Louise Curley

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

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

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/070309a.jpg" width="353">
Nonfarm payrolls grew by 97,000, an increase that was right in line with the Consensus forecast for a 100,000 rise; the prior two months&#39; gains were revised upward once again, this time by a collective 55,000.
The unemployment rate eased last month to 4.5% from 4.6%, but this was the result of a decline in the total labor force of 190,000. Household employment edged lower by 38,000 and the number unemployed fell 152,000. The labor force participation rate fell to 66.2% from 66.3% in January and the employment rate (the number of people employed as a share of the civilian population over age 16) decreased to 63.2% in February from 63.3% the month before.
From the establishment survey, the job gain of 97,000 was the smallest since January 2005. However, the February figure included a 62,000 drop in construction jobs, most probably related to the severe winter storms that hit several parts of the country during the reference week. Other data from the household survey show that &quot;bad weather&quot; caused 522,000 employees to be &quot;not at work&quot;, the largest number since January 1997. [This information is in Haver&#39;s EMPL database.] <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070309b.jpg" width="353">
Total private sector payrolls grew 58,000 (incorporating that construction drop), close to the ADP figure of 57,000 reported Wednesday. Manufacturing jobs continue to decline, falling 14,000, the eighth consecutive negative number; the two most recent declines were revised noticeably, however, to just 14,000 combined from 34,000 reported last month. Private service sector jobs picked up to a 129,000 increase and were revised for January from 90,000 to 105,000. Most notable is a small but so far sustained recovery in the information sector, up 13,000 in February, following increases of 1,000 and 16,000 in January and December. This is the best result for that grouping since the tech bust in 2000. Financial services and business and professional services are seeing modest slowdowns, but retail trade looks to have stabilized in January and February after a six-month-long contraction from July through December. Government employment was up 39,000 in February, the largest increase since last September.
Average hourly earnings increased 0.4%, offsetting the prior month&#39;s weak 0.2% rise. The average workweek, though, dipped to 33.7 hours, a second consecutive 0.1 hour decrease.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EB/@EB01/@EB01.HTM">Employment</a></th>
<th scope="col">February</th>
<th scope="col">January</th>
<th scope="col">December</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Nonfarm Payrolls</td>
<td>97,000</td>
<td>146,000</td>
<td>226,000</td>
<td>1.5%</td>
<td>1.8%</td>
<td>1.7%</td>
<td>1.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Manufacturing</td>
<td>-14,000</td>
<td>-2,000</td>
<td>-12,000</td>
<td>-0.7%</td>
<td>-0.2%</td>
<td>-0.6%</td>
<td>-1.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Average Weekly Hours</td>
<td>33.7</td>
<td>33.8</td>
<td>33.9</td>
<td>33.8 (Feb. &#39;06)</td>
<td>33.8</td>
<td>33.8</td>
<td>33.7</td>
</tr>
<tr>
<td class="firstcol">Average Hourly Earnings</td>
<td>0.4%</td>
<td>0.2%</td>
<td>0.5%</td>
<td>4.1%</td>
<td>3.9%</td>
<td>2.8%</td>
<td>2.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment Rate</td>
<td>4.5%</td>
<td>4.6%</td>
<td>4.5%</td>
<td>4.8% (Feb. &#39;06)</td>
<td>4.6%</td>
<td>5.1%</td>
<td>5.5%</td>
</tr>
</tbody>
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Nonfarm payrolls grew by 97,000, an increase that was right in line with the Consensus forecast for a 100,000 rise; the prior two months' gains were revised upward once again, this time by a collective 55,000. The unemployment rate [...]

