Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050815b.jpg" width="353">
China&#39;s exports of merchandise declined in July by $3,802 million from June, but since imports declined by $4,435 million, the trade surplus increased $633 million to $10,445 million from $9,812 million in June. The growth of the China&#39;s trade surplus over the past few years is evident in the first chart. Most of the surplus is with the United States. Countries other than the United States have, as a whole, run a trade deficit with China as can be seen in the table below.
Only total trade figures are available for July. The latest data on trade by country are for June. In the table below, we show China&#39;s total exports, exports to the United States and all other countries, total imports and imports from the United States and all other countries, and the total balance of trade and the balances for the United States and all other countries. While the surplus with the United States is still increasing in the first half of this year, there appears to be a sharp deceleration in the deficit with countries other than the U. S. In 2004 the deficit with these countries was $47,452 million, but in the first half of this year the deficit was only $3,645 million. There has been a decline in exports to these countries but a much greater decline in imports from them has reduced their deficit with China. The second and third charts show exports to and imports from Europe and Japan. The trends in the first half of this year shown in these charts are typical of most of the countries for which data are available. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050815d.jpg" width="353"><img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050815c.jpg" width="353">

<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/EMERGEPR/@P1/@P1.HTM">China&#39;s Merchandise Trade (Million US$)</a>&nbsp;</th>
<th scope="col">2005 1st H</th>
<th scope="col">2004&nbsp;</th>
<th scope="col">2003</th>
<th scope="col">2002 </th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Exports</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; Total</td>
<td>365,996</td>
<td>593,633</td>
<td>438,398</td>
<td>325,596</td>
<td>266,108</td>
<td>249,202</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; US</td>
<td>78,152</td>
<td>124,973</td>
<td>92,512</td>
<td>69,959</td>
<td>54,319</td>
<td>52,142</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Rest of the world</td>
<td>287,844</td>
<td>468,660</td>
<td>345,886</td>
<td>255,637</td>
<td>211,789</td>
<td>197,060</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports&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; Total</td>
<td>315,594</td>
<td>560,765</td>
<td>412,840</td>
<td>295,170</td>
<td>243,554</td>
<td>225,092</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; US</td>
<td>24,105</td>
<td>44,653</td>
<td>33,883</td>
<td>27,228</td>
<td>26,204</td>
<td>22,365</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Rest of the world</td>
<td>291,489</td>
<td>516,112</td>
<td>278,957</td>
<td>267,942</td>
<td>217,350</td>
<td>202,727</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance</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; Total</td>
<td>50,402</td>
<td>32,868</td>
<td>25,558</td>
<td>30,426</td>
<td>22,554</td>
<td>24,110</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; US</td>
<td>54,047</td>
<td>80,320</td>
<td>58,629</td>
<td>42,731</td>
<td>28,115</td>
<td>29,777</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Rest of the world</td>
<td>-3.645</td>
<td>-47,452</td>
<td>-33,071</td>
<td>-12,305</td>
<td>-5,561</td>
<td>-5,667</td>
</tr>
</tbody>
</table>
</body>
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China's exports of merchandise declined in July by $3,802 million from June, but since imports declined by $4,435 million, the trade surplus increased $633 million to $10,445 million from $9,812 million in June. The growth of the [...]

China's Trade Surplus Growing: Not Only is the Surplus with the United States Rising, but the Deficit with All [...]

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050815a.jpg" width="353">
The Empire State Index of General Business Conditions in New York&#39;s manufacturing industries in August remained roughly at the same level as in July. At 23.04 versus 23.92, the two figures were the best back-to-back levels of the year.
The new orders component added to its earlier improvement and jumped to 33.75, the highest of the year, and the shipments index also rose. The employment index retraced all of the weakness of the prior four months while the prices paid index gained back virtually all of the July decline.
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 index of expectations for business conditions in six months rose sharply for the second consecutive month to the highest level since October of last year. Expectations for future capital spending remained about stable at the improved July level.
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>.
The Congressional Budget Office today updated its outlook for US budget deficits and the economy. The Federal budget deficit estimate for Fiscal Year 2005 was reduced to $331B from $365B projected in March but the FY2006 and FY2007 estimates were raised to $314B and $324B, respectively, from $298B and $268B.
Legislative (mostly Medicare) changes were estimated to cause the ten year deficit outlook, 2006-2015, to worsen by $1.2 trillion versus the earlier outlook.
The Budget Deficit and Economic Outlook: An Update from the Congressional Budget Office is available <a href="http://www.cbo.gov/ftpdocs/66xx/doc6609/08-15-OutlookUpdate.pdf"> here</a>.
Understanding the Twin Deficits: New Approaches, New Results from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2005/el2005-16.pdf"> here</a>.

