbsp; dif&nbsp;</th>
<th scope="col">Y/Y&nbsp; dif &nbsp;&nbsp;</th>
<th scope="col">2005&nbsp;&nbsp;</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Balance on Current Situation (%)&nbsp;</td>
<td>38.9</td>
<td>33.6</td>
<td>-58.1</td>
<td>5.3</td>
<td>92.0</td>
<td>-34.8</td>
<td>44.6</td>
<td>38.4</td>
</tr>
<tr>
<td class="firstcol">Balance on Situation Six Months Ahead&nbsp;(%)</td>
<td>-22.2</td>
<td>-5.6</td>
<td>38.6</td>
<td>-16.6</td>
<td>-60.8</td>
<td>34.8</td>
<td>44.6</td>
<td>38.4</td>
</tr>
</tbody>
</table>


</html>

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.

250501Z1.jpg

**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.

250501Z2.jpg

**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.

250501Z3.jpg

**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.

250501Z4.jpg

**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.

250501Z5.jpg

**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.

250501Z6.jpg

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.

<iframe style="border-radius:12px" src="https://open.spotify.com/embed/episode/3PzXXKrkHcwtOLipohEdnB?utm_source=generator" width="100%" height="152" frameBorder="0" allowfullscreen="" allow="autoplay; clipboard-write; encrypted-media; fullscreen; picture-in-picture" loading="lazy"></iframe>

Charts of the Week: Tariff Truce, Tenuous Trust

250501J5.jpg

250501K5.jpg

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.

250501L5.jpg

250501M5.jpg

- 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

250501N.jpg

250501O.jpg

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**.

250501P.jpg

250501Q.jpg

- 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

Carol Stone, CBE

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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.

250501C8.jpg

250501D8.jpg

- 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

250430N1.jpg

250430O1.jpg

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.

250430P1.jpg

250430Q1.jpg

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**.

250430R1.jpg

250430S1.jpg

- 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: September 2006

Jump to:

Mortgage Purchase Application Recovery Stalled

US Flow of Funds: Households' Net Worth Stable

US Flow of Funds: Households' Net Worth Stable

German Investors and Analysts Confident of the Present but Wary of the Future

Chain Store Sales Fell Hard Along With Gasoline Prices

Housing Starts Off 20% Y/Y

PPI Up 0.1%, Core Prices Fell

PPI Up 0.1%, Core Prices Fell