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/050615h.jpg" width="353">
Net purchases of securities by foreign investors in US markets totaled $47.4 billion in April, somewhat larger than March&#39;s $40.6 billion. These last two months, however, are well below recent trends, which generated an average of $62.5 billion over the last 12 months and $66.3 billion for 2004.
This most recent slowdown in net purchases has come mainly in federal agency securities, so-called &quot;GSEs&quot; (government-sponsored enterprises). March and April are the weakest two months since mid-2003, and they represent a general flattening of what had been building momentum in this sector until that time in mid-2003 when financial irregularities at Fannie Mae and Freddie Mac came to the fore. Importantly, and in contrast, the pace of net foreign purchases of US Treasuries has been sustained at about $25 billion a month. Corporate debt purchases have continued to trend higher, as evident in the first graph, which shows 12-month averages of corporate bonds along with the flattening pattern of GSE debt purchases.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615i.jpg" width="353">
Among countries, monthly movements have been erratic. Japanese investors were net sellers of US securities in February and March, but in April, the beginning of their financial year, they came back in for $11.5 billion worth. This parallels the general pattern in the Japanese data that we discussed here last Friday. China&#39;s results are a bit surprising. Those investors were moving rapidly into US securities through mid-2003, but since then have slowed their participation. They sharply reduced purchases of both Treasuries and GSEs, while gradually picking up more corporate bonds. These last, however, remain quite modest. Over the last two years, then, the Chinese purchases of US securities have been smaller, even as their trade surplus with the US has continued to widen.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Net Foreign Purchases of Securities in US Markets (Billions US$)</th>
<th scope="col">Apr 2005 </th>
<th scope="col">Mar 2005 </th>
<th scope="col">Feb 2005 </th>
<th scope="col">Last 12 Months Average </th>
Monthly Average
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2004 </td>
<td>2003</td>
<td>2002</td>
</tr>
<tr>
<td class="firstcol">Total</td>
<td>47.4</td>
<td>40.6</td>
<td>84.1</td>
<td>62.5</td>
<td>66.3</td>
<td>56.1</td>
<td>47.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Treasuries</td>
<td>24.7</td>
<td>27.8</td>
<td>42.5</td>
<td>25.3</td>
<td>29.3</td>
<td>23.1</td>
<td>10.0</td>
</tr>
<tr>
<td class="firstcol">Federal Agencies (mostly &quot;GSEs&quot;)</td>
<td>6.7</td>
<td>7.5</td>
<td>16.1</td>
<td>17.6</td>
<td>18.9</td>
<td>13.3</td>
<td>16.3</td>
</tr>
<tr class="odd">
<td class="firstcol">US Corporate Bonds</td>
<td>18.0</td>
<td>21.9</td>
<td>32.0</td>
<td>26.3</td>
<td>24.8</td>
<td>22.3</td>
<td>15.2</td>
</tr>
<tr>
<td class="firstcol">US Corporate Stocks</td>
<td>4.3</td>
<td>1.7</td>
<td>7.4</td>
<td>4.5</td>
<td>2.3</td>
<td>3.0</td>
<td>4.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Foreign Bonds</td>
<td>-4.6</td>
<td>-3.9</td>
<td>1.4</td>
<td>-3.2</td>
<td>-2.1</td>
<td>1.6</td>
<td>2.4</td>
</tr>
<tr>
<td class="firstcol">Foreign Stocks</td>
<td>-1.6</td>
<td>-14.5</td>
<td>-15.3</td>
<td>-8.0</td>
<td>-7.0</td>
<td>-7.1</td>
<td>-0.1</td>
</tr>
</tbody>
</table>
</body>
</html>

Net purchases of securities by foreign investors in US markets totaled $47.4 billion in April, somewhat larger than March's $40.6 billion. These last two months, however, are well below recent trends, which generated an average of [...]

Foreign Buying of US Securities Moderates, Especially Among Agency Debt

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615g.jpg" width="353">
Total mortgage applications surged 17.4% last week following a 6.5% rise the week prior. Applications so far in June are 12.6% ahead of the May average which rose 6.5% versus April, according to the Mortgage Bankers Association.
Applications to refinance rose by one quarter w/w and are 23.8% higher so far in June than in May which rose 11.2% from April.
Purchase applications rose 10.4% w/w and this month are 4.0% ahead of May which rose 3.1% from April. During the last ten years there has been a 50% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
The effective interest rate on a conventional 30-year mortgage ticked up to 5.87% from 5.78% the week prior but remained down from the 5.92% averaged during May. The effective rate on a 15-year mortgage rose 10 basis points to 5.51%.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">06/10/05</th>
<th scope="col">06/03/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>887.0</td>
<td>755.5</td>
<td>47.7%</td>
<td>735.1</td>
<td>1,067.9</td>
<td>799.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>529.3</td>
<td>479.3</td>
<td>17.8%</td>
<td>454.5</td>
<td>395.1</td>
<td>354.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>2,967.4</td>
<td>2,362.1</td>
<td>100.6%</td>
<td>2,366.8</td>
<td>4,981.8</td>
<td>3,388.0</td>
</tr>
</tbody>
</table>
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Total mortgage applications surged 17.4% last week following a 6.5% rise the week prior. Applications so far in June are 12.6% ahead of the May average which rose 6.5% versus April, according to the Mortgage Bankers Association. [...]

