Tom Moeller

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090515a.jpg" align="left" border="0">
Weak pricing power continues to stem from a shortfall in U. S.
demand. The Bureau of Labor Statistics reported that the Consumer Price
Index was unchanged last month after a 0.1% slip during March. More
indicative of the weakness in pricing power, the year-to-year change in
consumer prices was -0.7%, the biggest since 1955. The April index was
in accord with Consensus expectations for no change in the month.
The weakness in the recent CPI readings owes mostly to lower
food and energy prices. In contrast, "core" pricing has picked up
slightly. The CPI less food &amp; energy rose 0.3% last month after
three consecutive 0.2% increases. These gains lifted the twelve-month
change to 1.9%, which was the firmest since January, and the growth
rate here in 2009 has averaged 2.4% (AR). That four-month growth is up
from a low of 0.5% as of December.
Lower energy prices again restrained overall pricing pressure
last month. The 2.4% decline in April reflected a 2.8% shortfall in
gasoline prices (-39.5% y/y) which added to a 4.0% March drop. Fuel oil
prices also continued downward with a 2.1% drop (-33.5% y/y). The
latest was the ninth consecutive monthly drop and it lowered prices by
one-third during the last twelve. Finally, prices for natural gas
&amp; electricity have fallen in all but one of the last nine
months and year-to-year they are down 1.7%.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090515b.jpg" align="right" border="0">
Lower food &amp; beverage prices also continue to restrain
overall inflationary pressure. Prices slipped for the third straight
month and the y/y change of 3.3% was the weakest since early 2007, down
from a peak of +6.1% last fall. Recent weakness has been led by lower
dairy product prices (-5.1% y/y). Moreover, price gains for meats,
poultry &amp; fish (2.5% y/y) as well as fruits &amp;
vegetables (0.6% y/y) have eased sharply.
Bucking the disinflationary trend have been core
goods prices which rose 0.5% during April after three
consecutive 0.4% increases. Higher tobacco prices account continue to
account for some of that acceleration with a 28.8% y/y increase. But
there has been some modest firming of prices elsewhere. Prices for
household furnishings &amp; operations have risen 1.8% y/y
following price deflation early last year. Apparel prices are up 0.9%
y/y after declines extending back to 1999. Prices of new &amp; used
motor vehicles have risen during the last four months and the y/y
change of -1.7% compares to a rate of decline of 3.5% as of yearend
2008.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090515c.jpg" align="left" border="0">
Gains in core services prices continue to
moderate. The 0.2% uptick last month left the y/y change of 2.3% at its
weakest since 1983. That moderation continues to owe mostly to weakness
in the housing market which caused April shelter prices to rise just
0.2%, putting them up 1.6% y/y. That rise compares to gains above 4.0%
two years ago. Owners equivalent rent of primary residence, a measure
not equivalent to other house price measures, ticked up just 0.1% (2.1%
y/y). The cost of travel did rise 0.5% during April but prices of
lodging away from home are down 5.9% during the last year. Other
service prices rose. The increase in medical care services prices
picked up slightly to 0.4% (3.3% y/y) while education costs rose 0.4%
and the y/y gain remained a firm 5.4%. Public transportation prices
fell again. The 0.8% decline was the eighth drop in a row (-5.9% y/y).
The chained CPI, which adjusts for shifts in consumption
patterns, gained 0.3% while year -to-year prices fell 1.1%. The
increase in chained prices less food and energy eased to 0.2% in the
month.
The consumer price data is available in Haver's USECON
database while detailed figures can be found in the CPIDATA
database.
Seeking Stability: What’s Next for Banking
Regulation? from the Federal Reserve Bank of Dallas can
be found <a 
 href="http://dallasfed.org/research/eclett/2009/el0903.pdf">
here</a>.

<table border="0" cellspacing="0" width="100%">
 <colgroup><col><col><col><col><col><col></colgroup>
 <thead><tr>
 <th scope="col" class="firstcol"><a 
 href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80101/@E80101.HTM">Consumer
Price Index</a> (%)</th>
 <th scope="col">April</th>
 <th scope="col">March</th>
 <th scope="col">Y/Y&nbsp;</th>
 <th scope="col">2008</th>
 <th scope="col">2007</th>
 <th scope="col">2006</th>
 </tr>
 </thead>
 <tbody>
 <tr class="even">
 <td class="firstcol">Total&nbsp;</td>
 <td>0.0</td>
 <td>-0.1</td>
 <td>-0.7</td>
 <td>3.8</td>
 <td>2.9</td>
 <td>3.2</td>
 </tr>
 <tr class="even">
 <td class="firstcol">Total less Food &amp; Energy</td>
 <td>0.3</td>
 <td>0.2</td>
 <td>1.9</td>
 <td>2.3</td>
 <td>2.3</td>
 <td>2.5</td>
 </tr>
 <tr class="even">
 <td class="firstcol">&nbsp; Goods less Food
&amp; Energy</td>
 <td>0.5</td>
 <td>0.4</td>
 <td>0.9</td>
 <td>0.1</td>
 <td>-0.4</td>
 <td>0.2</td>
 </tr>
 <tr class="even">
 <td class="firstcol">&nbsp;&nbsp;&nbsp;
Services less Energy</td>
 <td>0.2</td>
 <td>0.1</td>
 <td>2.3</td>
 <td>3.1</td>
 <td>3.4</td>
 <td>3.4</td>
 </tr>
 <tr class="even">
 <td class="firstcol">&nbsp; Energy</td>
 <td>-2.4</td>
 <td>-3.0</td>
 <td>-24.5</td>
 <td>13.5</td>
 <td>5.7</td>
 <td>11.0</td>
 </tr>
 <tr class="even">
 <td class="firstcol">&nbsp; Food &amp;
Beverages</td>
 <td>-0.2</td>
 <td>-0.1</td>
 <td>3.3</td>
 <td>5.4</td>
 <td>3.9</td>
 <td>2.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol">&nbsp;</td>
 <td>&nbsp;</td>
 <td>&nbsp;</td>
 <td>&nbsp;&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>&nbsp;</td>
 <td>0.3</td>
 <td>0.2</td>
 <td>-1.1 </td>
 <td>3.3</td>
 <td>2.5</td>
 <td>2.9 </td>
 </tr>
 <tr class="even">
 <td class="firstcol">&nbsp;Total less Food
&amp; Energy&nbsp;</td>
 <td>0.2</td>
 <td>0.4</td>
 <td>1.4</td>
 <td>2.0</td>
 <td>2.0</td>
 <td>2.2</td>
 </tr>
 </tbody>
</table>
EMU GDP Drops Sharply 
by <a href="/comment/Brusca.html">Robert
Brusca</a> May 15, 2009


<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090515d.jpg" align="left" border="0">
The EMU region’s sharp drop in GDP has turned out to be worse
than expected for the region as well as for most countries. Germany is
showing the deepest GDP drop since 1970. The drop that The Netherlands
is experiencing is the sharpest drop in GDP since the end of WWII.
Greece is the sole county in this table with positive growth yr/yr. 
 

