Robert Brusca

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070613f.jpg" width="353">
The inventory cycle appears to be winding down. Three-month inventory growth rates peaked in July of 2006 and have now decelerated to growth of 1.3% and begun to rise again. Equally as important however, is the upturn in sales. 
The first table below puts these trends together and reveals sector detail. The very goods news is that over the last three- and six-months the three major sectors, wholesaling, retailing and manufacturing, each has seen the growth in sales exceed the growth in inventories. This means that Inventory/Sales (I/S) ratios have been reduced in each sector over the past six months. This sort of stock whittling is an encouragement to firms to rebuild inventories.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070613e.jpg" width="353">
Moreover, the growth rate of sales has become quite strong and although retailing seems to lag, new figures for May tell us that retail sales are back in a strong growth profile. Over the past two years, however, manufacturers have had a problem: sales over the last 12 months and the past 24 months have lagged the growth in inventories leaving stocks &#145;toppish&#146; relative to sales levels. For this sector even the robust - nearly 10% rise in nominal sales over the last 3-mos - will be a slow-acting medicine for inventory revival. Manufacturers will want to see more, or at least more sustainability. 
Caveat: The top part of the first table below is all about dynamics: comparing the growth of inventories to the growth in sales over various periods. The changes in this growth balance are the stuff that shifting business fortunes are assessed over. But we also need to anchor these assessments, since the ebb and flow of sales versus inventories can make the relationship of &#145;I&#146; to &#145;S&#146; unclear. The bottom panel of the table provides an assessment of I to S ratios for that purpose. We also calculate the current I/S ratio as a percentage of its range over the last three years.
The latter calculation shows that while inventories are lean they are not so in all sectors. Wholesaling shows the lowest I to S ratio in three years. Retail inventories also are lean as they reside in the bottom 7 percentile of their 3-year range. As sales pick up, each of these sectors should see inventories grow as stock-to-sales ratios are so lean. But manufacturers, despite seeing the light at the end of their tunnel have been in that tunnel for a long time and have seen false glimmerings of light before. Inventories there are still in the top one quarter of their recent range for them. This not enough to keep them cutting stocks even as sales have truly picked up, so do not expect too much stock-building from this sector.
A second caveat is to be careful of aggregation when looking at inventories.
The second table below details retailing by sector and we see that lean motor vehicle inventories are driving the low reading for this sector (motor vehicles make up 43% of the sectors&#146; stocks, so that is not surprising). While most other industry groups within retailing are in good shape, building materials, with its stock-to-sales ratio at a three year high, is a clear exception. We do know that retail sales kicked it up a notch in May so these figures in the table below are going to look even better next month. But this is a warning that inventory figures are tricky and require a lot of effort to be well understood. For this sector, truth, not just the devil, is in the details. The aggregate figures really tell you nothing. Summary: 
On balance, these trends mean that US production should NOT get a huge kick from inventory-building since reporting factories are located in the US and if they build stocks they build them from US generated output by definition. And factories appear to be the laggard sector. Retailers, on the other hand, when they rebuild, will rebuild using imports to a great degree.
One implication of these trends is that imports are about to increase their growth to replenish dissipated stocks at the retail level. Wholesalers have a good complement of consumer goods and imports as well. The factory sector is the one that will kick US production into high gear when it rebuilds and so far that sector is still in the &#145;yellow light&#146; region, not the &#145;green light&#146; region, of its cycle at least for inventory building. But better times should be coming to that sector before long, especially if the current pace of sales has staying power.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Inventory and Sales Paired Growth Rates by Major Divisions
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="2">3-Mo Growth</td>
<td colspan="2">6-Mo Growth</td>
<td colspan="2">12-Mo Growth</td>