Mortgage Applications Surged As Rates Remained Low

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615f.jpg" width="353">
Total business inventories rose just 0.3% in April, the weakest monthly increase this year. The gain lowered the three month change in inventories to 5.5% (AR), less than half the 12.1% peak rate of accumulation through last August. The ratio of inventories-to-sales fell back to the record low of 1.30.
Retail inventories rose 0.2% in April, the same as during a downwardly revised March. The three month change in retail inventories fell to 3.1% versus the peak of 12.4% one year ago. Excluding autos inventories also repeated a 0.2% gain in April and the three month rate of accumulation fell to 3.9% from 11.0% just this past January. Growth in inventories of furniture &amp; electronics dropped to 4.3% from 18.5%, general merchandise inventory accumulation slowed to 7.3% from 12.1% and apparel inventories rose 5.8% versus a three month rate of gain of 12.2% through March.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615e.jpg" width="353">
Factory sector inventories ticked up just 0.1% in April and three month growth fell to 5.8%, half the three month rate in March.
Wholesale inventories rose a strong 0.8% but here too the three month growth rate of 8.2% is less than half last summer&#39;s peak rate of gain. During the last ten years there has been a 64% correlation between the y/y change in wholesale inventories and the change in imports of merchandise.
Overall business sales rose a sharp 1.2% (8.3% y/y).

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED06/@ED0601/@ED0601.HTM">Business Inventories</a></th>
<th scope="col">April</th>
<th scope="col">March</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>0.3%</td>
<td>0.5%</td>
<td>7.6%</td>
<td>7.7%</td>
<td>1.4%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail</td>
<td>0.2%</td>
<td>0.2%</td>
<td>3.6%</td>
<td>5.7%</td>
<td>3.9%</td>
<td>5.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Retail excl. Autos</td>
<td>0.2%</td>
<td>0.2%</td>
<td>6.1%</td>
<td>5.9%</td>
<td>2.0%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale</td>
<td>0.8%</td>
<td>0.6%</td>
<td>11.8%</td>
<td>10.8%</td>
<td>2.0%</td>
<td>1.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>0.1%</td>
<td>0.7%</td>
<td>8.6%</td>
<td>7.5%</td>
<td>-1.3%</td>
<td>-1.8%</td>
</tr>
</tbody>
</table>
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Total business inventories rose just 0.3% in April, the weakest monthly increase this year. The gain lowered the three month change in inventories to 5.5% (AR), less than half the 12.1% peak rate of accumulation through last August. [...]

U.S. Business Inventory Accumulation Slowing

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615d.jpg" width="353">
The Empire State Index of General Business Conditions in New York&#39;s manufacturing industries turned positive in June with a rise to 11.65 following a one blip into negative territory during May.
The new orders component jumped to +8.23 following two months negative and the shipments index also was slightly positive after two months negative. The employment index recovered but still indicated little if any job growth. Like the Philadelphia Fed Index of General Business Conditions, the Empire State Business Conditions Index reflects answers to an independent survey question; it is not a weighted combination of the components.
The prices paid index fell to the lowest level since last January.
Expectations for business conditions in six months continued the slide which began in late 2003. Expectations for future capital spending dropped sharply to the lowest since April 2003.
The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. Participants from across the state in a variety of industries respond to a questionnaire and report the change in a variety of indicators from the previous month. Respondents also state the likely direction of these same indicators six months ahead. April 2002 is the first report, although survey data date back to July 2001.
For more on the Empire State Manufacturing Survey, including methodologies and the latest report, click <a href="http://www.newyorkfed.org/research/regional_economy/empiresurvey_overview.html">here</a>.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S511/@S511.HTM">Empire State Manufacturing Survey</a> </th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">June &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Business Conditions (diffusion index)</td>
<td>11.65</td>
<td>-11.06</td>
<td>30.19</td>
<td>28.76</td>
<td>16.17</td>
<td>7.19</td>
</tr>
</tbody>
</table>
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The Empire State Index of General Business Conditions in New York's manufacturing industries turned positive in June with a rise to 11.65 following a one blip into negative territory during May. The new orders component jumped to [...]

