Tom Moeller

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The Federal Housing Finance Agency (FHFA) Price Index for
house purchases increased 0.3% (6.1% y/y) during August following a 0.4% gain
during July, revised from 0.2%. Over the last three months, the index rose at a
lessened 3.8% annual rate, down from a 9.9% rate of increase six months earlier.

Prices in the Mountain region were little changed m/m but
rose a strong 8.4% y/y. The Pacific region posted a firm 0.8% m/m increase (7.3%
y/y) while home prices in the South Atlantic region rose 0.4% (6.8% y/y).

Lesser y/y increases in home prices were logged in the East
North Central region where they edged 0.2% higher m/m and 6.1% y/y. Home prices
in the West North Central region improved 0.1% (6.0% y/y) and in the East South
Central region prices gained 0.3% (5.6% y/y).

In New England the house price index rose a strong 0.7, but
just 5.2% y/y. The home price index for the West South Central region improved
0.4% (4.5% y/y), and amongst the Middle Atlantic states prices declined 0.7% (+4.0% y/y).

The FHFA house price index is a weighted purchase-only index
that measures average price changes in repeat sales of the same property. An
associated quarterly index includes refinancings on the same kinds of
properties. The indexes are based on transactions involving conforming,
conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac.
Only mortgage transactions on single-family properties are included. The FHFA
data are available in Haver's USECON database.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" >FHFA U.S. House Price Index, 
 Purchase Only (SA %)</th>
 <th scope="col" >Aug</th>
 <th scope="col" >Jul</th>
 <th scope="col" >Jun</th>
 <th scope="col" >Aug Y/Y</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Total</td>
 <td >0.3</td>
 <td >0.4</td>
 <td >0.3</td>
 <td >6.1</td>
 <td >6.7</td>
 <td >6.1</td>
 <td >5.4</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; New England</td>
 <td >0.7</td>
 <td >-0.1</td>
 <td >-0.0</td>
 <td >5.2</td>
 <td >5.9</td>
 <td >4.1</td>
 <td >3.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Middle Atlantic</td>
 <td >-0.7</td>
 <td >0.3</td>
 <td >0.6</td>
 <td >4.0</td>
 <td >4.9</td>
 <td >3.7</td>
 <td >2.6</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; East North Central</td>
 <td >0.2</td>
 <td >0.4</td>
 <td >0.4</td>
 <td >6.1</td>
 <td >6.1</td>
 <td >5.4</td>
 <td >4.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; West North Central</td>
 <td >0.1</td>
 <td >0.4</td>
 <td >0.5</td>
 <td >6.0</td>
 <td >5.4</td>
 <td >5.6</td>
 <td >4.0</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; South Atlantic</td>
 <td >0.4</td>
 <td >1.0</td>
 <td >-0.3</td>
 <td >6.8</td>
 <td >7.0</td>
 <td >7.0</td>
 <td >6.2</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; East South Central</td>
 <td >0.3</td>
 <td >-0.2</td>
 <td >1.0</td>
 <td >5.6</td>
 <td >5.9</td>
 <td >5.1</td>
 <td >4.6</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; West South Central</td>
 <td >0.4</td>
 <td >-0.0</td>
 <td >0.0</td>
 <td >4.5</td>
 <td >6.5</td>
 <td >5.8</td>
 <td >6.2</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Mountain</td>
 <td >-0.0</td>
 <td >-0.1</td>
 <td >0.7</td>
 <td >8.4</td>
 <td >8.8</td>
 <td >7.9</td>
 <td >7.6</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Pacific</td>
 <td >0.8</td>
 <td >0.4</td>
 <td >0.5</td>
 <td >7.3</td>
 <td >8.7</td>
 <td >8.0</td>
 <td >7.7</td>
 </tr>
 </tbody>
</table>
&nbsp;

 
 
 
 
 New England: Maine, New Hampshire, Vermont,
 Massachusetts, Rhode Island and Connecticut. 
 Middle Atlantic: New York, New Jersey and Pennsylvania. 
 East North Central: Michigan, Wisconsin, Illinois, Indiana and Ohio. 
 West North Central: North Dakota, South Dakota, Minnesota, Nebraska,
 Iowa, Kansas and Missouri. 
 South Atlantic: Delaware, Maryland, D.C., Virginia, West Virginia,
 North Carolina, South Carolina, Georgia and Florida. 
 East South Central: Kentucky, Tennessee, Mississippi and Alabama. 
 West South Central: Oklahoma, Arkansas, Texas and Louisiana. 
 Mountain: Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona and
 New Mexico. 
 Pacific: Alaska, California, Hawaii, Oregon, Washington.
 
 
 
 
</html>

The Federal Housing Finance Agency (FHFA) Price Index for house purchases increased 0.3% (6.1% y/y) during August following a 0.4% gain during July, revised from 0.2%. Over the last three months, the index rose at a lessened 3.8% [...]

U.S. FHFA House Prices Remain Firm

Robert Brusca

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The German PPI rose by a strong 0.6% in September, but the PPI excluding energy gained just 0.1%. The sequential inflation forces over shorter horizons show more pressure for headline PPI and CPI measures while the ex-energy measures show diminishing inflation forces at work. This division could be a big problem for policymakers depending on how they view what they see.

