Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061117a.jpg" width="353">
In October, housing starts more than retraced the downwardly revised 4.9% September gain and fell 14.6% to the lowest level since July 2000. The latest result fell well short of Consensus expectations for 1.68M starts.
At 1.486M units, the October figure pulled the year-to-date average to 1.863 starts and 10.2% below the first ten months of 2005.
Single-family starts in October fell 15.9% to 1.177M, also the lowest level since July 2000. The year-to-date average level of single family starts fell 11.5% from 2005. Multi family starts in addition were down by 9.1% m/m.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061117b.jpg" width="353">
By region, single family housing starts were weakest down South and fell 24.8% (-32.4% y/y). Starts also fell 9.1% (-32.9% y/y) out West, were 7.3% (-33.1% y/y) lower in the Midwest but in the Northeast single family starts rose 10.9% (-22.2% y/y).
Building permits fell 6.3% after a revised 5.2% September drop. The ninth monthly decline this year was to the lowest level since 1997. Permits to start single family homes fell 3.8% (-31.7% y/y), the lowest since 2000.
What Do Financial Asset Prices Say About the Housing Market? from the Board of Governors of the Federal Reserve System can be found <a href="http://www.federalreserve.gov/pubs/feds/2006/200632/200632abs.html"> here</a>.

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<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">October</th>
<th scope="col">September</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>1,486</td>
<td>1,740</td>
<td>-27.4%</td>
<td>2,073</td>
<td>1,950</td>
<td>1,854</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Single-family</td>
<td>1,177</td>
<td>1,400</td>
<td>-31.8%</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>309</td>
<td>340</td>
<td>-3.4%</td>
<td>354</td>
<td>345</td>
<td>349</td>
</tr>
<tr>
<td class="firstcol">Building Permits</td>
<td>1,535</td>
<td>1,638</td>
<td>-28.0%</td>
<td>2,159</td>
<td>2,058</td>
<td>1,888</td>
</tr>
</tbody>
</table>
Mexico GDP Up 4.6% Yr/Yr in Q3, With Good Gains in Construction and Services 
by <a href="/comment/Stone.html">Carol Stone</a> November 17, 2006


<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061117j.jpg">
Mexico&#39;s GDP is enjoying its best run of growth since before dot.com bust in 2001. In Q3, the year-on-year gain was 4.6%, following 5.5% and 4.7% in Q1 and Q2, respectively. The quarterly growth in Q3 was 1.0% from Q2, led by construction and transportation. Manufacturing edged up a mere 0.1% and didn&#39;t grow at all in Q2, but it had surged 2.9% in Q1 and is ahead 5.1% year-on-year. These data were reported yesterday afternoon, November 16, by INEGI, the Mexican government statistics institute.<img align="right" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061117k.jpg">
Government officials, speaking prior to the G-20 Conference in Melbourne, Australia, indicated that this pattern was in line with their hopes. Their aim is to diminish the Mexican economy&#39;s dependency on demand from the US. So they are emphasizing local construction and services industries. The financial sector and other business services are up 4.6% year-on-year for Q3, the same as total GDP, but they have been expanding more rapidly than the total for most of the last five years. Finance Minister Gil Diaz highlighted the growth in construction, fueled in part by expansion of mortgage lending. Indeed, during the first half of this year, mortgage lending at banks was running more than 40% ahead of last year. Gross value added in construction is up 7.7% in Q3 from a year ago and 2.6% Q3/Q2 alone. Another strong sector is transportation, storage and communication, up 9.4% year-on-year. Mexico&#39;s output of oil is slowing, but its production of natural gas is growing rapidly, and we would surmise that pipeline usage is one part of the gain in the transportation sector.