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<colgroup><col><col><col><col><col><col></colgroup>
<thead>
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<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">August</th>
<th scope="col">July</th>
<th scope="col">August &#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>23.04</td>
<td>23.91</td>
<td>14.67</td>
<td>28.76</td>
<td>16.17</td>
<td>7.19</td>
</tr>
</tbody>
</table>
</body>
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The Empire State Index of General Business Conditions in New York's manufacturing industries in August remained roughly at the same level as in July. At 23.04 versus 23.92, the two figures were the best back-to-back levels of the [...]

Empire State Index Improved, Budget Deficit Estimate Reduced

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050815a.jpg" width="353">
The Empire State Index of General Business Conditions in New York&#39;s manufacturing industries in August remained roughly at the same level as in July. At 23.04 versus 23.92, the two figures were the best back-to-back levels of the year.
The new orders component added to its earlier improvement and jumped to 33.75, the highest of the year, and the shipments index also rose. The employment index retraced all of the weakness of the prior four months while the prices paid index gained back virtually all of the July decline.
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 index of expectations for business conditions in six months rose sharply for the second consecutive month to the highest level since October of last year. Expectations for future capital spending remained about stable at the improved July level.
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>.
The Congressional Budget Office today updated its outlook for US budget deficits and the economy. The Federal budget deficit estimate for Fiscal Year 2005 was reduced to $331B from $365B projected in March but the FY2006 and FY2007 estimates were raised to $314B and $324B, respectively, from $298B and $268B.
Legislative (mostly Medicare) changes were estimated to cause the ten year deficit outlook, 2006-2015, to worsen by $1.2 trillion versus the earlier outlook.
The Budget Deficit and Economic Outlook: An Update from the Congressional Budget Office is available <a href="http://www.cbo.gov/ftpdocs/66xx/doc6609/08-15-OutlookUpdate.pdf"> here</a>.
Understanding the Twin Deficits: New Approaches, New Results from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2005/el2005-16.pdf"> 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">August</th>
<th scope="col">July</th>
<th scope="col">August &#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>23.04</td>
<td>23.91</td>
<td>14.67</td>
<td>28.76</td>
<td>16.17</td>
<td>7.19</td>
</tr>
</tbody>
</table>
China's Trade Surplus Growing:  Not Only is the Surplus with the United States Rising, but the Deficit with All Other Countries Is Declining Sharply 
by <a href="/comment/Curley.html">Louise Curley</a> August 15, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050815b.jpg" width="353">
China&#39;s exports of merchandise declined in July by $3,802 million from June, but since imports declined by $4,435 million, the trade surplus increased $633 million to $10,445 million from $9,812 million in June. The growth of the China&#39;s trade surplus over the past few years is evident in the first chart. Most of the surplus is with the United States. Countries other than the United States have, as a whole, run a trade deficit with China as can be seen in the table below.
Only total trade figures are available for July. The latest data on trade by country are for June. In the table below, we show China&#39;s total exports, exports to the United States and all other countries, total imports and imports from the United States and all other countries, and the total balance of trade and the balances for the United States and all other countries. While the surplus with the United States is still increasing in the first half of this year, there appears to be a sharp deceleration in the deficit with countries other than the U. S. In 2004 the deficit with these countries was $47,452 million, but in the first half of this year the deficit was only $3,645 million. There has been a decline in exports to these countries but a much greater decline in imports from them has reduced their deficit with China. The second and third charts show exports to and imports from Europe and Japan. The trends in the first half of this year shown in these charts are typical of most of the countries for which data are available. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050815d.jpg" width="353"><img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050815c.jpg" width="353">