Fortunately, in the EMU, Mario Draghi, President of the European Central Bank, has adopted the stance of looking more at ex-energy prices during periods when energy prices are moving abruptly. The table below shows that Brent oil prices are up by 42% over 12 months, up at a 40% pace over six months and still rising at a nearly 18% pace over three months. Energy is giving headline inflation fits, but little of its pressure is filtering down into non-energy prices. The ex-energy PPI and CPI both are showing very contained inflation and inflation momentum with both well below the ECB’s target pace of a bit less than 2% for inflation. Formally, the ECB target applies to the HICP prices and not to CPI or to PPI prices and never to any price index at the local level. But it is also useful to look at local level inflation since local inflation is the building block of EMU-wide inflation. And in the case of Germany, it is a very important building block since Germany carries a substantial weight in the EMU economy.

<img border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/181023.png" width="660" height="190">

<img border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/181023 2.png" width="300" height="210" align="left">
The table on the left delivers some information about inflation and how oil prices relate to the headline price indexes in Germany as well as how well-correlated is energy to other various inflation metrics in terms of their year-on-year percentage changes. Evaluating year-to-year changes is what the ECB does when it looks at prices and assesses inflation relative to target. The Brent price level has a relatively high correlation with price index levels. But in terms of year-over-year percentage changes, the correlation is much lower. For year-on-year inflation, the correlation between the German ex-energy CPI and Brent is negative. When energy prices rise, other non-energy consumer prices in Germany fall.

This correlation, while odd-seeming to non-economists, reflects the way that economists see oil prices impacting the economy. It is typical for people to say that rising oil prices are inflationary. And they do send of pulse of inflation into whatever headline price index is monitored. But if monetary policy does not accommodate the inflation pulse, it gets squeezed out of the economic system by the process we see memorialized in the German ex-energy inflation correlation: other prices fall to make room for higher energy prices in the context of a fixed budget and steady monetary policy.

To understand why this happens, consider a person on a fixed income. What do they do- what can they do- when energy prices rise? Energy use is relatively inelastic - in the short run anyway. You drive X miles to work; you heat or air-condition your home; you cook food, etc. There is little room to economize in the short run. In the long run, you can buy an energy efficient vehicle or move closer to work or install solar panels on your roof or do a hundred things to lessen your dependence on energy. But not in the short run; there you pay the piper. So when energy prices go up, your total energy bill rises leaving fewer funds to be spent on non-energy items. Because of this, a rise in energy prices acts like a reduction in income for other goods and it is deflationary for them as a whole. The household budget to buy non-oil items goes down and that puts downward pressure on non-oil item prices. Over time, energy prices themselves may cause some non-energy prices to rise since merchants must cover all their costs. But in the short run, there are very different energy/non-energy economic forces playing out.

Under such conditions, keeping a hard-headed target on headline inflation might not be the best thing to do since oil prices will likely cause headline inflation to balloon initially as the economic system digests the higher prices and eventually deals with them. With the higher oil price persisting the after the fact of a price hike the CPI index likely to be (forever) higher as well but after the impact of higher oil prices work into the headline and through the system the pace of inflation is unaffected if the central bank has not accommodated it. It is only during the period when the relative price of oil is still rising that even headline inflation is affected. So a policy that targets headline inflation strictly in the short run might raise rates during an oil price hike episode only to have to cut them later. The process of raising oil prices by itself puts some stress on an economy by forcing consumers to change their spending habits to deal with the higher relative prices of oil. It is not a good idea to raise rates during such a period and put the economy under even more stress unless that is absolutely necessary. But it is important to send a message that monetary policy is not going to accommodate the oil price rise. If consumers are not inculcated to the belief that the central bank will hold the line and will be containing inflation, they may act differently and promote the spread of inflation. This is a question both of how the central bank acts and how it is perceived; what its credibility is.

Euro area countries had adopted different ways of dealing with theses tensions prior to the formation of the currency union. Southern European countries were less concerned about the price level and price ‘stability.’ They were more likely to let higher inflation play out to deal with a hike in the relative price of oil. On topical correlations back to 1998, the highest positive correlations between core HICP inflation and Brent oil price increases are (in order from highest to lowest) Spain, Italy, Portugal, France, and Greece. Negative correlations (inversely ordered) are from Belgium, the Netherlands, Germany, Finland, and Austria. Old habits die hard. Even though the Southern European economies are in the EMU and face the same monetary conditions as the hard currency countries, the reactions to energy prices have been different and remain to some extent different among members in the same currency union. And this stems from the legacy of when Southern European nations used to let rising oil prices boost inflation and then allowed their currencies to drop to restore competiveness. The countries of Northern and Western Europe generally did not do that.

Behaviors remain ingrained in the EMU and continue to affect the way that economies operate. Still, inflation in the EMU has stayed below target and now a greater proportion of members are conforming to the region’s target on their own. For the early years of the EMU, the ECB hitting its target was mostly because Germany ran a very low inflation rate and had a large weight while smaller economies often ran higher inflation but that did not contribute much to overall inflation in the EMU where economic data are size-weighted. However, that sort of price and inflation divergence in the EMU tended to exacerbate competitiveness issues. Prior to the Great Recession, the standard deviation of inflation across EMU members was greater than 1%; since 2015, it has averaged 0.6%.

Has German medicine been a cure-all or snake oil? 
Still, the hard currency countries of the EMU have longer traditions of keeping a lid on inflation and have the discipline to do it that is reflected in consumer behavior. Countries in Southern Europe still are learning this lesson. German medicine did a lot to pull into line Greece, Spain, Portugal, and Italy. However, in Italy, there has been a great cost of lost growth. Real GDP in Italy is still below its precession level of about one decade ago and Italians do not view austerity as having ‘worked’ for that reason. And for that reason, they now are unwilling to continue with it and instead seek budget flexibility to restart growth – flexibility that is prohibited under EU Commission rules under the Maastricht criteria. So Europe may yet come to blows over that.

