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 [...]

Robert Brusca

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	 What Is a Central Bank to Do?
 
 
 
 

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Canada's retail sales show relatively widespread deceleration. The headline shows growth one year ago at 7.3%, down to 3.6% over the most recent 12 months, dropping further to a pace of 2.2% over six months, and contracting over three months at an annualized pace of -0.2%. That's not a good progression.

Not all categories show such monotonic slowing. But all show slowing from the 12-month pace of one year ago to the pace over the last 12 months and all show weaker (generally much weaker) growth over three months than over 12 months. The lone exception to this is supermarket sales that are accelerating from 12-months to six-months to three-months. Real sales show a steady sequential step down in rates of growth and log a growth rate over three months of -2.7%.

In the quarter-to-date, nominal retail sales log a growth rate of 3.3% that seems adequate on its own. But in real terms, retail sales are up at just a 0.4% pace in Q3.


<img border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/181019.png" width="660" height="200">


Against this background of slowing sales, we find Canada's inflation data somewhat less disturbing. Headline inflation is at 2.4% with a core expansion at 2% and the CPIx at a much more modest 1.5%. Both headline and core measures have fallen month-to-month in September, knocking down the stronger rates of growth each experienced in August. Canada's headline CPI pace slowed to 2.4% in September from 2.7% in August; the core slowed to 2% from 2.1%; and the CPIx decelerated to 1.5% from 1.7%.

Central bankers, policy limitations and inflation 
A major problem for all central bankers globally has been how to treat inflation in this period when growth has been weak and oil prices have been gyrating. With every oil gyration higher, there is some inflation impulse transmitted to the headline rate and central banks tend to favor that rate as the policy rate. The Bank of Canada has an alternative approach as it monitors three different inflation gauges in a broad 1% to 3% target range. In the U.S., the Federal Reserve has a sort of back of the envelope emphasis on core inflation so long as it deems the headline as distorted but there is no formal announcement on that and officially the U.S. targets the headline of the PCE deflator. In the EMU, the headline HICP is the basis for ECB policy, period! But ECB head Mario Draghi has made it clear that with oil prices as an issue and with the core pace vastly undershooting the headline pace, he will continue to be advised by performance of the core rate.

The Bank of Canada emphasizes three inflation measures: the CPI trim (2.1% in September), the CPI median (2.0% in September) and the CPI common (1.9% in September). The Bank maintains a target range of 1% to 3% with the objective of keeping inflation in the middle of this range. As central bank inflation targeting goes, this range is a much more pragmatic approach than the stringent and somewhat-strange ‘a bit less than 2%' objective of the ECB and the point targeting of 2% by the Fed. The Fed's single point target approach has necessitated all sorts of additional arm-waving when inflation has deviated from the 2.0000% mark (the zeros are for sarcasm, rather than for precision) since inflation will almost always deviate from any point target.


<img border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/181019 2.png" width="660" height="300">


Dealing with limitations 
As odd as this may seem economics really has no good measure for two of the most important events in economics: recession and inflation. There is no quantitative definition of recession. Journalists use the rule-of-thumb (often, laughably, called a ‘technical definition of recession) of two consecutive quarters of negative GDP growth to chronicle a recession. But if you look at charts with recession bands in the U.S., these bands are decided by the NBER's Business Cycle Dating Committee. Formally, the declaration of recessions in the U.S. is made by a judgmental human decision. The NBER tells us that a recession occurs in a period when economic activity has be disrupted deeply enough, broadly enough and for a long enough period to call it a recession. So recession determination has a framework but not an actual measure. In Canada, it is much the same; the C.D. Howe Institute's Business Cycle Council establishes the parameters for recession and recovery cycles.

As for inflation, my comment may see strange or just outright wrong. After all, am I not writing about inflation statistics? Indeed I am. But what do they mean? And if we ‘know' inflation so well, why are there so many measures being juggled by the Bank of Canada and why are the basic inflation measures massaged to exclude certain things? And aren't these measures- all measures- of what inflation HAS BEEN rather than WHAT IT IS? Answer: they are. And that is a big part of the problem.

