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/070620a.jpg" width="353">
Several European countries today reported their PPI data for May. After considerable upward pressure during 2005 and 2006, Germany has experienced some relief that began last autumn. For May, the total PPI was up 0.3%, following just 0.1% in April and the index stands 1.9% above a year ago.
Estonia and Slovenia, by contrast, are presently seeing greater wholesale price pressure than previously. Estonia&#39;s overall index was up 0.5% in May and is ahead of May 2006 by 8.7%. In Slovenia, it&#39;s a little better, with 0.4% in May and 5.1% over the year ago.
Energy, as elsewhere, makes a difference in all three countries. Germany&#39;s energy costs rose dramatically from mid-2004 through summer of 2006, erratically, to be sure, but with a strong trend. Then, inflation in that sector slowed notably in the autumn and continued easing, so that now, the status of energy costs shows them modestly below year-ago levels. Other prices have firmed somewhat since 2004. This may be related to higher energy costs, but probably also to higher prices for other raw materials, especially metals.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070620b.jpg" width="353">
The pattern in Estonia and Slovenia is different. It appears that in those regions, energy prices were restrained initially. In fact, in Estonia, they were cut in early 2005. Now, however, at least some of the higher world cost of energy is making its way into manufacturers&#39; prices. So producer prices overall just began to reflect this in early 2006 and, with the added push of other raw materials, they continue to accelerate now.
In Slovenia, prices in energy-related industries were raised in early 2004, then held back until this year. They jumped 12.5% this February and have crept somewhat higher since then. Some of this movement is apparently generated by utilities, an area where prices are often administered, which would account for the lurches in its path.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070620c.jpg" width="353">
So we see that even if the full impact of higher energy costs is postponed, it eventually must hit, contributing to increases in overall price measures. At the same time, we continue to see only limited evidence that non-energy prices have been impacted. They are probably as susceptible to moves in industrial commodity prices as to those in energy goods and services; this would be a good empirical question for some interested econometrician.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Producer Price Indexes</th>
<th scope="col">May 2007*</th>
<th scope="col">Apr 2007*</th>
<th scope="col">Mar 2007*</th>
<th scope="col">Year Ago</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Germany</td>
<td>0.3</td>
<td>0.1</td>
<td>0.2</td>
<td>1.9</td>
<td>5.5</td>
<td>4.6</td>
<td>1.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp; ex Energy</td>
<td>0.2</td>
<td>0.4</td>
<td>0.1</td>
<td>2.7</td>
<td>2.3</td>
<td>2.0</td>
<td>1.4</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Energy (NSA)</td>
<td>0.7</td>
<td>-0.8</td>
<td>0.4</td>
<td>-0.3</td>
<td>16.0</td>
<td>14.0</td>
<td>2.5</td>
</tr>
<tr>
<td class="firstcol">Estonia</td>
<td>0.5</td>
<td>1.5</td>
<td>0.6</td>
<td>8.7</td>
<td>4.5</td>
<td>2.1</td>
<td>2.9</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Energy</td>
<td>0.6</td>
<td>0.3</td>
<td>0.5</td>
<td>6.9</td>
<td>1.9</td>
<td>-1.5</td>
<td>3.5</td>
</tr>
<tr>
<td class="firstcol">Slovenia</td>
<td>0.4</td>
<td>0.0</td>
<td>0.5</td>
<td>5.1</td>
<td>2.3</td>
<td>2.7</td>
<td>4.3</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Energy-related</td>
<td>0.3</td>
<td>0.8</td>
<td>1.2</td>
<td>11.3</td>
<td>2.8</td>
<td>1.5</td>
<td>6.2</td>
</tr>
</tbody>
</table>
</body>
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Several European countries today reported their PPI data for May. After considerable upward pressure during 2005 and 2006, Germany has experienced some relief that began last autumn. For May, the total PPI was up 0.3%, following just [...]

European PPIs: Energy Hits Early in Germany and Relief Is Already Evident; Estonia and Slovenia Postpone Impact, [...]