While inflation in Germany is tempered, oil prices as always make waves. Some countries ride the waves better than others. Oil prices themselves do not cause a stability threat in the EMU and for now neither does inflation. But the after effects of the inflation medication have been debilitating in Italy and we will have to see where that realization takes us.

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The German PPI rose by a strong 0.6% in September, but the PPI excluding energy gained just 0.1%. The sequential inflation forces over shorter horizons show more pressure for headline PPI and CPI measures while the ex-energy measures [...]

German PPI Makes Sharp Gain on Rising Energy Costs

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The Federal Reserve Bank of Philadelphia reported that its
Nonmanufacturing Business Index of current conditions at the company level
declined to 37.2 during October and reversed its September improvement. Despite
the fall in the overall index, a higher 53 percent of respondents reported an
improvement in current activity while a greatly increased 16% reported a decline.

The expectations index for October declined to 43.9 and was
at the bottom of the range in place since early last year. Fifty-nine percent of
respondents reported improved expectations while 15 percent indicated a decline.

The components of the overall index all deteriorated. The new
orders series plummeted to the lowest level in over three years and the unfilled
orders series also fell markedly. The inventory index similarly
more-than-reversed its recent strength. Moving down just slightly was the sales
or revenue index, but it remained improved sharply versus twelve months earlier.

On the labor front, the number of full-time permanent
employees index deteriorated sharply after reaching a record high in September.
A greatly lessened twenty-six percent of companies added jobs while a moderately
higher nine percent indicated reduction. The index of part-time/temporary
employment fell moderately m/m, but remained in the upward trend in place during
the last year. The average workweek reading continued to trend sideways as it
was little changed m/m. The index of wage &amp; benefit costs weakened sharply
to the lowest level in six months.

The index of prices paid plummeted to the lowest level since
June of last year. A greatly lessened 18% of respondents paid higher prices
while a slightly higher three percent paid less. The prices received index also
weakened m/m, but remained in its recent upward trend.

The index for capital spending on equipment &amp; software
stabilized after deteriorating sharply during the prior two months. The capital
expenditures for facilities index weakened greatly to the lowest level in two years.

The Philadelphia Fed figures are diffusion indexes which are
calculated by subtracting the percent of respondents reporting poorer business
conditions from those reporting improvement. So, readings above zero indicate
more positive than negative responses. These indexes have a good correlation
with growth in the series covered. The data are available in Haver's SURVEYS database.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >Federal Reserve Bank of
 Philadelphia: Nonmanufacturing Business Outlook Survey (Diffusion Index,
 SA)</th>
 <th scope="col" >Oct</th>
 <th scope="col" >Sep</th>
 <th scope="col" >Aug</th>
 <th scope="col" >Oct'17</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >General Activity - Company</td>
 <td >37.2</td>
 <td >46.8</td>
 <td >41.1</td>
 <td >25.0</td>
 <td >27.3</td>
 <td >19.7</td>
 <td >31.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; New Orders</td>
 <td >7.8</td>
 <td >26.7</td>
 <td >29.0</td>
 <td >23.6</td>
 <td >12.5</td>
 <td >15.7</td>
 <td >21.8</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Sales or Revenue</td>
 <td >41.3</td>
 <td >42.8</td>
 <td >40.5</td>
 <td >27.4</td>
 <td >27.9</td>
 <td >16.2</td>
 <td >23.8</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Inventories</td>
 <td >-1.5</td>
 <td >13.9</td>
 <td >9.5</td>
 <td >1.3</td>
 <td >3.8</td>
 <td >4.4</td>
 <td >5.2</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Number of Full-Time Permanent
 Employees</td>
 <td >16.6</td>
 <td >36.7</td>
 <td >32.2</td>
 <td >15.6</td>
 <td >14.8</td>
 <td >11.7</td>
 <td >15.6</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Prices Paid</td>
 <td >15.0</td>
 <td >26.3</td>
 <td >27.4</td>
 <td >17.5</td>
 <td >21.4</td>
 <td >17.5</td>
 <td >19.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Wage &amp; Benefit Costs</td>
 <td >41.9</td>
 <td >48.1</td>
 <td >46.4</td>
 <td >38.3</td>
 <td >33.4</td>
 <td >31.2</td>
 <td >32.5</td>
 </tr>
 <tr>
 <td class="firstcol" >Expected General Activity - Company</td>
 <td >43.9</td>
 <td >53.6</td>
 <td >50.7</td>
 <td >41.7</td>
 <td >49.9</td>
 <td >43.0</td>
 <td >53.8</td>
 </tr>
 </tbody>
 </table>
 
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The Federal Reserve Bank of Philadelphia reported that its Nonmanufacturing Business Index of current conditions at the company level declined to 37.2 during October and reversed its September improvement. Despite the fall in the [...]

Philadelphia Fed Nonmanufacturing Business Activity Weakens

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Gasoline prices fell four cents last week to an average
$2.84 per gallon (+14.6% y/y). Prices have been fairly steady since May. Haver Analytics constructs factors to adjust for
the marked seasonal variation in prices. The seasonally-adjusted gasoline price
also was $2.84 per gallon.

West Texas Intermediate crude oil prices slipped to
$70.26 per barrel last week (+35.8% y/y) from $72.95 during the prior week. Yesterday, the
price weakened to $69.17. Brent crude oil prices declined to $80.41 per barrel
(+39.2% y/y) last week from $83.05. The price was $80.45 yesterday.

Natural gas prices backpedaled to $3.26/mmbtu (+15.3%
y/y) last week. Prices remained up from the low of $2.52 in February. The price
was $3.20 yesterday.