GDP continues to decelerate across Europe. We knew these GDP
reports would be weak after viewing the weakness in industrial output
ahead of the release of this GDP report. Germany’s Q1 decline is so
large it is not looking for much if any further decline in GDP for the
rest of the year. 
 

The Swedish Finance Minister Anders Borg has said that Europe
may be in need of some further stimulus. Of course Europe also labors
under the constraint of the Maastricht rules that restrict fiscal
deficits and cap ratios of government debt to GDP. Not only does Europe
lack a central fiscal authority comparable to its central bank, but the
fragmented nature of fiscal responsibility makes it hard for Europe to
be involved in fiscal stimulus in a coordinated way. Instead of a
central fiscal authority the Maastricht rules stand in to restrict
individual nations from going overboard with fiscal policy actions that
could create too many government liabilities that might undermine the
value of the euro. Of course recessions naturally put pressure on
Maastricht rules since growth slows or declines, pushing tax revenues
down at a time that social safety new spending rises. Countries that
have room under the Maastricht ratios can engage in fiscal stimulus in
times like theses, but often it is the high debt countries that are in
greater need of the stimulus and must risk running afoul of the rules
if they act. 
 

This down turn has exposed problems in the Euro Area. The Euro
Area is asymmetric. Its Central Bank has a mandate for price stability
only. Meanwhile there is no fiscal authority to step in when things get
tough. In this cycle the ECB actually joined in on an coordinated
international rate cut with its inflation rate well over ceiling on the
basis of a forecast that inflation would drop (of course the spot oil
price had dropped sharply and that was not a very risky forecast at the
time). Still it was an action that seemed to violate the rule if not
the spirit of having and inflation ceiling. Europe has not been able to
confront the problem that only the ECB can move fast in a crisis yet
its mandate is price stability. 
 

After seeing these GDP reports markets did not react very
strongly. The weakness in GDP was expected. The degree of weakness has
turned out to be a bit worse than expected. It sill is not clear what
steps Europe will take next and if more fiscal stimulus will be part of
the approach or not. 


<table border="0" cellspacing="0" width="100%">
 <colgroup></colgroup>
 <thead><tr>
 <th colspan="8" scope="col">Euro Area
and Main G-10 Country GDP Results </th>
 </tr>
 </thead>
 <tbody>
 <tr class="grey4">
 <td class="firstcol">&nbsp;</td>
 <td colspan="3">Quarter over quarter-SAAR</td>
 <td colspan="4">Year/Year</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol">GDP</td>
 <td>Q1-09</td>
 <td>Q4-08</td>
 <td>Q3-08</td>
 <td>Q1-09</td>
 <td>Q4-08</td>
 <td>Q3-08</td>
 <td>Q2-08</td>
 </tr>
 <tr class="grey2">
 <td class="firstcol">EMU-15</td>
 <td>-9.6%</td>
 <td>-6.3%</td>
 <td>-1.0%</td>
 <td>-4.6%</td>
 <td>-1.5%</td>
 <td>0.6%</td>
 <td>1.4%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">Austria</td>
 <td>-8.5%</td>
 <td>-2.6%</td>
 <td>-1.3%</td>
 <td>-4.6%</td>
 <td>0.3%</td>
 <td>1.8%</td>
 <td>2.3%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">France</td>
 <td>-4.7%</td>
 <td>-5.7%</td>
 <td>-0.7%</td>
 <td>-3.2%</td>
 <td>-1.7%</td>
 <td>0.1%</td>
 <td>1.0%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">Germany</td>
 <td>-14.4%</td>
 <td>-8.6%</td>
 <td>-2.1%</td>
 <td>-6.9%</td>
 <td>-1.8%</td>
 <td>0.8%</td>
 <td>2.0%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">Greece</td>
 <td>-4.6%</td>
 <td>1.2%</td>
 <td>1.5%</td>
 <td>0.3%</td>
 <td>2.4%</td>
 <td>2.7%</td>
 <td>3.4%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">Italy</td>
 <td>-9.4%</td>
 <td>-8.3%</td>
 <td>-3.2%</td>
 <td>-5.9%</td>
 <td>-3.0%</td>
 <td>-1.3%</td>
 <td>-0.3%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">The Netherlands</td>
 <td>-10.7%</td>
 <td>-4.7%</td>
 <td>-1.8%</td>
 <td>-4.5%</td>
 <td>-0.8%</td>
 <td>1.8%</td>
 <td>3.4%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">Portugal</td>
 <td>-5.9%</td>
 <td>-6.2%</td>
 <td>-0.8%</td>
 <td>-3.0%</td>
 <td>-1.8%</td>
 <td>0.4%</td>
 <td>0.6%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">Spain</td>
 <td>-7.0%</td>
 <td>-3.8%</td>
 <td>-1.2%</td>
 <td>-2.9%</td>
 <td>-0.7%</td>
 <td>0.9%</td>
 <td>1.8%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">UK</td>
 <td>-7.4%</td>
 <td>-5.9%</td>
 <td>-2.8%</td>
 <td>-4.2%</td>
 <td>-2.0%</td>
 <td>0.4%</td>
 <td>1.8%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">US</td>
 <td>-6.1%</td>
 <td>-6.3%</td>
 <td>-0.5%</td>
 <td>-2.6%</td>
 <td>-0.8%</td>
 <td>0.7%</td>
 <td>2.1%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">Japan</td>
 <td>#N/A</td>
 <td>-12.1%</td>
 <td>-1.4%</td>
 <td>#N/A</td>
 <td>-4.3%</td>
 <td>-0.2%</td>
 <td>0.5%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">Switzerland</td>
 <td>#N/A</td>
 <td>-1.2%</td>
 <td>-0.3%</td>
 <td>#N/A</td>
 <td>-0.1%</td>
 <td>1.3%</td>
 <td>2.3%</td>
 </tr>
 </tbody>
</table>
U.S. Factory Production Shortfall
Eases 
by <a href="/comment/Moeller.html">Tom
Moeller</a> May 15, 2009