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070619b.jpg" width="353">
The ZEW indicator that measures the balance of opinion among German institutional investors and analysts on the outlook six months ahead fell to 20.3% in June from 24% in May. The consensus expectation was for a rise to 29%. At the same time the balance of opinion on current conditions rose to a record of 88.7%, as shown in the first chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070619c.jpg" width="353">
Some of the events that took place and some of the data that were released during the period, June 4th to June 18th, when the participants of the survey were asked for their opinions, may help explain the decline in the optimists over the pessimists.
The European Central Bank raised its official rate to 4% on June 6 and suggested further increases might be in the offing. The yield on the ten year government bond, which had been rising moderately since March, jumped by 8 basis points on June 8th. Although it has since recovered, the Frankfurt Xetra Dax Index declined 2.4% in the one day of June 6. The second chart shows the ten year government bond yield and the stock market index on a daily basis for the last year and a half.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070619d.jpg" width="353">
During the survey period it was revealed that the volume of manufacturing sales had declined 3.07% in April from March and that the volume of new orders for April was 1.17% below March. Moreover, April industrial production was down 2.27% from March. On the cost side, unit labor costs were up sharply, 4.25%, in April from March.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">ZEW INDICATOR&nbsp; (% BALANCE)&nbsp;</th>
<th scope="col">Jun &nbsp; 07</th>
<th scope="col">May&nbsp; 07&nbsp;</th>
<th scope="col">Jun &nbsp; 06</th>
<th scope="col">M/M Dif</th>
<th scope="col">Y/Y Dif</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Current Conditions</td>
<td>88.7</td>
<td>88.0</td>
<td>11.9</td>
<td>0.7</td>
<td>76.8</td>
<td>18.3</td>
<td>-61.8</td>
<td>-67.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Expectations 6 months ahead</td>
<td>20.3</td>
<td>24.0</td>
<td>37.8</td>
<td>-3.7</td>
<td>-17.5</td>
<td>22.3</td>
<td>34.8</td>
<td>44.6</td>
</tr>
<tr>
<td class="firstcol">ECONOMIC INDICATORS&nbsp; (2000=100)</td>
<td>Apr&nbsp;&nbsp; 07</td>
<td>Mar&nbsp; 07&nbsp;</td>
<td>Apr&nbsp;&nbsp; 06</td>
<td>M/M %</td>
<td>Y/Y %</td>
<td>2006</td>
<td>2005</td>
<td>2004</td>
</tr>
<tr class="odd">
<td class="firstcol"> Manufacturing Sales</td>
<td>116.9</td>
<td>120.6</td>
<td>111.6</td>
<td>-3.07</td>
<td>4.75</td>
<td>113.3</td>
<td>106.3</td>
<td>103.0</td>
</tr>
<tr class="odd">
<td class="firstcol"> Manufacturing New Orders </td>
<td>127.0</td>
<td>128.5</td>
<td>117.7</td>
<td>-1.17</td>
<td>7.90</td>
<td>119.0</td>
<td>108.7</td>
<td>103.2</td>
</tr>
<tr class="odd">
<td class="firstcol"> Industrial Production </td>
<td>112.1</td>
<td>114.7</td>
<td>108.1</td>
<td>-2.27</td>
<td>3.70</td>
<td>109.8</td>
<td>103.7</td>
<td>100.8</td>
</tr>
<tr class="odd">
<td class="firstcol"> Unit Labor Cost </td>
<td>93.2</td>
<td>89.4</td>
<td>93.0</td>
<td>4.25</td>
<td>0.22</td>
<td>91.8</td>
<td>95.9</td>
<td>99.3</td>
</tr>
</tbody>
</table>
</body>
</html>

The ZEW indicator that measures the balance of opinion among German institutional investors and analysts on the outlook six months ahead fell to 20.3% in June from 24% in May. The consensus expectation was for a rise to 29%. At the [...]

