Tom Moeller

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<p><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/041018a.jpg" width="353"></p>
<p>Total business inventories rose 0.7% in August, the twelfth consecutive month of accumulation. During the four quarters ended in 2Q04, inventory accumulation added between 0.5 and 1.2 percentage points to real GDP growth versus subtractions in early 2003.</p>
<p>Retail inventories rose 0.7% in August paced by higher auto inventories (16.5% y/y). Non-auto inventories rose 0.5% after an upwardly revised uptick in July.</p>
<p>Wholesale inventories rose 0.9%. During the last ten years there has been a 62% correlation between the y/y change in wholesale inventories and the change in imports of merchandise.</p>
<p>Overall business sales rose 0.7% (+10.9% y/y) following an upwardly revised 0.9% June increase.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/041018b.jpg" width="353"></p>
<p>The ratio of inventories-to-sales fell to 1.31, well below the 1.37 averaged last year.</p>
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<th scope="col" class="firstcol"><b> <a href="http://www.haverselect.com/dlx/USECON/@ED/@ED06/@ED0601/@ED0601.HTM"> Business Inventories</a></b></th>
<th scope="col"><u><b>Aug</b></u></th>
<th scope="col"><u><b>July</b></u></th>
<th scope="col"><b><u>Y/Y</u></b></th>
<th scope="col"><u><b> 2003</b></u></th>
<th scope="col"><b><u>2002</u></b></th>
<th scope="col"><u><b>2001</b></u></th>
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</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>0.7%</td>
<td>1.0%</td>
<td>7.7%</td>
<td>1.9%</td>
<td>1.5%</td>
<td>-4.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail</td>
<td>0.7%</td>
<td>0.7%</td>
<td>9.1%</td>
<td>4.9%</td>
<td>6.0%</td>
<td>-2.8%</td>
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<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Retail excl. Autos</td>
<td>0.5%</td>
<td>0.1%</td>
<td>5.5%</td>
<td>3.0%</td>
<td>2.6%</td>
<td>-1.1%</td>
</tr>
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<td class="firstcol">&nbsp; Wholesale</td>
<td>0.9%</td>
<td>1.5%</td>
<td>9.8%</td>
<td>2.2%</td>
<td>0.4%</td>
<td>-4.5%</td>
</tr>
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<td class="firstcol">&nbsp; Manufacturing</td>
<td>0.5%</td>
<td>1.0%</td>
<td>4.8%</td>
<td>-1.3%</td>
<td>-1.8%</td>
<td>-6.1%</td>
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Total business inventories rose 0.7% in August, the twelfth consecutive month of accumulation. During the four quarters ended in 2Q04, inventory accumulation added between 0.5 and 1.2 percentage points to real GDP growth versus [...]