<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/EMERGEPR/@P1/@P1.HTM">China&#39;s Merchandise Trade (Million US$)</a>&nbsp;</th>
<th scope="col">2005 1st H</th>
<th scope="col">2004&nbsp;</th>
<th scope="col">2003</th>
<th scope="col">2002 </th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Exports</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; Total</td>
<td>365,996</td>
<td>593,633</td>
<td>438,398</td>
<td>325,596</td>
<td>266,108</td>
<td>249,202</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; US</td>
<td>78,152</td>
<td>124,973</td>
<td>92,512</td>
<td>69,959</td>
<td>54,319</td>
<td>52,142</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Rest of the world</td>
<td>287,844</td>
<td>468,660</td>
<td>345,886</td>
<td>255,637</td>
<td>211,789</td>
<td>197,060</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports&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; Total</td>
<td>315,594</td>
<td>560,765</td>
<td>412,840</td>
<td>295,170</td>
<td>243,554</td>
<td>225,092</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; US</td>
<td>24,105</td>
<td>44,653</td>
<td>33,883</td>
<td>27,228</td>
<td>26,204</td>
<td>22,365</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Rest of the world</td>
<td>291,489</td>
<td>516,112</td>
<td>278,957</td>
<td>267,942</td>
<td>217,350</td>
<td>202,727</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance</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; Total</td>
<td>50,402</td>
<td>32,868</td>
<td>25,558</td>
<td>30,426</td>
<td>22,554</td>
<td>24,110</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; US</td>
<td>54,047</td>
<td>80,320</td>
<td>58,629</td>
<td>42,731</td>
<td>28,115</td>
<td>29,777</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Rest of the world</td>
<td>-3.645</td>
<td>-47,452</td>
<td>-33,071</td>
<td>-12,305</td>
<td>-5,561</td>
<td>-5,667</td>
</tr>
</tbody>
</table>
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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050812b.jpg" width="353">
In August, the University of Michigan&#39;s preliminary reading of consumer sentiment fell unexpectedly versus July by 3.9% to 92.7. Consensus expectations had been for stability m/m.
During the last ten years there has been a 74% correlation between the level of consumer sentiment and the y/y change in real PCE, although the correlation has fallen in recent years.
Consumer expectations fell a sharp 4.9% to the lowest level since May and the reading of current economic conditions fell 2.7%.
Sentiment amongst families earning more than $50,000 per year fell sharply and is down 5.5% y/y. While sentiment amongst families earning less than $50,000 also has fallen the last two months, it is up 0.2% y/y.
The University of Michigan survey is not seasonally adjusted.The mid-month survey is based on telephone interviews with 250 households nationwide on personal finances and business and buying conditions. The survey is expanded to a total of 500 interviews at month end.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM">University of Michigan</a></th>
<th scope="col">August</th>
<th scope="col">July</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">Consumer Sentiment</td>
<td>92.7</td>
<td>96.5</td>
<td>-3.3%</td>
<td>95.2</td>
<td>87.6</td>
<td>89.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>110.4</td>
<td>113.5</td>
<td>2.3%</td>
<td>105.6</td>
<td>97.2</td>
<td>97.5</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Consumer Expectations</td>
<td>81.3</td>
<td>85.5</td>
<td>-7.8%</td>
<td>88.5</td>
<td>81.4</td>
<td>84.6</td>
</tr>
</tbody>
</table>
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In August, the University of Michigan's preliminary reading of consumer sentiment fell unexpectedly versus July by 3.9% to 92.7. Consensus expectations had been for stability m/m. During the last ten years there has been a 74% [...]

U.S. Consumer Sentiment Down

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050812c.jpg" width="353">
Import prices in July rose 1.1% on top of a like gain one month earlier, the increase quite a bit stronger than Consensus expectations for a 0.6% rise.
Petroleum prices jumped 6.6% and in early August Brent crude rose another 8%. Yesterday Brent crude was $65.64/bbl. versus an average $57.52 in July.
Import prices other than petroleum fell for the third consecutive month, off 0.1% last month. Prices for nonauto consumer goods fell 0.2% (+1.2% y/y) and capital goods prices fell 0.7% (-0.5% y/y). Excluding computers capital goods prices were unchanged (2.5% y/y).
During the last ten years there has been a 66% (negative) correlation between the nominal trade-weighted exchange value of the US dollar vs. major currencies and the y/y change in non oil import prices. The correlation is a lower 47% against a broader basket of currencies and a lower 57% against the real value of the dollar.
Export prices rose 0.1%. Agricultural prices fell 0.2% (-1.9% y/y) and nonagricultural prices rose 0.2% (3.2% 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/@E8/@E807/@E807.HTM">Import/Export Prices (NSA)</a></th>
<th scope="col">July</th>
<th scope="col">June</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">Import - All Commodities</td>
<td>1.1%</td>
<td>1.0%</td>
<td>7.7%</td>
<td>5.6%</td>
<td>2.9%</td>
<td>-2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Petroleum</td>
<td>6.6%</td>
<td>7.9%</td>
<td>43.0%</td>
<td>30.5%</td>
<td>21.0%</td>
<td>3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Non-petroleum</td>
<td>-0.1%</td>
<td>-0.2%</td>
<td>2.2%</td>
<td>2.6%</td>
<td>1.1%</td>
<td>-2.4%</td>
</tr>
<tr>
<td class="firstcol">Export - All Commodities</td>
<td>0.1%</td>
<td>-0.1%</td>
<td>2.7%</td>
<td>3.9%</td>
<td>1.6%</td>
<td>-1.0%</td>
</tr>
</tbody>
</table>
</body>
</html>

Import prices in July rose 1.1% on top of a like gain one month earlier, the increase quite a bit stronger than Consensus expectations for a 0.6% rise. Petroleum prices jumped 6.6% and in early August Brent crude rose another 8%. [...]