German Financial Community Turns Less Optimistic

Robert Brusca

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070615i.jpg" width="353">
Private net securities purchases by foreigners continues to be an important part of financing the US current account deficit. 
Exports have built stronger growth than imports and driven the deficit lower over the past four quarters. Services exports also are growing faster than imports. The memo item in the table shows that in addition to solid private net securities purchases in Q1 official purchases of Government securities ran strong in 2007-Q1. While the dollar is drifting and weak vs. the euro it has moved up to a 4 &frac12; year high vs yen supported by inflows such as these. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
US Current Account
</tr>
</thead>
<tbody>
<tr class="grey6">
<td class="firstcol">Balances:</td>
<td>Q1-07</td>
<td>Q4-06</td>
<td>Q3-06</td>
<td>4Qtr-Avg</td>
<td>Prev4Qtr</td>
</tr>
<tr class="grey5">
<td class="firstcol">Current Account</td>
<td>-192.6</td>
<td>-187.9</td>
<td>-217.3</td>
<td>-200.9</td>
<td>-193.3</td>
</tr>
<tr class="grey5">
<td class="firstcol">Trade</td>
<td>-200.9</td>
<td>-200.3</td>
<td>-218.9</td>
<td>-207.8</td>
<td>-202.6</td>
</tr>
<tr class="grey5">
<td class="firstcol">Services</td>
<td>34.4</td>
<td>33.1</td>
<td>25.4</td>
<td>30.6</td>
<td>29.8</td>
</tr>
<tr class="grey4">
<td class="firstcol">Growth Rates</td>
<td colspan="3">Quarterly Saar</td>
<td colspan="2">4-Qtr % for Yr Ended:</td>
</tr>
<tr class="grey3">
<td class="firstcol">Merchandise</td>
<td>Q1-07</td>
<td>Q4-06</td>
<td>Q3-06</td>
<td>Q1-07</td>
<td>Q1-06</td>
</tr>
<tr class="grey5">
<td class="firstcol">Exports</td>
<td>5.6%</td>
<td>9.9%</td>
<td>13.0%</td>
<td>10.8%</td>
<td>13.8%</td>
</tr>
<tr class="grey5">
<td class="firstcol">Imports</td>
<td>3.6%</td>
<td>-9.9%</td>
<td>14.0%</td>
<td>4.3%</td>
<td>13.3%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Services</td>
<td>Q1-07</td>
<td>Q4-06</td>
<td>Q3-06</td>
<td>Q1-07</td>
<td>Q1-06</td>
</tr>
<tr class="grey5">
<td class="firstcol">Exports</td>
<td>6.1%</td>
<td>22.8%</td>
<td>5.8%</td>
<td>10.9%</td>
<td>7.8%</td>
</tr>
<tr class="grey5">
<td class="firstcol">Imports</td>
<td>4.7%</td>
<td>8.3%</td>
<td>2.7%</td>
<td>6.0%</td>
<td>9.3%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Memo: ($-Blns)</td>
<td>Q4-03</td>
<td>Q3-03</td>
<td>Q2-03</td>
<td>4Qtr-Avg</td>
<td>Prev4Qtr</td>
</tr>
<tr class="grey5">
<td class="firstcol">Offical Gov&#39;t Securities Purchases</td>
<td>106.3</td>
<td>94.8</td>
<td>108.0</td>
<td>93.7</td>
<td>71.7</td>
</tr>
</tbody>
</table>
</body>
</html>

Private net securities purchases by foreigners continues to be an important part of financing the US current account deficit. Exports have built stronger growth than imports and driven the deficit lower over the past four quarters. [...]