<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090515g.jpg" align="left" border="0">
The severity of the downturn in industrial output eased last
month, according to the industrial production figures published by the
Federal Reserve. Output, which includes mining and utilities, declined
an expected and moderate 0.5%, which was by far the smallest decline of
this recession. The drop followed declines between one and four percent
during the prior several months. Declines in the factory sector alone
have eased as well. The 0.3% April shortfall was the smallest since
February and compares to monthly declines between one and three percent
during this recession.
Output of consumer goods overall was unchanged last month and
the year-to-date rate of decline eased to 7.3%. Last month, production
of autos actually increased, though it's down at a 44.4% rate this
year. Conversely, furniture output posted a 2.8% decline last month and
it's down at a 23.7% rate so far this year as consumers continue to shy
away from purchases of large durable goods. Apparel output fell 1.3%
and the three-month rate of -17.3% is half that of its worst. Even the
pace of the decline in the production of business equipment seems to
have eased with a 0.5% decline, though the three-month rate was near
its worst at -23.6%. The downturn in the housing market continued to
lower output of construction supplies. It fell 1.1% and the three-month
rate of decline eased to a "modest" 23.4%. <img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090515h.jpg" align="right" border="0">
Even in the high-tech sector the rate of decline in output
slowed. Here, industrial production fell 0.8% last month and at a
reduced 13.5% rate during the last four. Less high tech, overall
industrial production fell a reduced 0.4% last month and the annual
rate of change eased to -15.3%.
O.K., so the slowing pace of output declines is largely in
autos and the high-tech sector. But outside of these two sectors,
output moderated to a 0.5% decline last month, less than one-third the
March drop. The three-month rate of decline was still near its worst at
a -13.4% annual rate.
Excess capacity grew even further last month. Capacity
utilization fell to 69.1%, a record low for the series which dates to
1966. Utilization in the factory sector dropped even harder
to 65.7% from a peak near 80% back in 2007. The latest rate was a
record low since WW II.
The industrial production data are available in Haver's USECON
database.
Ties that Bind: Bilateral Trade's Role in
Synchronizing Business Cycles from the Federal Reserve
Bank of Dallas is available <a 
 href="http://dallasfed.org/research/eclett/2009/el0901.pdf">
here</a>.

<table border="0" cellspacing="0" width="100%">
 <colgroup><col><col><col><col><col><col></colgroup>
 <thead><tr>
 <th scope="col" class="firstcol">INDUSTRIAL
PRODUCTION (SA, %)</th>
 <th scope="col">April</th>
 <th scope="col">March</th>
 <th scope="col">Y/Y</th>
 <th scope="col">2008</th>
 <th scope="col">2007</th>
 <th scope="col">2006</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd">
 <td class="firstcol">Total Output </td>
 <td>-0.5</td>
 <td>-1.7</td>
 <td>-12.5</td>
 <td>-2.2</td>
 <td>1.5</td>
 <td>2.3</td>
 </tr>
 <tr>
 <td class="firstcol">&nbsp;&nbsp; Manufacturing</td>
 <td>-0.3</td>
 <td>-2.1</td>
 <td>-14.5</td>
 <td>-3.2</td>
 <td>1.4</td>
 <td>2.5</td>
 </tr>
 <tr>
 <td class="firstcol">&nbsp;&nbsp;&nbsp;&nbsp;
Consumer Goods</td>
 <td>0.0</td>
 <td>-0.3</td>
 <td>-6.6</td>
 <td>-2.6</td>
 <td>0.9</td>
 <td>0.4</td>
 </tr>
 <tr>
 <td class="firstcol">&nbsp;&nbsp;&nbsp;&nbsp;
Business Equipment</td>
 <td>-0.5</td>
 <td>-2.9</td>
 <td>-13.9</td>
 <td>-1.1</td>
 <td>2.7</td>
 <td>9.4</td>
 </tr>
 <tr>
 <td class="firstcol">&nbsp;&nbsp;&nbsp;&nbsp;
Construction Supplies</td>
 <td>-1.1</td>
 <td>-2.8</td>
 <td>-20.0</td>
 <td>-6.3</td>
 <td>-2.0</td>
 <td>2.3</td>
 </tr>
 <tr>
 <td class="firstcol">&nbsp; Utilities</td>
 <td>0.5</td>
 <td>1.8</td>
 <td>-3.2</td>
 <td>0.3</td>
 <td>3.4</td>
 <td>-0.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol">Capacity Utilization</td>
 <td>69.1</td>
 <td>69.4</td>
 <td>79.2 (April '08)</td>
 <td>77.6</td>
 <td>80.6</td>
 <td>80.9</td>
 </tr>
 </tbody>
</table>

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Weak pricing power continues to stem from a shortfall in U. S. demand. The Bureau of Labor Statistics reported that the Consumer Price Index was unchanged last month after a 0.1% slip during March. More indicative of the weakness in [...]

