Robert Brusca

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<div align="left"><img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070816j.jpg">
Inflation trends are peaking and falling in the Euro area with the key core measure. Still that core measure is hugging the 2% ceiling rate for the overall HICP. While Year/year inflation is lower and 3-month inflation is lower 6-month inflation is NOT.
Overall and core rate of inflation are mostly conforming to the ECB ceiling across major countries. There is no sense of accelerating inflation in this group and that is certainly good news. The bad news is that the trends for the components of inflation are more decidedly mixed. While goods price inflation is still falling (and that one contains oil and gas price effects), services inflation is high and accelerating. It may contain some energy price impacts as well, but the speed right now is over the top of acceptability. Internal inflation (services) can be more stubborn than goods inflation. These days, due to international competition, goods price inflation tends to be better behaved. Pressure from services prices tends to be longer lived while goods price oscillations may not be so permanent. As a result the drop in goods prices that helped to contain the overall HICP is to be closely watched in the coming months. We obviously want to see as well the service sector trends and how much they are able to deflate.</div>

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Trends in HICP
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td colspan="3">M/M % Change</td>
<td colspan="4">% SAAR</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Jul-07</td>
<td>Jun-07</td>
<td>May-07</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>12-Mo</td>
<td>Yr Ago</td>
</tr>
<tr>
<td class="firstcol">EMU-13</td>
<td>0.1%</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.0%</td>
<td>2.6%</td>
<td>1.8%</td>
<td>2.4%</td>
</tr>
<tr>
<td class="firstcol">Core</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.1%</td>
<td>1.3%</td>
<td>2.0%</td>
<td>1.9%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">Goods</td>
<td>-1.0%</td>
<td>0.0%</td>
<td>0.2%</td>
<td>-2.9%</td>
<td>2.6%</td>
<td>1.2%</td>
<td>2.7%</td>
</tr>
<tr>
<td class="firstcol">Services</td>
<td>0.8%</td>
<td>0.2%</td>
<td>0.2%</td>
<td>5.2%</td>
<td>4.5%</td>
<td>2.6%</td>
<td>2.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">HICP</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>0.2%</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.3%</td>
<td>2.5%</td>
<td>2.0%</td>
<td>2.1%</td>
</tr>
<tr>
<td class="firstcol">France</td>
<td>0.0%</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.0%</td>
<td>2.1%</td>
<td>1.2%</td>
<td>2.2%</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>-0.1%</td>
<td>0.3%</td>
<td>0.3%</td>
<td>1.9%</td>
<td>2.7%</td>
<td>1.7%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">UK</td>
<td>-0.3%</td>
<td>0.3%</td>
<td>0.1%</td>
<td>0.4%</td>
<td>1.5%</td>
<td>1.9%</td>
<td>2.4%</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>0.2%</td>
<td>0.3%</td>
<td>0.3%</td>
<td>3.1%</td>
<td>3.4%</td>
<td>2.3%</td>
<td>4.0%</td>
</tr>
<tr>
<td class="firstcol">Core:xFE&amp;A</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>0.2%</td>
<td>0.1%</td>
<td>0.3%</td>
<td>2.4%</td>
<td>2.4%</td>
<td>2.1%</td>
<td>1.0%</td>
</tr>
<tr>
<td class="firstcol">France</td>
<td>0.0%</td>
<td>0.1%</td>
<td>0.1%</td>
<td>1.1%</td>
<td>1.3%</td>
<td>1.4%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>0.0%</td>
<td>0.1%</td>
<td>0.2%</td>
<td>1.2%</td>
<td>3.0%</td>
<td>1.8%</td>
<td>1.7%</td>
</tr>
<tr>
<td class="firstcol">UK</td>
<td>-0.1%</td>
<td>0.1%</td>
<td>0.3%</td>
<td>1.2%</td>
<td>1.6%</td>
<td>1.8%</td>
<td>1.2%</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>0.2%</td>
<td>0.2%</td>
<td>0.1%</td>
<td>2.2%</td>
<td>2.3%</td>
<td>2.4%</td>
<td>3.2%</td>
</tr>
</tbody>
</table>
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Inflation trends are peaking and falling in the Euro area with the key core measure. Still that core measure is hugging the 2% ceiling rate for the overall HICP. While Year/year inflation is lower and 3-month inflation is lower [...]