Payrolls Up 97,000, Close to Forecast; Construction Hit by Bad Weather

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070309a.jpg" width="353">
Nonfarm payrolls grew by 97,000, an increase that was right in line with the Consensus forecast for a 100,000 rise; the prior two months&#39; gains were revised upward once again, this time by a collective 55,000.
The unemployment rate eased last month to 4.5% from 4.6%, but this was the result of a decline in the total labor force of 190,000. Household employment edged lower by 38,000 and the number unemployed fell 152,000. The labor force participation rate fell to 66.2% from 66.3% in January and the employment rate (the number of people employed as a share of the civilian population over age 16) decreased to 63.2% in February from 63.3% the month before.
From the establishment survey, the job gain of 97,000 was the smallest since January 2005. However, the February figure included a 62,000 drop in construction jobs, most probably related to the severe winter storms that hit several parts of the country during the reference week. Other data from the household survey show that &quot;bad weather&quot; caused 522,000 employees to be &quot;not at work&quot;, the largest number since January 1997. [This information is in Haver&#39;s EMPL database.] <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070309b.jpg" width="353">
Total private sector payrolls grew 58,000 (incorporating that construction drop), close to the ADP figure of 57,000 reported Wednesday. Manufacturing jobs continue to decline, falling 14,000, the eighth consecutive negative number; the two most recent declines were revised noticeably, however, to just 14,000 combined from 34,000 reported last month. Private service sector jobs picked up to a 129,000 increase and were revised for January from 90,000 to 105,000. Most notable is a small but so far sustained recovery in the information sector, up 13,000 in February, following increases of 1,000 and 16,000 in January and December. This is the best result for that grouping since the tech bust in 2000. Financial services and business and professional services are seeing modest slowdowns, but retail trade looks to have stabilized in January and February after a six-month-long contraction from July through December. Government employment was up 39,000 in February, the largest increase since last September.
Average hourly earnings increased 0.4%, offsetting the prior month&#39;s weak 0.2% rise. The average workweek, though, dipped to 33.7 hours, a second consecutive 0.1 hour decrease.