Most economists agree that the most important measure of inflation is what is expected, but we never observe that and never measure it! We can infer it from certain securities prices and we can survey groups to ask them what they think. The central bank can in models estimate future inflation but all of this is stabbing in the dark. And we know central banks individually and as a whole have not forecasted well. Yet, the Fed's own inflation expectations guide policy and in the U.S., the Fed's certainty that inflation is rising back to path and its concern that it might rise too much is dominating policy. In Europe, Draghi's insistence on emphasizing the core undershoot is keeping ECB policy easy. In Japan, no measure of inflation is restarting making the policy choice obvious except for those who fear that rates have been too low for too long. And there are a lot of those concerns everywhere.

The best policy approach is... 
So what is the right thing to do? Economists, never lacking in confidence, would probably call for better modeling, better data and perhaps better more focused consumer/investor surveys. But in the end, we have flawed metrics, whatever we choose to do. If we choose to use surveys of expectations, we need to be alert to things that might change the opinions of those who we survey. If we use models, we need to pay attention to current conditions and ask if the model's forecasts remain on track every month. If we use various lagging inflation measures, we constantly need to reassess past trends and data that affect future trends. In short, whatever a policymaker chooses to do, he or she must remain flexible. Past trends may not be the future trends and our view of future trends held today may prove to have been wrong when the future comes. Are we really prepared to change our forecast in a timely way when its underpinnings shift? These are the main reasons that the policy of forward guidance is so peculiar. Forward guidance is only as good as each central bank's last policy mistake and for most that makes the value of forward guidance pretty low. Still, what is useful about forward guidance is having a more specific of idea of what the central bank thinks will happen so that when something different happens the investor knows to brace for a policy change. Forward guidance is not meant to be swallowed whole without any chewing.

BOC policy framework 
In Canada, policy is more centered on its three main measures of backward-looking inflation: the CPI trim, CPI median, and CPI common. The median rate is the rate of the CPI component that has many components above it as below it. The trim rate takes out the most volatile elements (20% of the most volatile weighed elements), while the CPI common uses a model to identify common price changes across components and to eliminate movements that seem to be intrinsic to particular component. All of these approaches have pluses and minuses. The measures do not always tell the same story. But neither is the story that each tells usually very different.

With three inflation gauges and a broad band, the Bank of Canada has latitude to impose judgement and to communicate to markets what it thinks is going on with inflation given the various metrics it puts forth (in addition to the headline, the core and the CPIx). The primary gauges all show a rise in inflation in 2018, but most of them simply cluster around the fabled 2% pace <a href="https://www.bankofcanada.ca/rates/indicators/key-variables/key-inflation-indicators-and-the-target-range/">(here)</a>. Coupled with weakness in retail sales and global slowing conditions, that suggests that the Bank of Canada should bide its time. However, like in the U.S., Europe and Japan, many are concerned that Canada has left rates too low for too long. So Canada's policy choice remains in limbo with a meeting coming up the end of the month. With it emphasize getting rates back toward ‘normal' as the Fed has done or will it give more weight to changing and weakening conditions at home and abroad? After all, the Bank of Canada, more than most, has wide latitude for judgement.

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Canada's retail sales show relatively widespread deceleration. The headline shows growth one year ago at 7.3%, down to 3.6% over the most recent 12 months, dropping further to a pace of 2.2% over six months, and contracting over three [...]

Canadian Retail Sales Weaken As Inflation Slows

Tom Moeller

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The housing market softened last month. The National Association of Realtors reported that sales of
existing homes during September declined 3.4% to 5.150 million (SAAR, -4.1%).
August's figure was revised slightly lower to 5.330 million. Sales have declined
for six consecutive months and were at the lowest level since November 2015, off
10.0% from the November 2017 peak. Expectations had been for 5.31 million
sales in the Action Economics Forecast Survey.

The median price of all existing homes sold declined 2.8%
last month (+4.2% y/y) to $258,100. Prices hit a record $273,800 in June.
The average sales price fell 2.4% (+2.5% y/y) to $296,800.

By region, home sales in the South declined 5.4% (-0.5% y/y)
to 2.110 million units, the lowest point since November 2015. Home sales in the
West fell 3.6% (-12.2% y/y) to 1.080 million, also equaling the 2015 low. Home sales in the
Northeast fell 2.9% (-5.6% y/y) to 680,000 units. Sales in the Midwest held
steady m/m (-1.5% y/y) at 1.280 million units.

Sales of existing single-family homes fell 3.4% last month
(-4.0% y/y) to 4.580 million units. Sales of co-ops &amp; condos declined 3.4%
(-5.0% y/y) to 570,000 units.