<td colspan="2">Yr Ago Growth</td>
<td>I:S ratio</td>
</tr>
<tr class="even">
<td class="firstcol">2007 Apr</td>
<td>Sales</td>
<td>Inventory</td>
<td>Sales</td>
<td>Inventory</td>
<td>Sales</td>
<td>Inventory</td>
<td>Sales</td>
<td>Inventory</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">Total Business</td>
<td>11.7%</td>
<td>2.2%</td>
<td>7.7%</td>
<td>1.9%</td>
<td>3.8%</td>
<td>4.6%</td>
<td>7.7%</td>
<td>5.6%</td>
<td>33.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Manufacturers</td>
<td>9.9%</td>
<td>2.9%</td>
<td>4.8%</td>
<td>1.8%</td>
<td>0.5%</td>
<td>4.7%</td>
<td>6.1%</td>
<td>7.1%</td>
<td>75.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Retailers</td>
<td>6.3%</td>
<td>-0.2%</td>
<td>6.2%</td>
<td>0.0%</td>
<td>2.9%</td>
<td>2.5%</td>
<td>7.0%</td>
<td>2.9%</td>
<td>6.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Wholesalers</td>
<td>19.3%</td>
<td>4.3%</td>
<td>12.8%</td>
<td>4.6%</td>
<td>8.8%</td>
<td>7.1%</td>
<td>10.4%</td>
<td>7.3%</td>
<td>0.0%</td>
</tr>
<tr>
<td colspan="10">Ratio of Stocks to Sales: Stocks Vs Flows</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="6">Inventory-to-Sales Ratios In Perspective</td>
<td colspan="3">Over three Years</td>
</tr>
<tr class="even">
<td class="firstcol">2007 Apr</td>
<td>Current</td>
<td>3-Mo Ago</td>
<td>6-Mo Ago</td>
<td>Yr Ago</td>
<td>2-Yrs Ago</td>
<td>3-Yrs Ago</td>
<td>Percentile</td>
<td>Max</td>
<td>Min</td>
</tr>
<tr class="odd">
<td class="firstcol">Total Business</td>
<td>1.27</td>
<td>1.30</td>
<td>1.31</td>
<td>1.26</td>
<td>1.29</td>
<td>1.29</td>
<td>33.3%</td>
<td>1.31</td>
<td>1.25</td>
</tr>
<tr class="odd">
<td class="firstcol">Manufacturers</td>
<td>1.24</td>
<td>1.26</td>
<td>1.26</td>
<td>1.19</td>
<td>1.18</td>
<td>1.18</td>
<td>75.0%</td>
<td>1.27</td>
<td>1.15</td>
</tr>
<tr class="odd">
<td class="firstcol">Retailers</td>
<td>1.46</td>
<td>1.49</td>
<td>1.51</td>
<td>1.47</td>
<td>1.53</td>
<td>1.58</td>
<td>6.7%</td>
<td>1.6</td>
<td>1.45</td>
</tr>
<tr class="odd">
<td class="firstcol">Wholesalers</td>
<td>1.12</td>
<td>1.16</td>
<td>1.16</td>
<td>1.14</td>
<td>1.17</td>
<td>1.14</td>
<td>0.0%</td>
<td>1.18</td>
<td>1.12</td>
</tr>
</tbody>
</table>
<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Inventory and Sales Paired Growth Rates by Major Retail Divisions
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">2007 Apr</td>
<td colspan="2">3-Mo Growth</td>
<td colspan="2">6-Mo Growth</td>
<td colspan="2">12-Mo Growth</td>
<td colspan="2">Year Ago Growth</td>
<td>3-Yr</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Sales</td>
<td>Inventory</td>
<td>Sales</td>
<td>Inventory</td>
<td>Sales</td>
<td>Inventory</td>
<td>Sales</td>
<td>Inventory</td>
<td>Percentile</td>
</tr>
<tr>
<td class="firstcol">Retail Total</td>
<td>6.3%</td>
<td>-0.2%</td>
<td>6.2%</td>
<td>0.0%</td>
<td>2.9%</td>
<td>2.5%</td>
<td>7.0%</td>
<td>2.9%</td>
<td>11.1%</td>
</tr>
<tr>
<td class="firstcol">Excl Motor Vehicles</td>
<td>7.1%</td>
<td>3.3%</td>
<td>7.4%</td>
<td>3.5%</td>
<td>3.2%</td>
<td>4.3%</td>
<td>8.9%</td>
<td>3.9%</td>
<td>14.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Sectors</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Motor Vehicles &amp; Parts</td>
<td>3.8%</td>
<td>-7.4%</td>
<td>2.2%</td>
<td>-7.2%</td>
<td>2.0%</td>
<td>-1.3%</td>
<td>1.2%</td>
<td>0.8%</td>
<td>50.0%</td>
</tr>
<tr>
<td class="firstcol">Furniture, Electronics &amp; Appliance</td>
<td>-0.4%</td>
<td>-0.1%</td>
<td>4.8%</td>
<td>1.1%</td>
<td>3.1%</td>
<td>1.0%</td>
<td>8.2%</td>
<td>5.9%</td>
<td>18.2%</td>
</tr>
<tr>
<td class="firstcol">Building Materials</td>
<td>-4.4%</td>
<td>15.8%</td>
<td>-1.2%</td>
<td>2.6%</td>
<td>-5.6%</td>
<td>1.7%</td>
<td>14.4%</td>
<td>9.4%</td>
<td>100.0%</td>
</tr>
<tr>
<td class="firstcol">Clothing &amp; Accessories</td>
<td>-4.9%</td>
<td>-1.8%</td>
<td>3.9%</td>
<td>7.9%</td>
<td>4.6%</td>
<td>8.5%</td>
<td>5.6%</td>
<td>5.6%</td>
<td>76.2%</td>
</tr>
<tr>
<td class="firstcol">General Merchandise Stores</td>
<td>-1.3%</td>
<td>3.9%</td>
<td>4.3%</td>
<td>5.3%</td>
<td>3.1%</td>
<td>7.4%</td>
<td>6.2%</td>
<td>-2.0%</td>
<td>50.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td colspan="8">Percentage of Sectors where Sales Growth Exceeds Inventory Growth</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">Sector Diffusion</td>
<td>20</td>
<td>&nbsp;</td>
<td>40</td>
<td>&nbsp;</td>
<td>40</td>
<td>&nbsp;</td>
<td>80</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
</tbody>
</table>
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The inventory cycle appears to be winding down. Three-month inventory growth rates peaked in July of 2006 and have now decelerated to growth of 1.3% and begun to rise again. Equally as important however, is the upturn in sales. The [...]