Import Prices Recovered

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050812a.jpg" width="353">
The U.S. foreign trade deficit deepened more than expected in June to $58.8B versus May&#39;s deficit of $55.4 which was little revised. Consensus expectations had been for a deficit of $57.2B.
Total exports were unchanged for the second consecutive month. Goods exports were again unchanged (13.0% y/y), last month held back by a 7.0% decline in food, feeds &amp; beverages and a 2.2% (+12.2% y/y) drop in nonauto consumer goods. Capital goods recovered 1.9% (12.4% y/y) after the prior month&#39;s decline. Exports of advanced technology products jumped 12.2% (NSA, 10.3% y/y) after two months of decline.
Services exports rose 0.2% (13.7% y/y).
Imports of goods &amp; services rose 2.1% as imports of capital goods jumped 4.0% (11.2% y/y). Imports of petroleum products rose 9.8% (31.9% y/y) due to a 3.1% rise in the average price of crude oil to $44.40 per bbl. (31.6% y/y). Imports of non-petroleum goods rose 1.3% (8.6% y/y).
The US trade deficit with China deepened further to $17.6B ($161.9B in 2004) and the US trade deficit with Japan deepened to $6.9B ($75.6B in 2004) following two months of improvement. The monthly trade deficit with the Asian NICs deepened to $1.3B ($21.9B in 2004) and the deficit with the European Union deepened to $10.8B ($109.3B in 2004). 
Foreign Exchange Rates Are Predictable! from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/publications/net/20050801/cover.pdf"> here</a>.
International Perspectives on the &quot;Great Moderation&quot; from the Federal Reserve Bank of St. Louis can be found <a href="http://research.stlouisfed.org/publications/iet/20050801/cover.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EE/@EE03/@EE03.HTM">Foreign Trade</a></th>
<th scope="col">June</th>
<th scope="col">May</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">Trade Deficit</td>
<td>$58.8B</td>
<td>$55.4B</td>
<td>$54.9B (6/04)</td>
<td>$617.6B</td>
<td>$494.8B</td>
<td>$421.2B</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Exports - Goods &amp; Services</td>
<td>0.0%</td>
<td>0.0%</td>
<td>13.4%</td>
<td>12.6%</td>
<td>4.6%</td>
<td>-3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Imports - Goods &amp; Services</td>
<td>2.1%</td>
<td>-0.9%</td>
<td>11.1%</td>
<td>16.6%</td>
<td>8.5%</td>
<td>2.1%</td>
</tr>
</tbody>
</table>


</html>

The U.S. foreign trade deficit deepened more than expected in June to $58.8B versus May's deficit of $55.4 which was little revised. Consensus expectations had been for a deficit of $57.2B. Total exports were unchanged for the second [...]