Empire State Index Again Positive

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With a 0.3% rise in May, industrial production recovered all of the prior month&#39;s deepened 0.3% decline. Consensus expectations had been for a 0.2% gain.
The headline figure masked a sharper improvement in factory sector output which rose 0.6% (3.3% y/y) following two months of modest decline. Scattered industry gains were strongest for machinery (6.7% y/y), electrical equipment (2.2% y/y) aerospace (7.9% y/y) and high tech (19.5% y/y). Excluding the high tech sector factory output rose 0.4% (2.3% y/y) and reversed the decline during the prior two months.
Motor vehicle output rose a slight 0.1% (+1.4% y/y) following two months of sharp decline. Output of furniture fell 0.2% (-3.6% y/y), the fourth monthly decline this year.
Total capacity utilization rose to 79.4% and capacity grew 1.2% y/y. Factory sector utilization rose to 78.2% versus 76.7% last May and capacity rose 1.4% y/y. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615c.jpg" width="353"><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615b.jpg" width="353">

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</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EA/@EA.HTM">Production &amp; Capacity</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Industrial Production</td>
<td>0.3%</td>
<td>-0.3%</td>
<td>2.7%</td>
<td>4.1%</td>
<td>-0.0%</td>
<td>-0.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Consumer Goods</td>
<td>0.5%</td>
<td>-0.9%</td>
<td>1.4%</td>
<td>2.7%</td>
<td>0.3%</td>
<td>1.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Business Equipment</td>
<td>0.8%</td>
<td>1.0%</td>
<td>8.1%</td>
<td>9.5%</td>
<td>1.2%</td>
<td>-7.9%</td>
</tr>
<tr>
<td class="firstcol">Capacity Utilization</td>
<td>79.4%</td>
<td>79.1%</td>
<td>78.2% (05/04)</td>
<td>78.1%</td>
<td>75.5%</td>
<td>75.3%</td>
</tr>
</tbody>
</table>
</body>
</html>

With a 0.3% rise in May, industrial production recovered all of the prior month's deepened 0.3% decline. Consensus expectations had been for a 0.2% gain. The headline figure masked a sharper improvement in factory sector output which [...]

Industrial Production Recovered

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615a.jpg" width="353">
The CPI-U fell 0.1% in May, the first m/m decline since last July and compared to Consensus expectations for a 0.1% rise. During the first five months of 2005 the CPI is up 4.7% at an annual rate.
Pricing power less food &amp; energy continued modest. A 0.1% increase followed no change in April and during the first five months of this year the core CPI is up 2.4% at an annual rate. Consensus expectations had been for a 0.2% May increase.
The 0.2% increase in core goods prices recovered some of April&#39;s decline led by a 0.5% m/m gain in used car &amp; truck prices and a 0.5% gain in medical care commodities. Apparel prices were unchanged (-0.8% y/y) following April&#39;s 0.6% decline and home furnishings &amp; operation prices rose 0.6% (1.1% y/y) due to strength in the &quot;other&quot; category. New motor vehicle prices rose 0.1% (0.9% y/y).
Services price inflation eased from the low reading in April. Shelter prices were unchanged for the second consecutive month (2.4% y/y) and medical care services prices rose the same 0.3% as during April (5.0% y/y). Public transportation prices were strong for the third consecutive month though the 0.7% gain (3.5% y/y) was down from 1.7% and 1.3% during the prior two months. School tuition costs firmed 0.7% (6.7% y/y).
Energy prices fell 2.0% led by a 4.4% drop in gasoline prices which have fallen another 1.8% so far in June to an average $2.12 per gallon.
Food price inflation eased to 0.1% following the 0.7% jump in April.
The chained CPI which adjusts for shifts in the mix of consumer purchases was unchanged and less food &amp; energy chain prices fell 0.1%.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80101/@E80101.HTM">Consumer Price Index</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total&nbsp;</td>
<td>-0.1%</td>
<td>0.5%</td>
<td>2.8%</td>
<td>2.7%</td>
<td>2.3%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.1%</td>
<td>0.0%</td>
<td>2.2%</td>
<td>1.8%</td>
<td>1.5%</td>
<td>2.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Goods less Food &amp; Energy</td>
<td>0.2%</td>
<td>-0.1%</td>
<td>0.6%</td>
<td>-0.9%</td>
<td>-2.0%</td>
<td>-1.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Services less Energy</td>
<td>0.1%</td>
<td>0.2%</td>
<td>2.7%</td>
<td>2.8%</td>
<td>2.9%</td>
<td>3.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Energy</td>
<td>-2.0%</td>
<td>4.5%</td>
<td>9.8%</td>
<td>10.9%</td>
<td>12.2%</td>
<td>-5.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Food</td>
<td>0.1%</td>
<td>0.7%</td>
<td>2.4%</td>
<td>3.4%</td>
<td>2.1%</td>
<td>1.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&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"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80113/@E80113.HTM">Chained CPI: Total (NSA)</a></td>
<td>0.0%</td>
<td>0.5%</td>
<td>2.5%</td>
<td>2.3%</td>
<td>2.0%</td>
<td>1.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>-0.1%</td>
<td>0.2%</td>
<td>1.8%</td>
<td>1.5%</td>
<td>1.1%</td>
<td>1.9%</td>
</tr>
</tbody>
</table>
</body>
</html>

The CPI-U fell 0.1% in May, the first m/m decline since last July and compared to Consensus expectations for a 0.1% rise. During the first five months of 2005 the CPI is up 4.7% at an annual rate. Pricing power less food & energy [...]