During the latest four weeks, gasoline demand fell
2.8% y/y; total petroleum product demand rose 0.4% y/y. Gasoline
inventories strengthened 5.3% y/y, but inventories of all petroleum products
declined 1.8% y/y. Crude oil input
to refineries rose a lessened 2.8% y/y in the last four weeks.

These data are reported by the U.S. Department of Energy. The
price data can be found in Haver's WEEKLY and DAILY databases.
Greater detail on prices, as well as the demand, production and inventory data,
along with regional breakdowns, are in OILWKLY.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >Weekly Energy Prices</th>
 <th scope="col" >10/22/18</th>
 <th scope="col" >10/15/18</th>
 <th scope="col" >10/08/18</th>
 <th scope="col" >Y/Y %</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd">
 <td class="firstcol" >Retail Gasoline ($ per Gallon Regular,
 Monday Price)</td>
 <td >2.84</td>
 <td >2.88</td>
 <td >2.90</td>
 <td >14.6</td>
 <td >2.47</td>
 <td >2.31</td>
 <td >2.03</td>
 </tr>
 <tr>
 <td class="firstcol" >Light Sweet Crude Oil, WTI ($ per bbl,
 Previous Week's Average)</td>
 <td >70.26</td>
 <td >72.95</td>
 <td >75.11</td>
 <td >35.8</td>
 <td >50.87</td>
 <td >43.22</td>
 <td >48.90</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Natural Gas ($/mmbtu, LA, Previous
 Week's Average)</td>
 <td >3.26</td>
 <td >3.30</td>
 <td >3.23</td>
 <td >15.3</td>
 <td >2.96</td>
 <td >2.49</td>
 <td >2.62</td>
 </tr>
	 </tbody>
	 </table>
	 
	</body></html>

Gasoline prices fell four cents last week to an average $2.84 per gallon (+14.6% y/y). Prices have been fairly steady since May. Haver Analytics constructs factors to adjust for the marked seasonal variation in prices. The seasonally- [...]

