Robert Brusca

Personal income +0.4% in May. Real PCE spending is up by just 01% in May as services spending falls by 0.1%. Core PCE +0.1% and +1.9% Yr/Yr. Consumption has a moderate contribution to growth in Q2 advancing by just 1.6% in the quarter [...]

PCE Report is Weaker Than Expected With Good Inflation

Carol Stone, CBE

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070628e.jpg" width="353">
The quip in our title isn&#39;t universally applicable, but it does describe some housing market behavior in the last few years. On Monday, our colleague Bob Brusca brought us up to date on existing home sales; he interpreted these data from the National Association of Realtors (NAR) as showing &quot;diminishing&quot; weakness through May. Today, NAR published some details on its housing affordability indexes, and it is evident that an improvement in the affordability situation is giving some support to sales volumes.
However, we also see that the relationship between sales and affordability has largely broken down since early 2004. Buyers, sellers and financiers appeared to be in some denial as financing costs were rising from that time to the middle of last year. We can see this in the nation as a whole and in a couple of regions in particular.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070628f.jpg" width="353">
&quot;Housing affordability&quot; is calculated from home prices, mortgage rates and incomes. NAR analysts calculate the mortgage payment on a home at the median price financed by an average mortgage rate with a 20% down payment. Assuming the mortgage payment is 25% of household income, they can derive the &quot;qualifying income&quot; associated with the prevailing market conditions. The affordability index is the ratio of actual median income to the calculated qualifying income. Ordinarily, one would expect affordability and sales volume to be positively correlated: more affordability should support more sales and less affordability should be associated with fewer sales. In the first graph this is plainly the case, with a 63% correlation ratio from 1989 through 2003. But in the second graph, the 14-plus-year span from 1993 through the latest month carries a -44% ratio. People kept buying -- and lenders kept lending -- long after affordability had begun to fall sharply.
This is especially the case in the West. See in the third graph that &quot;affordability&quot; over the more recent time span has a whopping 75% negative relationship with sales. Affordability was already much lower there than in other areas, as seen in the table below. It shows that homes are most affordable in the Midwest and least in the West. Affordability is just about in equilibrium (that is, near 100) in the Northeast, which we find a bit surprising. This says incomes and home prices are fairly well balanced in this region, while the West faces substantially over-priced housing relative to incomes. The median household devotes a major fraction of its income to housing expense.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070628g.jpg" width="353">
What did happen in 2004 to break up the relation of sales to so-called affordability? We show this in the fourth graph: home prices were continuing to climb, but prior to 2004, interest rates were declining enough so that the monthly payment was fairly steady as a percentage of income, hovering around 20%. All it took for affordability to start to suffer was for interest rates to stop falling. Even before they began to rise in earnest in mid-2005, affordability was dropping. It continued to decline until prices leveled out in mid-2006 and only began to recover when both mortgage rates and home prices were easing. [In the graph, we have indexed the price series to 2000=100, so it will fit nicely on the graph with an affordability index and an interest rate. Indexing is a simple-to-apply function in the DLXVG3 software.]<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070628h.jpg" width="353">
All these data are in Haver&#39;s REALTOR database, information we get from the National Association of Realtors, which also contains other detail and a national calculation of affordability for first-time homebuyers. A few summary series are contained in USECON.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Housing Affordability Indexes</th>
<th scope="col">May 2007</th>
<th scope="col">Apr 2007</th>
<th scope="col">Mar 2007</th>
<th scope="col">May 2006</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total US</td>
<td>109.9</td>
<td>112.4</td>
<td>113.3</td>
<td>101.8</td>
<td>106.1</td>
<td>111.8</td>
<td>123.9</td>
</tr>
<tr>
<td class="firstcol">Northeast</td>
<td>96.7</td>
<td>94.1</td>
<td>99.7</td>
<td>91.8</td>
<td>95.5</td>
<td>99.1</td>
<td>108.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Midwest</td>
<td>149.1</td>
<td>156.0</td>
<td>157.3</td>
<td>140.1</td>
<td>145.5</td>
<td>150.2</td>
<td>167.5</td>
</tr>
<tr>
<td class="firstcol">South</td>
<td>120.6</td>
<td>124.7</td>
<td>124.0</td>
<td>109.9</td>
<td>115.7</td>
<td>121.9</td>
<td>129.9</td>
</tr>
<tr class="odd">
<td class="firstcol">West</td>
<td>73.6</td>
<td>73.6</td>
<td>75.1</td>
<td>69.3</td>
<td>70.4</td>
<td>76.0</td>
<td>88.3</td>
</tr>
</tbody>
</table>
</body>
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The quip in our title isn't universally applicable, but it does describe some housing market behavior in the last few years. On Monday, our colleague Bob Brusca brought us up to date on existing home sales; he interpreted these data [...]

"I'm Going To Buy That House Whether I Can Afford It or Not!" "And I'm Going To Lend You the Money!"