Consumer Price Inflation Eased

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615a.jpg" width="353">
The CPI-U fell 0.1% in May, the first m/m decline since last July and compared to Consensus expectations for a 0.1% rise. During the first five months of 2005 the CPI is up 4.7% at an annual rate.
Pricing power less food &amp; energy continued modest. A 0.1% increase followed no change in April and during the first five months of this year the core CPI is up 2.4% at an annual rate. Consensus expectations had been for a 0.2% May increase.
The 0.2% increase in core goods prices recovered some of April&#39;s decline led by a 0.5% m/m gain in used car &amp; truck prices and a 0.5% gain in medical care commodities. Apparel prices were unchanged (-0.8% y/y) following April&#39;s 0.6% decline and home furnishings &amp; operation prices rose 0.6% (1.1% y/y) due to strength in the &quot;other&quot; category. New motor vehicle prices rose 0.1% (0.9% y/y).
Services price inflation eased from the low reading in April. Shelter prices were unchanged for the second consecutive month (2.4% y/y) and medical care services prices rose the same 0.3% as during April (5.0% y/y). Public transportation prices were strong for the third consecutive month though the 0.7% gain (3.5% y/y) was down from 1.7% and 1.3% during the prior two months. School tuition costs firmed 0.7% (6.7% y/y).
Energy prices fell 2.0% led by a 4.4% drop in gasoline prices which have fallen another 1.8% so far in June to an average $2.12 per gallon.
Food price inflation eased to 0.1% following the 0.7% jump in April.
The chained CPI which adjusts for shifts in the mix of consumer purchases was unchanged and less food &amp; energy chain prices fell 0.1%.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80101/@E80101.HTM">Consumer Price Index</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total&nbsp;</td>
<td>-0.1%</td>
<td>0.5%</td>
<td>2.8%</td>
<td>2.7%</td>
<td>2.3%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.1%</td>
<td>0.0%</td>
<td>2.2%</td>
<td>1.8%</td>
<td>1.5%</td>
<td>2.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Goods less Food &amp; Energy</td>
<td>0.2%</td>
<td>-0.1%</td>
<td>0.6%</td>
<td>-0.9%</td>
<td>-2.0%</td>
<td>-1.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Services less Energy</td>
<td>0.1%</td>
<td>0.2%</td>
<td>2.7%</td>
<td>2.8%</td>
<td>2.9%</td>
<td>3.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Energy</td>
<td>-2.0%</td>
<td>4.5%</td>
<td>9.8%</td>
<td>10.9%</td>
<td>12.2%</td>
<td>-5.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Food</td>
<td>0.1%</td>
<td>0.7%</td>
<td>2.4%</td>
<td>3.4%</td>
<td>2.1%</td>
<td>1.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&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"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80113/@E80113.HTM">Chained CPI: Total (NSA)</a></td>
<td>0.0%</td>
<td>0.5%</td>
<td>2.5%</td>
<td>2.3%</td>
<td>2.0%</td>
<td>1.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>-0.1%</td>
<td>0.2%</td>
<td>1.8%</td>
<td>1.5%</td>
<td>1.1%</td>
<td>1.9%</td>
</tr>
</tbody>
</table>
Industrial Production Recovered 
by <a href="/comment/Moeller.html">Tom Moeller</a> June 15, 2005


With a 0.3% rise in May, industrial production recovered all of the prior month&#39;s deepened 0.3% decline. Consensus expectations had been for a 0.2% gain.
The headline figure masked a sharper improvement in factory sector output which rose 0.6% (3.3% y/y) following two months of modest decline. Scattered industry gains were strongest for machinery (6.7% y/y), electrical equipment (2.2% y/y) aerospace (7.9% y/y) and high tech (19.5% y/y). Excluding the high tech sector factory output rose 0.4% (2.3% y/y) and reversed the decline during the prior two months.
Motor vehicle output rose a slight 0.1% (+1.4% y/y) following two months of sharp decline. Output of furniture fell 0.2% (-3.6% y/y), the fourth monthly decline this year.
Total capacity utilization rose to 79.4% and capacity grew 1.2% y/y. Factory sector utilization rose to 78.2% versus 76.7% last May and capacity rose 1.4% y/y. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615c.jpg" width="353"><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615b.jpg" width="353">