HICP is Losing Momentum

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<div align="left"><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070816i.jpg" width="353">
In the new third quarter, UK real retail sales excluding autos were up strongly - in July. Real retail sales are rising at a 7% annual rate in the new quarter. Real ex-auto retail sales are ramping up in terms of 3-month and 6-month trends as well. The UK is one country in the EU where consumers seem to have stepped up. In Germany growth has been strong but the consumer has lagged. In France recent stock market events have been worse than in other countries and its business surveys have weakened. The consumer remains the key to the next leg up in growth in Europe and only in the UK do we have evidence that the consumer is ready to comply.</div>

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
UK Real and Nominal Retail Sales
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Nominal</td>
<td>Jul-07</td>
<td>Jun-07</td>
<td>May-07</td>
<td>3-MO</td>
<td>6-MO</td>
<td>12-MO</td>
<td>Yr Ago</td>
</tr>
<tr>
<td class="firstcol">Retail Total</td>
<td>-0.2%</td>
<td>0.3%</td>
<td>-0.1%</td>
<td>0.0%</td>
<td>6.5%</td>
<td>3.5%</td>
<td>3.3%</td>
</tr>
<tr>
<td class="firstcol">Food Beverages &amp; Tobacco</td>
<td>-0.4%</td>
<td>-0.5%</td>
<td>-0.3%</td>
<td>-4.4%</td>
<td>0.6%</td>
<td>0.8%</td>
<td>5.3%</td>
</tr>
<tr>
<td class="firstcol">Clothing Footwear</td>
<td>-0.5%</td>
<td>0.2%</td>
<td>-4.3%</td>
<td>-17.1%</td>
<td>9.7%</td>
<td>1.6%</td>
<td>5.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Real</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Retail ex auto</td>
<td>0.7%</td>
<td>0.4%</td>
<td>0.4%</td>
<td>6.4%</td>
<td>8.1%</td>
<td>4.4%</td>
<td>4.1%</td>
</tr>
</tbody>
</table>
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In the new third quarter, UK real retail sales excluding autos were up strongly - in July. Real retail sales are rising at a 7% annual rate in the new quarter. Real ex-auto retail sales are ramping up in terms of 3-month and 6-month [...]

UK Real Retail Sales Pop in July

Tom Moeller

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<div align="left"><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070816g.jpg" width="353">
The Philadelphia Federal Reserve Bank&#39;s Index of General Business Conditions in the manufacturing sector fell more than expected during August. The drop to 0.0 from 9.2 indicated that activity was &quot;steady,&quot; but Consensus expectations had been for a reading that was roughly unchanged from July at 10.
During the last ten years there has been a 65% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 43% correlation with q/q growth in real GDP.
The sub indexes for new orders, shipments, unfilled orders and inventories all fell, the latter two into negative territory. The employment reading, however, improved to its best reading since 2004. During the last ten years there has been a 75% correlation between the employment index and the three month growth in factory payrolls.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070816h.jpg" width="353">
The business conditions index reflects a separate survey question, not the sub indexes.
The prices paid index fell for the third consecutive month, back to its lowest level since January. During the last ten years there has been a 76% correlation between the prices paid index and the three month growth in the intermediate goods PPI. There has been an 85% correlation with the change in core intermediate goods prices.
The separate index of expected business conditions in six months rose to its best level since late in 2004.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos0708.html">here</a>.
The latest Survey of Professional Forecasters from the Federal Reserve Bank of Philadelphia can be found <a href="http://www.philadelphiafed.org/files/spf/survq307.html"> here</a>. </div>

<table border="0" cellspacing="0" width="100%">
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<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">August</th>
<th scope="col">July &nbsp;</th>
<th scope="col">Aug. &#145;06</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>0.0&nbsp;</td>
<td>9.2</td>
<td>12.6&nbsp;</td>
<td>8.1</td>
<td>11.5</td>
<td>28.1</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>15.4&nbsp;</td>
<td>28.1&nbsp;</td>
<td>46.6&nbsp;</td>
<td>36.6</td>
<td>40.1</td>
<td>51.2</td>
</tr>
</tbody>
</table>
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The Philadelphia Federal Reserve Bank's Index of General Business Conditions in the manufacturing sector fell more than expected during August. The drop to 0.0 from 9.2 indicated that activity was "steady," but Consensus expectations [...]