The number of homes on the market increased 1.1% y/y. The
supply of homes on the market was little changed at 4.4 months, up from the record
low of 3.2 months in December.

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" >Sep</th>
 <th scope="col" >Aug</th>
 <th scope="col" >Jul</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>
 
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The housing market softened last month. The National Association of Realtors reported that sales of existing homes during September declined 3.4% to 5.150 million (SAAR, -4.1%). August's figure was revised slightly lower to 5.330 [...]

U.S. Existing Home Sales Continue to Weaken, Dragging Down Prices

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 The Conference Board's Composite Index of Leading
 Economic Indicators increased 0.5% (7.0% y/y) during September following
 an unrevised 0.4% August gain. A 0.5% rise had been expected in the Action
 Economics Forecast Survey. The index is comprised of 10 components which
 tend to precede changes in the overall economy.

 Movement amongst the components of the index remained
 mixed last month. Improvement was paced by a rise in consumer expectations
 for business/economic conditions, a higher ISM new orders index, the
 leading credit index and a steeper interest rate spread between 10-Year
 Treasuries &amp; Fed funds. Initial claims for unemployment insurance, stock
 prices, orders for nondefense capital goods excluding aircraft, as well as
 orders for consumer goods &amp; materials also improved. The length of the
 average workweek for production workers and building permits had negative effects.

 Three-month growth in the leading index held steady at
 6.7% (AR), but remained below its 10.3% December 2017 peak.

 The Index of Coincident Economic Indicators increased a
 lessened 0.1% (2.4% y/y) in September. Each of the index components
 contributed positively, but minimally, to the index including changes in
 personal income less transfer payments, industrial production,
 nonagricultural payroll employment and manufacturing &amp; trade sales.

 Three-month growth in the coincident index of 1.9% (AR)
 remained improved from 1.6% growth early in the year, but below its 3.6%
 peak as of December.

 The Index of Lagging Economic Indicators eased 0.1%
 last month (+2.4% y/y) following an unrevised 0.2% August gain. The
 average prime rate charged by banks and the ratio consumer installment
 credit-to-income contributed positively to the index change. The average
 duration of unemployment, the change in unit labor costs, the change in
 commercial &amp; industrial loan outstanding and the change in the
 services CPI contributed negatively to the index change. The ratio of
 business inventories-to-sales had no effect on the index change.

 The three-month change in the lagging index fell to -0.4%,
 down from a high of 5.1% growth in February.

 The ratio of coincident-to-lagging indicators is often
 considered to be another leading indicator of economic activity. As
 economic slack diminishes relative to current performance, the ratio will
 rise. It improved slightly to 99.1 last month.

 The Conference Board figures are available in Haver's BCI
 database; the components are available there, and most are also in USECON.
 The expectations are in the AS1REPNA database. Visit the Conference
 Board's <a href="http://www.conference-board.org/">site</a> for coverage
 of leading indicator series from around the world.

 Modernizing Monetary Policy Rules from St. Louis
 Fed President &amp; CEO James Bullard is available <a href="https://www.stlouisfed.org/~/media/files/pdfs/bullard/remarks/2018/bullard_memphis_economic_club_18_october_2018.pdf?la=en">here</a>.

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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" >Business Cycle
 Indicators (%)</th>
 <th scope="col" >Sep</th>
 <th scope="col" >Aug</th>
 <th scope="col" >Jul</th>
 <th scope="col" >Sep 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" >Leading</td>
 <td >0.5</td>
 <td >0.4</td>
 <td >0.7</td>
 <td >7.0</td>
 <td >4.1</td>
 <td >1.2</td>
 <td >4.2</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Coincident</td>
 <td >0.1</td>
 <td >0.3</td>
 <td >0.1</td>
 <td >2.4</td>
 <td >1.8</td>
 <td >1.3</td>
 <td >2.2</td>
 </tr>
 <tr>
 <td class="firstcol" >Lagging</td>
 <td >-0.1</td>
 <td >0.2</td>
 <td >-0.2</td>
 <td >2.4</td>
 <td >2.6</td>
 <td >2.9</td>
 <td >3.7</td>
 </tr>
	 </tbody>
	 </table>
	 
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The Conference Board's Composite Index of Leading Economic Indicators increased 0.5% (7.0% y/y) during September following an unrevised 0.4% August gain. A 0.5% rise had been expected in the Action Economics Forecast Survey. The index [...]