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</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EA/@EA.HTM">Production &amp; Capacity</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Industrial Production</td>
<td>0.3%</td>
<td>-0.3%</td>
<td>2.7%</td>
<td>4.1%</td>
<td>-0.0%</td>
<td>-0.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Consumer Goods</td>
<td>0.5%</td>
<td>-0.9%</td>
<td>1.4%</td>
<td>2.7%</td>
<td>0.3%</td>
<td>1.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Business Equipment</td>
<td>0.8%</td>
<td>1.0%</td>
<td>8.1%</td>
<td>9.5%</td>
<td>1.2%</td>
<td>-7.9%</td>
</tr>
<tr>
<td class="firstcol">Capacity Utilization</td>
<td>79.4%</td>
<td>79.1%</td>
<td>78.2% (05/04)</td>
<td>78.1%</td>
<td>75.5%</td>
<td>75.3%</td>
</tr>
</tbody>
</table>
U.S. Business Inventory Accumulation Slowing 
by <a href="/comment/Moeller.html">Tom Moeller</a> June 15, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615f.jpg" width="353">
Total business inventories rose just 0.3% in April, the weakest monthly increase this year. The gain lowered the three month change in inventories to 5.5% (AR), less than half the 12.1% peak rate of accumulation through last August. The ratio of inventories-to-sales fell back to the record low of 1.30.
Retail inventories rose 0.2% in April, the same as during a downwardly revised March. The three month change in retail inventories fell to 3.1% versus the peak of 12.4% one year ago. Excluding autos inventories also repeated a 0.2% gain in April and the three month rate of accumulation fell to 3.9% from 11.0% just this past January. Growth in inventories of furniture &amp; electronics dropped to 4.3% from 18.5%, general merchandise inventory accumulation slowed to 7.3% from 12.1% and apparel inventories rose 5.8% versus a three month rate of gain of 12.2% through March.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615e.jpg" width="353">
Factory sector inventories ticked up just 0.1% in April and three month growth fell to 5.8%, half the three month rate in March.
Wholesale inventories rose a strong 0.8% but here too the three month growth rate of 8.2% is less than half last summer&#39;s peak rate of gain. During the last ten years there has been a 64% correlation between the y/y change in wholesale inventories and the change in imports of merchandise.
Overall business sales rose a sharp 1.2% (8.3% y/y).

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED06/@ED0601/@ED0601.HTM">Business Inventories</a></th>
<th scope="col">April</th>
<th scope="col">March</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>0.3%</td>
<td>0.5%</td>
<td>7.6%</td>
<td>7.7%</td>
<td>1.4%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail</td>
<td>0.2%</td>
<td>0.2%</td>
<td>3.6%</td>
<td>5.7%</td>
<td>3.9%</td>
<td>5.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Retail excl. Autos</td>
<td>0.2%</td>
<td>0.2%</td>
<td>6.1%</td>
<td>5.9%</td>
<td>2.0%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale</td>
<td>0.8%</td>
<td>0.6%</td>
<td>11.8%</td>
<td>10.8%</td>
<td>2.0%</td>
<td>1.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>0.1%</td>
<td>0.7%</td>
<td>8.6%</td>
<td>7.5%</td>
<td>-1.3%</td>
<td>-1.8%</td>
</tr>
</tbody>
</table>
Empire State Index Again Positive 
by <a href="/comment/Moeller.html">Tom Moeller</a> June 15, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615d.jpg" width="353">
The Empire State Index of General Business Conditions in New York&#39;s manufacturing industries turned positive in June with a rise to 11.65 following a one blip into negative territory during May.
The new orders component jumped to +8.23 following two months negative and the shipments index also was slightly positive after two months negative. The employment index recovered but still indicated little if any job growth. Like the Philadelphia Fed Index of General Business Conditions, the Empire State Business Conditions Index reflects answers to an independent survey question; it is not a weighted combination of the components.
The prices paid index fell to the lowest level since last January.
Expectations for business conditions in six months continued the slide which began in late 2003. Expectations for future capital spending dropped sharply to the lowest since April 2003.
The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. Participants from across the state in a variety of industries respond to a questionnaire and report the change in a variety of indicators from the previous month. Respondents also state the likely direction of these same indicators six months ahead. April 2002 is the first report, although survey data date back to July 2001.
For more on the Empire State Manufacturing Survey, including methodologies and the latest report, click <a href="http://www.newyorkfed.org/research/regional_economy/empiresurvey_overview.html">here</a>.