U.S. Energy Prices Ease

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Gasoline prices fell four cents last week to an
average $2.84 per gallon (+14.6% y/y). Prices have been fairly steady since May.
Haver Analytics constructs factors to adjust for the marked seasonal variation
in prices. The seasonally-adjusted gasoline price also was $2.84 per gallon.
West Texas Intermediate crude oil prices slipped to
$70.26 per barrel last week (+35.8% y/y) from $72.95 during the prior week.
Yesterday, the price weakened to $69.17. Brent crude oil prices declined to
$80.41 per barrel (+39.2% y/y) last week from $83.05. The price was $80.45
yesterday.
Natural gas prices backpedaled to $3.26/mmbtu (+15.3%
y/y) last week. Prices remained up from the low of $2.52 in February. The price
was $3.20 yesterday.
During the latest four weeks, gasoline demand fell
2.8% y/y; total petroleum product demand rose 0.4% y/y. Gasoline
inventories strengthened 5.3% y/y, but inventories of all petroleum products
declined 1.8% y/y. Crude oil input
to refineries rose a lessened 2.8% y/y in the last four weeks.
These data are reported by the U.S. Department of Energy. The
price data can be found in Haver's WEEKLY and DAILY databases.
Greater detail on prices, as well as the demand, production and inventory data,
along with regional breakdowns, are in OILWKLY.
<table width="1871" class="centered" border="0" cellSpacing="0">
 <thead>
 <tr>
 <th class="firstcol" scope="col" width="1028">Weekly Energy Prices</th>
 <th scope="col" width="119">10/22/18</th>
 <th scope="col" width="120">10/15/18</th>
 <th scope="col" width="120">10/08/18</th>
 <th scope="col" width="120">Y/Y %</th>
 <th scope="col" width="120">2017</th>
 <th scope="col" width="120">2016</th>
 <th scope="col" width="120">2015</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd">
 <td class="firstcol" width="1028">Retail Gasoline ($ per Gallon Regular,
 Monday Price)</td>
 <td align="center" width="119">2.84</td>
 <td align="center" width="120">2.88</td>
 <td align="center" width="120">2.90</td>
 <td align="center" width="120">14.6</td>
 <td align="center" width="120">2.47</td>
 <td align="center" width="120">2.31</td>
 <td align="center" width="120">2.03</td>
 </tr>
 <tr>
 <td class="firstcol" width="1028">Light Sweet Crude Oil, WTI ($ per bbl,
 Previous Week's Average)</td>
 <td align="center" width="119">70.26</td>
 <td align="center" width="120">72.95</td>
 <td align="center" width="120">75.11</td>
 <td align="center" width="120">35.8</td>
 <td align="center" width="120">50.87</td>
 <td align="center" width="120">43.22</td>
 <td align="center" width="120">48.90</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="1028">Natural Gas ($/mmbtu, LA, Previous
 Week's Average)</td>
 <td align="center" width="119">3.26</td>
 <td align="center" width="120">3.30</td>
 <td align="center" width="120">3.23</td>
 <td align="center" width="120">15.3</td>
 <td align="center" width="120">2.96</td>
 <td align="center" width="120">2.49</td>
 <td align="center" width="120">2.62</td>
 </tr>
 </tbody>
</table>
&nbsp;Philadelphia Fed Nonmanufacturing
Business Activity Weakens 
by <a href="http://www.haver.com/comment/Moeller.html">Tom
Moeller</a>&nbsp;&nbsp;October 23, 2018
The Federal Reserve Bank of Philadelphia reported that its
Nonmanufacturing Business Index of current conditions at the company level
declined to 37.2 during October and reversed its September improvement. Despite
the fall in the overall index, a higher 53 percent of respondents reported an
improvement in current activity while a greatly increased 16% reported a
decline.
The expectations index for October declined to 43.9 and was
at the bottom of the range in place since early last year. Fifty-nine percent of
respondents reported improved expectations while 15 percent indicated a decline.
The components of the overall index all deteriorated. The new
orders series plummeted to the lowest level in over three years and the unfilled
orders series also fell markedly. The inventory index similarly
more-than-reversed its recent strength. Moving down just slightly was the sales
or revenue index, but it remained improved sharply versus twelve months earlier.
On the labor front, the number of full-time permanent
employees index deteriorated sharply after reaching a record high in September.
A greatly lessened twenty-six percent of companies added jobs while a moderately
higher nine percent indicated reduction. The index of part-time/temporary
employment fell moderately m/m, but remained in the upward trend in place during
the last year. The average workweek reading continued to trend sideways as it
was little changed m/m. The index of wage &amp; benefit costs weakened sharply
to the lowest level in six months.
The index of prices paid plummeted to the lowest level since
June of last year. A greatly lessened 18% of respondents paid higher prices
while a slightly higher three percent paid less. The prices received index also
weakened m/m, but remained in its recent upward trend.
The index for capital spending on equipment &amp; software
stabilized after deteriorating sharply during the prior two months. The capital
expenditures for facilities index weakened greatly to the lowest level in two
years.
The Philadelphia Fed figures are diffusion indexes which are
calculated by subtracting the percent of respondents reporting poorer business
conditions from those reporting improvement. So, readings above zero indicate
more positive than negative responses. These indexes have a good correlation
with growth in the series covered. The data are available in Haver's SURVEYS
database.
<table width="1871" class="centered" border="0" cellSpacing="0">
 <thead>
 <tr>
 <th class="firstcol" scope="col" width="1384">Federal Reserve Bank of
 Philadelphia: Nonmanufacturing Business Outlook Survey (Diffusion Index,
 SA)</th>
 <th scope="col" width="69">Oct</th>
 <th scope="col" width="69">Sep</th>
 <th scope="col" width="69">Aug</th>
 <th scope="col" width="69">Oct'17</th>
 <th scope="col" width="69">2017</th>
 <th scope="col" width="69">2016</th>
 <th scope="col" width="69">2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" width="1384">General Activity - Company</td>
 <td align="center" width="69">37.2</td>
 <td align="center" width="69">46.8</td>
 <td align="center" width="69">41.1</td>
 <td align="center" width="69">25.0</td>
 <td align="center" width="69">27.3</td>
 <td align="center" width="69">19.7</td>
 <td align="center" width="69">31.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="1384">&nbsp; New Orders</td>
 <td align="center" width="69">7.8</td>
 <td align="center" width="69">26.7</td>
 <td align="center" width="69">29.0</td>
 <td align="center" width="69">23.6</td>
 <td align="center" width="69">12.5</td>
 <td align="center" width="69">15.7</td>
 <td align="center" width="69">21.8</td>
 </tr>
 <tr>
 <td class="firstcol" width="1384">&nbsp; Sales or Revenue</td>
 <td align="center" width="69">41.3</td>
 <td align="center" width="69">42.8</td>
 <td align="center" width="69">40.5</td>
 <td align="center" width="69">27.4</td>
 <td align="center" width="69">27.9</td>
 <td align="center" width="69">16.2</td>
 <td align="center" width="69">23.8</td>
 </tr>
 <tr>
 <td class="firstcol" width="1384">&nbsp; Inventories</td>
 <td align="center" width="69">-1.5</td>
 <td align="center" width="69">13.9</td>
 <td align="center" width="69">9.5</td>
 <td align="center" width="69">1.3</td>
 <td align="center" width="69">3.8</td>
 <td align="center" width="69">4.4</td>
 <td align="center" width="69">5.2</td>
 </tr>
 <tr>
 <td class="firstcol" width="1384">&nbsp; Number of Full-Time Permanent
 Employees</td>
 <td align="center" width="69">16.6</td>
 <td align="center" width="69">36.7</td>
 <td align="center" width="69">32.2</td>
 <td align="center" width="69">15.6</td>
 <td align="center" width="69">14.8</td>
 <td align="center" width="69">11.7</td>
 <td align="center" width="69">15.6</td>
 </tr>
 <tr>
 <td class="firstcol" width="1384">&nbsp; Prices Paid</td>
 <td align="center" width="69">15.0</td>
 <td align="center" width="69">26.3</td>
 <td align="center" width="69">27.4</td>
 <td align="center" width="69">17.5</td>
 <td align="center" width="69">21.4</td>
 <td align="center" width="69">17.5</td>
 <td align="center" width="69">19.3</td>
 </tr>
 <tr>
 <td class="firstcol" width="1384">&nbsp; Wage &amp; Benefit Costs</td>
 <td align="center" width="69">41.9</td>
 <td align="center" width="69">48.1</td>
 <td align="center" width="69">46.4</td>
 <td align="center" width="69">38.3</td>
 <td align="center" width="69">33.4</td>
 <td align="center" width="69">31.2</td>
 <td align="center" width="69">32.5</td>
 </tr>
 <tr>
 <td class="firstcol" width="1384">Expected General Activity - Company</td>
 <td align="center" width="69">43.9</td>
 <td align="center" width="69">53.6</td>
 <td align="center" width="69">50.7</td>
 <td align="center" width="69">41.7</td>
 <td align="center" width="69">49.9</td>
 <td align="center" width="69">43.0</td>
 <td align="center" width="69">53.8</td>
 </tr>
 </tbody>
</table>





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Japan's economy continues to fight for revival. In August, the METI all-sector index has revived, rising to 105.7 from 105.2, but it had fallen in June and July and is still below its May level of 106.4. The index is up on its reading of 105.1 of 12-months ago but that is a small gain for 12 months, less than one tick per month, amounting to net gain of 0.6% over 12 months.

