Robert Brusca

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081216c.jpg" align="left" border="0" height="265" width="353">
The Markit PMI FLASH indices for the MFG and Services sectors
show that deterioration continues. Both are on lows for the period that
the services index has been available. 
 

The drop this month was much smaller than last month&#8217;s drop.
Still the result tells us that month-to-month conditions that already
are weak are getting worse. That&#8217;s a bad sign. Still the ECB&#8217;s Trichet
says the decision for the next meeting is no foregone conclusion. How
bad are things? 
 

The manufacturing index began in June 1997, the Services
series began in July 1998. Both are on all time lows for their
respective periods. 
 

The EMU indices are available for a shorter period than the US
measure at least for MFG. And since the US MFG measure is already
extremely low in its longer term range we might surmise that the level
of distress indicated by this shorter lived EMU index is in fact
comparable to some of the extremely weak periods of its past using its
tracking with the US index as a reason for the conclusion. Already many
EMU measure are extremely weak. The US MFG PMI that goes back to 1950
finds the current (Nov) US index is weaker only 1.6% of the time. Is
Europe that bad off too? If so is this anyplace for the ECB to halt
cutting rates? Just a thought. 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr><th colspan="3" scope="col"> FLASH Readings</th>
</tr>
<tr class="grey4">
<th colspan="3">Markit PMIs for the
E-Zone-13</th>
</tr>
</thead>
<tbody>
<tr class="grey3">
<td class="firstcol">&nbsp;</td>
<td>MFG</td>
<td>Services</td>
</tr>
<tr class="grey2">
<td class="firstcol">Dec-08</td>
<td>34.47</td>
<td>42.05</td>
</tr>
<tr class="grey2">
<td class="firstcol">Nov-08</td>
<td>35.58</td>
<td>42.47</td>
</tr>
<tr class="grey2">
<td class="firstcol">Oct-08</td>
<td>41.10</td>
<td>45.76</td>
</tr>
<tr class="grey2">
<td class="firstcol">Sep-08</td>
<td>44.97</td>
<td>48.44</td>
</tr>
<tr class="grey1">
<td colspan="3" class="firstcol">Averages</td>
</tr>
<tr class="grey2">
<td class="firstcol">3-Mo</td>
<td>40.55</td>
<td>44.10</td>
</tr>
<tr class="grey2">
<td class="firstcol">6-Mo</td>
<td>44.29</td>
<td>46.16</td>
</tr>
<tr class="grey2">
<td class="firstcol">12-Mo</td>
<td>48.07</td>
<td>48.73</td>
</tr>
<tr class="grey1">
<td colspan="3" class="firstcol">125-Mo Range</td>
</tr>
<tr class="grey2">
<td class="firstcol">High</td>
<td>60.47</td>
<td>62.36</td>
</tr>
<tr class="grey2">
<td class="firstcol">Low</td>
<td>34.47</td>
<td>42.05</td>
</tr>
<tr class="grey2">
<td class="firstcol">% Range</td>
<td>0.0%</td>
<td>0.0%</td>
</tr>
</tbody>
</table>
</body></html>

The Markit PMI FLASH indices for the MFG and Services sectors show that deterioration continues. Both are on lows for the period that the services index has been available. The drop this month was much smaller than last month’s drop. [...]

MFG and Services Indices Drop to New Lows

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081216a.jpg" width="353">
Housing starts fell even further last month. The level of 625,000 units (SAAR) was the lowest in the series&#39; history which dates back to 1959. It followed a downwardly revised October figure of 771,000. Consensus expectations had been for November starts of 735,000.
Perhaps more indicative of the bleeding in the housing sector was that the speed of the decline in starts during the last three months accelerated to a 71.3% annual rate. That is nearly double the rates of earlier this year and it is nearly triple the rate of 2007.
Starts of single-family homes fell a whopping 16.9% m/m to 441,000 from an unrevised October level. The latest level also was a record low and it is down by three-quarters since the peak in early 2006. The latest was the lowest level since the 1981-82 recession. During the last three months, the rate of decline picked up to -73.6%, also twice as fast as earlier in 2008 and triple 2007. Permits to build single-family homes also were quite weak and fell by roughly the same 12.3% (-46.3% y/y) as during October.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081216b.jpg" width="353">
During 4Q starts are down 19.4% from the 3Q average and in the last ten years there has been an 84% correlation between the q/q change in single-family starts and their contribution to quarterly GDP growth.
October multi-family starts fell 26.3% from October and they are down by one-half from last year.
By region, November starts of single-family units in the Northeast fell 42.1% m/m and by 59.8% y/y. In the Midwest, starts fell 12.9% (-41.7% y/y) and in the South single-family starts fell 13.6% (-45.7% y/y). Finally, starts in the West starts fell 15.5% (-43.4% y/y).