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070628c.jpg" width="353">
Germany&#39;s consumer goods sector is losing momentum: current situation is still improving but expectations and orders have soured. 
Same picture for capital goods: current situation is still improving; expectations have gone flat while orders are getting volatile. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070628d.jpg" width="353">
The IFO percentile readings show that orders on hand have slipped to the 85th percentile. Month-to-month demand has slipped to the low 70th percentile. Business expectations have fallen out of their 80th percentile. These readings are still elevated but are less than other components. The current situation is still improving. Foreign orders on hand also are still growing. But business expectations, activity (m/m) and orders on hand are shrinking. 
The IFO three month outlook shows that orders expectations are faltering in wholesaling and falling in retail. Business export expectations are also fading. Only employment expectations are still improving and at a quickening pace. But employment is a notoriously lagging variable.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
IFO Survey: Germany
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="5">Percent: Yr/Yr</td>
<td colspan="4">Index Numbers</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>CURRENT</td>
<td>Average</td>
<td>Curr/Avg</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">Biz Climate</td>
<td>0.2%</td>
<td>2.8%</td>
<td>2.5%</td>
<td>2.1%</td>
<td>3.4%</td>
<td>107.0</td>
<td>95.6</td>
<td>111.9%</td>
<td>92.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">Current Situation</td>
<td>1.7%</td>
<td>4.7%</td>
<td>6.3%</td>
<td>6.7%</td>
<td>9.3%</td>
<td>111.4</td>
<td>94.7</td>
<td>117.7%</td>
<td>87.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Biz Expectations</td>
<td>-1.3%</td>
<td>1.0%</td>
<td>-0.9%</td>
<td>-2.3%</td>
<td>-2.1%</td>
<td>102.8</td>
<td>96.6</td>
<td>106.4%</td>
<td>87.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>CURRENT</td>
<td>Average</td>
<td>Curr/Avg</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">Biz Climate</td>
<td>0.2%</td>
<td>2.8%</td>
<td>2.5%</td>
<td>2.1%</td>
<td>3.4%</td>
<td>107.0</td>
<td>95.6</td>
<td>111.9%</td>
<td>92.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">Current Situation</td>
<td>1.7%</td>
<td>4.7%</td>
<td>6.3%</td>
<td>6.7%</td>
<td>9.3%</td>
<td>111.4</td>
<td>94.7</td>
<td>117.7%</td>
<td>87.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>4.3%</td>
<td>6.6%</td>
<td>7.6%</td>
<td>9.4%</td>
<td>12.1%</td>
<td>112.0</td>
<td>92.1</td>
<td>121.6%</td>
<td>97.0%</td>
</tr>
<tr class="even">
<td class="firstcol">Biz Expectations</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>CURRENT</td>
<td>Average</td>
<td>Curr/Avg</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>-2.8%</td>
<td>1.0%</td>
<td>-1.4%</td>
<td>-3.0%</td>
<td>-4.1%</td>
<td>100.6</td>
<td>96.4</td>
<td>104.4%</td>
<td>78.1%</td>
</tr>
<tr class="even">
<td class="firstcol">Activity (m/m)</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>CURRENT</td>
<td>Average</td>
<td>Curr/Avg</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>-3.7%</td>
<td>2.0%</td>
<td>-0.5%</td>
<td>0.4%</td>
<td>4.4%</td>
<td>103.8</td>
<td>96.8</td>
<td>107.2%</td>
<td>81.6%</td>
</tr>
<tr class="even">
<td class="firstcol">Demand (m/m)</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>CURRENT</td>
<td>Average</td>
<td>Curr/Avg</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>-7.1%</td>
<td>0.5%</td>
<td>-3.6%</td>
<td>-1.6%</td>
<td>1.6%</td>
<td>102.6</td>
<td>97.0</td>
<td>105.8%</td>
<td>73.3%</td>
</tr>
<tr class="even">
<td class="firstcol">Orders on hand</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>CURRENT</td>
<td>Average</td>
<td>Curr/Avg</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>-3.6%</td>
<td>-0.9%</td>
<td>-3.0%</td>
<td>-2.7%</td>
<td>-0.6%</td>
<td>105.9</td>
<td>96.3</td>
<td>110.0%</td>
<td>85.8%</td>
</tr>
<tr class="even">
<td class="firstcol">Foreign orders on hand</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>CURRENT</td>
<td>Average</td>
<td>Curr/Avg</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>2.0%</td>
<td>2.5%</td>
<td>1.9%</td>
<td>5.4%</td>
<td>7.6%</td>
<td>112.1</td>
<td>94.1</td>
<td>119.2%</td>
<td>98.1%</td>
</tr>
<tr class="odd">
<td colspan="10">Yr/Yr percentage changes in underlying Indices</td>
</tr>
<tr>
<td colspan="10">IFO outlook for 3-Months ahead</td>
</tr>
<tr class="even">
<td class="firstcol">3-Mos ahead</td>
<td colspan="5">Percent Year over Year</td>
<td colspan="4">Index Numbers</td>
</tr>
<tr class="even">
<td class="firstcol">Expected Activity</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>CURRENT</td>
<td>Average</td>
<td>Curr/Avg</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>3.4%</td>
<td>0.5%</td>
<td>0.7%</td>
<td>-1.6%</td>
<td>-2.2%</td>
<td>103.4</td>
<td>96.7</td>
<td>107.0%</td>
<td>96.0%</td>
</tr>
<tr class="even">
<td colspan="10">Orders Expectations</td>
</tr>
<tr class="odd">
<td class="firstcol">Retail Orders Expectations</td>
<td>-1.1%</td>
<td>-4.6%</td>
<td>-10.9%</td>
<td>-10.0%</td>
<td>-11.4%</td>
<td>-10.8</td>
<td>-17.4</td>
<td>62.2%</td>
<td>64.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Wholesale</td>
<td>0.6%</td>
<td>15.8%</td>
<td>15.0%</td>
<td>10.7%</td>
<td>10.9%</td>
<td>5.8</td>
<td>-14.1</td>
<td>-41.3%</td>
<td>80.4%</td>
</tr>
<tr class="even">
<td colspan="10">Export Biz Expectations</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>0.4%</td>
<td>-0.5%</td>
<td>-1.1%</td>
<td>-1.9%</td>
<td>-1.3%</td>
<td>104.5</td>
<td>98.3</td>
<td>106.3%</td>
<td>94.7%</td>
</tr>
<tr class="even">
<td colspan="10">Employment Expectations</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>8.4%</td>
<td>7.5%</td>
<td>6.4%</td>
<td>8.3%</td>
<td>7.3%</td>
<td>105.5</td>
<td>95.8</td>
<td>110.1%</td>
<td>81.0%</td>
</tr>
</tbody>
</table>
</body>
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Germany's consumer goods sector is losing momentum: current situation is still improving but expectations and orders have soured. Same picture for capital goods: current situation is still improving; expectations have gone flat while [...]