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<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Mexico</th>
<th scope="col">Bil. New 1993 Pesos</th>
<th scope="col">Q3 2006</th>
<th scope="col">Q2 2006</th>
<th scope="col">Q1 2006</th>
<th scope="col">Year Ago</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">Real GDP</td>
<td>1854.1</td>
<td>0.9</td>
<td>0.8</td>
<td>1.9</td>
<td>4.6</td>
<td>3.0</td>
<td>4.2</td>
<td>1.3</td>
</tr>
<tr>
<td class="firstcol">Manufacturing</td>
<td>330.0</td>
<td>0.1</td>
<td>-0.0</td>
<td>2.9</td>
<td>5.1</td>
<td>1.2</td>
<td>4.0</td>
<td>-1.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Construction</td>
<td>73.8</td>
<td>2.6</td>
<td>-0.1</td>
<td>2.1</td>
<td>7.7</td>
<td>3.3</td>
<td>6.1</td>
<td>3.3</td>
</tr>
<tr>
<td class="firstcol">Transportation, Etc.</td>
<td>236.4</td>
<td>1.8</td>
<td>1.5</td>
<td>4.1</td>
<td>9.4</td>
<td>7.1</td>
<td>9.2</td>
<td>5.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Finance, Other Business Services</td>
<td>301.3</td>
<td>0.5</td>
<td>1.4</td>
<td>1.2</td>
<td>4.6</td>
<td>5.8</td>
<td>3.9</td>
<td>3.9</td>
</tr>
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In October, housing starts more than retraced the downwardly revised 4.9% September gain and fell 14.6% to the lowest level since July 2000. The latest result fell well short of Consensus expectations for 1.68M starts. At 1.486M [...]