U.S. Inventories Accumulate Further

Carol Stone, CBE

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<p><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/041015i.jpg" width="353"></p>
<p>Yesterday here, we described how factors other than trade are impacting the Japanese current account position. Services and incomes were highly influential in the recent Japanese balance of payments performance. But in our desire to highlight often overlooked elements in these developments, we can&#39;t fail to take note of the very obvious ones: the recent rapid rise in petroleum prices does make oil imports a major force in many nations&#39; current account trends.</p>
<p>Today&#39;s case in point is France, which reported its balance of payments for August. It is dominated by trade, and in the last few months, trade has been dominated by oil imports. The French current account gapped to a &#128;1.5 billion deficit in the month as trade in goods pushed from near balance in July to a &#128;2.0 billion deficit. Both exports and imports contributed to this adverse move: exports fell &#128;1.2 billion and imports increased almost &#128;800 million.</p>
<p>France&#39;s current account behavior is unique in including a substantial outflow of current transfer payments every month, lately on the order of &#128;1.5 - 2.0 billion. Despite this, until about a year ago, it has run a fairly consistent current account surplus. Trade has generally had its own modest surplus while services and income together have been more noticeably positive. Most of these trends are still in place. But rising energy imports are putting constant pressure on other trade accounts, while non-energy imports are moving ahead and exports are going up and down erratically. This unsure trade and current account scenario illustrates some of the rationale for the present tension among the world&#39;s traders and diplomats.</p>
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<th scope="col" class="firstcol">Millions of Euros, Seasonally Adjusted</th>
<th scope="col"><b>Aug 2004</b></th>
<th scope="col"><b>Jul 2004</b></th>
<th scope="col"><b>Jun 2004</b></th>
<th scope="col"><b>Aug 2003</b></th>
<th scope="col"><b>2003</b></th>
<th scope="col"><b>2002</b></th>
<th scope="col"><b>2001</b></th>
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<td class="firstcol"><b>Current Account Balance</b></td>
<td>-1,486</td>
<td>-765</td>
<td>-512</td>
<td>+811</td>
<td>+403</td>
<td>+1,281</td>
<td>+2,003</td>
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<td class="firstcol"><b>Goods Balance</b></td>
<td>-2,027</td>
<td>-21</td>
<td>-237</td>
<td>+643</td>
<td>+131</td>
<td>+664</td>
<td>+329</td>
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<td class="firstcol"><b>Exports</b></td>
<td>27,334</td>
<td>28,561</td>
<td>28,636</td>
<td>+8.8%</td>
<td>-1.9%</td>
<td>-0.9%</td>
<td>1.8%</td>
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<td class="firstcol"><b>Imports</b></td>
<td>29,361</td>
<td>28,582</td>
<td>28,874</td>
<td>+19.6%</td>
<td>7.7%</td>
<td>5.4%</td>
<td>-15.6%</td>
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<tr class="odd">
<td class="firstcol"><b>Balance: All Other*</b></td>
<td>+216</td>
<td>+46</td>
<td>-755</td>
<td>+399</td>
<td>+273</td>
<td>+616</td>
<td>+1673</td>
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Yesterday here, we described how factors other than trade are impacting the Japanese current account position. Services and incomes were highly influential in the recent Japanese balance of payments performance. But in our desire to [...]

Petroleum Imports Hit French Current Account

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<p></p>
<p><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/041015h.jpg" width="353"></p>
<p>The US budget deficit at $413B for FY 2004 came in slightly below the latest Congressional Budget Office estimate of $422. The latest CBO deficit estimate for FY05 is $348B.</p>
<p>For FY04 the deficit of $412.6B was 9.4% larger than a year earlier. According to the Fed&#39;s Flow of Funds figures, through 2Q04 the growth in outstanding liabilities of the Federal government grew 10.6% y/y versus 7.4% growth in nonfederal liabilities.</p>
<p>Growth in net receipts improved late in the fiscal year raising the year&#39;s growth to 5.5% versus a 3.8% decline in FY03. Individual tax receipts jumped in September, as they often do, and pulled the FY04 total up 1.9% versus a decline of 7.5% last year. Corporate tax receipts also surged in September and rose 43.7% in FY04.</p>
<p>Growth in Federal net expenditures for FY04 eased slightly to 6.2% versus 7.4% growth in FY03. Defense expenditures actually grew a lesser 12.7% versus 15.9% growth last year. Growth in Medicare outlays was stable at 8.0 and interest expense grew 4.8% versus a 10.5% decline during last year. Outlays for income security fell 0.4% after as 7.5% rise in FY03 and growth in education &amp; training outlays slowed to 6.8% from 16.5%.</p>
<p>&quot;The Budget and Economic Outlook: An Update&quot; from the Congressional Budget Office is available <a href="http://www.cbo.gov/ftpdocs/57xx/doc5773/08-24-BudgetUpdate.pdf"> here</a>.</p>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E1/@E106/@E10602/@E10602.HTM"> US Government Finance</a></th>
<th scope="col"><u><b>Sept</b></u></th>
<th scope="col"><u><b>Aug</b></u></th>
<th scope="col"><u><b>Sept &#39;03</b></u></th>
<th scope="col"><b><u>FY2004</u></b></th>
<th scope="col"><u><b>FY2003</b></u></th>
<th scope="col"><u><b>FY2002</b></u></th>
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<td class="firstcol">Budget Balance</td>
<td>$24.4B</td>
<td>$-41.1B</td>
<td>$23.4B</td>
<td>$-412.6B</td>
<td>$-377.1B</td>
<td>$-157.8B</td>
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<td class="firstcol">&nbsp; Revenues</td>
<td>$207.4B</td>
<td>$137.7B</td>
<td>8.2%</td>
<td>5.5%</td>
<td>-3.8%</td>
<td>-6.9%</td>
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<td class="firstcol">&nbsp; Outlays</td>
<td>$183.0B</td>
<td>$178.9B</td>
<td>8.8%</td>
<td>6.2%</td>
<td>7.4%</td>
<td>7.9%</td>
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The US budget deficit at $413B for FY 2004 came in slightly below the latest Congressional Budget Office estimate of $422. The latest CBO deficit estimate for FY05 is $348B. For FY04 the deficit of $412.6B was 9.4% larger than a year [...]