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Housing Starts (000s, SAAR)</th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">September</th>
<th scope="col">Y/Y</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>625</td>
<td>771</td>
<td>824</td>
<td>-47.0%</td>
<td>1,341</td>
<td>1,812</td>
<td>2,073</td>
</tr>
<tr>
<td class="firstcol">Single-Family</td>
<td>441</td>
<td>531</td>
<td>551</td>
<td>-46.0</td>
<td>1,034</td>
<td>1,474</td>
<td>1,719</td>
</tr>
<tr>
<td class="firstcol">Multi-Family</td>
<td>184</td>
<td>240</td>
<td>273</td>
<td>-49.3</td>
<td>307</td>
<td>338</td>
<td>354</td>
</tr>
<tr class="odd">
<td class="firstcol">Building Permits</td>
<td>616</td>
<td>730</td>
<td>805</td>
<td>-48.1</td>
<td>1,389</td>
<td>1,844</td>
<td>2,160</td>
</tr>
</tbody>
</table>
</body>
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Housing starts fell even further last month. The level of 625,000 units (SAAR) was the lowest in the series' history which dates back to 1959. It followed a downwardly revised October figure of 771,000. Consensus expectations had been [...]

U.S. Housing Downdraft Intensifies

The Federal Open Market Committee today cut the Federal funds rate more than expected to a "range from 0 to 1/4 percent." The discount also was cut to 0.50%. The latest Fed funds rate was its lowest ever. While the latest action was a [...]

FOMC Cut Funds Rate to Near 0%

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081215k.jpg" align="left" border="0" height="265" width="353">
Japan&#8217;s Tankan for 2008 Q4 shows dramatic weakening. The
headline pace for large enterprises in manufacturing has dropped to -24
from -3 in 2008-Q4. Non MFG has turned negative to -9 in Q4 from +1 in
Q3. The all industries index is at -16 in 2008-Q4 down from flat in
2008-Q3. Of the main sectors, Construction. Real estate, Wholesaling,
Retailing, Transportation, Services for businesses, Personal services
and Restaurants and hotels all are on their weakest respective readings
since 2003-Q3 except Construction. That sector reading lies in the
bottom quarter of its range. 
 

Even construction is weak as its average has been a reading of
-3.0 while its actual reading in 2008 Q4 is -10. Manufacturing&#8217;s
average score has been -13.5 and that is now at -24.0. 
 

The manufacturing outlook has also deteriorated. The Q1
outlook if for a reading of -36 compared to an outlook for -4 for
2008-Q4. Similarly for Nonmanufacturing the outlook has slipped to -14
in 2009-Q1 from what was -1 for 2008-Q4. 
 

The outlook and current assessments for small and medium-sized
firms is just as bad or worse. In Japan the large enterprise survey is
the bellwether. 
 