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<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S511/@S511.HTM">Empire State Manufacturing Survey</a> </th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">June &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Business Conditions (diffusion index)</td>
<td>11.65</td>
<td>-11.06</td>
<td>30.19</td>
<td>28.76</td>
<td>16.17</td>
<td>7.19</td>
</tr>
</tbody>
</table>
Mortgage Applications Surged As Rates Remained Low 
by <a href="/comment/Moeller.html">Tom Moeller</a> June 15, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615g.jpg" width="353">
Total mortgage applications surged 17.4% last week following a 6.5% rise the week prior. Applications so far in June are 12.6% ahead of the May average which rose 6.5% versus April, according to the Mortgage Bankers Association.
Applications to refinance rose by one quarter w/w and are 23.8% higher so far in June than in May which rose 11.2% from April.
Purchase applications rose 10.4% w/w and this month are 4.0% ahead of May which rose 3.1% from April. During the last ten years there has been a 50% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
The effective interest rate on a conventional 30-year mortgage ticked up to 5.87% from 5.78% the week prior but remained down from the 5.92% averaged during May. The effective rate on a 15-year mortgage rose 10 basis points to 5.51%.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">06/10/05</th>
<th scope="col">06/03/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>887.0</td>
<td>755.5</td>
<td>47.7%</td>
<td>735.1</td>
<td>1,067.9</td>
<td>799.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>529.3</td>
<td>479.3</td>
<td>17.8%</td>
<td>454.5</td>
<td>395.1</td>
<td>354.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>2,967.4</td>
<td>2,362.1</td>
<td>100.6%</td>
<td>2,366.8</td>
<td>4,981.8</td>
<td>3,388.0</td>
</tr>
</tbody>
</table>
Foreign Buying of US Securities Moderates, Especially Among Agency Debt 
by <a href="/comment/Stone.html">Carol Stone</a> June 15, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615h.jpg" width="353">
Net purchases of securities by foreign investors in US markets totaled $47.4 billion in April, somewhat larger than March&#39;s $40.6 billion. These last two months, however, are well below recent trends, which generated an average of $62.5 billion over the last 12 months and $66.3 billion for 2004.
This most recent slowdown in net purchases has come mainly in federal agency securities, so-called &quot;GSEs&quot; (government-sponsored enterprises). March and April are the weakest two months since mid-2003, and they represent a general flattening of what had been building momentum in this sector until that time in mid-2003 when financial irregularities at Fannie Mae and Freddie Mac came to the fore. Importantly, and in contrast, the pace of net foreign purchases of US Treasuries has been sustained at about $25 billion a month. Corporate debt purchases have continued to trend higher, as evident in the first graph, which shows 12-month averages of corporate bonds along with the flattening pattern of GSE debt purchases.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050615i.jpg" width="353">
Among countries, monthly movements have been erratic. Japanese investors were net sellers of US securities in February and March, but in April, the beginning of their financial year, they came back in for $11.5 billion worth. This parallels the general pattern in the Japanese data that we discussed here last Friday. China&#39;s results are a bit surprising. Those investors were moving rapidly into US securities through mid-2003, but since then have slowed their participation. They sharply reduced purchases of both Treasuries and GSEs, while gradually picking up more corporate bonds. These last, however, remain quite modest. Over the last two years, then, the Chinese purchases of US securities have been smaller, even as their trade surplus with the US has continued to widen.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Net Foreign Purchases of Securities in US Markets (Billions US$)</th>
<th scope="col">Apr 2005 </th>
<th scope="col">Mar 2005 </th>
<th scope="col">Feb 2005 </th>
<th scope="col">Last 12 Months Average </th>
Monthly Average
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2004 </td>
<td>2003</td>
<td>2002</td>
</tr>
<tr>
<td class="firstcol">Total</td>
<td>47.4</td>
<td>40.6</td>
<td>84.1</td>
<td>62.5</td>
<td>66.3</td>
<td>56.1</td>
<td>47.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Treasuries</td>
<td>24.7</td>
<td>27.8</td>
<td>42.5</td>
<td>25.3</td>
<td>29.3</td>
<td>23.1</td>
<td>10.0</td>
</tr>
<tr>
<td class="firstcol">Federal Agencies (mostly &quot;GSEs&quot;)</td>
<td>6.7</td>
<td>7.5</td>
<td>16.1</td>
<td>17.6</td>
<td>18.9</td>
<td>13.3</td>
<td>16.3</td>
</tr>
<tr class="odd">
<td class="firstcol">US Corporate Bonds</td>
<td>18.0</td>
<td>21.9</td>
<td>32.0</td>
<td>26.3</td>
<td>24.8</td>
<td>22.3</td>
<td>15.2</td>
</tr>
<tr>
<td class="firstcol">US Corporate Stocks</td>
<td>4.3</td>
<td>1.7</td>
<td>7.4</td>
<td>4.5</td>
<td>2.3</td>
<td>3.0</td>
<td>4.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Foreign Bonds</td>
<td>-4.6</td>
<td>-3.9</td>
<td>1.4</td>
<td>-3.2</td>
<td>-2.1</td>
<td>1.6</td>
<td>2.4</td>
</tr>
<tr>
<td class="firstcol">Foreign Stocks</td>
<td>-1.6</td>
<td>-14.5</td>
<td>-15.3</td>
<td>-8.0</td>
<td>-7.0</td>
<td>-7.1</td>
<td>-0.1</td>
</tr>
</tbody>
</table>
</body>
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Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050614b.jpg" width="353">
May Inflation rates in four European countries--France, Finland, Spain and the U.K. were released today. The consumer price index in the U.K. rose 1.9% continuing at the seven year high rate reached in March. In each of the Euro Zone countries the rate of inflation declined. In France from 1.9% in April to 1.6% in May, in Spain from 3.5% to 3.0% and in Finland from 1.2$ to 0.6%.
The contrast between inflation rates in the U.K. and in the Euro Zone as a whole is shown in the first chart. We have used the Flash Estimate series for the Euro Zone since it contains data for May while the overall index does not. The Flash Estimate series is a fairly good proxy for the actual series. The correlation between the two series is .86. (The actual May data for the overall index will be available on Thursday of this week.) In spite of its higher growth rate, the U. K. has had a lower inflation rate than the Euro Zone, but now the U. K. rate appears to be increasing while that in the Euro Zone is declining. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050614a.jpg" width="353">
The rate of inflation within the Euro Zone has varied widely. Two of the countries reporting data today--Finland and Spain--represent two extremes and different trends in the rate of inflation as shown in the second chart. The trend in the relatively high rate of inflation in Spain appears to be stabilizing or decelerating, while the trend in the low rate of inflation in Finland shows some signs of increasing.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Year over Year Change in CPI</th>
<th scope="col">May 05</th>
<th scope="col">Apr 05</th>
<th scope="col">Mar 04</th>
<th scope="col">Feb 05</th>
<th scope="col">Jan 05</th>
<th scope="col">&nbsp;2004&nbsp;&nbsp;</th>
<th scope="col">&nbsp;2003</th>
<th scope="col">&nbsp;2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Euro Zone Flash Estimate</td>
<td>2.00</td>
<td>2.10</td>
<td>2.10</td>
<td>2.00</td>
<td>2.10</td>
<td>n.a.</td>
<td>n.a.</td>
<td>n.a.</td>
</tr>
<tr>
<td class="firstcol">Euro Zone&nbsp; Overall Index</td>
<td>n.a.</td>
<td>2.08</td>
<td>2.09</td>
<td>2.10</td>
<td>1.93</td>
<td>2.14</td>
<td>2.07</td>
<td>2.25</td>
</tr>
<tr class="odd">
<td class="firstcol">United Kingdom</td>
<td>1.89</td>
<td>1.89</td>
<td>1.90</td>
<td>1.63</td>
<td>1.63</td>
<td>1.34</td>
<td>1.36</td>
<td>1.27</td>
</tr>
<tr>
<td class="firstcol">France</td>
<td>1.63</td>
<td>1.91</td>
<td>1.91</td>
<td>1.73</td>
<td>1.46</td>
<td>2.13</td>
<td>2.14</td>
<td>1.88</td>
</tr>
<tr class="odd">
<td class="firstcol">Spain</td>
<td>2.99</td>
<td>3.46</td>
<td>3.47</td>
<td>3.26</td>
<td>3.17</td>
<td>3.05</td>
<td>3.03</td>
<td>3.53</td>
</tr>
<tr>
<td class="firstcol">Finland</td>
<td>0.62</td>
<td>1.15</td>
<td>0.88</td>
<td>0.00</td>
<td>-0.14</td>
<td>0.14</td>
<td>1.30</td>
<td>2.01</td>
</tr>
</tbody>
</table>
</body>
</html>