IFO Detail Shows Strong Readings but Slipping Momentum

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070628b.jpg" width="353">
Japan&#146;s industrial output trend is slipping as it has fallen for the third month in a row. The data show a steady deterioration in both short term and Yr/Yr trends. Still, Japanese officials are not worried. They see a snap back in the months ahead. Japanese officials are convinced of ongoing demand for Japanese made electronics. A METI survey looks for output to be up by 1.9% in June and 1.7% in July. For the time being Japan&#39;s nonmanufacturing economy is carrying growth ahead, much as it has done for the US when MFG slumped. Japan&#146;s IP still is up by 3.7% Y/Y &#150; but is slowing. 
Despite the upbeat posture by METI, and recent comments made by the BOJ&#146;s Fukui, the risk seems palpable and greater than the official positions admit. Fukui is worried that the output gap has been pressured too much to relieve the zero inflation situation, as his view is just one example of how Japan continues to take an optimistic view of economic events. The BoJ is ostensibly worried about causing a boom/bust cycle but doing so with no evidence of a boom at all. Growth is in fact barely moderate as the BoJ worries about the size of its output GAP and finds that the economy has been growing beyond potential for some time; Fukui says that the Japanese economy has been growing above its potential of 1.5% to 2.0% in the past few years, boosting production capacity and causing labor shortages, which has resulted in tighter supply and demand conditions. But this has gotten no traction on prices. Still Japan&#146;s central bank is worried about overheating in the midst of a mild frost and METI is sure of rebound even as production suffers a series of setbacks.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Japan Industrial Production Trends
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">M/M %</td>
<td colspan="3">SAAR %</td>
<td>Yr/Yr</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>3-mo</td>
<td>6-mo</td>
<td>12-mo</td>
<td>Yr-Ago</td>
</tr>
<tr>
<td class="firstcol">Mining &amp; Manufacturing</td>
<td>-0.4%</td>
<td>-0.2%</td>
<td>-0.3%</td>
<td>-3.3%</td>
<td>-3.1%</td>
<td>2.3%</td>
<td>3.7%</td>
</tr>
<tr>
<td class="firstcol">Total Industry</td>
<td>-0.6%</td>
<td>0.3%</td>
<td>-0.1%</td>
<td>-1.8%</td>
<td>-2.7%</td>
<td>2.3%</td>
<td>3.7%</td>
</tr>
<tr>
<td class="firstcol">Manufacturing</td>
<td>-0.4%</td>
<td>-0.2%</td>
<td>-0.4%</td>
<td>-3.7%</td>
<td>-3.1%</td>
<td>2.3%</td>
<td>3.7%</td>
</tr>
<tr>
<td class="firstcol">Food &amp; Tobacco</td>
<td>0.0%</td>
<td>-0.6%</td>
<td>1.5%</td>
<td>3.5%</td>
<td>1.3%</td>
<td>0.4%</td>
<td>-0.2%</td>
</tr>
<tr>
<td class="firstcol">Textiles</td>
<td>0.3%</td>
<td>0.0%</td>
<td>-2.1%</td>
<td>-6.9%</td>
<td>-4.7%</td>
<td>-4.1%</td>
<td>-3.5%</td>
</tr>
<tr>
<td class="firstcol">Transportation</td>
<td>4.3%</td>
<td>-2.4%</td>
<td>-1.4%</td>
<td>1.5%</td>
<td>-2.5%</td>
<td>9.5%</td>
<td>4.8%</td>
</tr>
<tr class="odd">
<td colspan="8">Product</td>
</tr>
<tr>
<td class="firstcol">Consumer Goods</td>
<td>-3.5%</td>
<td>0.6%</td>
<td>-2.1%</td>
<td>-18.3%</td>
<td>-8.2%</td>
<td>-1.5%</td>
<td>2.1%</td>
</tr>
<tr>
<td class="firstcol">Intermediate Goods</td>
<td>-0.4%</td>
<td>-0.3%</td>
<td>1.0%</td>
<td>0.7%</td>
<td>-1.7%</td>
<td>4.2%</td>
<td>5.8%</td>
</tr>
<tr>
<td class="firstcol">Investment Goods</td>
<td>1.7%</td>
<td>0.6%</td>
<td>-2.9%</td>
<td>-2.3%</td>
<td>-1.0%</td>
<td>2.2%</td>
<td>0.8%</td>
</tr>
<tr>
<td class="firstcol">Mining</td>
<td>0.2%</td>
<td>0.4%</td>
<td>0.9%</td>
<td>5.8%</td>
<td>3.5%</td>
<td>6.2%</td>
<td>2.4%</td>
</tr>
<tr>
<td class="firstcol">Electricity &amp; Gas</td>
<td>-1.7%</td>
<td>2.0%</td>
<td>2.6%</td>
<td>12.1%</td>
<td>0.5%</td>
<td>2.6%</td>
<td>4.3%</td>
</tr>
</tbody>
</table>
</body>
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Japans industrial output trend is slipping as it has fallen for the third month in a row. The data show a steady deterioration in both short term and Yr/Yr trends. Still, Japanese officials are not worried. They see a snap back in [...]