U.S. CPI Unchanged in April; Year-to-Year Drop of 0.7% Is Largest Since 1955

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<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090514a.jpg">
A stutter-step was taken by the U.S. job market last week. Initial claims for unemployment insurance increased 32,000 to 637,000 and that recovered all of the prior week&#39;s decline. Nevertheless, claims remained down sharply from their March high of 674,000. The four-week average of claims, which smoothes out some of the volatility in the weekly numbers, ticked up to 630,500, still near the lowest level since mid-February. Initial claims of 610,000 was the Consensus expectation for claims last week.<img align="right" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090514b.jpg">
The Labor Department indicated that the largest increases in initial claims for the week ending May 2 were in Illinois (+2,052), Kansas (+2,025), Puerto Rico (+1,781), Indiana (+1,051), and Ohio (+1,013), while the largest decreases were in New York (-13,386), Michigan (-10,952), North Carolina (-8,988), Massachusetts (-3,705), and Connecticut (-2,802).
Layoffs may have eased, but the pace of rehiring of unemployed workers remains depressed. Continuing claims for unemployment insurance increased again to another record high of 6,560,000 and they remain twice the year ago level. The series dates back to 1966. The four-week average of continuing claims also rose to another record of 6,337,250. Continuing claims provide some indication of workers&#39; ability to find employment and they lag the initial claims figures by one week.
The lack of hiring continued to push the insured unemployment rate higher to 4.9%. That level was more than double last April and the highest level since 1983. During the last ten years there has been a 93% correlation between the level of the insured unemployment rate and the overall rate of unemployment published by the Bureau of Labor Statistics.Clearly, the latest weekly figure understates labor market distress in some states. The highest insured unemployment rates in the week ending April 25 were in Michigan (7.8 percent), Oregon (7.5), Pennsylvania (6.5), Wisconsin (6.4), Nevada (6.3), Idaho (6.1), Puerto Rico (5.9), Vermont (5.8), Alaska (5.7), and Rhode Island (5.7).
The unemployment insurance claim data is available in Haver&#39;s WEEKLY database.
Comparing patterns of default among prime and subprime mortgages from the Federal Reserve Bank of Chicago is available <a href="http://www.chicagofed.org/publications/economicperspectives/ep_2qtr2009_part2_amromin_paulson.pdf">here.</a>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><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>&nbsp;</th>
<th scope="col">05/09/09</th>
<th scope="col">05/02/09</th>
<th scope="col">04/25/09</th>
<th scope="col">Y/Y</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006&nbsp;</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>637</td>
<td>635</td>
<td>635</td>
<td>69.9%</td>
<td>420</td>
<td>321</td>
<td>313</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>6,560</td>
<td>6,358</td>
<td>114.2%</td>
<td>3,342</td>
<td>2,552</td>
<td>2,459</td>
</tr>
</tbody>
</table>
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A stutter-step was taken by the U.S. job market last week. Initial claims for unemployment insurance increased 32,000 to 637,000 and that recovered all of the prior week's decline. Nevertheless, claims remained down sharply from their [...]

U.S. Initial Weekly Claims For Jobless Insurance Rebound But Still Trending Lower

Robert Brusca

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090514f.jpg" align="left" border="0">
GDP: more reports coming - The bulk of the euro-countries&#8217; GDP
reports will begin to be released on Friday. For now we have the Q/Q
number for Spain and a release for the UK (an EU member country) and a
comparison available to the US. France&#8217;s Finance Minister, Christine
Lagarde, is on record saying that the French GDP result will be &#8216;bad.&#8217;
She has not put a figure to that. Germany has been releasing results
and projections for tax revenues that increasingly are falling behind
what was anticipated, tipping off the weakness in German GDP. France is
headed to bust the Maastricht rules for fiscal deficits. Spain&#8217;s GDP
has made the largest quarterly drop and Yr/Yr drop in four decades as
its property boom gone-bust is taking its toll on the economy. Spain&#8217;s
4 million people out of work account for about 70% of the increase in
all of the euro area. And&#8230;Spain&#8217;s adjustment is still in progress. 
 

Europe&#8217;s IP has been horrifically weak -- The large EMU
economies have already posted weak results for industrial output with
that sector showing declines at horrifically negative growth rates in
the first quarter, clustering around -30% annualized and ranging from
-25% to -45% <a href="http://haver.com/COMMENT/090513B.HTM">here.</a> 
 
 

Euro FX rate is resilient - For all of that weakness the euro
exchange rate has held up pretty well and even advanced, reversing its
recent down cycle. The chart (above) shows the level of the EMU area&#8217;s
real effective exchanger rate up 25.5% from its year 2000 level. This
rate compares the euro&#8217;s many bilateral values compressing them to a
single number using trade-weights, (hence it is &#8216;effective&#8217;, or
&#8216;multilateral&#8217;). It also accounts for inflation differences in doing so
(hence it is &#8216;real&#8217;). The euro is off peak but it is still strong. 
 

Euro is still &#8216;strong&#8217; -- Counting from all its monthly values
since 1973, the synthetic euro stands at about the 79Th percentile of
its range of values. The synthetic euro uses actual euro weighting
against non euro currencies and hypothetically calculates what the euro
exchange rate would have been had the EMU currency value arrangement
been in existence since 1973. On this basis the value of the euro is in
the top 20th percentile of its range. That is a relatively strong
showing, despite its recent backtracking. 
 

Relativity has helped to stabilize the euro -- In April of
2008 the synthetic euro reached its &#8216;all time&#8217; high for this same
period. It since has dropped and regained some momentum. While the euro
area remains quite weak with output still declining with vigor,
currency values are a relative thing. The rest of the world is
experiencing output declines as well. But the declines in US output,
plus the well-publicized banking problems and investment losses in
certain classes of dollar assets, have harmed the aura of security
surrounding the dollar and the US. In truth &#8216;the US&#8217; has been more of
an issue than &#8216;the dollar.&#8217; 
 

Relativity and perception - In fact, European banks are
troubled as well. I will not try and make any comparative statement on
their health. But international agencies are urging European
authorities to do more to help them. Germany has just taken steps to
bolster the Landesbanks and to set up a German &#8216;bad bank.&#8217; In France
authorities have promised to back stop French banks. After the failure
of the US investment bank Lehman Brothers, the US has taken steps to
prop up banks as well although small- to moderate-sized banks have been
allowed to go out of business. Those are not usually the sorts of banks
that would affect overseas investors. A big issue for investors has
been the threat to Fannie Mae and Freddie Mac which they once saw as a
gold standard and from losses on various mortgage backed securities in
the US as well as to losses in equities and directly in real estate,
each of which has a more global dimension. 
 

The Fed and monetary policy prospects: While the US dollar
remains backed by a careful and watchful US monetary policy the Fed&#8217;s
balance sheet has expanded greatly. US inflation is still tempered but
some harbor concerns about the future. The most recent rumblings come
from a Fed conference in Sea Island Georgia where John Taylor, inventor
of &#8216;The Taylor Rule,&#8217; has suggested that, according to that rule, the
Fed is close to needing to hike rates. 
 