Housing Starts Plumb Six Year Low

Carol Stone, CBE

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061116j.jpg" width="353">
The US Treasury today reported its &quot;TIC&quot; data for September. Besides the usual monthly flows of security purchases, there is a new compilation of summary data on short-term liabilities and on return of capital to foreign investors through such vehicles as stock swaps and repayments of principal on mortgage-backed securities. The new table is called &quot;TIC Monthly Reports on Cross-Border Financial Flows&quot;.
The flows themselves are large, but relatively unsurprising, given the size and direction of world trade. Foreign investors continue to buy domestic US securities in size, totaling $88.0 billion in September and the same average over the past year. This year, though, they have reduced their purchases of Treasuries and increased their participation in agencies (&quot;GSEs&quot;) and corporate bonds. The trend in purchases of corporate equities remains far smaller than other assets, but considerably larger than anytime in the past five years -- since the &quot;dot.com&quot; bust.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061116k.jpg" width="353">
We often argue that the capital accounts do not exist simply to &quot;finance the trade deficit&quot;. People make investment decisions based on their assessments of relative return in its own right. So we note with interest that in addition to the outflows of funds associated with the current account deficit, there are capital outflows as US investors participate in foreign financial markets. In September this amounted to nearly $23 billion and has averaged $15 billion over the past 12 months, an unprecedented amount.
Further, as the Treasury&#39;s new summary table shows, &quot;other acquisition of long-term securities&quot; is responsible for net capital outflows of about $12.0 billion monthly. These data have long been available, but hidden far down in the tables. This move by the Treasury to put them in a main table highlights the growing importance of these flows -- mortgage prepayments and swaps. In another helpful action, the Treasury has also summarized the detailed bank-reported data on Treasury bills and custody holdings. These perhaps can be seen as transactions that help put the &quot;balance of payments&quot; in balance. And they are volatile; for instance, they generated inflows of almost $30 billion in July, but outflows of nearly $11 billion in September. Over the last 12 months, net foreign acquisition of these short-term assets has averaged $9.2 billion, but there were net foreign liquidations in 2005 of almost $4 billion a month.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061116l.jpg" width="353">
In a final new item, &quot;Monthly Net TIC Flows&quot;, the sum of the Treasury&#39;s data shows that foreign investors have invested about $75 billion a month over the last year, up from $55.6 billion in 2005 but less than the $81.6 billion in 2004. These flows omit direct investment and other banking and non-banking instruments, so they are not a complete balance of payments set, but they are strong indicators of investor interest in both US and international capital markets.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USINT/@U3/@U3.HTM">Net Foreign Pur chases from US Residents</a><a href="http://www.haverselect.com/dlx/USINT/@U3/@U3.HTM">, Bil $</a></th>
<th scope="col">Sept 2006</th>
<th scope="col">Aug 2006</th>
<th scope="col">July 2006</th>
Monthly Average
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Last 12 Months</td>
<td>2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">1. Domestic Securities</td>
<td>88.0</td>
<td>117.2</td>
<td>54.5</td>
<td>88.0</td>
<td>84.2</td>
<td>76.4</td>
<td>60.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Treasuries</td>
<td>-0.4</td>
<td>44.3</td>
<td>6.2</td>
<td>17.8</td>
<td>28.2</td>
<td>29.3</td>
<td>22.0</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Agencies</td>
<td>26.0</td>
<td>31.4</td>
<td>18.6</td>
<td>23.4</td>
<td>18.3</td>
<td>18.9</td>
<td>13.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Corporate Bonds</td>
<td>52.7</td>
<td>37.0</td>
<td>19.1</td>
<td>37.5</td>
<td>31.0</td>
<td>25.8</td>
<td>22.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Equities</td>
<td>9.6</td>
<td>4.4</td>
<td>10.4</td>
<td>9.2</td>
<td>6.7</td>
<td>2.4</td>
<td>2.9</td>
</tr>
<tr class="odd">
<td class="firstcol">2. Foreign Securities</td>
<td>-22.9</td>
<td>-2.7</td>
<td>-21.8</td>
<td>-15.2</td>
<td>-14.4</td>
<td>-12.7</td>
<td>-4.7</td>
</tr>
<tr>
<td class="firstcol">3. &quot;Other Acquisition&quot;*</td>
<td>-11.9</td>
<td>-11.1</td>
<td>-14.5</td>
<td>-12.0</td>
<td>-11.7</td>
<td>-3.2</td>
<td>-11.6</td>
</tr>
<tr class="odd">
<td class="firstcol">4. Net Foreign Acquisition (1+2+3)</td>
<td>53.2</td>
<td>103.3</td>
<td>18.3</td>
<td>60.8</td>
<td>58.2</td>
<td>60.4</td>
<td>43.7</td>
</tr>
<tr>
<td class="firstcol">5. Short-Term Liabilities</td>
<td>-10.8</td>
<td>9.6</td>
<td>29.7</td>
<td>9.2</td>
<td>-3.9</td>
<td>15.8</td>
<td>1.3</td>
</tr>
<tr class="odd">
<td class="firstcol">6. Total TIC Flows**&nbsp; </td>
<td>53.7</td>
<td>97.1</td>
<td>53.9</td>
<td>75.4</td>
<td>55.6</td>
<td>81.6</td>
<td>60.0</td>
</tr>
</tbody>
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The US Treasury today reported its "TIC" data for September. Besides the usual monthly flows of security purchases, there is a new compilation of summary data on short-term liabilities and on return of capital to foreign investors [...]

Treasury TIC Data Shows Strong Investment Flows into US, but Also Sizable Outflows Abroad by US Investors

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061116h.jpg" width="353">
The Philadelphia Federal Reserve Bank&#39;s Index of General Business Conditions in the manufacturing sector matched expectations and improved slightly in November after two months in negative territory. At 5.1, the figure compares with -0.7 and -0.4 during October &amp; September but remained well below the average of 12.0 during the prior eight months.
During the last ten years there has been a 65% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 43% correlation with q/q growth in real GDP.
The sub indexes for shipments, unfilled orders, delivery times and the workweek each improved moderately, however, new orders and inventories fell. In addition, the employment index fell to near zero. During the last ten years there has been a 75% correlation between the employment index and the three month growth in factory payrolls.
The business conditions index reflects a separate survey question, not the sub indexes.
The prices paid index fell for the eighth month this year to the lowest level since March. During the last ten years there has been a 76% correlation between the prices paid index and the three month growth in the intermediate goods PPI. There has been an 85% correlation with the change in core intermediate goods prices.
The separate index of expected business conditions in six months fell and retraced one quarter of the prior month&#39;s improvement.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos1106.html">here</a>.
Today&#39;s comments by Chicago Federal Reserve Bank President Michael H. Moskow can be found <a href="http://www.chicagofed.org/news_and_conferences/speeches/2006_11_16_abm_top_mgmt_meeting.cfm"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Nov. &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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<td class="firstcol">General Activity Index</td>
<td>5.1</td>
<td>-0.7</td>
<td>10.7</td>
<td>12.4</td>
<td>28.0</td>
<td>10.5</td>
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<tr>
<td class="firstcol">Prices Paid Index</td>
<td>26.7</td>
<td>32.0</td>
<td>55.1</td>
<td>43.5</td>
<td>51.2</td>
<td>16.8</td>
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The Philadelphia Federal Reserve Bank's Index of General Business Conditions in the manufacturing sector matched expectations and improved slightly in November after two months in negative territory. At 5.1, the figure compares with [...]