<table border="0" cellspacing="0" width="100%">
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<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EB/@EB01/@EB01.HTM">Employment</a></th>
<th scope="col">February</th>
<th scope="col">January</th>
<th scope="col">December</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Nonfarm Payrolls</td>
<td>97,000</td>
<td>146,000</td>
<td>226,000</td>
<td>1.5%</td>
<td>1.8%</td>
<td>1.7%</td>
<td>1.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Manufacturing</td>
<td>-14,000</td>
<td>-2,000</td>
<td>-12,000</td>
<td>-0.7%</td>
<td>-0.2%</td>
<td>-0.6%</td>
<td>-1.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Average Weekly Hours</td>
<td>33.7</td>
<td>33.8</td>
<td>33.9</td>
<td>33.8 (Feb. &#39;06)</td>
<td>33.8</td>
<td>33.8</td>
<td>33.7</td>
</tr>
<tr>
<td class="firstcol">Average Hourly Earnings</td>
<td>0.4%</td>
<td>0.2%</td>
<td>0.5%</td>
<td>4.1%</td>
<td>3.9%</td>
<td>2.8%</td>
<td>2.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment Rate</td>
<td>4.5%</td>
<td>4.6%</td>
<td>4.5%</td>
<td>4.8% (Feb. &#39;06)</td>
<td>4.6%</td>
<td>5.1%</td>
<td>5.5%</td>
</tr>
</tbody>
</table>
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<tr>
<td><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070309c.jpg" width="353">The US goods and services deficit dropped in January 2007 to $59.1 billion from a revised $61.5 billion in December.&nbsp; January exports were $1.4 billion more than December exports of $125.3 billion.&nbsp; January imports were $1.0 billion less than December imports of $186.7 billion. US non-oil trade also improved sharply in January by nearly $3.5 billion. The improvement on the overall balance of trade for December over the Q4 average of&nbsp;-$59.5 billion imparts a slight upward push (about 0.2 percentage points) to GDP in the first quarter of 2007. While that is a good start it is a push that may not last.&nbsp; Imports are being inordinately restrained by a domestic slow down in growth coupled with an inventory-paring cycle. At the same time foreign growth seem to be in a holding pattern &#150; if that - rather than accelerating.&nbsp; Inventory-cutting accounts for much of the import weakness The chart on the left shows the relationship between changes in imports (in %) and changes in inventories (Real $billions). Inventory swings account for a good deal of the action for changes in imports and it is happening again in late 2006 (these are quarterly GDP sourced data). When (if?) the economy recovers further in 2007 as demand becomes steadier and inventory-cutting stops, we can expect imports to go back to their normal behavior, that is, inflation-adjusted imports growing at about twice the speed (or more) of US real GDP.&nbsp;&nbsp;At that point adjustment in the US trade deficit will become difficult. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070309d.jpg" width="353">Non-oil trade trends and facts The current trade trends are clear. Exports are outpacing imports and have done so for most of 2006 (see the non petroleum export and import chart). Stronger foreign growth that has boosted US exports has had something to do with this and so has the US inventory cycle. Since non-oil imports are nearly 50% larger in nominal terms that non-oil exports, exports must grow about 50% faster just to hold the line on the nominal trade balance for these accounts. That seems a challenge that is just to stiff for the period ahead despite past success. &nbsp;Since early 2005, export and import growth on this basis have been roughly equal, with export growth having an edge recently as the US economy slowed. But as the economy strengthens the import link to US growth will revive.&nbsp;&nbsp; Real export growth at 7.6% currently would show only a small margin of improvement compared to import growth at 6% and a loss compared to growth at 8.7%. (US real imports will grow by twice US growth given the habitually high US import elasticity of 2 to 2.5; US growth is expected in the range of 3% to 3.5% for the year ahead).&nbsp; And these figures exclude oil trade which likely will act to push the overall deficit even higher or blunt improvement in non-oil trade should that occur.&nbsp;Tipping point? The US may already be at a tipping point for the size of its current account deficit, the better part of that being made up by its trade deficit. The US current account deficit is at 6.8% of GDP in Q3 2006. For developing economies 5% of GDP is thought to be the point where lending bankers get nervous. China has already run its total foreign exchange reserves up to over one trillion dollars equivalent. Over the last four quarters the US current account deficit has racked up a total of $878 billion. That&#146;s 88% of a trillion right there.