The story of Japan's economic recovery still seems to be a story of two steps forward and one and one-half steps backward as progress is very difficult to come by and then just as hard to sustain. Inflation continues to be below target and the Bank of Japan has gone to extraordinary lengths to try to get it back on track.

Internationally, Japan's largest trade partner, China, is dealing with a trade war with the United States that has coincided with slower growth in China and with market setbacks. Meanwhile, Japan has its own trade issues to hammer out with the U.S.

And Japan's own economy is not performing all that well on its own. I rank the METI indexes' performance on their year-over-year growth over a period back to 2008. Against this benchmark, the overall METI activity index has a 36th percentile rank; historic growth rates rank it higher 64% of the time. The current growth is at the border of the bottom one-third of all historic growth rates since 2008. Construction is even weaker with a 13th percentile standing. Industry has a weak and still below median 41st percentile standing. The services sector has a 63rd percentile standing, above its median (at the 50th percentile on this metric) but still a reading that lies outside the top one-third of results historically. Japan is still struggling to get and to stay mediocre.

In the consolidated table, we offer a look at several different sorts of surveys. The economy watchers index has a muted 50th percentile standing for August when it moved nicely higher to 48.7 from July's 46.6. Still, its employment gauge has a weak 12.9 percentile standing. But the future gauge is more optimistic with a 71st percentile standing.

The Markit manufacturing service gauge that ranks value over the past 4.5 years shows rankings in the 64th and 60th percentiles respectively for manufacturing and services. These are rankings just out of the top third of their respective historic ranges.

The Teikoku sector indexes are much more upbeat if they are ranked as diffusion indexes based on their levels. On that basis, they emerge quite strong almost in line with the high-low percentile statistics in the table. But if we rank them based on their annual changes or growth rates, they are only slightly more upbeat than the METI indexes. Based on their rankings by annual growth rates, the Teikoku indexes show a manufacturing ranking in its 44th percentile and various service sector standings ranging from the 26th to 43rd percentiles. Construction in this framework has a 30th percentile rank standing which is better than in the METI framework but still quite weak.

Japan's LEI rose in August to 104.4 from July's 103.9, but like the METI indexes, the LEI still sits below its May level. The LEI growth rank is at the border of the bottom one-third of its historic rank of values.

Japan's orders series has a relatively upbeat showing for the trimmed ‘core orders' measure that excludes volatile and lumpy items; that has an 88th percentile standing. But the overall order gauge has a much more modest 52nd percentile standing. Accordingly, foreign demand is evaluated as the weakest with foreign orders having a 39th percentile standing and with domestic orders at an elevated 80th percentile standing.

Japan's growth has always been importantly plugged into the global economy. But it is also driven by its domestic economy and on all fronts Japan is struggling. The weak construction sector speaks to weakness at home. Services have a higher historic rank, but that part of the economy is usually a slow growing more dependable backbone rather than a growth leader. When the services sector is the growth leader, the economy has fallen on hard times for sure. Japan's industrial sector is struggling with a good deal of headwind coming from the foreign sector as the orders data remind us. But clearly, the very structure of Japan's trade makes it clear that will be the case in this sort of a global environment.

Inflation remains contained everywhere globally so it is not a good idea to be too hard in any assessment of the BOJ. Japan has demographic issues as its population shrinks in addition to a global environment unfriendly to restarting inflation. Encroaching global weakness and extreme competiveness, at the same time that technology is making life difficult for labor to get paid all stand in the way of an inflation restart. Japan is growing, but it is not prospering and inflation is not making progress to its policy objective. In that sense, Japan can only claim mediocre economic performance at best.

With a debt-to-GDP ratio that already is massive and BOJ policy already at full-stop stimulus, it is unclear what if any levers policymakers have left to pull except those that might slow growth. And that does not seem to be in order. Globally, growth is disappointing as well with the possible and past exception of the U.S. But looking ahead, it is unclear that the U.S. can keep up its progress as it is getting more distant from its fiscal stimulus and Fed rate hiking has gone on for long enough that the Fed may be too distracted by where it wants to go to have kept tabs on where it's been and what that offers for the future since monetary policy works with lags and U.S. has been hiking rates since end-2015. Add in the welter of geopolitical risks that have emerged and the risk to global growth seems to be cumulating at a rapid pace. The view from the U.S. is from a very special, and perhaps biased, vantage point. A survey of prospects from most any other global venue is much more circumspect, Japan included.


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Japan's economy continues to fight for revival. In August, the METI all-sector index has revived, rising to 105.7 from 105.2, but it had fallen in June and July and is still below its May level of 106.4. The index is up on its reading [...]

Japan's METI Sector Indexes Rebound But Still Lag

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 <a href="/comment/181022b.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/181022b.png"></a>

The Industrial Materials Price Index from the Foundation for
International Business and Economic Research (FIBER) declined 1.3% during the
last four weeks and extended the decline in prices since the peak four months
ago. The decline left the index down 4.1% during the last year. During the last
ten years, there has been a 66% correlation between the y/y change in industrial
commodity prices and the y/y change in factory sector production.