Philadelphia Fed Index Unexpectedly Steady

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<div align="left"><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070816f.jpg" width="353">
Initial claims for unemployment insurance rose again last week. This third increase in as many weeks was to 322,000 from an unrevised 316,000 during the opening week of the month. The increase exceeded Consensus expectations for 315,000 claims in the latest week.
A claims level below 400,000 typically has been associated with growth in nonfarm payrolls. During the last ten years there has been a (negative) 78% correlation between the level of initial claims and the m/m change in nonfarm payroll employment.
The four-week moving average of initial claims rose to 312,500 (-0.2% y/y), its highest level in one month.
Continuing claims for unemployment insurance rose 17,000 after a downwardly revised 16,000 increase during the prior week. The continuing claims numbers lag the initial claims figures by one week.
The insured rate of unemployment remained at 1.9%.
Family Caregiver: Balancing Home and Work from the Federal Reserve Bank of Boston is available <a href="http://www.bos.frb.org/commdev/c&amp;b/2007/summer/Lochhead_home_health.pdf"> here</a>.</div>

<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/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">08/11/07 </th>
<th scope="col">08/04/07 </th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>&nbsp;322</td>
<td>316</td>
<td>1.9%</td>
<td>313</td>
<td>331</td>
<td>343</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,567</td>
<td>3.1%</td>
<td>2,545</td>
<td>3.3%</td>
<td>2,459</td>
</tr>
</tbody>
</table>
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Initial claims for unemployment insurance rose again last week. This third increase in as many weeks was to 322,000 from an unrevised 316,000 during the opening week of the month. The increase exceeded Consensus expectations for [...]

U.S. Initial Claims for Jobless Insurance Rose Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070816d.jpg" width="353"><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070816e.jpg" width="353">
The Composite Housing Market Index from the National Association of Home Builders&#39; (NAHB) fell hard this month to the lowest level since early 1991. At 22, for August, the index fell 8.3% from July after a 14.3% during that month. 
During the last twenty years there has been a 76% correlation between the y/y change in the Composite Index and the change in single family housing starts. 
The sub-index for current sales also was down and fell 4.2% (-37.8% y/y) from July. The sub-index covering prospective sales in the next six months dropped 5.9% m/m (-22.0% y/y). 
Traffic of prospective home buyers fell 15.8% m/m (-27.3% y/y).
The NAHB index is a diffusion index based on a survey of builders. Readings above 50 signal that more builders view conditions good than poor. 
Visit the <a href="http://www.nahb.org">National Association of Home Builders</a>. 

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S4/@S4.HTM">Nat&#39;l Association of Home Builders</a>&nbsp;</th>
<th scope="col">August</th>
<th scope="col">July &nbsp;</th>
<th scope="col">Aug. &#39;06&nbsp;</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Composite Housing Market Index</td>
<td>22&nbsp;</td>
<td>24</td>
<td>33</td>
<td>42</td>
<td>67</td>
<td>68</td>
</tr>
</tbody>
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The Composite Housing Market Index from the National Association of Home Builders' (NAHB) fell hard this month to the lowest level since early 1991. At 22, for August, the index fell 8.3% from July after a 14.3% during that month. [...]

U.S. NAHB Housing Market Index Lowest Since 1991

Carol Stone, CBE

The US Treasury's monthly "TIC" data were reported yesterday for June. They indicate that foreign interest in US capital markets remained strong with the same magnitude of net flows into the US as occurred in May, the record period. [...]

TIC Data Show Sizable Foreign Interest in US Securities Even Through June; Hong Kong, Russia & Brazilian Investors [...]

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070815k.jpg" width="353">
Every business day at about 9:30, the New York Federal Reserve Bank&#39;s trading desk announces the day&#39;s &quot;temporary open market operation&quot;. These are routine transactions in which the NY Fed buys securities from the group of &quot;primary dealers&quot; together with an agreement to sell them back at a later time, the familiar &quot;repo&quot; transaction. This is usually the next day, but can also be 3, 4, 7 or 15 days later. The effect is to add reserves to the banking system for that corresponding period, that is, to provide liquidity. If there is a surfeit of liquidity, the NY Fed may do &quot;reverse repurchase agreements&quot;, selling securities with an arrangement to buy them back, thus draining some reserves for the day or 2 or 3 during which the transaction is in force.
In the wake of the Fed&#39;s extraordinary repo operations late last week, Haver has added some series to the DAILY database, which show the amount of each day&#39;s operations and the type of collateral used. These are simple series, with only the total dollar amount in a given day&#39;s combined transactions. The objective, then, of these series is to show the amount of liquidity added or drained, and not the market conditions prompting the operations or the specifications of individual transactions beyond the securities used for collateral. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070815l.jpg" width="353">
The source for this information is a &quot;user-friendly&quot; page on the New York Fed&#39;s <a href="http://www.newyorkfed.org/markets/omo/dmm/temp.cfm">website</a>. The current day&#39;s transactions are described along with a link to the previous 25 transactions and to a search facility that allows reference to periods from a single specified day to the entire history since July 7, 2000. All of the information can be exported to an Excel spreadsheet.
As we see in the first graph, the daily amounts of these reserve provisions vary widely. Most of the transactions are related to ordinary seasonal flows in the banking system. Today, for example, is August 15, the settlement date for the regular quarterly issues of new debt by the US Treasury. It is also the last day of a Federal Reserve &quot;maintenance period&quot;, the bi-weekly time span over which banks are required to &quot;meet&quot; their reserve requirement. Today&#39;s operation added $7.0 billion. Other examples relate to developments in the real economy: in December when shopping is at its highest volume of the year, so are reserve needs. In January, when business slows way down after the holidays and in the depths of winter, reserve needs decrease markedly. There is nothing unusual about Federal Reserve additions in December or draining operations in January. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070815m.jpg" width="353">
The transactions on Thursday and Friday deserve special mention. On Thursday, they totaled $24 billion. This seems large if we don&#39;t follow these daily operations. But additions on Thursdays routinely run $15 billion or more and often around $20 billion. So this alone wasn&#39;t all that dramatic an intervention. Friday&#39;s operations, though, were quite distinctive. They totaled $38 billion, the largest single day&#39;s addition since the days immediately following September 11, 2001, when a number of New York dealers were briefly shut down. Also, they used mortgage-backed collateral exclusively. Demand for Treasury securities is strong in the midst of market uncertainty, so it is likely that the Fed didn&#39;t want to restrain the floating supply of those securities. But mortgages, of course, are the source of much of the present market dislocations. Our third graph here shows how unusual the volume of these repos is. At the same time, the Fed did not buy these securities outright, they only bought them to hold over the weekend. On Monday, they did a modest $2 billion operation and none on Tuesday, so those MBS returned to the markets. Even so, note that the federal funds rate remained very low on Monday and Tuesday. This indicates that normal banking system operations were providing reserves on those days, obviating the need for more Federal Reserve intervention.