&nbsp;&nbsp; Who will absorb the new trillion dollars that deficit is pumping out? Who wants new US liabilities at a pace fast approaching one trillion dollars per year? Systemic risk? It should be lost on no one that the stock market turbulence of early March featured Japan and China. China&#146;s nascent and tiny stock market&#146;s fall was the proximate cause of the market volatility. But Japan&#146;s yen-carry trade also figured prominently in the discussion. There can be no doubt that the massive size of the trade and capital flow disequilibrium in Japan, China and the US is partly to blame for such events and last week serves as a warning for the future. These imbalances must be addressed rather than be allowed to grow further in the wrong directions. The January trade report The January trade report leaves exports in a broad-based slowdown over three months. Real exports&#146; three month growth (annualized) is below the annual pace over six-months and 12-months. And that slowdown is present for four of six end-use categories of exports: foods, feed &amp; beverages, industrial supplies &amp; materials, capital goods, and the catch all category of miscellaneous goods for the 3-month to 6-month comparison. For imports the pick up has not yet begun as industrial supplies and materials alone are growing strongly and that is oil-related. Only imports of capital goods and auto parts imports are stronger over three and six months. In those cases foreign-made autos are giving US production some stiff competition and the strength in capital goods imports belies the weakness in orders for capital goods and the weak spending for capital improvements by business that we have seen early in 2007. Strength in capital goods import is an oddity. To sum up, the trade picture remains murky. The month&#146;s result for January has turned up and moved the deficit lower, but intermediate trends show deterioration. The year-over-year growth rates are linked to macroeconomic phenomena that are shifting and that have yet to show their impact.&nbsp;</td>
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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070308c.jpg" width="353">
Industrial production among a group of European countries reporting today appears to have slowed in January, but is keeping up vigorous trend growth. The largest, Germany, is an exception for the month, with a 1.7% gain in January, but not for the year, as it has seen 8.2% expansion over January 2006. Others have declines for January; these include Sweden, -2.3%, and Hungary, Croatia and Turkey, in the ranges of 0.4% to 0.9%. But all of these also have sizable year-on-year advances.
For Germany, the January advance was widespread in areas where production had already been firm: machinery and some transport equipment. There were also increases in textiles, paper and printing, and rubber and plastics. From a longer time perspective, several sectors seem to be benefiting from a resurgence in construction activity since last summer. This was up 36% in January from the year earlier and has pulled with it building materials: concrete, stone, other nonmetallic mineral products, metals and wood products. Electrical equipment has also grown more than the 5.2% average of total industrial production. Thus, we see a broad-based industrial expansion in Germany.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070308e.jpg" width="353">
In Sweden, January&#39;s 2.3% downturn looks very much like a pause in an uptrend. The year-on-year performance was 4.1% growth, with 5.1% on average for 2006. Machinery, motor vehicles and electrical equipment -- Sweden&#39;s known specialties -- have shown good gains over longer time spans despite flat or down moves in January. Longer-run gains are also evident in chemical products, especially pharmaceuticals.
The minor declines in industrial activity in Hungary, Turkey and Croatia also seem to be interruptions of firmer trends. Hungarian output backtracked 0.4% in January, but was up a whopping 21.2% from January 2006. This is a preliminary figure; detailed data through December show double-digit growth in machinery, electrical equipment, transport equipment and &quot;other&quot; manufacturing. In Croatia, industrial production edged down 0.6% in January after a flat reading in December. But the year-on-year gain was 9.1% in January, with numerous and varied sectors participating. In this smaller economy, we should note, other sectors had sharp declines, the more uneven pattern likely owing to fewer firms in each sector that limit the depth of established business patterns.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070308d.jpg" width="353">
Turkey&#39;s industrial output fell 0.9% in January after a 6.8% decline in December; but November&#39;s had risen 9.5% on the month and January&#39;s year-over-year change is 14.8%. The growth areas are, as with other countries in the region, concentrated in machinery and the associated metals industries; in Turkey electrical machinery and apparatus contributed to the January growth, while computing equipment decreased somewhat, having expanded by a factor of more than 2 in 2006 -- 121% actually.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Industrial Production,&nbsp; % changes*</th>
<th scope="col">Jan 2007</th>
<th scope="col">Dec 2006</th>
<th scope="col">Nov 2006</th>
<th scope="col">Year/Year</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Germany</td>
<td>1.7</td>
<td>0.2</td>
<td>1.8</td>
<td>8.2</td>
<td>5.2</td>
<td>2.9</td>
<td>4.2</td>
</tr>
<tr>
<td class="firstcol">Sweden</td>
<td>-2.3</td>
<td>3.1</td>
<td>1.1</td>
<td>4.1</td>
<td>5.1</td>
<td>2.3</td>
<td>3.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Hungary</td>
<td>-0.4</td>
<td>0.9</td>
<td>-0.1</td>
<td>21.2</td>
<td>10.4</td>
<td>7.1</td>
<td>7.5</td>
</tr>
<tr>
<td class="firstcol">Croatia</td>
<td>-0.6</td>
<td>0.0</td>
<td>1.3</td>
<td>9.1</td>
<td>4.5</td>
<td>5.1</td>
<td>3.6</td>
</tr>
<tr class="odd">
<td class="firstcol">Turkey</td>
<td>-0.9</td>
<td>-6.8</td>
<td>9.5</td>
<td>14.8</td>
<td>5.8</td>
<td>5.4</td>
<td>9.8</td>
</tr>
</tbody>
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Industrial production among a group of European countries reporting today appears to have slowed in January, but is keeping up vigorous trend growth. The largest, Germany, is an exception for the month, with a 1.7% gain in January, [...]