The US Current Account Deficit Rises Slightly in 2007

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070613g.jpg" width="353">
Q1 GDP in Brazil grew 3.1% from Q4 (seasonally adjusted) and 4.3% from the year earlier. This represents a modest slowing from recent performance, as the 3.1% follows 12 quarters that averaged 4.4%. Still, the Brazilian economy looks to be on a strong trend overall.
<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070613h.jpg" width="353"> Fixed investment and exports were the main drivers of growth in Q1. Investment expanded at an 8.9% rate up from 7.5% in Q4. Exports swung from a decrease of 4.7% in Q4 to an increase of the same size in Q1. Exports are moderating from a period of rapid, but erratic, expansion that ran from late 2002 through Q3 2006. Possibly a strengthening currency is starting to be felt in export markets, or simply, after such strong growth, some consolidation is occurring. The strong currency argument has some force however in the trend of imports, which surged ahead at a 17.5% annual rate in Q1 and were almost 20% higher than the year-ago quarter.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070613i.jpg" width="353">
Consumer spending was up &quot;only&quot; 3.7% in Q1, but had risen considerably more in prior quarters, putting it up 6.0% over the past year.
We&#39;ll admit some surprise at the strength in Brazil (although analysts who follow it closely had projected slightly faster Q1 growth, according to one press report) but several conditions are favorable. Inflation, although above its lows, has diminished significantly from spurts in 2002-3 and 2004-5. The currency, in turn, has strengthened, as seen in the last graph here, where it fell just below 2 reais per US dollar in May, the most favorable exchange rate since early 2001, to say nothing of the mid-1990s periods of revaluation. So the Brazilian economy is settling and stabilizing. Haver and NTC Economics recently added a PMI index for manufacturing and a number of clients were anxious to get a look at it, even though there are only 15 months of history -- the May value was just above 54%, suggesting moderately widespread growth of manufacturing activity. But the point is that there is widening interest in the Brazilian economy, a diverse place with mineral resources and 187 million people (all told; a labor force count says there are just over 40 million people in the major urban areas, comparable to Argentina&#39;s 35.3 million). 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">BRAZIL</th>
<th scope="col">Q1 2007*</th>
<th scope="col">Q4 2006*</th>
<th scope="col">Year Ago*</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Real GDP (1995=100)</td>
<td>134.81</td>
<td>133.80</td>
<td>129.38</td>
<td>132.12</td>
<td>126.47</td>
<td>122.86</td>
</tr>
<tr>
<td class="firstcol">&nbsp; % Change</td>
<td>3.1</td>
<td>4.3</td>
<td>4.3</td>
<td>3.7</td>
<td>2.9</td>
<td>5.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Private Consumption</td>
<td>3.7</td>
<td>6.8</td>
<td>6.0</td>
<td>4.3</td>
<td>4.7</td>
<td>3.8</td>
</tr>
<tr>
<td class="firstcol">Gross Fixed Investment</td>
<td>8.9</td>
<td>7.5</td>
<td>7.2</td>
<td>8.7</td>
<td>3.6</td>
<td>9.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Exports</td>
<td>4.7</td>
<td>-4.7</td>
<td>5.9</td>
<td>4.6</td>
<td>10.1</td>
<td>15.3</td>
</tr>
<tr>
<td class="firstcol">Imports</td>
<td>17.5</td>
<td>16.1</td>
<td>19.9</td>
<td>18.1</td>
<td>9.3</td>
<td>14.4</td>
</tr>
</tbody>
</table>
</body>
</html>

Q1 GDP in Brazil grew 3.1% from Q4 (seasonally adjusted) and 4.3% from the year earlier. This represents a modest slowing from recent performance, as the 3.1% follows 12 quarters that averaged 4.4%. Still, the Brazilian economy looks [...]

Brazil's Q1 GDP Growth Eases, but Remains Surprisingly Buoyant; Fixed Investment Leads