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<th scope="col" class="firstcol">Million $</th>
<th scope="col">Aug 13</th>
<th scope="col">Aug 10</th>
<th scope="col">Aug 9</th>
<th scope="col">July* </th>
<th scope="col">June*</th>
<th scope="col">May*</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>2,000</td>
<td>38,000</td>
<td>24,000</td>
<td>8,810</td>
<td>8,464</td>
<td>8,250</td>
</tr>
<tr>
<td class="firstcol">Treasury</td>
<td>700</td>
<td>0</td>
<td>8,099</td>
<td>5,710</td>
<td>4,238</td>
<td>4,073</td>
</tr>
<tr class="odd">
<td class="firstcol">Agency</td>
<td>144</td>
<td>0</td>
<td>4,971</td>
<td>1,946</td>
<td>2,379</td>
<td>3,230</td>
</tr>
<tr>
<td class="firstcol">Mortgage-Backed</td>
<td>1,156</td>
<td>38,000</td>
<td>10,930</td>
<td>1,154</td>
<td>1,847</td>
<td>947</td>
</tr>
</tbody>
</table>
</body>
</html>

Every business day at about 9:30, the New York Federal Reserve Bank's trading desk announces the day's "temporary open market operation". These are routine transactions in which the NY Fed buys securities from the group of "primary [...]

Daily Fed Open Market Operations: The Pattern of Fed Liquidity Provision

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070815i.jpg" width="353">
The index of manufacturing activity in New York State for August slipped from its improve level of July &amp; June. The Index of General Business Conditions fell 1.4 points after a 0.7 point rise in July. The figures are reported by the Federal Reserve Bank of New York.
Since the series&#39; inception in 2001 there has been a 75% correlation between the index level and the three month change in U.S. factory sector industrial production.
The index for new orders fell hard as did the index for employment. The shipments index was negative for the second consecutive month.
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.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070815j.jpg" width="353">
Pricing pressure also fell considerably with the prices paid index and the prices received index falling into negative territory. Since 2001 there has been an 88% correlation between the index of prices paid and the three month change in the core intermediate materials PPI.
The Empire State index of expected business conditions in six months improved to its best level in two years, mostly due to improved expected delivery times.
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/survey/empire/empiresurvey_overview.html">here</a>. 

<table border="0" cellspacing="0" width="100%">
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<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">Aug. &#39;06 </th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
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<tbody>
<tr>
<td class="firstcol">General Business Conditions (diffusion index)</td>
<td>25.06</td>
<td>26.46</td>
<td>14.11</td>
<td>20.33</td>
<td>15.62</td>
<td>28.70</td>
</tr>
</tbody>
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The index of manufacturing activity in New York State for August slipped from its improve level of July & June. The Index of General Business Conditions fell 1.4 points after a 0.7 point rise in July. The figures are reported by the [...]

U.S. Empire State Index Slipped This Month

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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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.

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.

- 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

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.

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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- 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.

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.

Economy in Brief: August 2007

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