May Inflation rates in four European countries--France, Finland, Spain and the U.K. were released today. The consumer price index in the U.K. rose 1.9% continuing at the seven year high rate reached in March. In each of the Euro Zone [...]

Divergent Inflation Trends in the U.K. and the Euro Zone

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

Wage growth slowing in the US and Euro area; elevated and sticky in the UK

Stagflation-lite: Blue Chip forecasts below-trend growth and elevated inflation

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

US and Japan ended 2024 on solid ground in contrast to Europe

US economy expected to outperform other major economies in 2025

Only modest evidence of AI-related surge in US productivity growth

Previous Trump tariffs fading. A boost from new tariffs ahead?

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

Underperforming German economy generating increased policy uncertainty relative to Europe and the US

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Andrew Cates

**China-US shipping activity** 
The economic fallout from escalating US-China trade tensions is becoming increasingly visible in the data. A clear example is the chart below, which highlights a sharp drop in vessel arrivals at the ports of Los Angeles and Long Beach, along with a notable decline in ships waiting offshore. These trends point to a tangible weakening in bilateral trade flows, as the effects of tit-for-tat tariffs imposed by both countries begin to bite. Given the outsized role the US and China play in global commerce, this slowdown is likely to reverberate through global supply chains, weighing on trade volumes, dampening demand, and curbing economic growth worldwide.

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**GDP growth in Q1**
Data this week showed that the US economy contracted, albeit modestly, in Q1 even as the euro area recorded a modest expansion—an unusual divergence. The contraction in US GDP can be largely attributed to a sharp increase in imports, as firms rushed to front-load purchases ahead of anticipated tariff hikes. In addition, domestic demand was subdued, with weaker contributions from both consumer spending and government consumption. This decoupling between the US and euro area economies is particularly striking given the current global focus on the US dollar. While the euro area has shown unexpected signs of resilience, the US downturn raises important questions about its underlying momentum, especially as trade dynamics and policy uncertainty continue to cloud the outlook.

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**The US dollar versus yield differentials**
Chart 3 below illustrates a sharp breakdown in the correlation between the US-Germany 10-year yield differential and the EUR/USD exchange rate. Historically, the dollar has moved closely with interest rate spreads, as yield-seeking capital flowed into US assets. But since early 2025—and more acutely following the April tariff actions—the dollar has weakened markedly even as the yield spread has narrowed only modestly. This decoupling underscores a critical shift: capital markets are reacting not just to monetary policy, but to rising trade and geopolitical uncertainty. In other words, the exchange rate is now being driven as much by risk sentiment as by interest rate arbitrage.