U.S. Inventory Cycle: At Its End?

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070613d.jpg" width="353">
Even for the consumer where excluding food and energy trends have been mild and are not accelerating much of the acceleration in international prices is still there and quite clear. The chart on the left applies consumer price weights from nonfood consumer goods spending and applies them to export and import prices for vehicles and (nonfood) consumer goods to collapse consumer goods and vehicles into one measure. For both exports and imports these series show rising inflation tendencies. Even though the topography of the chart may seem shocking the scale is low to the acceleration in exports of consumer prices is up by just a percentage point since mid-2005, a period of nearly 2 years. For imports the acceleration is about 1.8 percentage points from its low over the past year. But that acceleration brings the inflation rate UP TO only 1.6% Y/Y for &#145;total&#146; consumer goods imports. Moreover that pace is not accelerating when looked at on shorter horizons such as the past three months or six months (see table below for consumer goods prices on imports and vehicle prices for imports). 
We plot core consumer prices for goods on this same graph to show that export/import trends do not quickly or fully get into US consumer prices. Core goods consumer prices in fact are still in a slight DOWNTREND during this episode of export/import price inflation based on these constructed core export and import consumer price measures. 
Overall export and import prices show accelerating trends based on the price movements of the energy component (embedded in industrial supplies). In contrast, capital goods prices show weakness. This is a bit of a concern since price weakness is often a sign of demand weakness (especially when commodity prices are not driving the result, as they would not be for capital goods). Since the main US export strength is in capital goods this could be an issue of adversity for US exporters. Weakening price for capital goods imports may also suggest weak capital spending domestically, although there were some signs of that picking up. By and large, the dollar weakness does not appear to have played much of a role for export and import prices although export prices are rising a bit faster than import prices as we might expect when the dollar is weak. 
In part these results reflect that the dollar is weak Vs the Euro but it has (just) hit a 4 &frac12; year high Vs the yen and its drop Vs the Chinese yuan is ever so slow. Export and import prices trends reflect these glacial movements amid cross currents. Beyond these short trends (3-month, 6-month) the big picture still shows that export and import prices are rising as Y/Y inflation is getting a bit worse. But the rate of change is not a great worry for US policymakers; although it comes at time when their inflation fighting hackles are up, it is a trend that is moving in the WRONG direction.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Export and Import Prices
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">&nbsp;</td>
<td colspan="3">M/MO</td>
<td colspan="3">Saar</td>
</tr>
<tr class="grey3">
<td class="firstcol">IMPORTS</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>12-Mo</td>
</tr>
<tr class="grey2">
<td class="firstcol">ALL Imports</td>
<td>1.3%</td>
<td>1.5%</td>
<td>0.4%</td>
<td>13.3%</td>
<td>7.2%</td>
<td>1.9%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Excl Petrol</td>
<td>0.2%</td>
<td>0.3%</td>
<td>0.0%</td>
<td>1.9%</td>
<td>3.7%</td>
<td>2.9%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Petrol</td>
<td>6.5%</td>
<td>8.1%</td>
<td>1.7%</td>
<td>87.7%</td>
<td>25.1%</td>
<td>-1.8%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Foods, Feeds and Beverages</td>
<td>1.4%</td>
<td>-0.2%</td>
<td>0.2%</td>
<td>6.2%</td>
<td>8.9%</td>
<td>8.8%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Industrial Supplies</td>
<td>3.7%</td>
<td>4.5%</td>
<td>1.0%</td>
<td>43.6%</td>
<td>19.9%</td>
<td>3.2%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Capital goods</td>
<td>-0.4%</td>
<td>-0.2%</td>
<td>-0.3%</td>
<td>-3.9%</td>
<td>-1.5%</td>
<td>-0.4%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Motor Vehicles &amp; Parts</td>
<td>0.0%</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.8%</td>
<td>0.4%</td>
<td>0.9%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Consumer Goods excl Autos</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.0%</td>
<td>0.8%</td>
<td>1.6%</td>
<td>1.9%</td>
</tr>
<tr class="grey4">
<td class="firstcol">&nbsp;</td>
<td colspan="3">M/MO</td>
<td colspan="3">Saar</td>
</tr>
<tr class="grey1">
<td class="firstcol">EXPORTS</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>12-Mo</td>
</tr>
<tr class="grey2">
<td class="firstcol">ALL Exports</td>
<td>0.3%</td>
<td>0.6%</td>
<td>0.8%</td>
<td>7.3%</td>
<td>6.6%</td>
<td>4.9%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Agriculture</td>
<td>-1.3%</td>
<td>2.0%</td>
<td>2.8%</td>
<td>15.0%</td>
<td>24.0%</td>
<td>19.0%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Non Agriculture</td>
<td>0.4%</td>
<td>0.5%</td>
<td>0.6%</td>
<td>6.6%</td>
<td>5.3%</td>
<td>3.9%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Foods, Feeds and Beverages</td>
<td>-0.8%</td>
<td>2.3%</td>
<td>3.2%</td>
<td>20.1%</td>
<td>24.9%</td>
<td>20.2%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Industrial Supplies</td>
<td>1.3%</td>
<td>1.7%</td>
<td>2.0%</td>
<td>22.2%</td>
<td>15.4%</td>
<td>10.2%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Capital goods</td>
<td>-0.1%</td>
<td>-0.1%</td>
<td>0.0%</td>
<td>-0.8%</td>
<td>0.4%</td>
<td>0.5%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Motor Vehicles &amp; Parts</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.1%</td>
<td>1.1%</td>
<td>1.3%</td>
<td>1.3%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Consumer Goods excl Autos</td>
<td>0.5%</td>
<td>0.0%</td>
<td>0.0%</td>
<td>1.9%</td>
<td>2.7%</td>
<td>2.6%</td>
</tr>
</tbody>
</table>
</body>
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Even for the consumer where excluding food and energy trends have been mild and are not accelerating much of the acceleration in international prices is still there and quite clear. The chart on the left applies consumer price weights [...]