Recent weakness in commodity prices was led by a 7.6% m/m decline
in prices&nbsp; (-13.2% y/y) in the miscellaneous group. Leading the downdraft
were framing lumber prices which fell 15.4% m/m.
Prices for structural panels declined 10.1% m/m and 20.3% y/y. Natural rubber
prices, however, reversed earlier declines with a 2.2% four-week rise (-0.3% y/y).
Prices in the textile group dipped again with a 0.3% four-week decline (+1.2%
y/y) paced by a 1.9% drop in cotton prices (+13.2% y/y). Burlap prices (used for
rope &amp; nets) were little changed (-2.4% y/y).

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Metals prices worked 4.4% higher during the last four weeks (-6.5% y/y).
The gain was led by zinc prices which increased 12.8% m/m, but fell 18.5% y/y. Steel scrap prices rose 8.1%
m/m and by roughly one quarter y/y. Copper scrap prices increased 4.3% m/m but
fell 10.4% y/y. The cost of aluminum rose 1.1% m/m although it declined 4.8%
y/y. Lead prices improved 0.4% m/m (-18.9% y/y). Also increasing were prices in the crude
oil &amp; benzene group by 0.7% m/m and 13.4% y/y. Crude oil
prices gained 1.0% during the last four weeks and roughly one-third y/y to an
average $70.73 per barrel, the highest price since November 2014. Accompanying
the rise in crude oil prices were benzene costs which gained 1.5% m/m (4.5% y/y).

Improvement in prices overall may be coming. The consensus
forecast from the National Association for Business Economics (NABE) calls for a
3.8% rise in industrial output during all of 2018 and 2.8% growth in 2019.
During the last ten years, there has been a 66% correlation between the y/y
change in industrial commodity prices and the y/y change in factory sector
output. In addition, factory sector production in the European Union and Japan
continues to improve.

Commodity price data can be found in Haver's DAILY,
WEEKLY, USECON and CMDTY databases. The NABE forecast is in the SURVEYS database.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <tbody>
 <tr>
 <th class="firstcol" scope="col" >FIBER Industrial Materials
 Price Index (%)</th>
 <th scope="col" >1-Mth</th>
 <th scope="col" >3-Mth</th>
 <th scope="col" >6-Mth</th>
 <th scope="col" >12-Mth</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </tbody>
 <tbody>
 <tr>
 <td class="firstcol" >All Items</td>
 <td >-1.3</td>
 <td >-5.4</td>
 <td >-8.3</td>
 <td >-4.1</td>
 <td >6.7</td>
 <td >19.2</td>
 <td >-16.3</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" >&nbsp;Textiles</td>
 <td >-0.3</td>
 <td >-2.0</td>
 <td >-1.4</td>
 <td >1.2</td>
 <td >3.0</td>
 <td >2.8</td>
 <td >2.2</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Cotton (cents per pound)</td>
 <td >-1.9</td>
 <td >-12.3</td>
 <td >-5.7</td>
 <td >13.2</td>
 <td >9.8</td>
 <td >10.2</td>
 <td >2.6</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" >&nbsp;Metals</td>
 <td >4.4</td>
 <td >-1.3</td>
 <td >-11.9</td>
 <td >-6.5</td>
 <td >18.6</td>
 <td >32.9</td>
 <td >-27.8</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Aluminum ($ per metric ton)</td>
 <td >1.1</td>
 <td >-3.0</td>
 <td >-17.0</td>
 <td >-4.8</td>
 <td >26.0</td>
 <td >13.0</td>
 <td >-19.2</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Copper Scrap (cents per
 pound)</td>
 <td >4.3</td>
 <td >2.3</td>
 <td >-9.0</td>
 <td >-10.4</td>
 <td >29.3</td>
 <td >17.3</td>
 <td >-27.0</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Steel Scrap ($ per ton)</td>
 <td >8.1</td>
 <td >-4.2</td>
 <td >-17.3</td>
 <td >26.7</td>
 <td >16.8</td>
 <td >74.5</td>
 <td >-53.8</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" >&nbsp;Crude Oil &amp; Benzene</td>
 <td >0.7</td>
 <td >1.0</td>
 <td >1.0</td>
 <td >13.4</td>
 <td >8.1</td>
 <td >20.4</td>
 <td >-19.4</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Crude Oil (WTI, $ per Barrel)</td>
 <td >1.0</td>
 <td >2.6</td>
 <td >4.7</td>
 <td >36.6</td>
 <td >10.9</td>
 <td >44.3</td>
 <td >-35.8</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" >&nbsp;Miscellaneous</td>
 <td >-7.6</td>
 <td >-13.9</td>
 <td >-14.3</td>
 <td >-13.2</td>
 <td >-0.5</td>
 <td >21.7</td>
 <td >-18.0</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Framing Lumber ($ per 1000
 board ft.)</td>
 <td >-15.4</td>
 <td >-29.9</td>
 <td >-24.5</td>
 <td >15.2</td>
 <td >20.0</td>
 <td >12.9</td>
 <td >-16.4</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Natural Rubber (cents per
 pound)</td>
 <td >2.2</td>
 <td >3.0</td>
 <td >-4.9</td>
 <td >-0.3</td>
 <td >-29.6</td>
 <td >89.4</td>
 <td >-22.5</td>
 </tr>
 </tbody>
 </table>
 
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The Industrial Materials Price Index from the Foundation for International Business and Economic Research (FIBER) declined 1.3% during the last four weeks and extended the decline in prices since the peak four months ago. The decline [...]

FIBER: Industrial Commodity Prices Fall Further

Sandy Batten

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The National Association of Realtors reported that sales of
existing homes during September declined 3.4% to 5.150 million (SAAR, -4.1%).