Philadelphia Fed Index Improved Slightly

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061116g.jpg" width="353">
The National Association of Home Builders&#39; (NAHB) reported that the November Composite Housing Market Index rose to 33 from 31 in October and from 31 in September. While off its low, the index remained down by roughly one half from last year. 
During the last twenty years there has been a 76% correlation between the y/y change in the Composite Index and the change in single family housing starts. 
The improvement again was led a sharp gain in the sub-index covering prospective sales in the next six months (9.5% m/m, -29.2% y/y). The sub-index for current sales rose just slightly m/m (-50.7% y/y). 
Traffic of prospective home buyers also rose moderately to the highest level since July <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061116i.jpg" width="353">
Improvement by region was mixed. The housing market indexes for the Northeast (-39.3% y/y) and the South (-41.2% y/y) improved m/m but in the Midwest the index fell (-56.8%) as it did out West (-58.0% y/y). 
The NAHB index is a diffusion index based on a survey of builders. Readings above 50 signal that more builders view conditions good than poor. 
Visit the <a href="http://www.nahb.org">National Association of Home Builders</a>.
Economic Freedom, Human Freedom, Political Freedom, a 1991 speech by the late Milton Friedman, is available <a href="http://www.sbe.csuhayward.edu/~sbesc/frlect.html"> here</a>.

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<colgroup><col><col><col><col><col><col></colgroup>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S4/@S4.HTM">Nat&#39;l Association of Home Builders</a> </th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Nov. &#39;05 </th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
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<td class="firstcol">Composite Housing Market Index</td>
<td>33</td>
<td>31</td>
<td>61</td>
<td>67</td>
<td>68</td>
<td>64</td>
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The National Association of Home Builders' (NAHB) reported that the November Composite Housing Market Index rose to 33 from 31 in October and from 31 in September. While off its low, the index remained down by roughly one half from [...]