U.S. Leading Economic Indicators Strengthen

Carol Stone, CBE

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Initial claims for unemployment insurance rose to 214,000 (-11.2% y/y) during the week ended October 6 from 207,000 in the prior week, which was unrevised. The Action Economics Forecast Survey had expected a smaller increase to 210,000. The four-week moving average of initial claims was 209,500, up from the prior week's 207,000.

In the week ending September 29, continuing claims for unemployment insurance rose 4,000 to 1.660 million....





Data on weekly unemployment insurance are contained in
Haver's WEEKLY database, and they are summarized monthly in USECON.
Data for individual states are in REGIONW. The expectations figure is from
the Action Economics Forecast Survey, carried 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" >Unemployment Insurance (SA, 000s)</th>
 <th>10/13/18</th>
 <th>10/06/18</th>
 <th>09/29/18</th>
 <th>Y/Y %</th>
 <th>2017</th>
 <th>2016</th>
 <th>2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Initial Claims</td>
 <td >214</td>
 <td >207</td>
 <td >215</td>
 <td >-11.2</td>
 <td >245</td>
 <td >262</td>
 <td >278</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Continuing Claims</td>
 <td >--</td>
 <td >1,660</td>
 <td >1,656</td>
 <td >-13.3</td>
 <td >1,961</td>
 <td >2,135</td>
 <td >2,266</td>
 </tr>
 <tr>
 <td class="firstcol" >Insured Unemployment Rate (%)</td>
 <td >--</td>
 <td >1.2</td>
 <td >1.2</td>
 <td >
 1.4 
 (Oct 2017)
 </td>
 <td >1.4</td>
 <td >1.6</td>
 <td >1.7</td>
 </tr>
 </tbody>
 </table>
 
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Initial claims for unemployment insurance rose to 214,000 (-11.2% y/y) during the week ended October 6 from 207,000 in the prior week, which was unrevised. The Action Economics Forecast Survey had expected a smaller increase to [...]

U.S. Initial Claims for Unemployment Insurance Show Modest Increase

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The U.K. is being buffeted by many forces these days. But the pummeling it is taking over Brexit is surely the number one feature being watched by the U.K. consumer/worker/citizen. Still, U.K. retail sales and growth have all held up remarkably well- so far. Depending on the deal that the U.K. gets, the jury is still out on what happens to investment in the U.K. although in banking a lot of firms already have left. Still, retail sales in September are up by 4.9% over 12 months and sales volume is up by 3%. Both of those are very respectable results. But in September, the monthly result is more of an eye-opener. Nominal September sales fell by 0.6% after a 0.7% rise in August. What’s worse is that sales volumes fell by 0.8% in September after a smaller 0.5% rise in August.

Still, in the quarter just completed (Q3 2018), nominal sales are up at a 7.1% pace and sales volumes are up at a very solid and strong 5.1% pace. If there is some slowing from those parameters, it is not a surprise or a problem. But retail sales are by their nature unruly, and despite the context whenever a sales figure moves lower abruptly, it rightly gains attention and garners some concern. No one knows what next month with bring. Will sales rebound or is there a problem, even one long in the making, cumulating?

U.K. passenger car registrations also have fallen sharply in September, but this was after a strong gain in August. Moreover, this is a European wide phenomenon as new emissions tests and standards are being phased in. Automakers ran promotions ahead of the new incentives to clear out noncompliant stocks. This had the effect of boosting August sales and robbing from September. So this is not a separate U.K. effect, but it is nonetheless real. It just is not part of a signaling mechanism about the health of the U.K. economy.

The CBI sales survey has been more suspect about retail sales with a small rise in September after two months of heavily negative readings for both nominal sales and sales volumes.

For their part, consumers are more of a drag in terms of their attitudes. Consumer confidence (GfK measure) fell in September but is unchanged over three months and 12 months. But the standing for the level of confidence is only in the 43rd percentile of its historic queue of values, a below-median showing. Clearly, consumers have been spending better than how they have been feeling.