Japan’s Industrial Production Falls by 0.4% Third M/M Drop in a Row

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070628a.jpg" width="353">
The chart on the left overlays Yr/Yr GDP growth on Q/Q annualized GDP growth. The more volatile quarterly numbers have been slowing enough to clearly reduce the growth in Y/Y GDP to just below 2% at 1.9% in Q1 2007. However, there is not much &#145;GDP weakness&#146; left in the pipeline. In fact GDP seems to have taken much of its hit from odd places in the span of a single quarter. At 1.9% Yr/Yr GDP is weaker than each of the four annualized quarters it contains except Q1 2007. So with a better Q2 the four-quarter growth rate can easily move back up above the 2% mark. Indeed, moving up above the 0.7% mark will be a piece of cake. 
 Taking inventory on the downturn. The GDP slowdown is in fact made up of factors that seem unlikely to repeat. Inventory investment is the main drag on Q1 GDP at a reading of -$4.2bil and that represents a Q/Q change of -$26.6bil &#150; it is the change in the change for inventories that feeds into GDP each quarter. So GDP suffered from its inventory malaise to the tune of minus $26.6bil not minus $4.2 bil. Inventories had grown by $22.4 bil in Q4 2006 and that was a drop off of $32bil from Q3 2006. By comparison, Q2 2006 and Q3 2006 inventory investment each were at about $55bil. So there has been an inventory correction that drastically slowed the rate of increase of inventories over the past TWO quarters and actually reduced the stock of inventories outstanding in Q1 2007. 
The damage done to GDP by so few. At the same time consumer spending for goods remains strong although capital equipment spending has been limp. Inventories could continue weak but with this sort of spending on goods that is unlikely and it is more unlikely that the DROP in inventory investment (change in the change) will come anything close to the minus $26bil posted in Q1 and that means that inventories will ADD to growth in Q2 2007. Since inventories shaved 0.9% POINTS off growth in Q1 2007 that means inventories alone could add more than one percentage point to Q2 growth. Meanwhile the bulging trade gap subtracted another $23bil off from GDP or 0.8% points of growth. These two components docked GDP growth by 1.7 percentage points (saar). In other words, without these subtractions, GDP growth might have been 2.5% in Q1 2007 - hardly a disturbing number. No wonder so many economists are now changing their tune and forecasts on the economy. 
Assessing the future by looking at the past. It is unrealistic to put all of those two subtractions back into GDP since while inventories cycle up and down, GDP growth makes the trade deficit bigger so we must allot some trade deterioration for each quarter due to trade unless foreign growth really picks up or US growth remains very weak. Still it is the point more than the numbers that I want to drive home. 
The road ahead. To correctly assess the potential for GDP in the period ahead it is also important to gauge the Q1 2007 result Vs the trend for previous quarters. We can do that by looking at Q1 Vs the Yr/Yr by components. Except for the dollar amount comparisons &#150; and we have talked about those above - this is what the final column in the table does (see table below).
GDP was weak in Q1 2007. Its growth rate fell short of trend by 1.2 percentage points. We can see that short fall just about (a bit less, actually) the impact of inventories and trade on the quarter. Consumer spending was strong in the quarter by a margin of 0.7 pct points (saar) over &#145;trend&#146;. Durables spending was much stronger than trend while non-durables and service sector spending were only slightly above trend. Business investment was slightly weaker relative to trend as spending on structures lagged and spending on equipment finally picked up relative to a very weak trend (it&#146;s still not very strong). Exports were well below trend while imports were above trend. Government spending was slightly weaker than trend. The key point of this comparison is to show that GDP has not really undergone a fundamental slowing. The slowing in TOP line GDP is real and clear. But that has been the confluence of inventory and trade patterns. I view this as evidence that the economy has been working on its problems and has made a running correction, rather than as evidence of an economy running out of gas. We would expect durable goods spending by consumers to slow in Q2 but spending on non-durables and services are simply at trend. Business capital spending has begun to pick up. As the national election cycle approaches the prospect for stronger government spending is obvious. As to the international components, imports generally follow &#150; and exceed -- trends in domestic demand; export trends have withered faster than foreign growth raising some questions on prospects there. Trade should deteriorate ahead but &#145;how fast&#146; is still a matter of conjecture. On balance, the outlook for improved growth gotten without sticking our neck out with a wild a forecast and by looking at deviations from the past trend is actually pretty bright. Despite all the moaning about housing and sub-prime woes and higher energy prices sapping consumers, the trend in the economy shows little of that. Pessimists say the worst of it lies ahead. Optimists say worst is behind us. Pragmatists say where&#146;s the beef? &#133;unless they are vegetarian. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
US GDP Summary
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">GDP GROWTH</td>
<td>2006 Q1</td>
<td>2006 Q2</td>
<td>2006 Q3</td>
<td>2006 Q4</td>
<td>2007 Q1</td>
<td>2007 Q1</td>
<td>2007 Q1</td>
<td>Current</td>
<td>Less Prev</td>
</tr>
<tr class="grey3">
<td class="firstcol">Actual/A,P,F</td>
<td>Actual</td>
<td>Actual</td>
<td>Actual</td>
<td>Actual</td>
<td>Advance</td>
<td>Prelim</td>
<td>Final</td>
<td>Yr/Yr</td>
<td>TREND</td>
</tr>
<tr class="grey2">
<td class="firstcol">Real GDP</td>
<td>5.6%</td>
<td>2.6%</td>
<td>2.0%</td>
<td>2.5%</td>
<td>1.3%</td>
<td>0.6%</td>
<td>0.7%</td>
<td>1.9%</td>
<td>-1.2%</td>
</tr>
<tr class="grey1">
<td class="firstcol">PCE</td>
<td>4.8%</td>
<td>2.6%</td>
<td>2.8%</td>
<td>4.2%</td>
<td>3.8%</td>
<td>4.4%</td>
<td>4.2%</td>
<td>3.5%</td>
<td>0.7%</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Durables</td>
<td>19.8%</td>
<td>-0.1%</td>
<td>6.4%</td>
<td>4.4%</td>
<td>7.3%</td>
<td>8.8%</td>
<td>8.7%</td>
<td>4.8%</td>
<td>3.9%</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Nondurables</td>
<td>5.9%</td>
<td>1.4%</td>
<td>1.5%</td>
<td>5.9%</td>
<td>2.9%</td>
<td>3.5%</td>
<td>3.2%</td>
<td>3.0%</td>
<td>0.2%</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Services</td>
<td>1.6%</td>
<td>3.7%</td>
<td>2.8%</td>
<td>3.4%</td>
<td>3.7%</td>
<td>4.0%</td>
<td>3.8%</td>
<td>3.4%</td>
<td>0.4%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Business Investment</td>
<td>13.7%</td>
<td>4.4%</td>
<td>10.0%</td>
<td>-3.1%</td>
<td>2.0%</td>
<td>2.9%</td>
<td>2.6%</td>
<td>3.4%</td>
<td>-0.8%</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Structures</td>
<td>8.8%</td>
<td>20.3%</td>
<td>15.7%</td>
<td>0.9%</td>
<td>2.1%</td>
<td>5.0%</td>
<td>4.8%</td>
<td>10.1%</td>
<td>-5.4%</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Equipment</td>
<td>15.6%</td>
<td>-1.4%</td>
<td>7.7%</td>
<td>-4.8%</td>
<td>1.9%</td>
<td>2.0%</td>
<td>1.7%</td>
<td>0.7%</td>
<td>1.0%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Housing</td>
<td>-0.3%</td>
<td>-11.1%</td>
<td>-18.6%</td>
<td>-19.8%</td>
<td>-17.0%</td>
<td>-15.4%</td>
<td>-15.7%</td>
<td>-16.4%</td>
<td>0.7%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Inventories ($B)*</td>
<td>$41.2</td>
<td>$53.7</td>
<td>$55.4</td>
<td>$22.4</td>
<td>$14.8</td>
<td>($4.5)</td>
<td>($4.2)</td>
<td>$29.9</td>
<td>--</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Farm</td>
<td>$4.3</td>
<td>$1.9</td>
<td>$2.5</td>
<td>$2.4</td>
<td>$3.0</td>
<td>$2.6</td>
<td>$2.6</td>
<td>$1.1</td>
<td>--</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Nonfarm</td>
<td>$36.8</td>
<td>$52.2</td>
<td>$53.3</td>
<td>$20.0</td>
<td>$11.3</td>
<td>($7.8)</td>
<td>($7.5)</td>
<td>($64.0)</td>
<td>--</td>
</tr>
<tr class="grey1">
<td class="firstcol">Net Exports ($B)**</td>
<td>($636.6)</td>
<td>($624.2)</td>
<td>($628.8)</td>
<td>($582.6)</td>
<td>($597.8)</td>
<td>($611.8)</td>
<td>($606.2)</td>
<td>$30.4</td>
<td>--</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Exports</td>
<td>14.0%</td>
<td>6.2%</td>
<td>6.8%</td>
<td>10.6%</td>
<td>-1.2%</td>
<td>-0.6%</td>
<td>0.7%</td>
<td>6.0%</td>
<td>-5.4%</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp; Imports</td>
<td>9.1%</td>
<td>1.4%</td>
<td>5.6%</td>
<td>-2.6%</td>
<td>2.3%</td>
<td>5.7%</td>
<td>5.5%</td>
<td>2.4%</td>
<td>3.1%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Government</td>
<td>4.9%</td>
<td>0.8%</td>
<td>1.7%</td>
<td>3.4%</td>
<td>0.9%</td>
<td>1.0%</td>
<td>1.0%</td>
<td>1.7%</td>
<td>-0.7%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Real Final Sales</td>
<td>5.6%</td>
<td>2.1%</td>
<td>1.9%</td>
<td>3.7%</td>
<td>1.6%</td>
<td>1.6%</td>
<td>1.7%</td>
<td>2.3%</td>
<td>-0.7%</td>
</tr>
<tr class="grey2">
<td colspan="10">For Yr/Yr: * average, ** Change from Yr ago Qtr</td>
</tr>
</tbody>
</table>
</body>
</html>

The chart on the left overlays Yr/Yr GDP growth on Q/Q annualized GDP growth. The more volatile quarterly numbers have been slowing enough to clearly reduce the growth in Y/Y GDP to just below 2% at 1.9% in Q1 2007. However, there is [...]