Underpinning the dollar: Currencies are underpinned by their
central banks and the policies they follow, particularly when it comes
to inflation. The US central bank has undertaken to stock pile a hoard
of private sector assets as collateral as it has provided financial
assistance to the beleaguered US financial sector. In Europe the ECB
has just agreed to do the same to a much more modest extent overriding
German opposition within the ECB. Certainly the asset quality at the
central bank is an issue for the credit worthiness of the bank itself.
But the real issue is it what a bank&#8217;s policies mean for the evolution
of inflation. There, some see a link between this asset quality and
future inflation. Given the odd sort of business cycle we have had in
the US that point is much more debatable. For the moment that asset
quality issue favors the ECB and the euro. But does it really matter? 
 

Private asset values matter too -- The asset price declines in
the US have been varied and, because more foreign money has been
invested in the US, more foreign investors have been burned on their
&#8216;dollar&#8217; exposures. While that is not a foreign exchange issue per se,
it is when viewed in a broader sense. Foreign money will not flow in
unless it has a place to be invested. Up to this point there has been
no other place to go other than to the US. More money has been lost in
US based investments than in dollar exposures- indeed the dollar has
risen since the crisis began. What is interesting is that there are
concerns about the dollar - even though we have not yet had dollar
problems attached to this crisis. The real concerns are about recycling
savings surpluses and those are not dollar issues per se. 
 

Earlier experiences with &#8216;recycling of savings surpluses&#8217; --
In the early 1970s surplus funds from OPECs price hikes went to banks
for recycling. They proved to be poor custodians as a binge of
international lending, much of it to Latin America, went bust. Next,
Japan&#8217;s surpluses helped to fuel a rise in US indebtedness and a global
stock market boom until the turn off the century. The fallout from that
was a rise in the yen that eviscerated Japan&#8217;s competitiveness that
thrust it into a lost decade of growth while Japan outsourced to regain
its industrial standing. The recent recycling was funneled more
directly though various securities markets (not just equity markets) as
China&#8217;s surpluses grew then as oil prices jolted savings in OEPC and
other oil-producing countries. The consequences again have been
devastating. Perhaps the lesson here is more about sudden international
shifts in savings imbalances than about currencies and the dollar in
particular. So far the dollar has weathered the storm well and has even
risen in value. The real problem for the global financial system and
its financial intermediaries has been the inability to weather sudden
shifts in various national savings rates be they in OPEC nations,
China, Japan or elsewhere. (In the case of Japan is was more a case of
a shift of funds on the margin to a country with an already high saving
rate.) 
 

Europe: better or just less exposed? Had relatively more
international funds been invested in Germany or in France in this cycle
similar losses would have been experienced there since real estate and
asset prices have declines there more or less in step with the losses
in the US. But since the US was amore advanced in securitization, that
market lent itself more readily to an influx of foreign investors who
now must deal with the consequences. 
 

Outlook: Looking ahead the issue for the euro&#8217;s value is going
to be much more about growth, inflation and rate-of-return issues than
about safety and soundness. Stock markets already are being led higher
by their cyclical components as the &#8216;low beta&#8217; or &#8216;safe&#8217; stock market
sectors languish. Investors who were &#8216;once bit, twice shy&#8217; with their
dollar assets are going to have to decide if the US has become a safe
place to invest again or they will have to look elsewhere. It they look
elsewhere, will that place be any safer than the US, if global saving
imbalances are allowed to grow again? These decisions carry with them
exchange rate implications. If the &#8216;Chinas&#8217; of the world want to (and
are allowed to) preserve their competitiveness positions Vs the dollar
they need to continue to push funds into the US to support current
dollar levels. Otherwise, switching funds to other countries will drop
the dollar&#8217;s value and hike the exchange rate of the yuan undercutting
their competitiveness. There is no de-linking these issues. Decisions
have consequences and consequences breed new decisions. There is no
doubt that the lessons of this cycle have important implications for
the period ahead and for the evolution of asset values. The question is
if those implications make the US and other places a safer place for
foreign monies or if foreign monies will now begin to deploy elsewhere.
And if they deploy elsewhere will that be to a destination of greater
safety or just to make a &#8216;new&#8217; mistake in the future? 
 

The currency values should tell much of the story of the
shifts in these flows of funds in the times ahead. 
 



<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr><th colspan="8" scope="col">E-Zone and main G-10 country GDP Results </th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Quarter over quarter-Saar</td>
<td colspan="4">Year/Year</td>
</tr>
<tr class="odd">
<td class="firstcol">GDP</td>
<td>Q1-09</td>
<td>Q4-08</td>
<td>Q3-08</td>
<td>Q1-09</td>
<td>Q4-08</td>
<td>Q3-08</td>
<td>Q2-08</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>-7.0%</td>
<td>-3.8%</td>
<td>-1.2%</td>
<td>-2.9%</td>
<td>-0.7%</td>
<td>0.9%</td>
<td>1.8%</td>
</tr>
<tr>
<td class="firstcol">UK</td>
<td>-7.4%</td>
<td>-5.9%</td>
<td>-2.8%</td>
<td>-4.2%</td>
<td>-2.0%</td>
<td>0.4%</td>
<td>1.8%</td>
</tr>
<tr>
<td class="firstcol">US</td>
<td>-6.1%</td>
<td>-6.3%</td>
<td>-0.5%</td>
<td>-2.6%</td>
<td>-0.8%</td>
<td>0.7%</td>
<td>2.1%</td>
</tr>
</tbody>
</table>
</body></html>

GDP: more reports coming - The bulk of the euro-countries’ GDP reports will begin to be released on Friday. For now we have the Q/Q number for Spain and a release for the UK (an EU member country) and a comparison available to the US. [...]