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070613f.jpg" width="353">
The inventory cycle appears to be winding down. Three-month inventory growth rates peaked in July of 2006 and have now decelerated to growth of 1.3% and begun to rise again. Equally as important however, is the upturn in sales. 
The first table below puts these trends together and reveals sector detail. The very goods news is that over the last three- and six-months the three major sectors, wholesaling, retailing and manufacturing, each has seen the growth in sales exceed the growth in inventories. This means that Inventory/Sales (I/S) ratios have been reduced in each sector over the past six months. This sort of stock whittling is an encouragement to firms to rebuild inventories.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070613e.jpg" width="353">
Moreover, the growth rate of sales has become quite strong and although retailing seems to lag, new figures for May tell us that retail sales are back in a strong growth profile. Over the past two years, however, manufacturers have had a problem: sales over the last 12 months and the past 24 months have lagged the growth in inventories leaving stocks &#145;toppish&#146; relative to sales levels. For this sector even the robust - nearly 10% rise in nominal sales over the last 3-mos - will be a slow-acting medicine for inventory revival. Manufacturers will want to see more, or at least more sustainability. 
Caveat: The top part of the first table below is all about dynamics: comparing the growth of inventories to the growth in sales over various periods. The changes in this growth balance are the stuff that shifting business fortunes are assessed over. But we also need to anchor these assessments, since the ebb and flow of sales versus inventories can make the relationship of &#145;I&#146; to &#145;S&#146; unclear. The bottom panel of the table provides an assessment of I to S ratios for that purpose. We also calculate the current I/S ratio as a percentage of its range over the last three years.
The latter calculation shows that while inventories are lean they are not so in all sectors. Wholesaling shows the lowest I to S ratio in three years. Retail inventories also are lean as they reside in the bottom 7 percentile of their 3-year range. As sales pick up, each of these sectors should see inventories grow as stock-to-sales ratios are so lean. But manufacturers, despite seeing the light at the end of their tunnel have been in that tunnel for a long time and have seen false glimmerings of light before. Inventories there are still in the top one quarter of their recent range for them. This not enough to keep them cutting stocks even as sales have truly picked up, so do not expect too much stock-building from this sector.
A second caveat is to be careful of aggregation when looking at inventories.
The second table below details retailing by sector and we see that lean motor vehicle inventories are driving the low reading for this sector (motor vehicles make up 43% of the sectors&#146; stocks, so that is not surprising). While most other industry groups within retailing are in good shape, building materials, with its stock-to-sales ratio at a three year high, is a clear exception. We do know that retail sales kicked it up a notch in May so these figures in the table below are going to look even better next month. But this is a warning that inventory figures are tricky and require a lot of effort to be well understood. For this sector, truth, not just the devil, is in the details. The aggregate figures really tell you nothing. Summary: 
On balance, these trends mean that US production should NOT get a huge kick from inventory-building since reporting factories are located in the US and if they build stocks they build them from US generated output by definition. And factories appear to be the laggard sector. Retailers, on the other hand, when they rebuild, will rebuild using imports to a great degree.
One implication of these trends is that imports are about to increase their growth to replenish dissipated stocks at the retail level. Wholesalers have a good complement of consumer goods and imports as well. The factory sector is the one that will kick US production into high gear when it rebuilds and so far that sector is still in the &#145;yellow light&#146; region, not the &#145;green light&#146; region, of its cycle at least for inventory building. But better times should be coming to that sector before long, especially if the current pace of sales has staying power.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Inventory and Sales Paired Growth Rates by Major Divisions