Export and Import Prices Trends Show Growing Pressure

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070613a.jpg" width="353">
There was a minor upward revision to sales in March. Now in May sales rose by 1.4% and 1.3% excluding motor vehicles. These are strong numbers even when the 3.8% rise in gas station sales is factored out. Virtually all major retail sales aggregates are gaining momentum after a Q1 lull beset with odd holiday shifts and some unfortunate weather developments. 
In the quarter to date total retail sales are rising at a 7.3% pace. Excluding Motor vehicles, sales are up at a 7.9% pace. Excluding motor vehicle sales and gas station sales the pace is at 5.3% and that number will have a very small price deflator associated with it since much of the energy is removed when gas station sales are taken out. 
On balance retail sales are NOW strong in the new quarter. Inflation is moderate, so much of this translates into real sales. The overall CPI rose by 0.4% in April when the core rose by 0.2%. Deflating the headline sales pace by 2.5% (annual rate) leaves growth in the range of 4.8% to 5.3% in real terms. It is a good start to Q2 for the consumer - better than was expected. If we take inflation at April&#146;s 0.4% headline pace as the deflator, the annualized overall pace of real retail sales drops to the 2.5% to 2.9% range in Q2 - that is s till very solid and likely an overreaction to inflation&#146;s impact. 

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<td><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070613b.jpg" width="353"> <img border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070613c.jpg" width="353"></td>
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<th scope="col" class="firstcol"> &middot; The growth numbers cut by various retailing segments are universally strong in May and in the three months ended in May. Nondurable goods growth rates, already strong, are accelerating and that is even if gasoline station sales with their energy impact are omitted. Durable goods purchases are strengthening too. Even building materials trends are accelerating. Furniture and electronics sales are a relative laggard in the sector. But the message is pretty clear. The upturn in consumer spending is very, very broad-based in May. And comparisons with 6-month and 12-month trends (see the second and third charts) make it clear that this is not a recoup from a weak patch in earlier months. The strength is real.</th>
</tr>
</thead>

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Retail Sales Trends
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">Retail:</td>
<td>Mo/Mo</td>
<td colspan="4">Seasonally Adjusted Annual Rate</td>
</tr>
<tr class="odd">
<td class="firstcol">Totals</td>
<td>2007 May</td>
<td>3-Mo</td>
<td>6Mo</td>
<td>Yr/Yr</td>
<td>Yr Ago:Y/Y</td>
</tr>
<tr>
<td class="firstcol">Retail &amp; Food Service</td>
<td>1.4%</td>
<td>9.6%</td>
<td>8.2%</td>
<td>5.0%</td>
<td>7.1%</td>
</tr>
<tr>
<td class="firstcol">Retail Excl Motor Vehicles &amp; Parts</td>
<td>1.3%</td>
<td>10.1%</td>
<td>8.8%</td>
<td>4.6%</td>
<td>9.0%</td>
</tr>
<tr>
<td class="firstcol">Retail Excl Motor Vehicles &amp; Parts &amp; Gas</td>
<td>1.0%</td>
<td>6.6%</td>
<td>6.1%</td>
<td>4.7%</td>
<td>7.7%</td>
</tr>
<tr class="even">
<td class="firstcol">Retail:</td>
<td>Mo/Mo</td>
<td colspan="4">Seasonally Adjusted Annual Rate</td>
</tr>
<tr class="odd">
<td class="firstcol">Durables</td>
<td>2007 May</td>
<td>3-Mo</td>
<td>6Mo</td>
<td>Yr/Yr</td>
<td>Yr Ago:Y/Y</td>
</tr>
<tr>
<td class="firstcol">Total-Durables</td>
<td>1.7%</td>
<td>6.7%</td>
<td>5.1%</td>
<td>4.1%</td>
<td>3.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Building Materials</td>
<td>2.1%</td>
<td>6.6%</td>
<td>3.5%</td>
<td>-1.7%</td>
<td>10.8%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Motor Vehicles &amp; Parts</td>
<td>1.8%</td>
<td>7.9%</td>
<td>6.2%</td>
<td>6.6%</td>
<td>0.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; MV Dealers</td>
<td>1.9%</td>
<td>7.6%</td>
<td>6.1%</td>
<td>6.8%</td>
<td>0.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Furniture, Electronics</td>
<td>0.8%</td>
<td>2.1%</td>
<td>2.9%</td>
<td>3.8%</td>
<td>8.1%</td>
</tr>
<tr class="even">
<td class="firstcol">Retail:</td>
<td>Mo/Mo</td>
<td colspan="4">Seasonally Adjusted Annual Rate</td>
</tr>
<tr class="odd">
<td class="firstcol">NonDurables</td>
<td>2007 May</td>
<td>3-Mo</td>
<td>6Mo</td>
<td>Yr/Yr</td>
<td>Yr Ago:Y/Y</td>
</tr>
<tr>
<td class="firstcol">Total-Nondurables</td>
<td>1.3%</td>
<td>11.2%</td>
<td>9.9%</td>
<td>5.4%</td>
<td>8.8%&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Food &amp; Beverages</td>
<td>0.3%</td>
<td>5.7%</td>
<td>6.6%</td>
<td>6.1%</td>
<td>4.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Health</td>
<td>0.8%</td>
<td>8.0%</td>
<td>5.2%</td>
<td>6.9%</td>
<td>7.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Gasoline</td>
<td>3.8%</td>
<td>40.6%</td>
<td>31.4%</td>
<td>3.7%</td>
<td>19.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Clothing</td>
<td>2.7%</td>
<td>13.4%</td>
<td>11.0%</td>
<td>7.8%</td>
<td>6.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Sport Goods</td>
<td>1.8%</td>
<td>15.1%</td>
<td>8.4%</td>
<td>2.5%</td>
<td>5.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; General Merchandises</td>
<td>1.0%</td>
<td>5.7%</td>
<td>5.5%</td>
<td>4.6%</td>
<td>5.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Non Store Retailers</td>
<td>0.1%</td>
<td>0.0%</td>
<td>11.2%</td>
<td>7.7%</td>
<td>15.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Miscellaneous Retail</td>
<td>0.9%</td>
<td>8.0%</td>
<td>5.2%</td>
<td>6.9%</td>
<td>7.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Non Durables Excl Gas</td>
<td>0.8%</td>
<td>7.0%</td>
<td>6.8%</td>
<td>5.7%</td>
<td>7.2%</td>
</tr>
<tr class="even">
<td class="firstcol">Services</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Food Services &amp; Drinking</td>
<td>0.7%</td>
<td>9.2%</td>
<td>5.7%</td>
<td>5.6%</td>
<td>8.1%</td>
</tr>
</tbody>
</table>
</body>
</html>