NAHB Housing Market Index Improved Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061116e.jpg" width="353">
Total U.S. industrial production ticked higher 0.2% during October following the prior month&#39;s unrevised 0.6% decline. The increase just missed Consensus expectations for a 0.3% rise.The recent weakness has left output unchanged during the last three months and compares to 5-8% annual rates of growth earlier this year.
Last month&#39;s output increase was all due to a 4.1% (2.8% y/y) jump in utility output due to unseasonably cool temperatures.
Factory sector output fell 0.3% for the second consecutive month. The unchanged level of factory production during the last three months compares to a 7.9% annualized rate of growth just this past August.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061116f.jpg" width="353">
Production of durable consumer goods fell 2.6% (-6.8% y/y) due to a 4.6% decline (-11.4% y/y) in the output of automotive products. Output of appliances &amp; furniture also fell 0.8% (-5.4% y/y) for the seventh monthly decline this year. Nondurable consumer goods output increased 0.3% (2.6% y/y) helped by a 1.4% (4.7% y/y) surge in clothing output which recovered the decline of the prior month.
Business equipment production recovered from the modest September decline with a 0.7% increase. Output of information processing &amp; equipment surged 1.3% (15.6% y/y) but factory output overall less the hi-tech industries fell 0.5% (+2.7% y/y) for the second consecutive month. Output of transit equipment rose 0.5% (16.9% y/y).
Overall capacity utilization increased slightly to 82.2%. Factory sector utilization, however, fell to 80.4%. Factory sector capacity again rose a firm 0.2% (2.5% y/y).
The U.S. Current Account Deficit and the Expected Share of World Output from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/economics/conferences/0606/Engel_Rogers.pdf"> here</a>.
The Conquest of Worldwide Inflation: Currency Competition and Its Implications for Interest Rates and the Yield Curve is today&#39;s speech by Fed Governor Randall S. Kroszner and can be found <a href="http://www.federalreserve.gov/BoardDocs/Speeches/2006/20061116/default.htm"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/output.htm">Production &amp; Capacity</a></th>
<th scope="col">October</th>
<th scope="col">September</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">Industrial Production</td>
<td>0.2%</td>
<td>-0.6%</td>
<td>4.9%</td>
<td>3.2%</td>
<td>4.1%</td>
<td>0.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Manufacturing (NAICS)</td>
<td>-0.3%</td>
<td>-0.3%</td>
<td>4.4%</td>
<td>3.9%</td>
<td>4.8%</td>
<td>0.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Consumer Goods</td>
<td>-0.5%</td>
<td>-0.9%</td>
<td>-0.1%</td>
<td>2.1%</td>
<td>2.1%</td>
<td>1.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Business Equipment</td>
<td>0.7%</td>
<td>-0.1%</td>
<td>11.7%</td>
<td>9.1%</td>
<td>9.3%</td>
<td>0.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Capacity Utilization</td>
<td>82.2%</td>
<td>82.1%</td>
<td>79.9% (10/05)</td>
<td>80.1%</td>
<td>78.6%</td>
<td>75.7%</td>
</tr>
</tbody>
</table>
</body>
</html>

Total U.S. industrial production ticked higher 0.2% during October following the prior month's unrevised 0.6% decline. The increase just missed Consensus expectations for a 0.3% rise.The recent weakness has left output unchanged [...]

Industrial Output Ticked Higher, Trend Slowdown Dramatic

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061116d.jpg" width="353">
Initial claims for jobless insurance fell 2,000 to 308,000 last week from an upwardly revised reading during the prior period. Consensus expectations had been for an increase to 311,000 claims.
During the last ten years there has been a (negative) 78% correlation between the level of initial claims and the m/m change in nonfarm payroll employment.
The four-week moving average of initial claims rose slightly to 313,750 (-0.7% y/y).
Continuing claims for unemployment insurance were unchanged and have been since September.
The insured rate of unemployment remained at 1.9%.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
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<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">11/11/06</th>
<th scope="col">11/04/06</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">Initial Claims</td>
<td>308</td>
<td>310</td>
<td>0.3%</td>
<td>332</td>
<td>343</td>
<td>403</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Continuing Claims</td>
<td>--</td>
<td>2,443</td>
<td>-10.4%</td>
<td>2,662</td>
<td>2,924</td>
<td>3,532</td>
</tr>
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Initial claims for jobless insurance fell 2,000 to 308,000 last week from an upwardly revised reading during the prior period. Consensus expectations had been for an increase to 311,000 claims. During the last ten years there has been [...]