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.

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**US competitiveness versus Europe, China and Japan** 
The next chart below examines relative unit labour costs across major economies since 2011. The US and China have seen a broadly similar trajectory, with steady increases in relative cost structures, while the euro area has remained flat and Japan has seen dramatic improvement. This suggests that, from a cost competitiveness standpoint, the US is not uniquely disadvantaged vis-à-vis China. However, as we discuss further below, this parallel erosion of cost competitiveness is occurring at much higher nominal wage levels in the US, which blunts its ability to regain export share through tariff-related shifts alone. The trade war strategy—absent a corresponding improvement in productivity or structural reforms—risks imposing costs without delivering material competitiveness gains.

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.

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Financial markets found a measure of calm this week, buoyed by some subtle shifts in tone from US policymakers. A softening in the administration’s rhetoric around trade tariffs coupled with a less confrontational stance toward Federal Reserve Chair Jerome Powell, helped ease tensions that had roiled markets earlier in the month. Equities rebounded modestly, and volatility indicators edged lower, reflecting cautious optimism that the worst of the policy shocks may be behind us. But beneath the surface, significant downside risks persist. New shipping data point to a pronounced slowdown in US-China trade flows (chart 1), suggesting the damage from recent tariff escalations is already rippling through global supply chains. Meanwhile, incoming data for the US revealed an unexpected contraction in the economy in Q1 and further signs of weakness in the labour market (chart 2). The US dollar, in the meantime, while long supported by superior growth and yield differentials, has begun to decouple from traditional drivers (charts 3 and 4) suggesting growing pressure on capital flows. At the same time, structural imbalances are drawing renewed scrutiny: unit labour cost comparisons show the US steadily losing competitiveness (chart 5), while nominal wage disparities remain stark versus China and other Asian economies, further complicating any effort to restore trade balance without broader reforms (chart 6). In short, while markets may be drawing temporary comfort from a pause in tariff brinkmanship, the deeper economic and financial vulnerabilities exposed this month remain unresolved—and increasingly central to the global macro narrative.

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Charts of the Week: Tariff Truce, Tenuous Trust

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

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

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

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

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

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

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250501I20.jpg

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

U.S. Light Vehicle Sales Fall in April

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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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250501M5.jpg

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

U.S. ISM Manufacturing Index Indicates Contraction in April

Winnie Tapasanun

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

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

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

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

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

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- March construction spending -0.5% m/m; +2.8% y/y, the lowest y/y rate since May ’19.
- Residential private construction -0.4% m/m, led by a 1.2% drop in home improvement building.
- Nonresidential private construction -0.8% m/m, down for the second month in three.
- Public sector construction -0.2% m/m, reflecting a 0.2% decline in nonresidential public building.

U.S. Construction Spending Unexpectedly Drops in March, the First M/M Fall Since September

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Initial claims for unemployment insurance rose 18,000 in the week ended April 26 to 241,000, seasonally adjusted.  This is higher by 16,000 than the Action Economics Forecast Survey amount of 225,000 and is the largest amount since the week of February 22. The previous week’s actual count was revised up by 1,000 to 223,000, from 222,000 reported initially.

The total number of unemployment insurance beneficiaries – also known as “continuing claims” – in the week ended April 19 was 1.916 million, up 83,000 from the prior week’s 1.833 million; that earlier amount was revised down by 8,000.

The insured unemployment rate, that is, the number of beneficiaries as a percentage of covered employment, was 1.3% in the April 19 week, following 1.2% continuously since the week of January 6, 2024.

Economic conditions vary widely across states and territories.  In the week ended April 12, the highest unemployment rates were in New Jersey (2.39%), California (2.24%), Washington (2.19%), Rhode Island (2.17%) and Massachusetts (1.93%).  The lowest rates were in Florida (0.35%), South Dakota (0.40%), Alabama (0.41%), Virginia (0.45%) and Tennessee (0.48%).  Rates in other notable states include the Illinois (1.85%), New York (1.71%), Pennsylvania (1.54%) and Texas (1.09%). These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in U**SECON**. Data for individual states are in **REGIONW** back to December 1986. The expectations figure is from the Action Economics Forecast Survey in the **AS1REPNA** database.

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- Actual initial claims amount is 16,000 more than forecast.
- Total beneficiaries rose by 83,000.
- Insured unemployment rate ticked up to 1.3% after 15 months at 1.2%.

Economy in Brief: June 2005

Jump to:

Foreign Buying of US Securities Moderates, Especially Among Agency Debt

Mortgage Applications Surged As Rates Remained Low

U.S. Business Inventory Accumulation Slowing

Empire State Index Again Positive

Industrial Production Recovered

Consumer Price Inflation Eased

Consumer Price Inflation Eased

Divergent Inflation Trends in the U.K. and the Euro Zone