 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr><th colspan="8" scope="col"> Tankan Results Large Enterprises</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="4">Readings</td>
<td colspan="2">Averages</td>
<td>PERCENTILES</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Q4-08</td>
<td>Q3-08</td>
<td>Q2-08</td>
<td>Q1-08</td>
<td>1-Y Avg</td>
<td>Since Q3'03</td>
<td>Since Q1'04</td>
</tr>
<tr>
<td class="firstcol">MFG</td>
<td>-24.0</td>
<td>-3.0</td>
<td>5.0</td>
<td>11.0</td>
<td>-13.5</td>
<td>16.3</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Nonmanufacturing</td>
<td>-9.0</td>
<td>1.0</td>
<td>10.0</td>
<td>12.0</td>
<td>-4.0</td>
<td>13.8</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Total Industry</td>
<td>-16.0</td>
<td>0.0</td>
<td>7.0</td>
<td>12.0</td>
<td>-8.0</td>
<td>15.1</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Construction</td>
<td>-10.0</td>
<td>-7.0</td>
<td>-1.0</td>
<td>-9.0</td>
<td>-8.5</td>
<td>-3.8</td>
<td>22.2%</td>
</tr>
<tr>
<td class="firstcol">Real Estate</td>
<td>-7.0</td>
<td>5.0</td>
<td>22.0</td>
<td>21.0</td>
<td>-1.0</td>
<td>29.2</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Wholesale</td>
<td>-7.0</td>
<td>11.0</td>
<td>12.0</td>
<td>14.0</td>
<td>2.0</td>
<td>17.5</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Retail</td>
<td>-18.0</td>
<td>-5.0</td>
<td>0.0</td>
<td>0.0</td>
<td>-11.5</td>
<td>4.5</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Transportation</td>
<td>-7.0</td>
<td>6.0</td>
<td>16.0</td>
<td>17.0</td>
<td>-0.5</td>
<td>13.9</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Services for Business</td>
<td>-1.0</td>
<td>4.0</td>
<td>20.0</td>
<td>22.0</td>
<td>1.5</td>
<td>22.2</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Personal Services</td>
<td>-11.0</td>
<td>6.0</td>
<td>10.0</td>
<td>13.0</td>
<td>-2.5</td>
<td>9.6</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Restaurants &amp; Hotels</td>
<td>-32.0</td>
<td>-13.0</td>
<td>-14.0</td>
<td>-3.0</td>
<td>-22.5</td>
<td>4.5</td>
<td>0.0%</td>
</tr>
<tr class="even">
<td colspan="8">Forecast</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Q1-09</td>
<td>Q4-08</td>
<td>Q3-08</td>
<td>Q2-08</td>
<td>1-Y Avg</td>
<td>Since Q3'03</td>
<td>Since Q1'04</td>
</tr>
<tr>
<td class="firstcol">Manufacturing - Outlook</td>
<td>-36.0</td>
<td>-4.0</td>
<td>4.0</td>
<td>7.0</td>
<td>-7.3</td>
<td>13.6</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Nonmanufacturing - Outlook</td>
<td>-14.0</td>
<td>-1.0</td>
<td>8.0</td>
<td>13.0</td>
<td>1.5</td>
<td>13.2</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">All Industry-Outlook</td>
<td>-25.0</td>
<td>-2.0</td>
<td>6.0</td>
<td>10.0</td>
<td>-2.8</td>
<td>13.3</td>
<td>0.0%</td>
</tr>
</tbody>
</table>
</body></html>

Japan’s Tankan for 2008 Q4 shows dramatic weakening. The headline pace for large enterprises in manufacturing has dropped to -24 from -3 in 2008-Q4. Non MFG has turned negative to -9 in Q4 from +1 in Q3. The all industries index is at [...]

Japan Tankan Survey Drops Sharply

Louise Curley

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081215i.jpg" align="left" border="0" height="265" width="353">
Chinese industrial production increased 5.4% in November, the
smallest increase since 2002. Growth in industrial production declined
intermittently for a year after reaching a monthly year to year peak of
19.5% in June, 2007, but in the last five months it has been in a free
fall, from 16.0% to 5.4%. The year to year changes in the growth of
industrial production are shown in the first chart.
Some of the components of industrial production are showing
declines of more than a month for first time. Production of electricity
has been down for the last two months, that of steel for the last three
months and the of pig iron for the last four months as shown in the
second chart.
China's National Bureau of Statistics measures industrial
production in terms of gross value added in 1990 prices. It is
therefore a much broader measure than the indexes of industrial
production of most other countries and is a good proxy for Real Gross
Domestic Product. The similarity between the trends of the GDP and GVA
, shown in the third chart, is apparent. The slow down in industrial
production growth in October and November, suggest that the growth in
the fourth quarter of GDP will be well below the 9% of the third
quarter.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081215h.jpg" border="0" height="265" width="312"><img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081215j.jpg" border="0" height="265" width="312">