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="2">3-Mo Growth</td>
<td colspan="2">6-Mo Growth</td>
<td colspan="2">12-Mo Growth</td>
<td colspan="2">Yr Ago Growth</td>
<td>I:S ratio</td>
</tr>
<tr class="even">
<td class="firstcol">2007 Apr</td>
<td>Sales</td>
<td>Inventory</td>
<td>Sales</td>
<td>Inventory</td>
<td>Sales</td>
<td>Inventory</td>
<td>Sales</td>
<td>Inventory</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">Total Business</td>
<td>11.7%</td>
<td>2.2%</td>
<td>7.7%</td>
<td>1.9%</td>
<td>3.8%</td>
<td>4.6%</td>
<td>7.7%</td>
<td>5.6%</td>
<td>33.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Manufacturers</td>
<td>9.9%</td>
<td>2.9%</td>
<td>4.8%</td>
<td>1.8%</td>
<td>0.5%</td>
<td>4.7%</td>
<td>6.1%</td>
<td>7.1%</td>
<td>75.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Retailers</td>
<td>6.3%</td>
<td>-0.2%</td>
<td>6.2%</td>
<td>0.0%</td>
<td>2.9%</td>
<td>2.5%</td>
<td>7.0%</td>
<td>2.9%</td>
<td>6.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Wholesalers</td>
<td>19.3%</td>
<td>4.3%</td>
<td>12.8%</td>
<td>4.6%</td>
<td>8.8%</td>
<td>7.1%</td>
<td>10.4%</td>
<td>7.3%</td>
<td>0.0%</td>
</tr>
<tr>
<td colspan="10">Ratio of Stocks to Sales: Stocks Vs Flows</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="6">Inventory-to-Sales Ratios In Perspective</td>
<td colspan="3">Over three Years</td>
</tr>
<tr class="even">
<td class="firstcol">2007 Apr</td>
<td>Current</td>
<td>3-Mo Ago</td>
<td>6-Mo Ago</td>
<td>Yr Ago</td>
<td>2-Yrs Ago</td>
<td>3-Yrs Ago</td>
<td>Percentile</td>
<td>Max</td>
<td>Min</td>
</tr>
<tr class="odd">
<td class="firstcol">Total Business</td>
<td>1.27</td>
<td>1.30</td>
<td>1.31</td>
<td>1.26</td>
<td>1.29</td>
<td>1.29</td>
<td>33.3%</td>
<td>1.31</td>
<td>1.25</td>
</tr>
<tr class="odd">
<td class="firstcol">Manufacturers</td>
<td>1.24</td>
<td>1.26</td>
<td>1.26</td>
<td>1.19</td>
<td>1.18</td>
<td>1.18</td>
<td>75.0%</td>
<td>1.27</td>
<td>1.15</td>
</tr>
<tr class="odd">
<td class="firstcol">Retailers</td>
<td>1.46</td>
<td>1.49</td>
<td>1.51</td>
<td>1.47</td>
<td>1.53</td>
<td>1.58</td>
<td>6.7%</td>
<td>1.6</td>
<td>1.45</td>
</tr>
<tr class="odd">
<td class="firstcol">Wholesalers</td>
<td>1.12</td>
<td>1.16</td>
<td>1.16</td>
<td>1.14</td>
<td>1.17</td>
<td>1.14</td>
<td>0.0%</td>
<td>1.18</td>
<td>1.12</td>
</tr>
</tbody>
</table>
<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Inventory and Sales Paired Growth Rates by Major Retail Divisions
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">2007 Apr</td>
<td colspan="2">3-Mo Growth</td>
<td colspan="2">6-Mo Growth</td>
<td colspan="2">12-Mo Growth</td>
<td colspan="2">Year Ago Growth</td>
<td>3-Yr</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Sales</td>
<td>Inventory</td>
<td>Sales</td>
<td>Inventory</td>
<td>Sales</td>
<td>Inventory</td>
<td>Sales</td>
<td>Inventory</td>
<td>Percentile</td>
</tr>
<tr>
<td class="firstcol">Retail Total</td>
<td>6.3%</td>
<td>-0.2%</td>
<td>6.2%</td>
<td>0.0%</td>
<td>2.9%</td>
<td>2.5%</td>
<td>7.0%</td>
<td>2.9%</td>
<td>11.1%</td>
</tr>
<tr>
<td class="firstcol">Excl Motor Vehicles</td>
<td>7.1%</td>
<td>3.3%</td>
<td>7.4%</td>
<td>3.5%</td>
<td>3.2%</td>
<td>4.3%</td>
<td>8.9%</td>
<td>3.9%</td>
<td>14.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Sectors</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Motor Vehicles &amp; Parts</td>
<td>3.8%</td>
<td>-7.4%</td>
<td>2.2%</td>
<td>-7.2%</td>
<td>2.0%</td>
<td>-1.3%</td>
<td>1.2%</td>
<td>0.8%</td>
<td>50.0%</td>
</tr>
<tr>
<td class="firstcol">Furniture, Electronics &amp; Appliance</td>
<td>-0.4%</td>
<td>-0.1%</td>
<td>4.8%</td>
<td>1.1%</td>
<td>3.1%</td>
<td>1.0%</td>
<td>8.2%</td>
<td>5.9%</td>
<td>18.2%</td>
</tr>
<tr>
<td class="firstcol">Building Materials</td>
<td>-4.4%</td>
<td>15.8%</td>
<td>-1.2%</td>
<td>2.6%</td>
<td>-5.6%</td>
<td>1.7%</td>
<td>14.4%</td>
<td>9.4%</td>
<td>100.0%</td>
</tr>
<tr>
<td class="firstcol">Clothing &amp; Accessories</td>
<td>-4.9%</td>
<td>-1.8%</td>
<td>3.9%</td>
<td>7.9%</td>
<td>4.6%</td>
<td>8.5%</td>
<td>5.6%</td>
<td>5.6%</td>
<td>76.2%</td>
</tr>
<tr>
<td class="firstcol">General Merchandise Stores</td>
<td>-1.3%</td>
<td>3.9%</td>
<td>4.3%</td>
<td>5.3%</td>
<td>3.1%</td>
<td>7.4%</td>
<td>6.2%</td>
<td>-2.0%</td>
<td>50.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td colspan="8">Percentage of Sectors where Sales Growth Exceeds Inventory Growth</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">Sector Diffusion</td>
<td>20</td>
<td>&nbsp;</td>
<td>40</td>
<td>&nbsp;</td>
<td>40</td>
<td>&nbsp;</td>
<td>80</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
</tbody>
</table>
</body>
</html>