U.S. GDP Revision Ticks Growth up to +0.7%

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070627g.jpg" width="353">
We fret over the Japanese economy: is it improving or not? Is it finally breaking out of 1990s stagnation enough so that deflation will go away? We&#39;re never quite sure. So when one figure is favorable, even by a little bit, we tend to get excited about it.
Today it is retail sales. In May, consumer purchases of goods in stores rose 0.1% from a year ago. The Bloomberg news service reports that of the 23 economists in its Japanese forecast survey, only 1 predicted a positive outcome for this indicator. It was the first 12-month increase since last September.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070627h.jpg" width="353">
We thought perhaps rising fuel prices had been the main mover. This had certainly been the case from about mid-2004 through mid-2006. But fuel purchases have slowed recently and for May they actually edged down from May 2006, by 0.4%. Excluding fuel, retail sales were still up 0.1%.
The largest single gain was in food and beverages, which rose 1.7%. Other categories of stores -- motor vehicle dealers, clothing, household durable goods and general merchandise -- all still saw year-on-year decreases. So it&#39;s the &quot;all other&quot; segment that helped push up the total: books, sporting goods, personal care items. These increased 1.3% over the year ago.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070627i.jpg" width="353">
The narrow scope of the May sales increase might suggest that it will turn out to be fleeting. However, the Ministry of Economy, Trade and Industry (METI) also calculates an index, which they seasonally adjust. As shown in the table below, this index rose 0.5% in May from April, which had been up 0.3% from March. By this measure, general merchandise store sales were up in May, as were clothing stores and &quot;other&quot;, suggesting that recent uptrends have been broadening, giving a more optimistic view going forward. Thus, Japanese consumers, who face an increasing positive employment situation and the lowest unemployment since early 1998, might be starting to spend more freely. The threads of evidence from this retail sales report are thin, but they look to be braiding a stronger rope.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">JAPAN: Retail Sales</th>
<th scope="col">May 2007</th>
<th scope="col">Apr 2007</th>
<th scope="col">Mar 2007</th>
<th scope="col">Year Ago</th>
Monthly Averages
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2006</td>
<td>2005</td>
<td>2004</td>
</tr>
<tr>
<td class="firstcol">Total (Bil.&yen;)</td>
<td>11,012</td>
<td>11,177</td>
<td>12,077</td>
<td>11,005</td>
<td>11,271</td>
<td>11,255</td>
<td>11,143</td>
</tr>
<tr>
<td class="firstcol">&nbsp; % Change</td>
<td>0.5*</td>
<td>0.3*</td>
<td>-1.3*</td>
<td>0.1</td>
<td>0.2</td>
<td>1.0</td>
<td>1.0</td>
</tr>
<tr>
<td class="firstcol">ex Fuel</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>0.1</td>
<td>-0.6</td>
<td>-0.2</td>
<td>0.4</td>
</tr>
</tbody>
</table>
</body>
</html>

We fret over the Japanese economy: is it improving or not? Is it finally breaking out of 1990s stagnation enough so that deflation will go away? We're never quite sure. So when one figure is favorable, even by a little bit, we tend to [...]

Hints of Improvement in Japanese Retailing as May Sales Show Gain from Year-Ago

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070627e.jpg" width="353">
French climate and outlook are on strong improving trend.
The services sector is still doing well. The climate and outlook indicators are strong in their respective ranges. Observed and expected sales are still strong but both are off peak. Observed and expected employment indicators are also off peak. The expected responses for these two indicators are sharply lower in June. Expected series are firm but only in about the 60th percentile of their respective ranges.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070627f.jpg" width="353">
The second table below summarizes France&#146;s Industry survey for June. The report scrapped and got back two of the four points it lost in May. The trends are still firm with climate nearly in the upper 25 percentile of its range. Recent and likely trend assessments spurted in June. Foreign and also domestic orders are slipping slightly with both having peaks in April. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
France INSEE Services Survey Jan 2000-date
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Percentile</td>
<td>Rank</td>
<td>Max</td>
<td>Min</td>
<td>Range</td>
<td>Mean</td>
</tr>
<tr>
<td class="firstcol">Climate Indicator</td>
<td>109</td>
<td>109</td>
<td>108</td>
<td>109</td>
<td>78.8</td>
<td>8</td>
<td>116</td>
<td>83</td>
<td>33</td>
<td>102</td>
</tr>
<tr>
<td class="firstcol">Climate: 3-Mo MAV</td>
<td>109</td>
<td>109</td>
<td>108</td>
<td>108</td>
<td>81.6</td>
<td>14</td>
<td>114</td>
<td>85</td>
<td>29</td>
<td>102</td>
</tr>
<tr>
<td class="firstcol">Climate: 12-Mo MAV</td>
<td>109</td>
<td>109</td>
<td>109</td>
<td>108</td>
<td>92.4</td>
<td>3</td>
<td>110</td>
<td>91</td>
<td>20</td>
<td>101</td>
</tr>
<tr>
<td class="firstcol">Outlook</td>
<td>9</td>
<td>8</td>
<td>8</td>
<td>6</td>
<td>86.1</td>
<td>6</td>
<td>14</td>
<td>-22</td>
<td>36</td>
<td>-1</td>
</tr>
<tr class="odd">
<td class="firstcol">Sales</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Observed 3-Mos</td>
<td>14</td>
<td>17</td>
<td>12</td>
<td>11</td>
<td>83.3</td>
<td>9</td>
<td>19</td>
<td>-11</td>
<td>30</td>
<td>6</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Expected 3-Mos</td>
<td>12</td>
<td>14</td>
<td>13</td>
<td>14</td>
<td>68.8</td>
<td>19</td>
<td>22</td>
<td>-10</td>
<td>32</td>
<td>7</td>
</tr>
<tr class="odd">
<td class="firstcol">Sales Price</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Observed over 3-Mos</td>
<td>1</td>
<td>0</td>
<td>2</td>
<td>-2</td>
<td>41.7</td>
<td>29</td>
<td>8</td>
<td>-4</td>
<td>12</td>
<td>0</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Expected over 3-Mos</td>
<td>1</td>
<td>3</td>
<td>0</td>
<td>-1</td>
<td>60.0</td>
<td>38</td>
<td>5</td>
<td>-5</td>
<td>10</td>
<td>1</td>
</tr>
<tr class="odd">
<td class="firstcol">Employment</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Observed over 3-Mos</td>
<td>13</td>
<td>15</td>
<td>13</td>
<td>12</td>
<td>70.6</td>
<td>11</td>
<td>23</td>
<td>-11</td>
<td>34</td>
<td>5</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Expected over 3-Mos</td>
<td>10</td>
<td>16</td>
<td>8</td>
<td>11</td>
<td>60.0</td>
<td>17</td>
<td>20</td>
<td>-5</td>
<td>25</td>
<td>5</td>
</tr>
</tbody>
</table>
</body>
</html>

French climate and outlook are on strong improving trend. The services sector is still doing well. The climate and outlook indicators are strong in their respective ranges. Observed and expected sales are still strong but both are off [...]