FY 2004 U.S. Budget Complete

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<p><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/041015g.jpg" width="353"></p>
<p>The Mid-October reading of consumer sentiment from the University of Michigan plunged 7.1% to 87.5 on the heels of declines during the prior two months. Consensus expectations for a reading of 95.0.</p>
<p>During the last ten years there has been a 75% correlation between the level of consumer sentiment and the y/y change in real PCE.</p>
<p>The War in Iraq, the higher price of gasoline and several hurricanes which buffeted Florida are the likely culprits behind the fall in sentiment.</p>
<p>The reading of current economic conditions fell a sharp 4.0%, about the same as in September, but it was consumer expectations that took a powder with a 9.5% drop.</p>
<p>The University of Michigan survey is not seasonally adjusted.The mid-month survey is based on telephone interviews with 250 households nationwide on personal finances and business and buying conditions. The survey is expanded to a total of 500 interviews at month end.</p>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM"> University of Michigan</a></th>
<th scope="col"><u><b> Mid-Oct</b></u></th>
<th scope="col"><u><b> Sept</b></u></th>
<th scope="col"><u><b>Y/Y</b></u></th>
<th scope="col"><u><b> 2003</b></u></th>
<th scope="col"><b><u>2002</u></b></th>
<th scope="col"><u><b>2001</b></u></th>
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<td class="firstcol">Consumer Sentiment</td>
<td>87.5</td>
<td>94.2</td>
<td>-2.3%</td>
<td>87.6</td>
<td>89.6</td>
<td>89.2</td>
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<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>99.6</td>
<td>103.7</td>
<td>-0.3%</td>
<td>97.2</td>
<td>97.5</td>
<td>100.1</td>
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<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Consumer Expectations</td>
<td>79.6</td>
<td>88.0</td>
<td>-4.1%</td>
<td>81.4</td>
<td>84.6</td>
<td>82.3</td>
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The Mid-October reading of consumer sentiment from the University of Michigan plunged 7.1% to 87.5 on the heels of declines during the prior two months. Consensus expectations for a reading of 95.0. During the last ten years there has [...]

U.S. Consumer Sentiment Plunged

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<p><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/041015e.jpg" width="353"></p>
<p>In September, industrial production rose just 0.2% following a downwardly revised 0.2% decline the prior month. Consensus expectations had been for a 0.4% September increase.</p>
<p>Production in the factory sector fell 0.3% (+5.3% y/y) last month following the modest 0.2% August gain.</p>
<p>Output fell broadly; motor vehicles (-0.4% m/m, -1.2% y/y), furniture (-0.6% m/m, +2.9% y/y), petroleum (-3.3% m/m, -0.3% y/y), and textiles (-0.9% m/m, -1.7% y/y).</p>
<p>The high tech sector was relatively firm posting a 1.0% (20.8% y/y) gain, however the prior month&#39;s strength was revised down and the sector&#39;s growth has been ebbing.<i>Factory output excluding motor vehicles &amp; high tech fell 0.3% (+4.8% y/y), the third down month in the last four (August was revised to a 0.2% decline).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/041015f.jpg" width="353"></i></p>
<p>Total capacity utilization was stable at an upwardly revised 77.3%. Growth in capacity inched up to 1.4% y/y from 1.1% earlier this year.</p>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EA/@EA.HTM"><b> Production &amp; Capacity</b></a></th>
<th scope="col"><b>Aug</b></th>
<th scope="col"><b> July</b></th>
<th scope="col"><u><b> Y/Y</b></u></th>
<th scope="col"><u><b> 2003</b></u></th>
<th scope="col"><b><u>2002</u></b></th>
<th scope="col"><u><b>2001</b></u></th>
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<td class="firstcol">Industrial Production</td>
<td>0.2%</td>
<td>-0.2%</td>
<td>4.7%</td>
<td>0.3%</td>
<td>-0.6%</td>
<td>-3.4%</td>
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<td class="firstcol">Capacity Utilization</td>
<td>77.2%</td>
<td>77.2%</td>
<td>74.9%(9/03)</td>
<td>74.8%</td>
<td>75.6%</td>
<td>77.4%</td>
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In September, industrial production rose just 0.2% following a downwardly revised 0.2% decline the prior month. Consensus expectations had been for a 0.4% September increase. Production in the factory sector fell 0.3% (+5.3% y/y) last [...]