Beyond sales trends and Brexit conditions 
With the U.K. in a stare-down contest with the EU over the terms of the Brexit divorce, there is persisting concern about how the economy is behaving in the presence of all the uncertainty that is generated. The reality is that the coming break up is more like Tammy Wynette’s heart rending ‘D-I-V-O-R-C-E’ than like Neil Sedaka’s light-hearted ‘Breaking up is hard to do.’ The Sedaka tune is intended more for a teenager with little at risk and a novice at love; while the Wynette song brings to bear all the separation anxiety of a pair joined for a long time with a lot of mutual assets and friends with clear dislocations to be dealt with. Surely, that is a better rendering of the conditions of separation under Brexit.

As for the Bank of England, it has steadied itself recently. Inflation seemed to be topping up, but it is now up by ‘only’ 2.4% over 12 months, an excessive rise that is made less painful by the fact that the inflation gauge rose by just 0.1% in September.

U.K. trends for spending are a bit up in the air. The year-on-year trends look good, but the monthly result is weak and the three-month trend results are held up by previous months. So we can view retail sales as in play from a policy standpoint. There might be enough weakness to cause the BOE to have some forbearance in the event of continuing inflation overshooting.

Brexit in motion 
The British Brexit talks have not gone well. But even the Swiss have been finding the EU an immoveable object in their quest to become a full-blown EU member with four years of haggling under their belt and little to show for it. The EU is concerned with the potential for ‘rogue states’ within. Clearly, this set of negotiations being conducted by bureaucrats who are afraid of what comes next and are very aware that there is a lot of internal dissent in the EU. Their fear is a new song entitled ‘P-R-E-C-E-D-E-N-T.’ The U.K. referendum on leaving was a lone act not followed in any other EU member nation. And while a lot of polls show that EU/EMU members generally want to stay together despite some very deeply held concerns, the U.K. pre-referendum poll had offered up much the same of what turned out to be bad analysis. No EU member is eager to test those waters at home. In fact, many of them still are ‘angry’ that the U.K. offered its people such a choice and put each of them on the spot as well.

There is also a hot internal conflict currently underway in the EMU and the European Commission seems determined to firmly establish and enforce its authority. This one is in a somewhat subtle yet very much a knock-down drag-out fight with Italy over budget rules. Early in the EU, both Germany and France violated budget rules in 2003 and then banded together to avoid sanctions and then acted to up the ante should anyone else transgress <a href="https://www.ft.com/content/dfb8adf7-7ca4-384c-a737-f28c0dc46924">(here)</a>. They escaped any sanctions. Conversely, Italy has been under and long yoke of austerity and has said ‘basta.’

The U.K. left the EU because of its border rules. Italy is angry over the excessive burden of migrant care it has been left to absorb, buttressed by little support from the EU as well as with the legacy of austerity and what that has done to the Italian economy; net shrinking in GDP ten years after the financial crisis and Great Recession. In Alice in Wonderland, Alice had it easy she possessed a pill to shrink and another to reverse it. Italy does not possess a reversal pill.

In Germany Angela, Merkel’s coalition has gone to dust over migrant issues and the EU is nowhere close to solving its migrant problems. The EU Commission’s solution/approach is a heavy handed strict enforcement of rules that benefit some members and bury others. Italy, one of the two countries most buried by this rules enforcement scheme, has just lodged a complaint with France because French police drove two ‘foreigners’ over the border and dumped them in Italy…Ciao, Bella! President Macron has been very critical of Italy and of is closing its borders to any more migrants especially by sea. What is the trade-off here: two if by land, thousands if by sea?

The U.K. Brexit wrap 
The EU is apparently offering the U.K. an extra year extension to negotiate, but Teresa May only thinks a few months might be necessary. It all depends on what can be agreed too. May apparently feels a deal is close at hand while her EU counterparts apparently are not about to give in on what have been the last sticking points. And the EU is apparently very concerned lest it be viewed as putting up a weak front that might encourage other members to leave and take an external deal like the one the U.K. ‘might yet get’. So take all of this, package it up, and put in the consumer’s knapsack and ask what does it all mean to him or her? With all this going on, it is surprising that the U.K. consumer has done as well as he and she have done. And it is not surprising the confidence has been suppressed. As time passes, the future hardly gets any easier to see. It is strange to see what passes for progress here.


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The U.K. is being buffeted by many forces these days. But the pummeling it is taking over Brexit is surely the number one feature being watched by the U.K. consumer/worker/citizen. Still, U.K. retail sales and growth have all held up [...]