France’s Service and Industry Sector Outlook Strong

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

Global freight costs are on the rise while supply chain pressures are contained

Accelerating positive economic surprises in the G10 are boosting the global economy

Considerably more monetary ease expected from US and UK as Japan tightens

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

AI boosting US investment in data centers

US productivity growth has been significantly faster than in other major economies

Consumers' short-term US inflation expectations still elevated while longer-term expectations of financial markets are steady

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

Job openings less than the number unemployed in July for first time since 2021

Reaccelerating goods price inflation along with sticky services inflation clouds the outlook

Falling oil prices aren't pulling down inflation expectations, pointing to a boost from increased tariffs

Equity market exuberance outpacing macroeconomic data

Apart from Japan, Blue Chip forecasters expect further sizable monetary easing

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Andrew Cates

**The Global Monetary Policy Consensus**
The latest Blue Chip Financial Forecasts survey points to a notably more balanced global monetary policy outlook over the coming year. In contrast to the pronounced easing bias that dominated much of the past two years, expectations are now more symmetric, with a similar number of central banks projected to raise rates as to ease policy. Japan is seen delivering further tightening, while Canada is expected to initiate an interest rate hike in coming months. In Australia’s case, this tightening guidance was reinforced this week, with the Reserve Bank lifting its policy rate by 25 basis points. Elsewhere, and in contrast, the euro area, UK and US are expected to move in the opposite direction.

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**US manufacturing activity**
The second chart underscores the recent improvement in US economic momentum, highlighted by an unexpected surge in the January ISM manufacturing PMI. After spending much of the past year hovering below the 50 threshold consistent with stagnation, the index jumped sharply back into expansionary territory, signalling a renewed pickup in industrial activity. This rebound has coincided with a broader run of stronger-than-anticipated US economic data, as reflected in the upswing in the Citigroup Economic Surprise Index. Together, these developments point to a US economy that continues to display notable resilience, complicating expectations of monetary easing in the near term.

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**US Bank Lending Standards and Financial Stress** 
The next chart turns to US financial conditions, highlighting the latest readings from the Senior Loan Officer Opinion Survey. The net proportion of banks tightening lending standards on corporate loans and mortgages is now more modest by historical standards, and well below the extremes seen during past episodes of financial stress. Some easing in credit headwinds has occurred alongside relatively subdued readings on the OFR Financial Stress Index, which continues to hover below its long-run average. Together, these indicators suggest that the US financial system has continued to avoid the kind of acute stress typically associated with sharp slowdowns in credit availability—helping to underpin the recent resilience in economic activity.

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**Semiconductor Sales**
The fourth chart highlights the renewed surge in global semiconductor sales, with momentum strengthening sharply over recent months across the Americas, China and the broader Asia-Pacific region. After the cyclical downturn in 2022–23, sales have rebounded to fresh highs, reflecting a powerful revival in demand for advanced chips and related technologies. This upswing has taken place amid intense investor preoccupation with artificial intelligence, with expectations that AI adoption will drive a sustained wave of capital spending on data centres, cloud infrastructure and high-performance computing. In contrast, semiconductor sales in Europe remain comparatively subdued, reflecting the region’s smaller footprint in high-end chip manufacturing, weaker industrial demand, and the ongoing impact of slower economic growth. While semiconductors are inherently cyclical, markets have increasingly interpreted the current rebound elsewhere as structural rather than purely cyclical—underpinned by the belief that AI represents a transformative and durable source of demand growth.

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**Large-Scale AI Models**
The next chart illustrates the rapid proliferation of large-scale AI models globally, with newly updated data for 2025 pointing to a further sharp acceleration in development activity. The United States continues to lead by a wide margin, while China has also seen a steep rise in model deployment in recent years, underscoring the intensifying technological competition between the two economies. Growth in the UK and other regions has been more modest by comparison, highlighting the increasingly concentrated nature of AI innovation. Taken together with the surge in semiconductor sales, these trends help explain the market’s strong preoccupation with AI as a potential driver of future productivity and investment cycles—although the geographic concentration of activity also raises questions about the uneven distribution of any resulting economic gains.

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**An AI Bubble?** 
The final chart draws on the latest Blue Chip Financial Forecasts special questions, highlighting market participants’ perceptions of the economic gains likely to be delivered by artificial intelligence. While a sizeable share of respondents still believe that financial markets may be overestimating AI’s potential benefits, an increasing proportion now judge current expectations to be broadly accurate, with only a small minority viewing the gains as underestimated. Notably, this represents a softening in scepticism compared with the survey results from last month, when concerns about excessive market optimism were more pronounced. The shift suggests a growing acceptance that AI-related investment and innovation could translate into meaningful economic impacts—though uncertainty remains high around the scale, timing and distribution of these gains.

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Financial markets have experienced renewed gyrations in recent weeks, as shifting geopolitical risks, questions around Federal Reserve independence, renewed talk of US dollar “debasement,” and ongoing enthusiasm surrounding artificial intelligence have combined to drive volatility across asset classes. These cross-currents have also contributed to a degree of rotation away from high-flying technology stocks, as investors reassess valuations and the timing of anticipated AI-driven gains. Against this backdrop, the charts in this week’s COTW highlight several important themes. Policy rate expectations now appear more balanced globally, marking a clear shift away from the one-sided easing bias of the past two years (chart 1), even as resilient US data—underscored by the unexpected jump in the January ISM index and a run of positive economic surprises—continues to complicate the outlook for monetary easing (chart 2). At the same time, US financial conditions remain relatively benign, with limited evidence of widespread credit stress or aggressive tightening in lending standards (chart 3). Meanwhile, the sharp rebound in semiconductor sales and the accelerating rollout of large-scale AI models underscore why investors remain so focused on the AI narrative, even as Europe lags behind due to weaker industrial momentum and a smaller footprint in advanced chip production (charts 4 and 5). Finally, while some scepticism about AI’s ultimate economic impact persists, the latest survey results suggest a moderation in concerns that markets are materially overestimating its gains (chart 6). Taken together, these developments paint a picture of a US economy that remains more resilient than many had anticipated, set against a financial landscape increasingly shaped by powerful—if sometimes competing—narratives around geopolitics, policy, and technological transformation.