Industrial Production Disappointing, Factory Output Down Broadly

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<p><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/041015c.jpg" width="353"></p>
<p>The October Empire State Index of General Business Conditions in New York&#39;s manufacturing industries fell 9.8 points to 17.43 following a 14.04 point gain in September.</p>
<p>New orders and shipments both gave back some of the prior months&#39; gains.The employment measure also fell. Like the Philadelphia Fed Index of General Business Conditions, the Empire State Business Conditions Index reflects answers to an independent survey question; it is not a weighted combination of the components.</p>
<p>The prices paid jumped to a record high of 59.17.</p>
<p>Expectations for business conditions six months fell modestly as did expectations for capital expenditures. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/041015d.jpg" width="353"></p>
<p>The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. Participants from across the state in a variety of industries respond to a questionnaire and report the change in a variety of indicators from the previous month. Respondents also state the likely direction of these same indicators six months ahead. April 2002 is the first report, although survey data date back to July 2001.</p>
<p>For more on the Empire State Manufacturing Survey, including methodologies and the latest report, click <a href="http://www.newyorkfed.org/research/regional_economy/empiresurvey_overview.html"> here</a>.</p>
<p>&quot;What Can Regional Manufacturing Surveys Tell Us? - Lessons From the Tenth District&quot; from the Federal Reserve Bank of Kansas City is available <a href="http://www.kansascityfed.org/PUBLICAT/ECONREV/Pdf/3q04keet.pdf"> here</a>.</p>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S511/@S511.HTM"> Empire State Manufacturing Survey</a></th>
<th scope="col"><u><b>Oct</b></u></th>
<th scope="col"><u><b>Sept</b></u></th>
<th scope="col"><b><u>10/03</u></b></th>
<th scope="col"><b><u>2003</u></b></th>
<th scope="col"><b><u>2002</u></b></th>
<th scope="col"><b><u>2001</u></b></th>
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<td class="firstcol">General Business Conditions (diffusion index)</td>
<td>17.43</td>
<td>27.26</td>
<td>20.20</td>
<td>16.30</td>
<td>7.02</td>
<td>-13.57</td>
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The October Empire State Index of General Business Conditions in New York's manufacturing industries fell 9.8 points to 17.43 following a 14.04 point gain in September. New orders and shipments both gave back some of the prior months' [...]