U.K. Retail Sales: Doing Well-As-Can-Be-Expected Despite September Drop

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Initial claims for unemployment insurance fell to 210,000 (-8.7% y/y) during the week ended October 13 from 215,000 in the prior week; the earlier figure was revised up 1,000. The latest report was in line with the Action Economics Forecast Survey at 210,000. The four-week moving average of initial claims was 211,750, up from the prior week's 209,750. The October 13 amount is the smallest since December 6, 1969, when there were 202,000 initial claims; the smallest on record was 162,000 the week ended November 30, 1968. These data begin January 7, 1967.

In the week ending October 6, 2018, continuing claims for unemployment insurance fell 13,000 to 1.640 million (-13.8% y/y) from 1.653 million a week earlier; that earlier number was revised down by 7,000. The 1.640 million is the smallest weekly amount since August 4, 1973. The four-week moving average of claimants declined to 1,653,000. This is again, as it was the previous week, the lowest four-week average since August 18, 1973, when it was 1,646,750.

The insured rate of unemployment remained at its record low of 1.2%, where it's been since early May.

Insured rates of unemployment vary widely by state. During the week ended September 29, the lowest rates were in South Dakota (0.19%), North Dakota (0.30%), Nebraska (0.31%), Indiana (0.42%), and Florida (0.45%). The highest rates were in Pennsylvania (1.43%), Connecticut (1.58%), California (1.64%), Alaska (1.84%), and New Jersey (1.87%). Among other of the largest states by population, the rate was 1.14% in New York and 0.87% in Texas. These state data are not seasonally adjusted.

Data on weekly unemployment insurance are contained in
Haver's WEEKLY database, and they are summarized monthly in USECON.
Data for individual states are in REGIONW. The expectations figure is from
the Action Economics Forecast Survey, carried 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" >Unemployment Insurance (SA, 000s)</th>
 <th>10/13/18</th>
 <th>10/06/18</th>
 <th>09/29/18</th>
 <th>Y/Y %</th>
 <th>2017</th>
 <th>2016</th>
 <th>2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Initial Claims</td>
 <td >210</td>
 <td >215</td>
 <td >207</td>
 <td >-8.7</td>
 <td >245</td>
 <td >262</td>
 <td >278</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Continuing Claims</td>
 <td >--</td>
 <td >1,640</td>
 <td >1,653</td>
 <td >-13.8</td>
 <td >1,961</td>
 <td >2,135</td>
 <td >2,266</td>
 </tr>
 <tr>
 <td class="firstcol" >Insured Unemployment Rate (%)</td>
 <td >--</td>
 <td >1.2</td>
 <td >1.2</td>
 <td >
 1.4 
 (Oct 2017)
 </td>
 <td >1.4</td>
 <td >1.6</td>
 <td >1.7</td>
 </tr>
 </tbody>
 </table>
 
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Initial claims for unemployment insurance fell to 210,000 (-8.7% y/y) during the week ended October 13 from 215,000 in the prior week; the earlier figure was revised up 1,000. The latest report was in line with the Action Economics [...]

U.S. Initial Claims for Unemployment Insurance Ease

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The Philadelphia Federal Reserve reported that its General
Factory Sector Business Conditions Index dipped to 22.2 during October following
a rise to 22.9 in September. The latest reading compared to expectations for a
greater decrease to 20.0 in the Action Economics Forecast Survey. The figures
are diffusion indexes where readings above zero indicate expansion. The
percentage of firms reporting an improvement in business activity fell to 35.9%,
down from the high of 48.2% in May of last year. The number reporting a
worsening eased to 13.7%, half the percentages early in 2016.

Haver Analytics constructs an ISM-Adjusted General Business
Conditions Index. The figure fell slightly this month to 55.7 and remained down
versus its March peak of 61.9. During the last ten years, there has been a 66%
correlation between the quarterly ISM-adjusted Philadelphia Fed Index and
quarterly real GDP growth.

Movement amongst the components of the survey was mixed last
month. To the down side were the new and the unfilled orders series. A sharp
decline in the delivery times series indicated the quickest product delivery
speeds in two years. Moving higher were the shipments and inventory figures.

Also showing improvement were the labor market readings. The
employment figure rose to its highest level since June. During the last ten
years there has been an 80% correlation between the employment index and the m/m
change in factory sector payrolls. A higher 30% of respondents reported
increased hiring while eleven percent indicated less. The index of future
employment slipped m/m and remained well below its May high. The average
workweek reading rose to its longest since June.