Charts of the Week: Balanced Policy, Resilient Data and AI Narratives

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With the December report, Germany’s production and some of the early European industrial production data reveal a good deal of chaos in terms of the embedded trends. On the month, German industrial production fell by 1.9%, with consumer goods output up by 0.5%, capital goods output falling by 5.3%, and intermediate goods output falling by 1.2%. Among the early reporters in the monetary union—France, Spain, and Portugal—only Spain showed an increase in manufacturing IP in December; however, Spanish industrial production is notoriously volatile.

**Broader IP trends in Germany and elsewhere in Europe**
As for other early industrial production reporters, both Sweden and Norway showed strong-to-solid gains in December and each of them showed two-months of gains in a row. Beyond that, sequential growth rates from 12-months to six-months to three-months show accelerating growth in German consumer goods output against decelerating growth for intermediate goods. Real manufacturing output and real sales show mixed results- no clear trends; however, real manufacturing orders in Germany are off the map strong. 

**German manufacturing/industrial Surveys**
German industrial surveys from the IFO for manufacturing shows persistent weakening as well as for IFO manufacturing expectations, and in the EU Commission industrial index in the last three months. More broadly, Germany shows some modest but ongoing step up all of these based on average levels from 12-months to six-months to three-months for IFO expectations and the EU Commission industrial readings with mixed results for other survey readings.

**IP trends in Europe**
For the early reporting EMU members France, Spain, and Portugal, who report industrial production trends, each show mixed monthly trends against ongoing decelerations for manufacturing output over the broader sequential periods (12-month, to 6-month, to 3-month). However, for other Europe, Sweden and Norway, manufacturing trends are steadily accelerating on this broader timeline.

**A feeling of ‘Deja- What?’**
These combinations of opposed trends mixed with a lack of trends leave us with this sense of confusion about what's going on in manufacturing. For Germany, the extreme strength in orders is reassuring since orders should be forward-looking rather than backward-looking or even contemporaneous. But orders can also be a fickle series and so we'll have to watch it to see if the trends for German orders hold up.

**Current quarter-What’s been happening now**
In addition, current quarter growth for Germany actually looks quite good with industrial production up 3.7% at an annual rate in the current quarter, led by output increases in manufacturing against a decline in the intermediate goods output. Real orders in the quarter are surging at a 44% growth rate, while real sales in manufacturing only had a 0.1% uptick at an annual rate. The industrial indicators for Germany in the quarter show weakness or flatness with the only exception being IFO manufacturing expectations that advanced by a small amount. The three EMU members who report industrial production data show positive growth in the just-completed quarter except for Portugal where industrial production is falling at a 2.9% rate in the fourth quarter. Sweden and Norway, European countries but not monetary union members, show a strong 22% annual rate gain in Sweden against the 3% annual rate decline in Norway.

260206.jpg

**Rankings**
**How growth rates stack up…**
Moving away from short-term trends, the rankings of growth rates of these various metrics using 12-month growth rates on data back to 2006, show below-median growth rates for German industrial production and all three of its major sectors. All of them have rankings below the 50% mark where the median resides. Germany’s manufacturing output growth rate is below its median as is the growth of real sales; and once again real manufacturing orders break out and show a stunning 90th percentile standing, extremely strong compared to other growth rates on this period.

**Indicator rankings are poor**
However, the survey based industrial indicators for Germany, ranked based on their index levels, are all extremely weak and much weaker than German sector or other German metrics. The strongest indicator reading is the 29th percentile standing for IFO manufacturing expectations while the current ZEW index, IFO manufacturing index, and the EU Commission industrial readings, all reside below their 15th percentile. The survey rankings suggest that industrial sentiment is in much worse shape than activity and growth.

**IP elsewhere in Europe**
However, the growth ranking of manufacturing industrial production for the reporting EMU members and other European members are all quite solid, with percentile standings ranging from the 66th up to the 93rd percentile.

**Summing up**
From these data, Germany emerges as the weak economy compared with historic norms based on industrial production growth and indicator readings. However, there's a glimpse of positivity from the growth of real orders, and at the same time, some concern about ongoing sentiment for manufacturing in Germany as distinct from actual performance.

Germany

German IP Reveals Chaotic Trends

Winnie Tapasanun

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**Total job openings** fell 5.6% m/m (-12.9% y/y) to 6.542 million in December after a downwardly revised 7.0% decline to 6.928 million in November (previously -4.1% m/m; 7.146 million), according to the Job Openings and Labor Turnover Survey. December marked the third consecutive m/m fall and the lowest level since September 2020. The job openings rate declined to 3.9% in December, the lowest since April 2020, from 4.2% in November, remaining below a record-high 7.4% in March 2022. This rate is calculated as the ratio of job openings to total nonfarm employment plus openings. Significantly, the drop in job openings also lowered the **ratio of job openings to unemployed individuals** to 0.872 in December—the lowest since March 2021—from 0.890 in November, down from 1.085 in December 2024 and a pre-pandemic 1.211 in February 2020. A reading of 0.872 implies there were about 0.87 open jobs per unemployed person—indicating fewer openings than unemployed workers. December was the fifth time in six months that this ratio remained below 1.0.

**Private sector job openings** fell 6.8% (-12.5% y/y) to 5.804 million in December after a 6.6% fall to 6.227 million in November, registering the third successive m/m decline and the lowest level since September 2020. The private sector job openings rate fell to 4.1% in December, the lowest since April 2020, from 4.4% in November. The December m/m decline in private sector openings reflected drops of 27.7% (-36.9% y/y) in financial activities, 20.2% (-25.5% y/y) in professional & business services, 14.4% (-5.1% y/y) in trade, transportation & utilities, and 5.2% (-12.4% y/y) in private educational & health services. To the upside, private sector openings in the following categories rose m/m in December: other services (21.1%; 11.0% y/y), mining & lodging (17.6%; 0.0% y/y), information (13.5%; -4.7% y/y), manufacturing (8.5%; 0.5% y/y), leisure & hospitality (7.5%; -17.2% y/y), and construction (2.8%; 42.4% y/y). Meanwhile, government job openings rose 5.3% (-15.6% y/y) in December, the first m/m rise in three months, after a 10.6% drop in November.