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">CHINA
INDUSTRIAL PRODUCTION (GROSS VALUE ADDED) 
&nbsp;Y/Y PERCENT CHANGE&nbsp;</th>
<th scope="col">Nov 08</th>
<th scope="col">Oct 08&nbsp;</th>
<th scope="col">Sep 08&nbsp;</th>
<th scope="col">Aug 08&nbsp;</th>
<th scope="col">Jul&nbsp; 08&nbsp;
&nbsp;</th>
<th scope="col">Jun&nbsp; 08</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Industrial Production</td>
<td>5.4</td>
<td>8.2</td>
<td>11.4</td>
<td>12.8</td>
<td>14.7</td>
<td>16.0</td>
</tr>
<tr>
<td class="firstcol">Output of Selected
Products</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Electricity</td>
<td>-7.79</td>
<td>-3.04</td>
<td>4.80</td>
<td>5.71</td>
<td>9.59</td>
<td>8.06</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Steel</td>
<td>-11.34</td>
<td>-16.36</td>
<td>-7.25</td>
<td>2.37</td>
<td>8.81</td>
<td>11.45</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Pig Iron</td>
<td>-16.00</td>
<td>-16.36</td>
<td>-4.97</td>
<td>-1.86</td>
<td>-5.80</td>
<td>-8.38</td>
</tr>
</tbody>
</table>
</body></html>

Chinese industrial production increased 5.4% in November, the smallest increase since 2002. Growth in industrial production declined intermittently for a year after reaching a monthly year to year peak of 19.5% in June, 2007, but in [...]

Growth in Chinese Industrial Production Slows: A Proxy for GDP Growth

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081215f.jpg" align="right" border="0" height="265" width="353">
The National Association of Home Builders' (NAHB) indicated
that its December Composite Housing Market Index remained stable m/m at
a reading of 9. The latest level was the lowest in the series' history
which extends back to 1984 and it was down by 90% from the high during
2005.
During the last twenty years there has been an 83% correlation
between the y/y change in the Composite Index and the change in single
family housing starts.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081215g.jpg" align="right" border="0" height="265" width="353">
The index for single-family detached homes dipped slightly m/m
to a new series' low while builders' view of single-family home sales
during the next six months also fell to the series' low.
Traffic of prospective home buyers held steady m/m at the
series' low.
Except for a modest uptick in the West, the builders' index in
the country's regions continued to decline or held steady at the record
low level.
The NAHB index is a diffusion index based on a survey of
builders. Readings above 50 signal that more builders view conditions
good than poor.
Visit the <a href="http://www.nahb.org">National
Association of Home Builders</a>.
The Great Recapitalization from the Federal
Reserve Bank of St. Louis can be found <a href="http://research.stlouisfed.org/publications/es/08/ES0829.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/SURVEYS/@S4/@S4.HTM">Nat'l
Association of Home Builders</a></th>
<th scope="col">December</th>
<th scope="col">November
&nbsp;</th>
<th scope="col">December '07</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Composite Housing Market Index</td>
<td>9</td>
<td>9</td>
<td>18</td>
<td>16</td>
<td>27</td>
<td>42</td>
</tr>
</tbody>
</table>
</body></html>

The National Association of Home Builders' (NAHB) indicated that its December Composite Housing Market Index remained stable m/m at a reading of 9. The latest level was the lowest in the series' history which extends back to 1984 and [...]

U.S. NAHB Housing Market Index Stable At A Record Low

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081215d.jpg" align="right" border="0" height="265" width="353">
The Empire State Index of manufacturing actor activity for
December, reported by the Federal Reserve Bank of New York, remained as
negative as it was during the prior month. At -25.73 the index was the
lowest in the series' short eight year history. A reading of -27 had
been the Consensus expectation.
The figure is a diffusion index. Since the series' inception
in 2001 there has been a 58% correlation between its level and the
three-month change in U.S. factory sector industrial production.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081215e.jpg" align="right" border="0" height="265" width="353">
The index of pricing pressure also fell to an eight year low
of -7.45, down over twenty five points from November. That was the
lowest level since December 2001. Since inception in 2001, there has
been an 81% correlation between the index of prices paid and the
three-month change in the core intermediate materials PPI.
The indexes for new orders, shipments and unfilled orders all
remained about as negative as during November.
The employment index improved just slightly m/m but remained
near its lowest level since late 2001, negative for the sixth
consecutive month. In the history of the NY employment index, there has
been an 86% correlation between it and the three-month growth in
overall factory sector employment.
Like the Philadelphia Fed Index of General Business
Conditions, the Empire State Business Conditions Index reflects answers
to an independent survey question; it is not a weighted combination of
the components.
The Empire State index of expected business
conditions in six months improved slightly to 19.48 from
13.02. It was still close to its lowest since the recession of 2001.
The subseries for shipments improved but employment and new orders
remained low. The pricing index collapsed to the lowest level since
2001.
The Empire State Manufacturing Survey is a monthly survey of
manufacturers in New York State conducted by the Federal Reserve Bank
of New York. Participants from across the state in a variety of
industries respond to a questionnaire and report the change in a
variety of indicators from the previous month. Respondents also state
the likely direction of these same indicators six months ahead.
For more on the Empire State Manufacturing Survey, including
methodologies and the latest report, click <a href="http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html">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/SURVEYS/@S5/@S511/@S511.HTM">Empire
State Manufacturing Survey</a></th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">December '07&nbsp;</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Business Conditions
(diffusion index, %)&nbsp;&nbsp;</td>
<td>-25.76</td>
<td>-25.43</td>
<td>9.89</td>
<td>-10.13</td>
<td>17.23</td>
<td>20.24</td>
</tr>
<tr>
<td class="firstcol">Prices Paid</td>
<td>-7.45</td>
<td>20.48</td>
<td>35.00</td>
<td>46.99</td>
<td>35.64</td>
<td>41.88</td>
</tr>
</tbody>
</table>
</body></html>