U.S. Trade Deficit Deepened

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050812a.jpg" width="353">
The U.S. foreign trade deficit deepened more than expected in June to $58.8B versus May&#39;s deficit of $55.4 which was little revised. Consensus expectations had been for a deficit of $57.2B.
Total exports were unchanged for the second consecutive month. Goods exports were again unchanged (13.0% y/y), last month held back by a 7.0% decline in food, feeds &amp; beverages and a 2.2% (+12.2% y/y) drop in nonauto consumer goods. Capital goods recovered 1.9% (12.4% y/y) after the prior month&#39;s decline. Exports of advanced technology products jumped 12.2% (NSA, 10.3% y/y) after two months of decline.
Services exports rose 0.2% (13.7% y/y).
Imports of goods &amp; services rose 2.1% as imports of capital goods jumped 4.0% (11.2% y/y). Imports of petroleum products rose 9.8% (31.9% y/y) due to a 3.1% rise in the average price of crude oil to $44.40 per bbl. (31.6% y/y). Imports of non-petroleum goods rose 1.3% (8.6% y/y).
The US trade deficit with China deepened further to $17.6B ($161.9B in 2004) and the US trade deficit with Japan deepened to $6.9B ($75.6B in 2004) following two months of improvement. The monthly trade deficit with the Asian NICs deepened to $1.3B ($21.9B in 2004) and the deficit with the European Union deepened to $10.8B ($109.3B in 2004). 
Foreign Exchange Rates Are Predictable! from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/publications/net/20050801/cover.pdf"> here</a>.
International Perspectives on the &quot;Great Moderation&quot; from the Federal Reserve Bank of St. Louis can be found <a href="http://research.stlouisfed.org/publications/iet/20050801/cover.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EE/@EE03/@EE03.HTM">Foreign Trade</a></th>
<th scope="col">June</th>
<th scope="col">May</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">Trade Deficit</td>
<td>$58.8B</td>
<td>$55.4B</td>
<td>$54.9B (6/04)</td>
<td>$617.6B</td>
<td>$494.8B</td>
<td>$421.2B</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Exports - Goods &amp; Services</td>
<td>0.0%</td>
<td>0.0%</td>
<td>13.4%</td>
<td>12.6%</td>
<td>4.6%</td>
<td>-3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Imports - Goods &amp; Services</td>
<td>2.1%</td>
<td>-0.9%</td>
<td>11.1%</td>
<td>16.6%</td>
<td>8.5%</td>
<td>2.1%</td>
</tr>
</tbody>
</table>
Import Prices Recovered 
by <a href="/comment/Moeller.html">Tom Moeller</a> August 12, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050812c.jpg" width="353">
Import prices in July rose 1.1% on top of a like gain one month earlier, the increase quite a bit stronger than Consensus expectations for a 0.6% rise.
Petroleum prices jumped 6.6% and in early August Brent crude rose another 8%. Yesterday Brent crude was $65.64/bbl. versus an average $57.52 in July.
Import prices other than petroleum fell for the third consecutive month, off 0.1% last month. Prices for nonauto consumer goods fell 0.2% (+1.2% y/y) and capital goods prices fell 0.7% (-0.5% y/y). Excluding computers capital goods prices were unchanged (2.5% y/y).
During the last ten years there has been a 66% (negative) correlation between the nominal trade-weighted exchange value of the US dollar vs. major currencies and the y/y change in non oil import prices. The correlation is a lower 47% against a broader basket of currencies and a lower 57% against the real value of the dollar.
Export prices rose 0.1%. Agricultural prices fell 0.2% (-1.9% y/y) and nonagricultural prices rose 0.2% (3.2% 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/@E8/@E807/@E807.HTM">Import/Export Prices (NSA)</a></th>
<th scope="col">July</th>
<th scope="col">June</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">Import - All Commodities</td>
<td>1.1%</td>
<td>1.0%</td>
<td>7.7%</td>
<td>5.6%</td>
<td>2.9%</td>
<td>-2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Petroleum</td>
<td>6.6%</td>
<td>7.9%</td>
<td>43.0%</td>
<td>30.5%</td>
<td>21.0%</td>
<td>3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Non-petroleum</td>
<td>-0.1%</td>
<td>-0.2%</td>
<td>2.2%</td>
<td>2.6%</td>
<td>1.1%</td>
<td>-2.4%</td>
</tr>
<tr>
<td class="firstcol">Export - All Commodities</td>
<td>0.1%</td>
<td>-0.1%</td>
<td>2.7%</td>
<td>3.9%</td>
<td>1.6%</td>
<td>-1.0%</td>
</tr>
</tbody>
</table>
U.S. Consumer Sentiment Down 
by <a href="/comment/Moeller.html">Tom Moeller</a> August 12, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050812b.jpg" width="353">
In August, the University of Michigan&#39;s preliminary reading of consumer sentiment fell unexpectedly versus July by 3.9% to 92.7. Consensus expectations had been for stability m/m.
During the last ten years there has been a 74% correlation between the level of consumer sentiment and the y/y change in real PCE, although the correlation has fallen in recent years.
Consumer expectations fell a sharp 4.9% to the lowest level since May and the reading of current economic conditions fell 2.7%.
Sentiment amongst families earning more than $50,000 per year fell sharply and is down 5.5% y/y. While sentiment amongst families earning less than $50,000 also has fallen the last two months, it is up 0.2% y/y.
The University of Michigan survey is not seasonally adjusted.The mid-month survey is based on telephone interviews with 250 households nationwide on personal finances and business and buying conditions. The survey is expanded to a total of 500 interviews at month end.

<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/@EF/@EF14/@EF1402/@EF1402.HTM">University of Michigan</a></th>
<th scope="col">August</th>
<th scope="col">July</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">Consumer Sentiment</td>
<td>92.7</td>
<td>96.5</td>
<td>-3.3%</td>
<td>95.2</td>
<td>87.6</td>
<td>89.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>110.4</td>
<td>113.5</td>
<td>2.3%</td>
<td>105.6</td>
<td>97.2</td>
<td>97.5</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Consumer Expectations</td>
<td>81.3</td>
<td>85.5</td>
<td>-7.8%</td>
<td>88.5</td>
<td>81.4</td>
<td>84.6</td>
</tr>
</tbody>
</table>