January Industrial Production Up in Germany, Off in Smaller European Economies, But All Enjoy Longer-Run Growth

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070308b.jpg" width="353">
Initial unemployment insurance claims fell 10,000 to 328,000 in the week ended March 3, basically reversing the prior week&#39;s 7,000 increase. The figure was marginally lower than Consensus expectations for a decline to 330,000 claims.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070308a.jpg" width="353">
Despite the drop in the latest week, the four-week moving average of initial claims rose to 339,000, the highest since the Katrina-inflated numbers in the autumn of 2005.
In the week of Feb 24, continuing claims fell 98,000 to 2.526 million after a rise of 118,000 the week before, which likely had been storm-related. This pulled the associated rate of insured unemployment back down to its recent 1.9% average from a one-week move to 2.0%.

<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/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">03/03/07</th>
<th scope="col">02/24/07</th>
<th scope="col">02/17/07</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>328</td>
<td>338</td>
<td>331</td>
<td>313</td>
<td>332</td>
<td>343</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Continuing Claims</td>
<td>--</td>
<td>2,526</td>
<td>2,624</td>
<td>2,459</td>
<td>2,662</td>
<td>2,924</td>
</tr>
</tbody>
</table>
</body>
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Initial unemployment insurance claims fell 10,000 to 328,000 in the week ended March 3, basically reversing the prior week's 7,000 increase. The figure was marginally lower than Consensus expectations for a decline to 330,000 claims. [...]

Initial Claims for Jobless Insurance Hover Around 330K

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070308b.jpg" width="353">
Initial unemployment insurance claims fell 10,000 to 328,000 in the week ended March 3, basically reversing the prior week&#39;s 7,000 increase. The figure was marginally lower than Consensus expectations for a decline to 330,000 claims.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070308a.jpg" width="353">
Despite the drop in the latest week, the four-week moving average of initial claims rose to 339,000, the highest since the Katrina-inflated numbers in the autumn of 2005.
In the week of Feb 24, continuing claims fell 98,000 to 2.526 million after a rise of 118,000 the week before, which likely had been storm-related. This pulled the associated rate of insured unemployment back down to its recent 1.9% average from a one-week move to 2.0%.

<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/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">03/03/07</th>
<th scope="col">02/24/07</th>
<th scope="col">02/17/07</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>328</td>
<td>338</td>
<td>331</td>
<td>313</td>
<td>332</td>
<td>343</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Continuing Claims</td>
<td>--</td>
<td>2,526</td>
<td>2,624</td>
<td>2,459</td>
<td>2,662</td>
<td>2,924</td>
</tr>
</tbody>
</table>
January Industrial Production Up in Germany, Off in Smaller European Economies, But All Enjoy Longer-Run Growth 
by <a href="/comment/Stone.html">Carol Stone</a> March 8, 2007