Real Euro Digs In Its Heels Despite Weak Growth

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090514c.jpg" align="right" border="0" height="265" width="353">U.S.
producer prices for finished goods rose 0.3% last month following their
1.2% downdraft during March. The latest rise outpaced Consensus
expectations for a 0.1% uptick. It did not, however, represent a
broad-based firming of the recent weakness in pricing power. In fact
pricing power was very limited.&nbsp;· Finished food prices jumped
1.5% m/m led by firm gains in beef (-4.2% y/y) &amp; vegetable
(1.3% y/y) prices as well as a notable 43.7% surge in egg prices (-4.0%
y/y). That surge was, however, just recovering declines during the
prior two months.
Energy prices ticked 0.1% lower (-25.2% y/y) after
their 5.5% decline during March. Finished gasoline prices rose 2.6%
which reversed just a piece of a 13.1% decline in March (-46.7% y/y).
That monthly increase was offset, however, by a 6.2% decline in natural
gas prices (-18.1% y/y).
 Prices of core finished consumer goods rose
another 0.2%. <img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090514d.jpg" align="right" border="0" height="265" width="353">The gain
left the y/y increase at a respectable 3.8% but
the trend has been moving lower since the end of last year. Durable
consumer goods prices increased 0.3% after having been unchanged during
March but, here again, the trend rate of gain has eased. On a
three-month basis prices have risen at a 2.0% annual rate versus a 6.4%
rise last October. The three-month gain in core nondurable goods prices
also has eased to 3.4% (AR), half the peak rate of increase last fall.
Finally, capital equipment prices have started to fall. The April
decline of 0.1% added to a 0.2% March drop and that was enough to pull
the three-month change negative versus a 5%+ rate of increase as of
last fall.
 Falling again were prices for intermediate goods and that
should foreshadow even lower finished goods prices. Intermediate goods
prices dropped another 0.5% pulling the year-to-year change to still
another record rate of decline of 10.4%. Excluding food &amp;
energy prices continued to move lower, last month by 0.9% which was
their seventh monthly decline. Pricing here has been so weak that the
3.8% y/y decline was a record drop for the series which dates back to
1974.
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090514e.jpg" align="right" border="0" height="265" width="353">The crude
materials PPI prices rose for the first
month since last summer. The modest 3.0% rise reflected higher food
prices which still are down a sharp 18.7% y/y. Core pricing power
continued to reflect the weak economy and prices fell 0.6%. They
remained down by more than one-third versus last year due to lower
metals and chemicals prices.
 The Producer Price Index data is
available in Haver's USECON database. More detailed
data is in the PPI and in the PPIR
databases.
Rethinking the Implications of Monetary Policy:
How a Transactions Role for Money Transforms the Predictions of Our
Leading Models from the Federal Reserve Bank of Philadelphia
can be found <a href="http://www.philadelphiafed.org/research-and-data/publications/business-review/2009/q1/brq109_implications-of-monetary-policy.pdf">here.</a>&nbsp;&nbsp;
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E802/@E80201/@E80201.HTM">Producer
Price Index</a> (%)</th>
<th scope="col">April</th>
<th scope="col">March</th>
<th scope="col">Y/Y</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Finished Goods</td>
<td>0.3</td>
<td>-1.2</td>
<td>-3.5</td>
<td>6.4</td>
<td>3.9</td>
<td>2.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.1</td>
<td>0.0</td>
<td>3.4</td>
<td>3.4</td>
<td>2.0</td>
<td>1.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>-0.5</td>
<td>-1.5</td>
<td>-10.4</td>
<td>10.5</td>
<td>4.0</td>
<td>6.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>-0.9</td>
<td>-0.3</td>
<td>-3.8</td>
<td>7.6</td>
<td>2.8</td>
<td>6.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Crude Goods</td>
<td>3.0</td>
<td>-0.3</td>
<td>-39.9</td>
<td>21.2</td>
<td>11.9</td>
<td>1.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>-0.6</td>
<td>-1.6</td>
<td>&nbsp;-39.7</td>
<td>15.0</td>
<td>15.6</td>
<td>20.8</td>
</tr>
</tbody>
</table>

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U.S. producer prices for finished goods rose 0.3% last month following their 1.2% downdraft during March. The latest rise outpaced Consensus expectations for a 0.1% uptick. It did not, however, represent a broad-based firming of the [...]

U.S. PPI Firms With Higher Food Prices, Core Price Gains Still Trending Lower

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<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090514a.jpg">
A stutter-step was taken by the U.S. job market last week. Initial claims for unemployment insurance increased 32,000 to 637,000 and that recovered all of the prior week&#39;s decline. Nevertheless, claims remained down sharply from their March high of 674,000. The four-week average of claims, which smoothes out some of the volatility in the weekly numbers, ticked up to 630,500, still near the lowest level since mid-February. Initial claims of 610,000 was the Consensus expectation for claims last week.
The Labor Department indicated that the largest increases in initial claims for the week ending May 2 were in Illinois (+2,052), Kansas (+2,025), Puerto Rico (+1,781), Indiana (+1,051), and Ohio (+1,013), while the largest decreases were in New York (-13,386), Michigan (-10,952), North Carolina (-8,988), Massachusetts (-3,705), and Connecticut (-2,802).<img align="right" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090514b.jpg">
While initial claims for jobless insurance benefits have been trending higher around the country, the increases versus last year are quite notable in several states. Year-to-year, claims have roughly doubled in Texas, Michigan, Massachusetts, Maine, Ohio, New Hampshire, and Connecticut. In many other states claims have risen by one-half including New York, New Jersey, Pennsylvania, Washington, Maryland and Wisconsin.
Layoffs may have eased, but the pace of rehiring of unemployed workers remains depressed. Continuing claims for unemployment insurance increased again to another record high of 6,560,000 and they remain twice the year ago level. The series dates back to 1966. The four-week average of continuing claims also rose to another record of 6,337,250. Continuing claims provide some indication of workers&#39; ability to find employment and they lag the initial claims figures by one week.
The lack of hiring continued to push the insured unemployment rate higher to 4.9%. That level was more than double last April and the highest level since 1983. During the last ten years there has been a 93% correlation between the level of the insured unemployment rate and the overall rate of unemployment published by the Bureau of Labor Statistics.Clearly, the latest weekly figure understates labor market distress in some states. The highest insured unemployment rates in the week ending April 25 were in Michigan (7.8 percent), Oregon (7.5), Pennsylvania (6.5), Wisconsin (6.4), Nevada (6.3), Idaho (6.1), Puerto Rico (5.9), Vermont (5.8), Alaska (5.7), and Rhode Island (5.7).
The unemployment insurance claim data is available in Haver&#39;s WEEKLY database. The state data is available in the REGIONAL database.
Comparing patterns of default among prime and subprime mortgages from the Federal Reserve Bank of Chicago is available <a href="http://www.chicagofed.org/publications/economicperspectives/ep_2qtr2009_part2_amromin_paulson.pdf">here.</a>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><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>&nbsp;</th>
<th scope="col">05/09/09</th>
<th scope="col">05/02/09</th>
<th scope="col">04/25/09</th>
<th scope="col">Y/Y</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006&nbsp;</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>637</td>
<td>635</td>
<td>635</td>
<td>69.9%</td>
<td>420</td>
<td>321</td>
<td>313</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>6,560</td>
<td>6,358</td>
<td>114.2%</td>
<td>3,342</td>
<td>2,552</td>
<td>2,459</td>
</tr>
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U.S. Initial Weekly Claims ForJobless Insurance Rebound But Still Trending Lower