There was a minor upward revision to sales in March. Now in May sales rose by 1.4% and 1.3% excluding motor vehicles. These are strong numbers even when the 3.8% rise in gas station sales is factored out. Virtually all major retail [...]

Quite Simply the Retail Data and Trends Tell the Story

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070612d.jpg" width="353">
The Japanese Corporate Goods Prices Index (CGPI), a measure of producers&#39; prices, rose 4.5% in May from May, 2006. This was the 37th month of year to year increases in this index. So far this rise has had little effect on the Consumer Price Index (CPI). From May, 2004 when the CGPI began its year over year rises until April* of this year, the index has risen by almost 11%. In contrast, the changes in the CPI have ranged between plus and minus 1% and have resulted in a decline of 0.1% over the whole period. The year to year changes in the CGPI and the CPI are shown in the first chart.
Import prices have been the chief culprit in the rise of the CGPI as can be seen in the second chart that shows the indexes for the total index and the domestic, export and import goods components.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070612c.jpg" width="353">
The prices of imported Metals and related products, Wood, lumber and related products and Petroleum, coal and natural gas have largely accounted for the increases in the import component of the index as can be seen in the third chart. The year over year change in the price of Petroleum, coal, and natural gas has actually shown some declines this year. But these declines have been offset by big year over year increases in the prices of Wood, lumber and related products and Metals and related products as can be seen in the third chart and in the table below.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070612e.jpg" width="353">
When and to what extent the producer prices will be reflected in the consumer price index is largely up to the consumer. The 0.76% increase in the private household consumption was encouraging. But consumers are still cautious. The Survey of Consumer Confidence showed a small decline in the diffusion index to 47.3% in May from 47.4% in April. A value of the index below 50% indicates that the pessimists outweigh the optimists. However, over the course of the history of survey, the optimists rarely prevailed, as can be seen in the fourth chart. The current level of 47.3% is among the highest values recorded. This suggests that the consumer may be less pessimistic than the a literal interpretation of the data would warrant.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070612f.jpg" width="353"> *We have used April as the final month since CPI data are not available for May.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">JAPAN&nbsp; CGPI AND CPI&nbsp;</th>
<th scope="col">May 07</th>
<th scope="col">&nbsp;Apr 07&nbsp;</th>
<th scope="col">Mar 07</th>
<th scope="col">Feb 07</th>
<th scope="col">Jan 07</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"></td>
<td>Y/Y %</td>
<td>&nbsp;Y/Y %&nbsp;</td>
<td>Y/Y %</td>
<td>Y/Y %</td>
<td>Y/Y %</td>
<td>AVG</td>
<td>AVG</td>
<td>AVG</td>
</tr>
<tr>
<td class="firstcol">CPI (2005=1000</td>
<td></td>
<td>1.00</td>
<td>-0.10</td>
<td>-0.20</td>
<td>0.00</td>
<td>100.3</td>
<td>100.</td>
<td>100.3</td>
</tr>
<tr>
<td class="firstcol">CGPI&nbsp; (2000=100)</td>
<td>4.51</td>
<td>3.46</td>
<td>2.71</td>
<td>2.71</td>
<td>4.20</td>
<td>105.1</td>
<td>100.1</td>
<td>97.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Domestic Prices&nbsp;</td>
<td>2.19</td>
<td>2.30</td>
<td>2.01</td>
<td>1.71</td>
<td>2.12</td>
<td>100.7</td>
<td>97.7</td>
<td>96.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Export Prices</td>
<td>7.85</td>
<td>4.62</td>
<td>3.56</td>
<td>4.53</td>
<td>6.21</td>
<td>102.8</td>
<td>98.3</td>
<td>96.4</td>
</tr>
<tr>
<td class="firstcol"> &nbsp; Import Prices </td>
<td>12.48</td>
<td>8.13</td>
<td>5.50</td>
<td>5.25</td>
<td>12.36</td>
<td>137.3</td>
<td>118.0</td>
<td>104.3</td>
</tr>
<tr>
<td class="firstcol"> &nbsp;&nbsp;&nbsp; Metals and products</td>
<td>25.80</td>
<td>30.14</td>
<td>30.77</td>
<td>29.25</td>
<td>34.20</td>
<td>215.9</td>
<td>157.1</td>
<td>124.9</td>
</tr>
<tr>
<td class="firstcol"> &nbsp;&nbsp;&nbsp; Wood, lumber &amp; related products</td>
<td>21.55</td>
<td>17.21</td>
<td>16.41</td>
<td>18.72</td>
<td>22.66</td>
<td>132.2</td>
<td>112.8</td>
<td>111.3</td>
</tr>
<tr>
<td class="firstcol"> &nbsp;&nbsp;&nbsp; Petroleum, coal and natural gas </td>
<td>10.16</td>
<td>3.55</td>
<td>-3.77</td>
<td>-6.44</td>
<td>9.36</td>
<td>216.1</td>
<td>172.0</td>
<td>124.0</td>
</tr>
</tbody>
</table>
</body>
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The Japanese Corporate Goods Prices Index (CGPI), a measure of producers' prices, rose 4.5% in May from May, 2006. This was the 37th month of year to year increases in this index. So far this rise has had little effect on the Consumer [...]