**Total hiring** rebounded 3.4% (-1.5% y/y) to 5.293 million in December, the first m/m increase since September, following a 4.6% decrease to 5.121 million in November. The hiring rate edged up to 3.3% in December from 3.2% in November, though it remained below pre-pandemic levels. **Private sector hiring** rose 3.1% (-0.4% y/y) to 4.978 million in December, the third m/m rise in four months, after a 4.0% decline to 4.826 million in November. The private sector hiring rate rose to 3.7% in December from 3.5% in November, the same as in October and September. The December m/m increase in private sector hiring was led by a 32.1% jump (42.3% y/y) in information, followed by gains of 24.0% (-4.6% y/y) in financial activities, 23.5% (0.0% y/y) in mining & lodging, 6.5% (-4.8% y/y) in private educational & health services, 4.2% (-4.9% y/y) in trade, transportation & utilities, 3.6% (6.1% y/y) in construction, 3.4% (7.9% y/y) in leisure & hospitality, and 1.8% (-4.3% y/y) in manufacturing. To the downside, private sector hiring in professional & business services (-5.2%; +0.5% y/y) and other services (-4.3%; -16.5% y/y) declined m/m in December. Meanwhile, government hiring rebounded 6.4% (-16.3% y/y) in December, the first m/m rise since September, following a 13.5% drop in November.

**Total separations** rose 2.1% (3.3% y/y) to 5.251 million in December after a 1.5% rise to 5.144 million in November, marking the third m/m increase in four months and the highest level since September. The total separations rate edged up to 3.3% after holding at 3.2% in November and October. Private sector separations rose 1.6% (4.2% y/y) to 4.932 million in December, the highest level since June, while government sector separations jumped 10.4% (-9.1% y/y) to 319,000 following two consecutive m/m declines. **Total quits** (voluntary separations initiated by the employee) increased 0.3% (3.5% y/y) to 3.204 million in December, the third m/m rise in four months and the highest level since June, after a 7.4% rebound in November. The quits rate (a measure of workers’ willingness or ability to leave jobs) held at 2.0% in December and November, slightly below 2.3% in February 2020. Private sector quits eased 0.2% (+4.5% y/y) following an 8.4% November rebound. **Layoffs and discharges** (involuntary separations initiated by the employer) increased 3.6% (5.6% y/y) to 1.762 million in December, up for the third time in four months, after an 8.1% drop in November. The layoffs & discharges rate remained at 1.1% in December and November, marginally below 1.3% in February 2020. Private sector layoffs grew 4.3% (7.8% y/y) following a 7.3% November decrease.

The Job Openings and Labor Turnover Survey (JOLTS) data are available in Haver’s **USECON** database.

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- Job openings down 5.6% (-12.9% y/y) to 6.542 mil., third straight m/m decline.
- Hiring up 3.4% (-1.5% y/y) to 5.293 mil., first m/m increase since September.
- Separations rise to a three-month high; quits reach a six-month high; layoffs rebound.

U.S. JOLTS: Openings Drop to Lowest Level Since Sept. ’20; Hiring Rebounds in December

Sandy Batten

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Initial claims for unemployment insurance jumped 22,000 to 231,000 in the week ended January 31 following an unrevised 209,000 in the prior week. The four-week average rose to 212,250 from 206,250. The Action Economics Forecast Survey looked for 213,000 claims to have been filed. Winter Storm Fern and the accompanying very cold temperatures could have provided a temporary boost. Historically speaking, claims remain at low levels.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—increased by 25,000 to 1.844 million in the week ending January 24, from a downwardly revised 1.819 million in the prior week (previously 1.827 million). The insured unemployment rate remained at 1.2% in the week of January 24, unchanged from the previous eight weeks.

The insured unemployment rate varied greatly across individual states and territories. In the week ending January 17, the highest unemployment rates were in Rhode Island (2.83%), New Jersey (2.77%), Massachusetts (2.67%), Washington (2.54%), and Minnesota (2.45%). The lowest rates were in Florida (0.30%), North Carolina (0.42%), Louisiana (0.43%), Alabama (0.46%), and Arkansas (0.47). Rates in other notable states include Illinois (2.15%), California, (2.08%), New York (2.02%), Pennsylvania (1.91%), and Texas (1.09%). These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986.

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- New claims jumped 22,000 to 231,000, the highest level since December 6.
- Continuing claims rose to 1.844 million from 1.819 million.

U.S. Initial Unemployment Claims Surged in Latest Week

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German real orders in December adjusted for inflation rose strongly again, gaining 7.8% month-to-month after rising 5.7% month-to-month in November. Foreign orders were up by 5.6% in December compared to 5.2% in November. Domestic orders surged by 10.7% in December after rising 6.4% in November and 10% in October.

**Real sales**
Real sales were mixed in December with overall sales falling 1.4% month-to-month mostly on weakness in capital goods sales.

**Broad categorical acceleration**
Many flows are accelerating this month. Sequential growth rates show acceleration. Total real orders accelerate from a year ago, to the current year, to six-months, and to three-months. Sales growth rates for consumer goods, consumer nondurables, and intermediate goods all show accelerations in gear. The exceptions are foreign orders that are not as strong over six months compared to their 12-month growth. And on the sales side, consumer durables sales and capital goods sales are weak.

**Quarter-to-quarter**
Quarterly annualized growth is complete for Q4 with this report. Foreign orders are the ‘weak flow’ expanding at a 13.6% annual rate – certainly not a weak growth rate. But domestic real orders are up at an astounding 101.9% annual rate. The net impact on the total real orders growth is to lift it to a pace of 44.1%. 

**Order ranking is very strong**
The table provides two rankings: one based on the level of variables and the other based on its year-on-year growth. The rankings this month for real orders overall, foreign, and domestic orders all reside in their top 80th to 90th percentiles- extremely strong based on level or growth. Sales do not follow suit. This gives us some reason to suspect that there is some lumpiness involved in the manufacturing data as distinct from strength. That will be something to watch. Overall mining and manufacturing sales growth is essentially at its historic median at a rank of 49.8. However, capital goods, intermediate goods and manufacturing sales all have rankings at or above their medians - as high as a 61-percentile standing for capital goods.

**Industrial confidence**
Industrial confidence for Germany, France, Italy and Spain (the EU’s big-four economies) show rankings based on these survey levels that are much lower at the 11th percentile for Germany, the 42nd and 36th percentiles, for France and Italy, respectively. Spain scores better with a 61.8 percentile standing on its industrial confidence measure. 

On balance, there is now an accelerating profile that is broad in sales trends and especially strong order trends. Perhaps Europe, under the pressure to stimulate its miliary capabilities, has a core of demand to help drive output ahead more consistently. This is something to watch in the coming months.

Economy in Brief: 2007

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