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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/050811c.jpg" width="353">
European GDP slowed in Q2, according to the &quot;Flash Estimate&quot; published today by the EC Commission. Growth for the Euro-Zone 12 countries was 0.3%, off from 0.5% in Q1. GDP ran 1.2% ahead of a year ago. At the same time, the EU expects Q3 and Q4 to improve, evidently due to the somewhat weaker euro; the &quot;high&quot; and &quot;low&quot; forecasts average to a 0.4% increase in Q3 and 0.6% in Q4.
The Q2 result is the net of widely varying outcomes among the countries reporting today. The German economy came to a dead stop, with zero change, although this followed a strong 0.8% gain in Q1. Growth over the last year has been 1.5%. Italy and the Netherlands, by contrast, saw Q2 rebounds after weak Q1 numbers. For Italy, this means that the year-on-year change is a mere 0.1%, but the Dutch economy has gained 1.3%. Spain maintained its Q1 pace of 0.9% in Q2 as well, with the year-on-year rate at 3.4%; it continues to sustain a growth trend well above other European economies.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050811d.jpg" width="353">
One technical note on the growth rates. In the table below, we show quarter-to-quarter changes based on seasonally adjusted data. But the year-on-year and annual figures come from not seasonally adjusted data. Seasonal adjustment is meant to smooth regular intra-year data movements. The year as a whole, however, should be unaffected by these shorter periodic changes, so the raw data is more appropriate for 12-month comparisons. Further, the calculations can produce different results as the seasonal forces might differ from year to year or the performance of components with varying weights might differ from year to year. A good example is Germany, where the second graph shows that year-on-year percent changes differ throughout, and in the table, the row showing annual growth calculated from seasonally adjusted figures is significantly different for Q2 over Q2 2004 and for 2004 as a whole. The Federal Statistics Office highlights the availability of two more trading days this year as a reason for the Q2 differential. Chain weighting and concurrent seasonal adjustment are two other factors that can increase the differences between the adjusted and unadjusted series in the most recent periods.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">&nbsp;</th>
Seasonally Adjusted
Not Seasonally Adjusted
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Q2 2005</td>
<td>Q1 2005</td>
<td>Year Ago</td>
<td>2004</td>
<td>2003</td>
<td>2002</td>
</tr>
<tr>
<td class="firstcol">Euro-Zone 12</td>
<td>0.3</td>
<td>0.5</td>
<td>1.2</td>
<td>1.7</td>
<td>0.7</td>
<td>0.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Germany</td>
<td>0.0</td>
<td>0.8</td>
<td>1.5</td>
<td>1.6</td>
<td>-0.2</td>
<td>0.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Seasonally Adjusted Year</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>0.6</td>
<td>1.1</td>
<td>-0.2</td>
<td>0.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Italy</td>
<td>0.7</td>
<td>-0.5</td>
<td>0.1</td>
<td>1.0</td>
<td>0.4</td>
<td>0.4</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>0.9</td>
<td>0.9</td>
<td>3.4</td>
<td>3.1</td>
<td>2.9</td>
<td>2.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Netherlands</td>
<td>1.2</td>
<td>-0.8</td>
<td>1.3</td>
<td>1.7</td>
<td>-0.1</td>
<td>0.1</td>
</tr>
</tbody>
</table>
</body>
</html>

European GDP slowed in Q2, according to the "Flash Estimate" published today by the EC Commission. Growth for the Euro-Zone 12 countries was 0.3%, off from 0.5% in Q1. GDP ran 1.2% ahead of a year ago. At the same time, the EU expects [...]

European GDP Growth for Q2 Slows to 0.3% as Germany Stalls; Variations Wide in Seasonally Adjusted and Unadjusted [...]

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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250502B5.jpg

Nonfarm payrolls increased 177,000 (1.2% y/y) during April after rising 185,000 in March, revised from 228,000, and 102,000 in February, revised from 117,000. Expectations had been for a 130,000 rise in the Action Economics Forecast Survey. The latest figure left the three-month average change at 155,000 in April, down from 232,000 in January.

Average hourly earnings rose 0.2% during April after unrevised increases of 0.3% in March and 0.2% in February. Earnings growth of 3.8% y/y was below the 5.9% high in March 2022.

The unemployment rate, measured in the household survey, held m/m at an expected 4.2% in April, and compared to 4.1% in February and 4.0% in January. It reached a low of 3.4% in April 2023. The unemployment rate, including employees working part-time for economic reasons plus all marginally-attached workers, eased to 7.8% in April from 7.9% in March.

In the **establishment survey**, private-sector employment rose 167,000 (1.2% y/y) after a 170,000 March increase. Factory sector jobs edged 1,000 lower (-0.7% y/y) following a 3,000 gain. Construction sector employment increased 11,000 (1.7% y/y), after rising 7,000 in March.

Private service-producing sector employment increased 156,000 (1.4% y/y) in April after improving 161,000 in March. Increases varied greatly amongst service sector categories. Private education & health sector employment rose 70,000 (3.4% y/y) last month following a 74,000 March increase. Leisure & hospitality employment rose 24,000 (1.3% y/y) after a 38,000 gain. Trade, transportation & utilities rose 32,000 (0.9% y/y) in April following a 25,000 March increase. Professional & business services employment rose 17,000 (-0.1% y/y) following a 3,000 rise while temporary help employment rose 3,600 (-3.9% y/y) following a 2,700 decline. Financial activities employment improved 14,000 (1.2% y/y) after a 6,000 gain. The number of information sector jobs held steady (-0.4% y/y) last month after falling 2,000 in March.