Rises in the Japanese Corporate Goods Prices Index (CGPI) Are Yet to Be Reflected in the CPI

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070612b.jpg" width="353">
The JOLTS report quit rate is the most important reading of this varied report that has regional and industry detail as well as national readings. When people are wiling to QUIT the jobs they have it is the best sign of strength in the underlying labor market. This month the private quit rate remained steady at 2.2% while the quit rate in services industries remained high (79.8 percentile of its range) and the MFG sector saw quits drop to 1.4% from 1.5% in what has been a sector with weakening labor demands. The quit rate rose &#150; surprisingly in construction but the seasonal construction work is beginning to pick up at this time of year. And the government quit rate, while a scant 0.7%, is as high as it has ever been &#150; government workers simply don&#146;t quit; many have the job for its job security and pension. 
Sector Detail &#150; complied from report details (see table)-- Services and Government showed a high quit rate in April and, while the construction sector&#146;s quit rate rose in the month, it was still in the bottom 20Th percentile of its range. Hires were very strong for government - at the top of its range. This reading squares with recent reports that tell us that many states have seen revenues rise above their expectations. Hires are also firm in services: approximately in the top third of its range. The job openings readings are strong in their respective ranges across industries, save construction, but that reading is not matched by strength in hires everywhere. Either this is an example of worker skill shortages or job openings statistics are vague and substantially meaningless. Separations are in the top two-thirds of their range for services and MFG and they are stronger still in Government. They remain low in construction. In MFG it is probably early retirements at work or negotiated attrition since layoffs per se were not up on the month.
On balance, the JOLTS report confirms the positive trends we have seen in MFG, Services and the weakness in construction. The Government sector appears to have become a stronger source of job creation and employee retention. The private quit rate is stable and strong and is well underpinned by the service sector. Weakness in MFG jobs does not seem a threat to overall labor market strength. On balance, the detail of this report is encouraging about the economy.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
JOLTS Rankings by Main Sectors
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">As of&#133;&#133;</td>
<td colspan="4">Major Job Sectors</td>
</tr>
<tr class="grey3">
<td class="firstcol">Apr-07</td>
<td>Services</td>
<td>MFG</td>
<td>Construction</td>
<td>Gov&#39;t</td>
</tr>
<tr class="grey2">
<td class="firstcol">Job Openings</td>
<td>76.2%</td>
<td>84.6%</td>
<td>57.1%</td>
<td>87.5%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Hires</td>
<td>65.1%</td>
<td>42.9%</td>
<td>13.3%</td>
<td>100.0%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Separations</td>
<td>62.9%</td>
<td>66.7%</td>
<td>29.2%</td>
<td>75.0%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Quits</td>
<td>79.8%</td>
<td>66.7%</td>
<td>16.7%</td>
<td>100.0%</td>
</tr>
<tr class="grey1">
<td colspan="5">Raw readings by Industry</td>
</tr>
<tr class="grey2">
<td class="firstcol">OPENINGS</td>
<td>Services</td>
<td>MFG</td>
<td>Construction</td>
<td>Gov&#39;t</td>
</tr>
<tr class="grey2">
<td class="firstcol">Apr-07</td>
<td>2.5</td>
<td>2.3</td>
<td>2.0</td>
<td>2.1</td>
</tr>
<tr class="grey2">
<td class="firstcol">Mar-07</td>
<td>2.3</td>
<td>2.2</td>
<td>1.9</td>
<td>2.1</td>
</tr>
<tr class="grey2">
<td class="firstcol">Feb-07</td>
<td>2.6</td>
<td>2.3</td>
<td>2.9</td>
<td>2.1</td>
</tr>
<tr class="grey2">
<td class="firstcol">Jan-07</td>
<td>2.6</td>
<td>2.3</td>
<td>1.8</td>
<td>2.1</td>
</tr>
<tr class="grey2">
<td class="firstcol">Hires</td>
<td>Services</td>
<td>MFG</td>
<td>Construction</td>
<td>Gov&#39;t</td>
</tr>
<tr class="grey2">
<td class="firstcol">Apr-07</td>
<td>4.4</td>
<td>2.5</td>
<td>4.3</td>
<td>1.9</td>
</tr>
<tr class="grey2">
<td class="firstcol">Mar-07</td>
<td>4.3</td>
<td>2.3</td>
<td>4.6</td>
<td>1.8</td>
</tr>
<tr class="grey2">
<td class="firstcol">Feb-07</td>
<td>4.5</td>
<td>2.6</td>
<td>3.9</td>
<td>1.7</td>
</tr>
<tr class="grey2">
<td class="firstcol">Jan-07</td>
<td>4.5</td>
<td>2.6</td>
<td>3.9</td>
<td>1.7</td>
</tr>
<tr class="grey2">
<td class="firstcol">SEPARATIONS</td>
<td>Services</td>
<td>MFG</td>
<td>Construction</td>
<td>Gov&#39;t</td>
</tr>
<tr class="grey2">
<td class="firstcol">Apr-07</td>
<td>4.0</td>
<td>2.8</td>
<td>4.9</td>
<td>1.4</td>
</tr>
<tr class="grey2">
<td class="firstcol">Mar-07</td>
<td>4.1</td>
<td>2.8</td>
<td>4.5</td>
<td>1.4</td>
</tr>
<tr class="grey2">
<td class="firstcol">Feb-07</td>
<td>4.0</td>
<td>3.0</td>
<td>4.2</td>
<td>1.3</td>
</tr>
<tr class="grey2">
<td class="firstcol">Jan-07</td>
<td>4.0</td>
<td>2.8</td>
<td>5.2</td>
<td>1.4</td>
</tr>
<tr class="grey2">
<td class="firstcol">QUITS</td>
<td>Services</td>
<td>MFG</td>
<td>Construction</td>
<td>Gov&#39;t</td>
</tr>
<tr class="grey2">
<td class="firstcol">Apr-07</td>
<td>2.5</td>
<td>1.4</td>
<td>1.8</td>
<td>0.7</td>
</tr>
<tr class="grey2">
<td class="firstcol">Mar-07</td>
<td>2.5</td>
<td>1.5</td>
<td>1.7</td>
<td>0.7</td>
</tr>
<tr class="grey2">
<td class="firstcol">Feb-07</td>
<td>2.6</td>
<td>1.5</td>
<td>1.6</td>
<td>0.6</td>
</tr>
<tr class="grey2">
<td class="firstcol">Since 2000</td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
</tbody>
</table>
</body>
</html>