Initial Claims for Jobless Insurance Remained Low

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The consumer price index (CPI-U) fell 0.5% during October for the second consecutive month and the decline outpaced expectations for a 0.3% drop. Together, the declines were the largest on record.
Energy prices about repeated the prior month&#39;s weakness and fell 7.0% as gasoline prices dropped 11.1% (-18.3% y/y) and fuel oil prices fell 6.1% (-7.7% y/y) for the second month. Gasoline prices have since fallen another 1.3% m/m so far in November to an average $2.22 per gallon. Natural gas prices were down as well by 7.7% (-24.0% y/y) &amp; electricity prices slipped 0.2% (+10.4% y/y).
The 0.1% rise in prices less food &amp; energy was the weakest since a like gain this past February and fell short of Consensus expectations for a 0.2% increase.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061116b.jpg" width="353">
Core goods prices fell 0.3%, down for the third month in the last four. New &amp; used motor vehicle prices fell 0.3% (-0.4% y/y) for the second consecutive month and apparel prices reversed all of their prior month&#39;s strength with a 0.7% (+0.6% y/y) decline. Household furnishings &amp; operation prices were unchanged (1,.1% y/y) as were medical care commodity prices (3.3% y/y). Tobacco prices rose 0.1% (2.3 y/y).
Core services prices rose 0.3% for the second month as did shelter prices (4.0% y/y). The rental equivalence measure of owners&#39; primary residences rose 0.4% (4.2% y/y) and rents rose 0.4% (3.9% y/y) for the fifth consecutive month. Public transportation costs fell 1.0% (+1.9% y/y) after a 0.7% September decline but education costs surged 0.6% (6.2% y/y). Medical care services prices rose 0.4% (4.2% y/y) for the third consecutive month.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061116c.jpg" width="353">
Food &amp; beverage prices rose 0.3% led by a 0.7% jump in dairy prices (-0.3% y/y). Prices for meats, poultry, fish &amp; eggs rose 0.2% (1.9% y/y).
The chained CPI, which adjusts for shifts in the mix of consumer purchases, fell 0.3% for the second month but less food &amp; energy prices rose 0.3% for the second month.
The Minutes to the Latest Meeting of the Federal Open Market Committee can be found <a href="http://www.federalreserve.gov/FOMC/MINUTES/20061025.htm"> 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/@E801/@E80101/@E80101.HTM">Consumer Price Index</a> </th>
<th scope="col">October</th>
<th scope="col">September</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&nbsp;</td>
<td>-0.5%</td>
<td>-0.5%</td>
<td>1.3%</td>
<td>3.4%</td>
<td>2.7%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.1%</td>
<td>0.2%</td>
<td>2.8%</td>
<td>2.2%</td>
<td>1.8%</td>
<td>1.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Goods less Food &amp; Energy</td>
<td>-0.3%</td>
<td>0.1%</td>
<td>0.2%</td>
<td>0.5%</td>
<td>-0.9%</td>
<td>-2.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Services less Energy</td>
<td>0.3%</td>
<td>0.3%</td>
<td>3.8%</td>
<td>2.8%</td>
<td>2.8%</td>
<td>2.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Energy</td>
<td>-7.0%</td>
<td>-7.2%</td>
<td>-11.2%</td>
<td>16.9%</td>
<td>10.8%</td>
<td>12.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Food &amp; Beverages</td>
<td>0.3%</td>
<td>0.4%</td>
<td>2.6%</td>
<td>2.4%</td>
<td>3.4%</td>
<td>2.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80113/@E80113.HTM">Chained CPI: Total (NSA)</a> </td>
<td>-0.3%</td>
<td>-0.3%</td>
<td>1.6%</td>
<td>2.9%</td>
<td>2.5%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.3%</td>
<td>0.3%</td>
<td>2.5%</td>
<td>1.9%</td>
<td>1.7%</td>
<td>1.1%</td>
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The consumer price index (CPI-U) fell 0.5% during October for the second consecutive month and the decline outpaced expectations for a 0.3% drop. Together, the declines were the largest on record. Energy prices about repeated the [...]

CPI Again Fell 0.5%, Core Increase Lightest Since February

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.

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Charts of the Week: Tariff Truce, Tenuous Trust

250501F20.jpg

250501G20.jpg

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.

250501H20.jpg

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

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**.

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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: November 2006

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Housing Starts Plumb Six Year Low

Treasury TIC Data Shows Strong Investment Flows into US, but Also Sizable Outflows Abroad by US Investors

Philadelphia Fed Index Improved Slightly

NAHB Housing Market Index Improved Again

Industrial Output Ticked Higher, Trend Slowdown Dramatic

Initial Claims for Jobless Insurance Remained Low

CPI Again Fell 0.5%, Core Increase Lightest Since February

CPI Again Fell 0.5%, Core Increase Lightest Since February