Government sector payrolls rose 10,000 (1.3% y/y) last month after increasing 15,000 in March. The number of local government jobs increased 13,000 (1.4% y/y) following a 17,000 gain. State government employment rose 6,000 (1.8% y/y) following a 2,000 March increase but federal government payrolls fell 9,000 (-0.3% y/y), the third consecutive monthly decline.

Private-sector average hourly earnings rose 0.2% (3.8% y/y) in April after increasing 0.3% in March. Earnings in the goods-producing sector eased 0.1% (+4.0% y/y) following a 0.6% gain. Earnings in construction rose 0.3% (3.6% y/y), after a 0.2% rise but factory sector earnings declined 0.3% (+4.3% y/y) after surging 0.8% in March. In the private services-sector, earnings rose 0.2% (3.7% y/y) in April for the third straight month. Information sector pay increased 1.0% (5.2% y/y) last month after easing 0.1%, and financial activities earnings rose 0.5% (4.3% y/y) for the second straight month. Trade, transportation & utilities sector pay increased 0.4% (3.4% y/y) after 0.6%. Professional & business sector earnings increased 0.1% (4.4% y/y) after 0.2% in March. Leisure & hospitality earnings held steady (+3.8% y/y) following a 0.6% March increase.

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The length of the average workweek held steady at 34.3 hours in April. The workweek in the goods-producing sector eased to 39.8 hours from 40.0 hours. The construction sector average workweek eased to 39.0 hours from 39.3 hours while the factory sector workweek moved lower to 40.0 hours from 40.2. The average workweek in the private service sector held at 33.2 hours. Professional & business service hours fell to 36.3 hours from 36.4 while trade, transportation & utilities hours improved to 34.3 from 34.0 hours. Private education hours rose slightly to 32.8, but leisure & hospitality held steady at 25.5 hours.

In the **household survey**, the unemployment rate held at 4.2% in April as employment rose 436,000 and the size of the labor force increased 518,000. The labor force participation rate edged up to 62.6% last month from 62.5% in March. It remained below the high of 63.3% early in 2020. The rate for teenagers declined to 36.9%. For workers aged 20-24, the rate held steady at 72.1%, up from 71.8% six months earlier. For workers aged 25-54 the rate rose to 83.6%, a five-month high. For individuals 55 and over, the rate improved to 38.4% in April.

The employment/population ratio for all workers in April rose to 60.0%. It remained below the peak reading of 61.1% in February, 2020 just prior to the pandemic.

The employment and earnings data are collected from surveys taken each month during the week containing the 12th day of the month. The labor market data are contained in Haver's **USECON** database. Detailed figures are in the **EMPL** and **LABOR** databases. The expectations figures are in the **AS1REPNA** database.

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- Job growth spreads across most sectors.
- Earnings growth trend decelerates.
- Jobless rate holds steady.

U.S. Job Growth Is Firm in April but March Gain Is Lessened

Winnie Tapasanun

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Total factory orders rose a slightly less-than-expected 4.3% m/m in March after rises of 0.5% in February and 1.8% in January, data from the U.S. Census Bureau showed. A 4.5% m/m March increase had been expected in the Action Economics Forecast Survey. The March reading was the third successive monthly rise and the largest since July 2024. The year-on-year rate accelerated to 6.0% in March, the highest since November 2022, from 2.3% in February. Notably, orders for nondefense aircraft & parts soared 139.0% in March following a 7.4% drop in February and a 92.9% surge in January. Factory orders excluding defense rose 4.8% (5.9% y/y), the largest of three straight m/m/ rises, after a 0.4% February increase. Factory orders excluding the transportation sector fell 0.2% (+1.1% y/y), the first m/m fall since August, after rising 0.3% in February, January and December.

Durable goods orders jumped 9.2% (11.9% y/y) in March, the third consecutive m/m gain and the biggest since July 2024, on top of a 0.8% increase in February (matching +9.2% m/m in the advance report on April 24). The March jump reflected m/m orders increases of 27.1% (the largest m/m surge since July 2024; 31.2% y/y) in transportation equipment, 1.1% (4.9% y/y) in primary metals, 0.5% (-0.4% y/y) in furniture & related products, 0.1% (2.5% y/y) in fabricated metal products, and 0.1% (0.9% y/y) in machinery. To the downside, durable goods orders for computers & electronic products (-1.3%; +2.7% y/y) and electrical equipment, appliances & components (-1.0%; +4.2% y/y) declined m/m in March.