Empire State Index Dropped

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<p></p>
<p><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/041015a.jpg" width="353"></p>
<p>In September the finished goods PPI rose 0.1% and matched Consensus expectations. The gain followed slight decline in two of the prior three months. Less food &amp; energy prices were a bit stronger, up 0.3%, versus expectations for a 0.2% rise.</p>
<p>&quot;Core&quot; finished consumer goods prices jumped 0.4% (2.0% y/y) on the strength of higher durable &amp; nondurable goods prices.<br> Finished capital goods prices also registered a firm 0.4% (1.8% y/y) gain reflecting strength in prices of textile machinery as well as ships.</p>
<p>Finished energy prices fell 0.9% (9.1% y/y). Residential gas prices dropped a not seasonally adjusted 2.4% (5.7% y/y) but they have recovered in October.Gasoline prices rose a not seasonally adjusted 1.9% m/m (+18.9% y/y).</p>
<p>Crude prices less food &amp; energy reversed some of the prior month&#39;s strength with a 2.5% decline. During the last thirty years &quot;core&quot; crude prices have been a fair indicator of activity in the industrial sector. There has been a 51% correlation between the six month change in core crude prices and the change in factory sector industrial production. Overall crude prices fell 4.2%, dragged lower by the 6.6% decline in crude energy costs.</p>
<p>Intermediate goods prices ticked just 0.1% higher but core intermediate prices added 0.7% to the 1.0% August jump. Industrial chemical prices continued strong.</p>
</span>
<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"><u><b>Sept</b></u></th>
<th scope="col"><u><b>Aug</b></u></th>
<th scope="col"><b><u>Y/Y</u></b></th>
<th scope="col"><u><b> 2003</b></u></th>
<th scope="col"><b><u>2002</u></b></th>
<th scope="col"><u><b>2001</b></u></th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Finished Goods</td>
<td>0.1%</td>
<td>-0.1%</td>
<td>3.3%</td>
<td>3.2%</td>
<td>-1.3%</td>
<td>2.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.3%</td>
<td>-0.1%</td>
<td>1.9%</td>
<td>0.2%</td>
<td>0.1%</td>
<td>1.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>0.1%</td>
<td>1.0%</td>
<td>8.3%</td>
<td>4.7%</td>
<td>-1.5%</td>
<td>0.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.7%</td>
<td>1.0%</td>
<td>7.8%</td>
<td>2.0%</td>
<td>-0.5%</td>
<td>-0.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Crude Goods</td>
<td>-4.2%</td>
<td>-0.7%</td>
<td>14.2%</td>
<td>25.1%</td>
<td>-10.6%</td>
<td>0.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>-2.5%</td>
<td>4.5%</td>
<td>25.4%</td>
<td>12.4%</td>
<td>3.8%</td>
<td>-10.0%</td>
</tr>
</tbody>
</table>
</body>
</html>


In September the finished goods PPI rose 0.1% and matched Consensus expectations. The gain followed slight decline in two of the prior three months. Less food & energy prices were a bit stronger, up 0.3%, versus expectations for a [...]

Finished Producer Prices Up Slightly

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.

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.

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Charts of the Week: Tariff Truce, Tenuous Trust

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U.S. light vehicle sales dropped 2.9% (+6.5% y/y) to 17.31 million units (SAAR) in April after surging 10.8% to 17.82 million units in March. The retreat in April vehicle sales accompanied a 1.7% y/y rise in real disposable income through March, which compared to 2.0% growth last year.

Sales declines were broad-based last month. Light truck sales fell 1.3% (+9.9% y/y) during April to 14.34 million units (SAAR), after rising 12.4% in March. Purchases of domestically-made light trucks declined 1.2% (+11.9% y/y) to 11.02 million units, after jumping 12.5% in March. Sales of imported light trucks fell 1.8% (+4.4% y/y) to 3.32 million units, following an 11.6% March surge.

Trucks’ record 82.8% share of the light vehicle market last month compared to 81.5% in March and 80.3% in April of last year. The share averaged 80.3% during all of 2024 versus 53.3% ten years earlier.

Auto sales also declined last month, down 9.5% (-7.5%) to 2.97 million units (SAAR) following a 3.5% March rise. The decline reversed all of the increase over the prior two months. Purchases of domestically-produced cars fell 9.8% (-4.3% y/y) last month to 2.22 million units, after rising 3.8% in March. Sales of imported autos declined 9.6% (-15.7% y/y) to 0.75 million units, following a 2.5% March increase.

Imports' 23.5% share of the U.S. light vehicle market was little changed from 23.6% in March and compared to a May 2023 low of 22.9% and a high of 26.3% in November of 2023. Imports' share of the passenger car market held steady at 25.3% last month and compared to 27.7% in April of last year. It reached a high of 38.7% in September 2021. Imports' share of the light truck market eased to 23.2% last month after falling to 23.3% in March.

U.S. vehicle sales figures can be found in Haver's **USECON** database. Additional detail by manufacturer is in the I**NDUSTRY** database.

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250501I20.jpg

- Light truck sales pull back, while auto sales tumble.
- Both domestic and imported sales decline.
- Imports' market share slips further.

U.S. Light Vehicle Sales Fall in April

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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%.

Economy in Brief: October 2004

Jump to:

U.S. Inventories Accumulate Further

U.S. Inventories Accumulate Further

Petroleum Imports Hit French Current Account

FY 2004 U.S. Budget Complete

U.S. Consumer Sentiment Plunged

Industrial Production Disappointing, Factory Output Down Broadly

Empire State Index Dropped

Finished Producer Prices Up Slightly