The JOLTS report quit rate is the most important reading of this varied report that has regional and industry detail as well as national readings. When people are wiling to QUIT the jobs they have it is the best sign of strength in [...]

JOLTS Headlines Weaker Than Report Itself Seems…

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070612a.jpg" width="353">
The NFIB index is depicted in the chart as being in the grip of a downtrend with a minor uptrend that remains trapped in a bear channel. It is still not close to breaking out of that channel on the upside but it is headed in that direction. At this point it is all speculation as to whether it will make it or not. 
The responses to the broader NFIB survey are in the table below. They are for the most part still on the weak side as you would expect with an overall index that looks as this one does. Still, evidence on the overall US economy shows that conditions are getting better. So this improved performance could filter down and lift small business as well. But it could also be that weakness in small business is &#145;the termites in the woodwork&#146; that will bring the big business strength down. Since much of hiring is in small businesses, the recent strength in jobs is encouraging even if not well reflected in the survey. For the moment it is a tug of war. These NFIB signals of course draw from this period of elevated energy prices and all firms are feeling that pinch. The revival of jobs growth after a period of persisting bad weather through the first four months of the year (as evidenced by work disruptions reported in the monthly jobs report) have now been set aside. In some sense we begin the process of assessing growth anew now with energy prices having moved up and the Fed no longer on a preconceived policy path and without a clear policy bias despite its stated relatively greater fear of inflation rising. 
The NFIB survey shows rebounds in trends from March onward. Still the absolute readings are poor and are very low by historic standards; the response for &quot;the economy is expected to improve&quot; is in the bottom 11 percentile of its range since 2001. The one clear element lacking is that farms are unwilling to increase inventories. Capital spending plans are a touch weaker than they have been but still reside at a strong point relative to history (in the 90-plus percentile). Firms report fairly steady and moderate selling prices obtained and worker compensation costs paid. While firms are not planning to increase inventories, they report that inventories are rising. They report that credit has become relatively harder to get. Those reporting higher sales Q/Q are fewer in number but the number of positive responses is still historically at or above average depending on the period.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
National Federation of Independent Business
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">NFIB</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td colspan="2">% of range</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>May-06</td>
<td>since 2001*</td>
<td>since 1990*</td>
</tr>
<tr class="odd">
<td class="firstcol">INDEX</td>
<td>97.2</td>
<td>96.8</td>
<td>97.3</td>
<td>98.2</td>
<td>19.2%</td>
<td>35.6%</td>
</tr>
<tr class="even">
<td class="firstcol">% saying&#133;&#133;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Firms Expecting</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Credit conditions to ease</td>
<td>-6.0</td>
<td>-7.0</td>
<td>-8.0</td>
<td>-8.0</td>
<td>42.9%</td>
<td>53.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Economy to Improve</td>
<td>-3.0</td>
<td>-8.0</td>
<td>-7.0</td>
<td>-2.0</td>
<td>11.5%</td>
<td>28.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Higher Real Sales 6-Mo</td>
<td>16.0</td>
<td>14.0</td>
<td>14.0</td>
<td>17.0</td>
<td>47.6%</td>
<td>47.6%</td>
</tr>
<tr>
<td class="firstcol">Firms Reporting</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Higher Earnings</td>
<td>-15.0</td>
<td>-19.0</td>
<td>-15.0</td>
<td>-19.0</td>
<td>60.7%</td>
<td>60.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Inventories &#39;too low&#39;</td>
<td>-6.0</td>
<td>-3.0</td>
<td>-5.0</td>
<td>-2.0</td>
<td>10.0%</td>
<td>9.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Good Time to Expand</td>
<td>12.0</td>
<td>12.0</td>
<td>12.0</td>
<td>18.0</td>
<td>22.7%</td>
<td>26.1%</td>
</tr>
<tr>
<td class="firstcol">Firms Planning</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; To Increase Employment</td>
<td>13.0</td>
<td>13.0</td>
<td>12.0</td>
<td>13.0</td>
<td>63.2%</td>
<td>57.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; To Add Inventories</td>
<td>0.0</td>
<td>3.0</td>
<td>3.0</td>
<td>3.0</td>
<td>7.7%</td>
<td>20.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Capital expenditures 3-6 mos</td>
<td>29.0</td>
<td>29.0</td>
<td>33.0</td>
<td>30.0</td>
<td>30.8%</td>
<td>25.0%</td>
</tr>
<tr class="even">
<td class="firstcol">Inflation Issues</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Firms Raising</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Avg Selling Price</td>
<td>26.0</td>
<td>18.0</td>
<td>15.0</td>
<td>13.0</td>
<td>91.7%</td>
<td>91.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Worker Compensation</td>
<td>29.0</td>
<td>26.0</td>
<td>28.0</td>
<td>30.0</td>
<td>93.3%</td>
<td>77.3%</td>
</tr>
<tr>
<td class="firstcol">Firms Plan to Raise</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Avg Selling Price</td>
<td>23.0</td>
<td>24.0</td>
<td>22.0</td>
<td>23.0</td>
<td>54.5%</td>
<td>54.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Worker Compensation</td>
<td>38.0</td>
<td>37.0</td>
<td>35.0</td>
<td>39.0</td>
<td>52.9%</td>
<td>52.9%</td>
</tr>
<tr class="even">
<td class="firstcol">Other</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Firms Reporting</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Higher sales Q/Q</td>
<td>1.0</td>
<td>4.0</td>
<td>0.0</td>
<td>-1.0</td>
<td>60.6%</td>
<td>50.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Credit Harder to Get</td>
<td>6.0</td>
<td>5.0</td>
<td>7.0</td>
<td>5.0</td>
<td>75.0%</td>
<td>46.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Raising Inventories</td>
<td>2.0</td>
<td>-2.0</td>
<td>2.0</td>
<td>5.0</td>
<td>70.6%</td>
<td>40.9%</td>
</tr>
<tr class="odd">
<td colspan="7">*100% is high, 0% is low</td>
</tr>
</tbody>
</table>
</body>
</html>