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090513f.jpg" width="353">
Total business inventories fell another 1.0% during March, down for the seventh straight month. These declines have given rise to a three-month decumulation rate of 13.5%. That is the strongest in the series&#39; history which dates back to 1980. The recent cutback in inventory accumulation is in reaction to an 11.0% rate of decline in business sales. However, the strong inventory cutbacks have done little to reduce the inventory/sales ratio which, at 1.44, was at its highest level since the recession of 2001. Illustrating the degree of inventory back-up is the increase in the I/S ratio during the last year, which is the swiftest since 1982. The rise ended a twenty-eight year downtrend.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090513e.jpg" width="353">
Retailers cut inventories by 0.7% in March and at a 13.2% annual rate during the last three months, nearly the fastest in the series&#39; history. Motor vehicle inventories continued to lead the decumulation and fell at a 30.1% rate during the last three months. Nevertheless, the inventory-to-sales ratio for automobiles remained near its historic high at 2.59. So unless sales recover soon, expect further production cuts.
Outside of autos, retailers continued to reduce the levels of unwanted products. Furniture, home furnishings &amp; electronics inventories fell 0.5% in March and they are off 8.6% during the past year. Apparel retailers ratcheted up the speed of cutbacks with a 1.4% March drawdown. Over the last three months they&#39;re down at a 9.7% annual rate, nearly the swiftest on record. General merchandise inventories bucked the trend, however, and rose 0.8% in March but they&#39;re still off at a 4.8% rate during the last three months. Despite the cuts the inventory-to-sales ratio for the nonauto retail sector remained high.
The business sales and inventory data are available in Haver&#39;s USECON database.
Inventory Accelerator In General Equilibrium from the Federal Reserve Bank of St. Louis can be found <a href="http://research.stlouisfed.org/wp/2009/2009-010.pdf">here.</a>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Business Inventories (%)</th>
<th scope="col">March</th>
<th scope="col">February</th>
<th scope="col">January</th>
<th scope="col">Y/Y</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>-1.0</td>
<td>-1.4</td>
<td>-1.2</td>
<td>-4.8</td>
<td>0.6</td>
<td>4.0</td>
<td>6.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail</td>
<td>-0.7</td>
<td>-1.2</td>
<td>-1.6</td>
<td>-6.9</td>
<td>-3.1</td>
<td>2.5</td>
<td>3.3</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Retail excl. Auto</td>
<td>-0.2</td>
<td>-0.5</td>
<td>-0.6</td>
<td>-3.1</td>
<td>-1.8</td>
<td>2.7</td>
<td>4.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale</td>
<td>-1.6</td>
<td>-1.7</td>
<td>-0.9</td>
<td>-3.5</td>
<td>3.1</td>
<td>6.2</td>
<td>8.2</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>-0.8</td>
<td>-1.3</td>
<td>-1.1</td>
<td>-3.8</td>
<td>2.1</td>
<td>3.7</td>
<td>8.2</td>
</tr>
</tbody>
</table>
</body>
</html>

Total business inventories fell another 1.0% during March, down for the seventh straight month. These declines have given rise to a three-month decumulation rate of 13.5%. That is the strongest in the series' history which dates back [...]

U.S. Business Inventory Decumulation Intensifies

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090513d.jpg" align="left" border="0">
Euro Area manufacturing output fell by 2.1% in March. The
21.2% drop Yr/Yr exceeds the 20.2% drop posted in February. The
sequential growth rate rates seem to have stabilized at a very torrid
pace of decline just under 30% at an annual rate. The capital goods
sector shows some slowdown in its decline in the Year/Year numbers but
the 3-mo growth rates for capital goods continue to deteriorate beyond
their readings for the six month growth rate. 
 

Germany, Italy and Spain have the most rapid declines in IP
growth over the past three months. Germany and Italy are also the two
worst over the last 12-months. Output declines in the UK have slowed
markedly in the last few months; they post an annual rate of decline of
only -12.9% over three months. 
 