<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070308c.jpg">
Industrial production among a group of European countries reporting today appears to have slowed in January, but is keeping up vigorous trend growth. The largest, Germany, is an exception for the month, with a 1.7% gain in January, but not for the year, as it has seen 8.2% expansion over January 2006. Others have declines for January; these include Sweden, -2.3%, and Hungary, Croatia and Turkey, in the ranges of 0.4% to 0.9%. But all of these also have sizable year-on-year advances.
For Germany, the January advance was widespread in areas where production had already been firm: machinery and some transport equipment. There were also increases in textiles, paper and printing, and rubber and plastics. From a longer time perspective, several sectors seem to be benefiting from a resurgence in construction activity since last summer. This was up 36% in January from the year earlier and has pulled with it building materials: concrete, stone, other nonmetallic mineral products, metals and wood products. Electrical equipment has also grown more than the 5.2% average of total industrial production. Thus, we see a broad-based industrial expansion in Germany.<img align="right" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070308e.jpg">
In Sweden, January&#39;s 2.3% downturn looks very much like a pause in an uptrend. The year-on-year performance was 4.1% growth, with 5.1% on average for 2006. Machinery, motor vehicles and electrical equipment -- Sweden&#39;s known specialties -- have shown good gains over longer time spans despite flat or down moves in January. Longer-run gains are also evident in chemical products, especially pharmaceuticals.
The minor declines in industrial activity in Hungary, Turkey and Croatia also seem to be interruptions of firmer trends. Hungarian output backtracked 0.4% in January, but was up a whopping 21.2% from January 2006. This is a preliminary figure; detailed data through December show double-digit growth in machinery, electrical equipment, transport equipment and &quot;other&quot; manufacturing. In Croatia, industrial production edged down 0.6% in January after a flat reading in December. But the year-on-year gain was 9.1% in January, with numerous and varied sectors participating. In this smaller economy, we should note, other sectors had sharp declines, the more uneven pattern likely owing to fewer firms in each sector that limit the depth of established business patterns.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070308d.jpg" width="353">
Turkey&#39;s industrial output fell 0.9% in January after a 6.8% decline in December; but November&#39;s had risen 9.5% on the month and January&#39;s year-over-year change is 14.8%. The growth areas are, as with other countries in the region, concentrated in machinery and the associated metals industries; in Turkey electrical machinery and apparatus contributed to the January growth, while computing equipment decreased somewhat, having expanded by a factor of more than 2 in 2006 -- 121% actually.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Industrial Production,&nbsp; % changes*</th>
<th scope="col">Jan 2007</th>
<th scope="col">Dec 2006</th>
<th scope="col">Nov 2006</th>
<th scope="col">Year/Year</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Germany</td>
<td>1.7</td>
<td>0.2</td>
<td>1.8</td>
<td>8.2</td>
<td>5.2</td>
<td>2.9</td>
<td>4.2</td>
</tr>
<tr>
<td class="firstcol">Sweden</td>
<td>-2.3</td>
<td>3.1</td>
<td>1.1</td>
<td>4.1</td>
<td>5.1</td>
<td>2.3</td>
<td>3.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Hungary</td>
<td>-0.4</td>
<td>0.9</td>
<td>-0.1</td>
<td>21.2</td>
<td>10.4</td>
<td>7.1</td>
<td>7.5</td>
</tr>
<tr>
<td class="firstcol">Croatia</td>
<td>-0.6</td>
<td>0.0</td>
<td>1.3</td>
<td>9.1</td>
<td>4.5</td>
<td>5.1</td>
<td>3.6</td>
</tr>
<tr class="odd">
<td class="firstcol">Turkey</td>
<td>-0.9</td>
<td>-6.8</td>
<td>9.5</td>
<td>14.8</td>
<td>5.8</td>
<td>5.4</td>
<td>9.8</td>
</tr>
</tbody>
</table>
</body>
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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070307d.jpg" width="353">
Yesterday, we wrote here about the sharp increases in hourly compensation and unit labor costs now seen in the productivity data for Q4. Compensation rose at an 8.2% annual rate, pushing unit labor costs up at a 6.6% pace. We mentioned that these big moves were the result of unusually large bonuses in Q4.
However, the personal income data show these bonuses -- said by the BLS to be $50 billion -- in January, not during Q4. How do these factors jibe?
The secret is a little noticed item in the National Income Accounts called &quot;Wage Accruals less Disbursements&quot;, which is usually 0. Businesses record wages as they are accrued, but workers receive wages when they are actually disbursed. Normally, these are simultaneous actions. So the clue that compensation would be raised sharply in the productivity revisions was visible to analysts who looked carefully at Table 1.10 in the National Income Accounts at that series &quot;Wage Accruals less Disbursements&quot;. In the GDP revisions released on February 28, this series was changed to $50 billion from the 0 originally reported. We&#39;d expect that to reverse in Q1 as wage disbursements will have been larger than accruals. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070307e.jpg" width="353">
Bonuses, of course, had been paid in early 2006 as well, but these were evidently also accounted for by businesses in Q1 2006, not late 2005. So compensation and unit labor cost in the productivity data moved simultaneously in Q1 with the income reported in the personal income data.
Another instructive example of the same kind of phenomenon occurred in 1992 and 1993. Tax rates were expected to be raised early in the new presidential administration, so disbursement of some compensation was accelerated into 1992 to capture it under the old tax rates. This meant that disbursements were larger than accruals, and the series &quot;wage accruals less disbursements&quot; was therefore negative, -$63.0 billion, followed by a commensurate positive offset in early 1993. In this instance, businesses&#39; accrued labor costs were not affected, so compensation in the productivity data continued along a relatively smooth path, despite the whipsaw in compensation -- up in Q4 1992 and down in Q1 1993 -- in the personal income data.
[We thank some colleagues in the New York Association for Business Economics for pointing out the application of accruals less disbursements. In the Haver data offerings, the Wage Accruals less Disbursements series is in the USNA database, and the productivity data are in USECON.]

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Yesterday, we wrote here about the sharp increases in hourly compensation and unit labor costs now seen in the productivity data for Q4. Compensation rose at an 8.2% annual rate, pushing unit labor costs up at a 6.6% pace. We [...]