The Empire State Index of manufacturing actor activity for December, reported by the Federal Reserve Bank of New York, remained as negative as it was during the prior month. At -25.73 the index was the lowest in the series' short [...]

U.S. Empire State Index Remained Negative; Prices Paid Index Lower Still

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081215b.jpg" align="right" border="0" height="265" width="353">
Industrial production fell 0.7% during November after a
revised 1.5% rise (initially reported at 1.3%) during October. That
earlier increase was lifted by recoveries from Hurricanes Gustav
&amp; Ike and an end to the strike at Boeing. Last month's decline
about matched Consensus expectations.The -5.5% y/y change in industrial
output was nearly sharpest drop since the recession of 1982.
The weakness in factory output was worse than the total IP
figure suggested. In fact a 1.4% decline in manufacturing production
was double that of the total and nearly the worst since 1982. Output of
consumer goods fell 0.7% and that pulled the y/y change to -3.8% as
production of motor vehicles &amp; parts declined 2.8% (-21.4%
y/y). Outside of the auto sector the news was quite bad and production
fell 1.4% for a 6.3% y/y decline.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081215c.jpg" align="right" border="0" height="265" width="353">
Industrial production in the high-tech sector is in steep
recession. Output fell 1.9% during November, about as it did during the
prior three months. The figure was pulled lower by a 1.1% (-2.9% y/y)
shortfall in the output of computers &amp; peripherals which was
the sixth consecutive monthly drop.
Output declines extend well beyond autos and high-tech. Less
those two sectors, production fell 1.4% last month for a y/y decline of
6.9%. Indeed, the industry detail further reflected widespread
recession in the factory sector. Output of furniture &amp; related
products fell 2.9% last month for an 18.8% y/y decline, the largest y/y
drop since the recession of 1975. Machinery production continued to
reflect recession. The 2.3% (-8.8% y/y) was the third such consecutive
drop. Output of electrical equipment production again joined the
recession show and fell 2.2% (-5.0% y/y). Apparel output in the
"recession-resistant" nondurables sector slipped 0.3% after much
heftier declines during the prior two months but it is down just 4.0%
y/y. Production of chemicals reversed much of an October increase and
fell 3.6% (-8.7% y/y).
Utility output surged 1.6% (-0.3% y/y) with colder
temperatures.
Capacity utilization fell to 75.4% after its brief October
recovery. It was close to its lowest level since 2003. Utilization in
the factory sector of 72.2% also was near the lowest since 2003.
Capacity in the factory sector increased a firm 1.7% y/y).
The Financial Tsunami and the Federal Reserve
is today's speech delivered by Philadelphia Fed President Charles I.
Plosser and it can be found <a href="http://www.philadelphiafed.org/publications/speeches/plosser/2008/12-02-08_university-of-rochester.cfm">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">November</th>
<th scope="col">October</th>
<th scope="col">Y/Y</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Output </td>
<td>-0.7</td>
<td>1.5</td>
<td>-5.5</td>
<td>1.7</td>
<td>2.2</td>
<td>3.3</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Manufacturing</td>
<td>-1.4</td>
<td>0.7</td>
<td>-7.3</td>
<td>1.8</td>
<td>2.8</td>
<td>4.2</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp;&nbsp;
Consumer Goods</td>
<td>-0.7</td>
<td>1.6</td>
<td>-3.8</td>
<td>1.7</td>
<td>0.3</td>
<td>2.8</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp;&nbsp;
Business Equipment</td>
<td>3.3</td>
<td>-2.6</td>
<td>-7.4</td>
<td>3.3</td>
<td>10.4</td>
<td>7.3</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp;&nbsp;
Construction Supplies</td>
<td>-3.3</td>
<td>-1.4</td>
<td>-9.7</td>
<td>-2.5</td>
<td>2.2</td>
<td>4.5</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Utilities</td>
<td>1.6</td>
<td>0.7</td>
<td>-0.3</td>
<td>3.3</td>
<td>-0.6</td>
<td>2.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Capacity Utilization</td>
<td>75.4</td>
<td>76.0</td>
<td>81.1 (Nov.'07)</td>
<td>81.0</td>
<td>80.9</td>
<td>80.2</td>
</tr>
</tbody>
</table>
</body></html>