The data on existing home sales, prices and affordability are
compiled by the National Association of Realtors and can be found in Haver's USECON
database. The regional price, affordability and inventory data are available in
the REALTOR database. The expectations figure is from the Action
Economics Forecast Survey, reported in the AS1REPNA database.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >Existing Home Sales (SAAR,
 000s)</th>
 <th scope="col" >Oct</th>
 <th scope="col" >Sep</th>
 <th scope="col" >Aug</th>
 <th scope="col" >Y/Y %</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Total</td>
 <td >5,150</td>
 <td >5,330</td>
 <td >5,340</td>
 <td >-4.1</td>
 <td >5,536</td>
 <td >5,441</td>
 <td >5,228</td>
 </tr>
 <tr class="even">
 <td class="firstcol" >&nbsp;&nbsp; Northeast</td>
 <td >680</td>
 <td >700</td>
 <td >660</td>
 <td >-5.6</td>
 <td >737</td>
 <td >735</td>
 <td >684</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp; Midwest</td>
 <td >1,280</td>
 <td >1,280</td>
 <td >1,250</td>
 <td >-1.5</td>
 <td >1,304</td>
 <td >1,298</td>
 <td >1,231</td>
 </tr>
 <tr class="even">
 <td class="firstcol" >&nbsp;&nbsp; South</td>
 <td >2,110</td>
 <td >2,230</td>
 <td >2,240</td>
 <td >-0.5</td>
 <td >2,270</td>
 <td >2,217</td>
 <td >2,147</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp; West</td>
 <td >1,080</td>
 <td >1,120</td>
 <td >1,190</td>
 <td >-12.2</td>
 <td >1,225</td>
 <td >1,192</td>
 <td >1,167</td>
 </tr>
 <tr class="even">
 <td class="firstcol" >Single-Family</td>
 <td >4,580</td>
 <td >4,740</td>
 <td >4,750</td>
 <td >-4.0</td>
 <td >4,910</td>
 <td >4,825</td>
 <td >4,623</td>
 </tr>
 <tr>
 <td class="firstcol" >Median Price Total ($, NSA)</td>
 <td >258,100</td>
 <td >265,600</td>
 <td >269,300</td>
 <td >4.2</td>
 <td >245,950</td>
 <td >232,067</td>
 <td >219,867</td>
 </tr>
 </tbody>
 </table>
 
</body></html>

The National Association of Realtors reported that sales of existing homes during September declined 3.4% to 5.150 million (SAAR, -4.1%). The data on existing home sales, prices and affordability are compiled by the National [...]

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.

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**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.

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**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.

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**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.

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**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.

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**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.

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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.

Charts of the Week: Tariff Truce, Tenuous Trust

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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.

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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**.

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- 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

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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**.

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

Personal Income, Consumption, and Prices in March

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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.

U.S. Pending Home Sales Surge in March

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The employment cost index (ECI) for civilian workers, arguably the most accurate measure of labor compensation in the United States, rose 0.9% q/q (3.6% y/y) in Q1, the same quarterly increase as in last year’s Q4, according to the Bureau of Labor Statistics. The quarterly gains have fluctuated between 0.8% and 1.0% for the past six quarters. The Action Economics Forecast Survey had expected a 0.9% q/q increase and a 3.5% y/y gain.

Wages and salaries for civilian workers rose 0.8% q/q (3.5% y/y) in Q1, down from 1.0% q/q in Q4. This tied the Q3 2024 quarterly rise as the smallest increase since Q2 2021. It was also the smallest y/y increase since Q2 2021. Benefits increased by an outsized 1.2% q/q (3.9% y/y) in Q1 versus 0.8% q/q in Q4. This is the largest quarterly gain since Q2 2022. In general, employment cost gains remain above the pace observed prior to the pandemic but are slowing gradually.

Private industry workers’ compensation rose 0.8% q/q (3.4% y/y) in Q1, down from 0.9% q/q (3.6% y/y) in Q4. Wages and salaries for private industry workers increased 0.8% q/q (3.4% y/y) in Q1 versus 0.8% q/q (3.7% y/y) in Q4. The quarterly gain in Q1 tied that in Q3 2024 as the smallest increase since Q4 2020. Benefits for private industry workers jumped 1.2% q/q (3.6% y/y). the largest quarterly gain since Q2 2022. The acceleration in benefits in Q1 was primarily in service-producing industries.

Compensation in private goods-producing industries increased 1.0% q/q (3.2% y/y) in Q1, the largest quarterly gain in five quarters, versus a 0.7% q/q increase in Q4. Compensation in construction jumped 1.3% q/q, its largest quarterly increase since Q2 2022, up from a 0.6% q/q gain in Q4. Manufacturing compensation growth slowed to 0.7% q/q, its slowest quarterly advance since Q4 2020, from 0.8% q/q in Q4. Compensation in private service-producing industries increased 0.8% q/q (3.5% y/y), down slightly from a 0.9% q/q gain in Q4. Compensation in education and health services jumped 1.3% q/q, its largest quarterly gain since Q3 2023. In contrast, compensation in other services edged up 0.1% q/q in Q1, its smallest quarterly advance since before the pandemic.

The employment cost index measures the change in the cost of labor, free from the influence of employment shifts across occupations and industries. It is provided by the Bureau of Labor Statistics and is available in Haver’s **USECON** database. Consensus estimates from the Action Economics Forecast Survey are in Haver’s **AS1REPNA** database.

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- Compensation grew 0.9 q/q in Q1, the same pace as in Q4.
- Wage growth slowed to 0.8% q/q while benefits surged 1.2% q/q, their largest quarterly increase since Q2 2022.

Economy in Brief

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U.S. FHFA House Prices Remain Firm

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FIBER: Industrial Commodity Prices Fall Further

TT