The NFIB index is depicted in the chart as being in the grip of a downtrend with a minor uptrend that remains trapped in a bear channel. It is still not close to breaking out of that channel on the upside but it is headed in that [...]

NFIB - Small Bounce but Still in Downtrend

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

Tom Moeller

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250501G20.jpg

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

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

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

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

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

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

250501H20.jpg

250501I20.jpg

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

U.S. Light Vehicle Sales Fall in April

250501J5.jpg

250501K5.jpg

The ISM Purchasing Managers Index of activity in the manufacturing sector slipped to 48.7 in April from 49.0 during March and 50.3 in February. It remained up from a low of 46.9 in October of last year. A level of 50 is the break-even point between a rising and falling level of activity. The Action Economics Forecast Survey expected a reading of 47.8 for April. The series reached a monthly high of 63.8 in March 2021.

Two of the five component indexes weakened last month. The April production index fell to 44.0 after declining to 48.3 in March. It was the lowest level since May 2020. A lessened 19.8% (NSA) of respondents reported higher production while an increased 24.2% reported lower output. The inventories index declined to 50.8 last month from 53.4 in March. The index remained up from a low of 43.2 in October of last year.

Moving higher, the new orders index rose to 47.2 last month from 45.2 in March. The index remained below a January high of 55.1. Twenty-eight percent (NSA) of respondents reported higher new orders while 26.7% reported a decline. The employment index rose to 46.5 from 44.7 in March. It was below a high of 50.3 in January. A greater 13.1% (NSA) of respondents reported more hiring while a fewer 16.2% indicated less. The supplier delivery index rose to 55.2 from 53.5 in March. A higher 16.6% (NSA) of respondents reported slower delivery speeds while a fairly steady 6.2% reported a quickening.

The prices index, which is not part of the composite series, edged up to 69.8 (NSA) in April after increasing to 69.4 in March. It was the highest level since June 2022, up from a December 2022 low of 39.4. An increased 49.2% of respondents reported higher prices last month, up from 12.2% in November, while a higher 9.7% reported lower prices.

In other series, the export orders index plummeted to 43.1 in April from 49.6 during March. It was down from the high of 52.4 in January. The imports index fell sharply to 47.1 from 50.1 in March. It was the lowest reading since December 2023. The order backlog index dropped to 43.7 (NSA) last month from 44.5 in March. It was the lowest level in five months.

The ISM figures are based on responses from over 400 purchasing executives from 18 industries, which are weighted according to each industry’s contribution to GDP. These indexes are diffusion indexes where a reading above 50 indicates expansion and a reading below 50 points to contraction. The figures from the Institute for Supply Management can be found in Haver’s **USECON** database; further detail is found in the **SURVEYS** database. The expectations number is available in Haver’s **AS1REPNA** database.

250501L5.jpg

250501M5.jpg

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

U.S. ISM Manufacturing Index Indicates Contraction in April

Winnie Tapasanun

250501N.jpg

250501O.jpg

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

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

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

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

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

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

250501A8.jpg

250501B8.jpg

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: June 2007

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