Industrial production fell 0.7% during November after a revised 1.5% rise (initially reported at 1.3%) during October. That earlier increase was lifted by recoveries from Hurricanes Gustav & Ike and an end to the strike at Boeing. [...]

U.S. Factory Output Off As Recession Worsens

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

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

250430N1.jpg

250430O1.jpg

Real GDP eased 0.3% SAAR (+2.1% y/y) during the first quarter of 2025 after increasing 2.4% in Q4’24 and 3.1% in Q3’24. A 0.4% increase had been expected in the Action Economics Forecast Survey. It was the first decline since Q1 2022.

Foreign trade subtracted 4.83 percentage points from growth last quarter as imports surged 41.3% (13.4% y/y) ahead of tariffs, which began to come into effect in the first quarter. The rise followed a 1.9% decline in Q4’24. Exports rose 1.8% (3.0% y/y) after easing 0.2% in Q4. Inventories added 2.25 percentage points to growth after subtracting 0.84 percentage point from Q4 growth.

Real final sales to domestic purchasers grew 2.3% (2.9% y/y) in Q1 after rising 3.0% in Q4. Personal consumption expenditures rose 1.8% (3.1% y/y) following a 4.0% gain. Durable goods spending fell 3.4% (+5.3% y/y) after surging 12.4% in Q4. Motor vehicle purchases declined 11.1% (+5.5% y/y) after strengthening 19.7% in Q4. Spending on home furnishings & appliances gained 1.5% (6.1% y/y) following a 5.4% rise. Recreational goods & vehicle outlays rose 2.5% (7.0% y/y) last quarter after a 13.9% Q4 increase.

Nondurable goods outlays rose 2.7% (3.0% y/y) following 3.1% growth in Q4. Apparel spending increased 6.7% (2.5% y/y) following a 5.0% rise. Food & beverage buying gained 2.5% (2.3% y/y) after a 1.8% increase. Gasoline & fuel oil purchases increased 4.6% (3.4% y/y) after falling 2.0% in Q4.

Spending on services increased 2.4% last quarter (2.7% y/y) after a 3.0% gain. Outlays on housing & utilities increased 3.4% (1.8% y/y) after rising 1.1% in Q4. Health care expenditures rose 4.0% (4.8% y/y) following a 4.7% strengthening. Transportation outlays increased 5.3% (4.6% y/y) after a 3.7% rise while recreation spending rose 4.7% (2.8% y/y) following a 4.5% rise. Restaurant & hotel expenditures declined 2.1% (+0.5% y/y) following a 2.8% rise. Financial services expenditures rose 1.9% (2.0% y/y) after a 3.1% Q4 increase.

Business fixed investment increased 9.8% (3.6% y/y) following a 3.0% decline in Q4. Expenditures on structures rose 0.4% (-0.4% y/y) after a 2.9% increase. Expenditures on producers’ durable equipment jumped 22.5% (8.0% y/y) after falling 8.7%.  Outlays on information processing equipment soared 69.3% (18.9% y/y) following a 7.3% decline. Industrial equipment investment fell 1.4% (-0.3% y/y) after easing 0.9%. Intellectual property product spending rose 4.1% (1.8% y/y) following a 0.5% decline. 

Residential structures investment increased 1.3% (-0.1% y/y) in Q1 after a 5.5% Q4 rise.

250430P1.jpg

250430Q1.jpg

Government spending fell 1.5% (+2.4% y/y) after a 3.1% Q4 rise. Federal government expenditures declined 5.1% (+2.9% y/y) after rising 4.0% in Q4. National defense expenditures declined 8.0% (+4.0% y/y) after increasing 4.8% in Q4. State & local government spending rose 0.8% (2.1% y/y) following a 2.5% rise.