Nondurable goods orders, which equal nondurable goods shipments, fell 0.3% (+0.4% y/y) in March, the first m/m fall since September, after a 0.1% uptick in February. The March fall reflected m/m drops of 2.4% (-9.3% y/y) in petroleum & coal products and 0.9% (-1.2% y/y) in apparel. To the upside, the following nondurable goods shipments rose m/m in March: leather & allied products (1.5%; 8.6% y/y), beverage & tobacco products (0.7%; 5.8% y/y), paper products (0.6%; 2.3% y/y), printing (0.3%; 3.8% y/y), textile mills (0.3%; 0.8% y/y), chemical products (0.2%; 5.4% y/y), plastics & rubber products (0.2%; 0.4% y/y), food products (0.1%; 1.8% y/y), and textile products (0.1%; 2.1% y/y).

Total shipments slipped 0.1% (+2.0% y/y) in March, the first m/m easing since October, after a 0.7% increase in February. Excluding transportation, shipments were virtually unchanged m/m (+1.1% y/y) in March following six straight m/m gains. Shipments of durable goods industries inched up 0.1% (3.8% y/y) in March, the smallest of four consecutive m/m increases, after a 1.3% advance in February. This reflected m/m durable goods shipments rises of 1.2% (5.6% y/y) in primary metals, 0.9% (0.1% y/y) in furniture & related products, 0.8% (-0.2% y/y) in nonmetallic mineral products, 0.4% (0.0% y/y) in machinery, 0.3% (1.8% y/y) in fabricated metal products, 0.2% (4.5% y/y) in computers & electronic products, 0.2% (-2.1% y/y) in wood products, and 0.1% (3.0% y/y) in electrical equipment, appliances & components. In contrast, durable goods shipments for transportation equipment (-0.5%; +7.3% y/y) and miscellaneous durable goods (-0.1%; +2.9% y/y) fell m/m in March following three successive m/m increases.

Unfilled orders rose 2.0% (2.3% y/y) in March, up for the eighth month in nine, after a 0.1% uptick in February. Excluding transportation, unfilled orders dipped 0.1% (+0.7% y/y) in March, the first m/m easing since May 2024, after holding steady in February. Backlogs of durable goods rose 2.0% (2.3% y/y) in March, reflecting m/m rises of 3.1% (3.1% y/y) in transportation equipment and 0.2% (2.4% y/y) in electrical equipment, appliances & components.

Inventories edged up 0.1% (0.9% y/y) in March, the fifth straight m/m increase, after rising at the same pace in the prior two months. Excluding transportation, inventories were up 0.1% (0.5% y/y) in March, the fifth consecutive m/m rise. Durable goods inventories ticked up 0.1% (1.0% y/y) in March after holding steady in February and January; nondurable goods inventories edged up 0.1% (0.8% y/y), the fifth successive m/m increase.

The factory sector data are available in Haver’s **USECON** database. The Action Economics Forecast Survey is in the **AS1REPNA** database.

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- March manufacturers’ new orders +4.3% m/m; +6.0% y/y, highest since Nov. ’22.
- Durable goods orders (+9.2%) jump m/m, while nondurable goods orders (-0.3%) and shipments (-0.1%) decline m/m.
- Transportation equipt. orders +27.1% m/m, w/ a 139.0% m/m surge in nondefense aircraft & parts orders.
- Unfilled orders +2.0%, the eighth m/m rise in nine months.
- Inventories +0.1%, the fifth consecutive m/m increase.

U.S. Factory Orders Increase for the Third Straight Month in March

Andrew Cates

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

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

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

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**The US economy’s structural outperformance and the dollar**
A second dynamic, captured in the next chart, reveals a tight correlation between the US real effective exchange rate and the potential GDP growth differential between the US and euro area over the past 50-60 years. This raises the question: has dollar strength (until recently) merely been a reflection of US growth leadership—or are capital inflows themselves helping to sustain this growth outperformance? In effect, the tail may be wagging the dog. Global investors have long allocated capital to the US, attracted by its macroeconomic resilience, technological leadership, and deep, liquid financial markets. The danger now is that the US trade war may disrupt this equilibrium. A sharp or sustained reduction in capital inflows could undermine growth, weaken the dollar, and trigger broader financial instability. Moreover, reversing this dynamic is not straightforward—barring a credible structural resurgence in European (or Asian) growth, the global investment landscape remains tilted toward the US.

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

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**Average wages in selected developed and developing economies**
This point is reinforced by the final chart, which shows estimates for average monthly wages across countries in 2024. US labour remains much more expensive than in peer or emerging economies. So even if China’s costs rise in tandem with the US, the global supply chain has ample alternatives. 'China plus one' strategies are accelerating, and the US remains structurally misaligned with low-cost production hubs. Tariffs aimed at reshoring supply chains are unlikely to deliver sustained gains unless accompanied by deep supply-side reforms, and risk further disincentivizing foreign direct investment if global firms perceive US trade policy as erratic or punitive.

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

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

Economy in Brief: August 2005

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