Pricing power slackened as the prices paid gauge fell to its
lowest level in nine months. A sharply lessened 42% of firms reported higher
prices while four percent reported a decline. The index of prices received rose
slightly m/m, but remained well below its high in May.

The index measuring expectations of future business
conditions eased m/m and remained well below the high reached in March of last
year. Expected employment, delivery times and unfilled orders fell, but the new
orders and shipments readings increased. Expected capital expenditures weakened.

The survey panel consists of 150 manufacturing companies in
the third Federal Reserve District (which consists of southeastern PA, southern
NJ and Delaware). The diffusion indexes represent the percentage of respondents
indicating an increase minus the percentage indicating a decrease in activity.
The ISM-adjusted figure, calculated by Haver Analytics, is the average of five
diffusion indexes: new orders, shipments, employment, delivery times and
inventories with equal weights (20% each). Each ISM-adjusted index is the sum of
the percent responding &quot;higher&quot; and one-half of the percent responding
&quot;same.&quot;

The figures from the Philadelphia Federal Reserve dating back
to 1968 can be found in Haver's SURVEYS database. The expectation from
the Action Economics Forecast Survey is available in AS1REPNA.

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 <a href="/comment/181018t.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/181018t.png"></a>

<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" >Philadelphia Fed - Manufacturing
 Business Outlook Survey (%, 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 Factory Sector Business
 Conditions</td>
 <td >22.2</td>
 <td >22.9</td>
 <td >11.9</td>
 <td >28.8</td>
 <td >27.4</td>
 <td >4.8</td>
 <td >3.7</td>
 </tr>
 <tr>
 <td class="firstcol" >ISM-Adjusted Business Conditions</td>
 <td >55.7</td>
 <td >56.3</td>
 <td >55.6</td>
 <td >60.1</td>
 <td >57.2</td>
 <td >48.2</td>
 <td >49.4</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;New Orders</td>
 <td >19.3</td>
 <td >21.4</td>
 <td >9.9</td>
 <td >23.3</td>
 <td >25.4</td>
 <td >4.9</td>
 <td >3.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Shipments</td>
 <td >24.5</td>
 <td >19.6</td>
 <td >16.6</td>
 <td >26.0</td>
 <td >26.8</td>
 <td >6.9</td>
 <td >3.0</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Unfilled Orders</td>
 <td >-2.3</td>
 <td >12.6</td>
 <td >5.6</td>
 <td >12.1</td>
 <td >11.9</td>
 <td >-5.6</td>
 <td >-5.1</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Delivery Time</td>
 <td >0.2</td>
 <td >11.1</td>
 <td >6.4</td>
 <td >19.9</td>
 <td >10.6</td>
 <td >-4.6</td>
 <td >-4.2</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Inventories</td>
 <td >-0.8</td>
 <td >-3.5</td>
 <td >15.4</td>
 <td >-0.8</td>
 <td >2.8</td>
 <td >-9.6</td>
 <td >-1.4</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Number of Employees</td>
 <td >19.5</td>
 <td >17.6</td>
 <td >14.3</td>
 <td >30.7</td>
 <td >16.2</td>
 <td >-5.6</td>
 <td >3.9</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Average Workweek</td>
 <td >20.8</td>
 <td >14.6</td>
 <td >10.7</td>
 <td >18.5</td>
 <td >14.9</td>
 <td >-5.4</td>
 <td >-1.7</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Prices Paid</td>
 <td >38.2</td>
 <td >39.6</td>
 <td >55.0</td>
 <td >37.6</td>
 <td >30.4</td>
 <td >13.5</td>
 <td >1.5</td>
 </tr>
 <tr>
 <td class="firstcol" >Expectations - General Business
 Conditions; Six Months Ahead</td>
 <td >33.8</td>
 <td >36.3</td>
 <td >38.8</td>
 <td >47.2</td>
 <td >47.1</td>
 <td >33.7</td>
 <td >37.6</td>
 </tr>
 </tbody>
 </table>
 
</body></html>

The Philadelphia Federal Reserve reported that its General Factory Sector Business Conditions Index dipped to 22.2 during October following a rise to 22.9 in September. The latest reading compared to expectations for a greater [...]

Philadelphia Fed Manufacturing Growth Continues; Pricing Pressure Eases

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.

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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.

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- 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

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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.