The GDP price index rose 3.7% (2.6% y/y) after increasing 2.3% in Q4. It was the largest increase since Q4’22. A 2.4% increase had been expected. The PCE chain price index increased 3.6% (2.5% y/y) following a 2.4% rise. The PCE price index excluding food and energy rose 3.5% (2.8% y/y) after increasing 2.6% in Q4. The business fixed investment price index rose 0.4% (1.8% y/y) after 1.5% rise. The residential price index strengthened 3.9% (3.2% y/y) after a 1.9% rise while the government price index increased 4.7% (2.8% y/y) following a 2.1% rise.

The GDP data can be found in Haver’s **USECON** and **USNA** databases. **USNA** contains virtually all of the Bureau of Economic Analysis detail in the national accounts. The Action Economics consensus estimates can be found in **AS1REPNA**.

250430R1.jpg

250430S1.jpg

- Decline in GDP is first in three years.
- Foreign trade subtracts substantially ahead of tariffs.
- Domestic final demand growth weakens.
- Price index strengthens with higher core PCE prices.

U.S. GDP Unexpectedly Declines in Q1’25; Prices Strengthen

Michael J. Moran

250430A.jpg

250430B.jpg

High-side readings on the price indexes for personal consumption expenditures in January and February caused some concern about emerging price pressure, especially with some policies of the Trump administration possibly adding to the upward force. However, March brought notable relief, with the headline price index falling slightly (-0.04%). A marked decline in energy prices was helpful (-2.7%), but core prices also were subdued, increasing less than 0.1%.  Year-over-year changes were still above the Fed’s target of 2%, but only barely so for the headline measure (2.3%). The core index backed away from the reading of 3.0% in February, but the latest reading of 2.7% was in line with observations in the past year, and still uncomfortably above target.

Consumers roused from a winter slumber in March, with nominal outlays increasing 0.7%. With inflation restrained, real outlays also posted a gain of 0.7%. Spending on durable gods stood out, with real outlays advancing 3.2%. Real outlays for both nondurable goods and services rose 0.4%, a solid pace. Signs of life were certainly welcome after an average decline of 0.1% in January and February. The March rebound left growth of 1.8% (annual rate) in the first quarter.

The brisk increase in spending in March was supported by a solid gain in personal income (0.5% in both nominal and real terms). Growth in wage income was firm at 0.5%, while proprietors’ income was robust with a gain of 1.8% (not annualized!). The farm sector led the advance in proprietors’ income, but the nonfarm sector also was strong (0.6%).

The personal income and consumption figures are available in Haver’s **USECON** database with detail in the **USNA** database. The Action Economics forecasts are in **AS1REPNA**.

250430C.jpg

250430D.jpg

- Price pressure eases.
- Spending rebounds after two soft months.

Personal Income, Consumption, and Prices in March

250430F20.jpg

250430G20.jpg

The Pending Home Sales Index, a forward-looking home sales measure based on contract signings, from the National Association of Realtors rose 6.1% to 76.5 (-0.6% y/y) during March after rising a little-revised 2.1% in February. These changes followed a 4.6% January decline.

The rise in March sales occurred as the rate on a 30-year mortgage eased to an average 6.65% from 6.84% in February. This rate was well above a low of 2.68% averaged in December 2020.

Pending home sales were up in most regions of the country. Sales in the Midwest rose 4.9% (1.4% y/y) last month after rising 1.8% in February. Sales in the South increased 9.8% (-0.4% y/y) following a 5.8% February rise. Sales in the West improved 4.8% (-2.0% y/y) after falling 3.0% in February. Sales in the Northeast were off 0.5% (-3.0% y/y) in March after falling 0.9% in February.

The pending home sales index measures sales at the time the contract for the purchase of an existing home is signed, similar to the Census Bureau's new home sales data. In contrast, the National Association of Realtors' existing home sales data are recorded when the sale is closed, which is usually a couple of months after the sales contract has been signed. In developing the pending home sales index, the NAR found that the level of monthly sales contract activity leads the level of closed existing home sales by about two months.

The series dates back to 2001 and are available in Haver's **PREALTOR** database. Weekly mortgage interest rates from the Mortgage Bankers Association can be found in the **WEEKLY** database.

- Sales rise to highest level in four months.
- Strength is evident throughout most of country.

Economy in Brief: 2008

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