For the quarter, massive declines in output are still being
registered. In Germany output is declining in the quarter at a 45%
annual rate. In France the decline is at a 25% annual rate. In Italy it
falls at a 34% annual rate. UK IP is falling at a 20% annual rate in
the quarter despite its recent greater stability. The upcoming EU
member country GDP growth rates for Q1 should be extremely weak 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="11" scope="col"> Euro
Area MFG IP</th>
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol"> Saar except m/m</td>
<td colspan="3">Mo/Mo</td>
<td>Mar 09</td>
<td>Feb 09</td>
<td>Mar 09</td>
<td>Feb 09</td>
<td>Mar 09</td>
<td>Feb 09</td>
<td>&nbsp;</td>
</tr>
<tr class="grey3">
<td class="firstcol">Euro Area&nbsp;
Detail</td>
<td>Mar 09</td>
<td>Feb 09</td>
<td>Jan 09</td>
<td>3Mo</td>
<td>3Mo</td>
<td>6mo</td>
<td>6mo</td>
<td>12mo</td>
<td>12mo</td>
<td> Q-1</td>
</tr>
<tr class="grey2">
<td class="firstcol">MFG</td>
<td>-2.1%</td>
<td>-2.4%</td>
<td>-3.6%</td>
<td>-28.1%</td>
<td>-31.9%</td>
<td>-29.0%</td>
<td>-29.5%</td>
<td>-21.2%</td>
<td>-20.2%</td>
<td> -31.2%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Consumer</td>
<td>-1.3%</td>
<td>-1.7%</td>
<td>-1.0%</td>
<td>-14.9%</td>
<td>-12.0%</td>
<td>-11.1%</td>
<td>-10.4%</td>
<td>-9.0%</td>
<td>-8.2%</td>
<td> -12.0%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Consumer Durables</td>
<td>-2.5%</td>
<td>-3.6%</td>
<td>-2.4%</td>
<td>-29.4%</td>
<td>-29.9%</td>
<td>-28.9%</td>
<td>-29.1%</td>
<td>-22.2%</td>
<td>-21.3%</td>
<td>--</td>
</tr>
<tr class="grey2">
<td class="firstcol">Consumer Non-durables</td>
<td>-1.0%</td>
<td>-1.5%</td>
<td>-0.9%</td>
<td>-12.6%</td>
<td>-9.8%</td>
<td>-8.1%</td>
<td>-7.5%</td>
<td>-6.8%</td>
<td>-6.4%</td>
<td>--</td>
</tr>
<tr class="grey2">
<td class="firstcol">Intermediate</td>
<td>-3.1%</td>
<td>-2.5%</td>
<td>-1.6%</td>
<td>-25.3%</td>
<td>-35.5%</td>
<td>-35.2%</td>
<td>-35.8%</td>
<td>-26.0%</td>
<td>-24.3%</td>
<td> -34.0%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Capital</td>
<td>-0.5%</td>
<td>-2.9%</td>
<td>-7.2%</td>
<td>-35.6%</td>
<td>-41.6%</td>
<td>-33.1%</td>
<td>-36.2%</td>
<td>-22.8%</td>
<td>-24.2%</td>
<td> -40.0%</td>
</tr>
<tr class="grey1">
<td colspan="11" class="firstcol">Main Euro Area Countries
and UK IP in MFG</td>
</tr>
<tr class="grey4">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Mo/Mo</td>
<td>Mar09</td>
<td>Feb09</td>
<td>Mar09</td>
<td>Feb09</td>
<td>Mar09</td>
<td>Feb09</td>
<td>&nbsp;</td>
</tr>
<tr class="grey3">
<td class="firstcol"> MFG Only</td>
<td>Mar 09</td>
<td>Feb 09</td>
<td>Jan 09</td>
<td>3Mo</td>
<td>3Mo</td>
<td>6mo</td>
<td>6mo</td>
<td>12mo</td>
<td>12mo</td>
<td>Q-1- Date</td>
</tr>
<tr class="grey2">
<td class="firstcol">Germany:</td>
<td>-0.2%</td>
<td>-3.5%</td>
<td>-7.7%</td>
<td>-37.8%</td>
<td>-48.4%</td>
<td>-37.1%</td>
<td>-40.0%</td>
<td>-22.9%</td>
<td>-22.9%</td>
<td> -45.7%</td>
</tr>
<tr class="grey2">
<td class="firstcol">France: IP ex Construction</td>
<td>-1.4%</td>
<td>-0.9%</td>
<td>-3.9%</td>
<td>-22.2%</td>
<td>-23.0%</td>
<td>-25.1%</td>
<td>-25.5%</td>
<td>-16.1%</td>
<td>-15.9%</td>
<td> -24.7%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Italy</td>
<td>-4.7%</td>
<td>-5.0%</td>
<td>-1.3%</td>
<td>-36.4%</td>
<td>-35.7%</td>
<td>-34.8%</td>
<td>-33.7%</td>
<td>-25.6%</td>
<td>-21.6%</td>
<td> -34.1%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Spain</td>
<td>-5.1%</td>
<td>1.1%</td>
<td>-8.2%</td>
<td>-39.7%</td>
<td>-21.4%</td>
<td>-36.5%</td>
<td>-25.5%</td>
<td>-13.9%</td>
<td>-24.5%</td>
<td> -37.1%</td>
</tr>
<tr class="grey2">
<td class="firstcol">UK: EU member</td>
<td>0.0%</td>
<td>-0.3%</td>
<td>-3.1%</td>
<td>-12.9%</td>
<td>-19.3%</td>
<td>-18.0%</td>
<td>-19.7%</td>
<td>-12.9%</td>
<td>-13.4%</td>
<td> -20.3%</td>
</tr>
</tbody>
</table>
</body></html>

Euro Area manufacturing output fell by 2.1% in March. The 21.2% drop Yr/Yr exceeds the 20.2% drop posted in February. The sequential growth rate rates seem to have stabilized at a very torrid pace of decline just under 30% at an [...]

Euro Area IP Drops Again All Sectors Still Weak

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

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

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

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

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

US economy expected to outperform other major economies in 2025

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

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

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

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

Policy uncertainty has surged since the US national elections.

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

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

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

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

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

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

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Andrew Cates

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

250501Z1.jpg

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

250501Z2.jpg

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

250501Z3.jpg

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

250501Z4.jpg

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

250501Z5.jpg

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

250501Z6.jpg

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

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

Charts of the Week: Tariff Truce, Tenuous Trust

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

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

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

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

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

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

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.

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250501M5.jpg

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

U.S. ISM Manufacturing Index Indicates Contraction in April

Winnie Tapasanun

250501N.jpg

250501O.jpg

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

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

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

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

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

250501P.jpg

250501Q.jpg

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

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

Carol Stone, CBE

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

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

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

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

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

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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: May 2009

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U.S. CPI Unchanged in April; Year-to-Year Drop of 0.7% Is Largest Since 1955

U.S. Initial Weekly Claims For Jobless Insurance Rebound But Still Trending Lower

Real Euro Digs In Its Heels Despite Weak Growth

U.S. PPI Firms With Higher Food Prices, Core Price Gains Still Trending Lower

U.S. Initial Weekly Claims For Jobless Insurance Rebound But Still Trending Lower

U.S. Initial Weekly Claims ForJobless Insurance Rebound But Still Trending Lower

U.S. Business Inventory Decumulation Intensifies

Euro Area IP Drops Again All Sectors Still Weak