U.S. Productivity & Unit Labor Costs: A Follow-Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070307a.jpg" width="353">
The ADP National Employment Report for February points to a 57,000 increase in private nonfarm payrolls. This measure is intended as a leading indicator for the &quot;official&quot; BLS data to be reported Friday, March 9. For January, the ADP figure was 121,000, with the actual coming at 97,000. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070307b.jpg" width="353">
With the annual revision of the BLS data, ADP has also revised its figures and made methodological changes in the calculations. ADP, you perhaps know, processes payrolls for millions of American workers; indeed, their annual report says they cover 1 in 6 private sector workers. Initially their calculation was based on a sample of their own clients covering about 7 million workers. They have expanded this to a substantial portion of their entire base, with data collection weekly not just once a month. New efforts are being made to align both the totals and a broad industry breakdown every month. The seasonal adjustment process was shifted from X-11 to X-12 ARIMA, and closer examination is being made for outliers. These changes are aimed at minimizing the production of false signals in the report: for example, in December, the original series pointed to a decline in private sector jobs of 40,000, but the BLS figure showed an increase of 150,000.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070307c.jpg" width="353">
The Report also contains new information. It shows a breakdown for goods-producing and service-producing sectors, with employment in goods industries presently seen declining 43,000 in February and services going up 100,000. Brand-new series are available on the size of payroll units. Since most business growth has occurred in small- and medium-sized firms, this would be useful in assessing the breadth of payroll changes. So for February, the ADP data show a 53,000 gain at small businesses (49 or fewer employees), 33,000 at medium-sized companies (50-499) and a decline of 29,000 at large firms (500 and over). It&#39;s easy to focus on large businesses because they get more public attention, but in fact, it&#39;s the smaller ones where there is more dynamism.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Private Nonfarm Payrolls (000s)</th>
<th scope="col">Feb 2007</th>
<th scope="col">Jan 2007</th>
<th scope="col">Dec 2006</th>
<th scope="col">Nov 2006</th>
Monthly Averages
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2006</td>
<td>2005</td>
<td>2004</td>
</tr>
<tr>
<td class="firstcol">ADP Total</td>
<td>115,111</td>
<td>115,054</td>
<td>114,933</td>
<td>114,815</td>
<td>114,165</td>
<td>112,288</td>
<td>110,290</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Change</td>
<td>57</td>
<td>121</td>
<td>118</td>
<td>258</td>
<td>142</td>
<td>171</td>
<td>153</td>
</tr>
<tr>
<td class="firstcol">BLS Total</td>
<td>--</td>
<td>115137</td>
<td>115040</td>
<td>114835</td>
<td>114186</td>
<td>111890</td>
<td>109804</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Change</td>
<td>--</td>
<td>97</td>
<td>205</td>
<td>190</td>
<td>167</td>
<td>198</td>
<td>159</td>
</tr>
</tbody>
</table>
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The ADP National Employment Report for February points to a 57,000 increase in private nonfarm payrolls. This measure is intended as a leading indicator for the "official" BLS data to be reported Friday, March 9. For January, the ADP [...]

ADP Report Points to 57K Private Payroll Growth for February; Survey Revised, Series Added on Sector and Firm-Size

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

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

Apart from the US, productivity is moribund

Financial market concerns ebb even though policy uncertainty continues to soar

US tariff revenues nearly doubled in April

Even with expected tariff-induced increases in inflation, BCFF forecasters look for a more aggressive round of monetary easing

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

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

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

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

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

US economy expected to outperform other major economies in 2025

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

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

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

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

Policy uncertainty has surged since the US national elections.

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

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

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Tom Moeller

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

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

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

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

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

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

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

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

NABE Forecasts Sharply Reduced Growth for 2025 & 2026

Winnie Tapasanun

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

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

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

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

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

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

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

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

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

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

Tian Yong Woon

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

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

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

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

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

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


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

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

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

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

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

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

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Asia

Economic Letter from Asia: India Rising

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

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

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

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

The Housing Affordability Index (HAI) equals 100 when a median-income borrower qualifies for an 80% mortgage on a median-priced existing single-family home. The HAI had exceeded 100 in each month since July 1990 and reached its all-time high of 213.3 in January 2013.

Data on Housing Affordability can be found in Haver’s **REALTOR** database. Median home sales prices are also available in **USECON**. Higher frequency interest rate data are found in **SURVEYS**, **WEEKLY**, and **DAILY**.

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

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

U.S. Housing Affordability Declines in April

Andrew Cates

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

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

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

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

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

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

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

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Economy in Brief: March 2007

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