The inventory cycle appears to be winding down. Three-month inventory growth rates peaked in July of 2006 and have now decelerated to growth of 1.3% and begun to rise again. Equally as important however, is the upturn in sales. The [...]

U.S. Inventory Cycle: At Its End?

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070613d.jpg" width="353">
Even for the consumer where excluding food and energy trends have been mild and are not accelerating much of the acceleration in international prices is still there and quite clear. The chart on the left applies consumer price weights from nonfood consumer goods spending and applies them to export and import prices for vehicles and (nonfood) consumer goods to collapse consumer goods and vehicles into one measure. For both exports and imports these series show rising inflation tendencies. Even though the topography of the chart may seem shocking the scale is low to the acceleration in exports of consumer prices is up by just a percentage point since mid-2005, a period of nearly 2 years. For imports the acceleration is about 1.8 percentage points from its low over the past year. But that acceleration brings the inflation rate UP TO only 1.6% Y/Y for &#145;total&#146; consumer goods imports. Moreover that pace is not accelerating when looked at on shorter horizons such as the past three months or six months (see table below for consumer goods prices on imports and vehicle prices for imports). 
We plot core consumer prices for goods on this same graph to show that export/import trends do not quickly or fully get into US consumer prices. Core goods consumer prices in fact are still in a slight DOWNTREND during this episode of export/import price inflation based on these constructed core export and import consumer price measures. 
Overall export and import prices show accelerating trends based on the price movements of the energy component (embedded in industrial supplies). In contrast, capital goods prices show weakness. This is a bit of a concern since price weakness is often a sign of demand weakness (especially when commodity prices are not driving the result, as they would not be for capital goods). Since the main US export strength is in capital goods this could be an issue of adversity for US exporters. Weakening price for capital goods imports may also suggest weak capital spending domestically, although there were some signs of that picking up. By and large, the dollar weakness does not appear to have played much of a role for export and import prices although export prices are rising a bit faster than import prices as we might expect when the dollar is weak. 
In part these results reflect that the dollar is weak Vs the Euro but it has (just) hit a 4 &frac12; year high Vs the yen and its drop Vs the Chinese yuan is ever so slow. Export and import prices trends reflect these glacial movements amid cross currents. Beyond these short trends (3-month, 6-month) the big picture still shows that export and import prices are rising as Y/Y inflation is getting a bit worse. But the rate of change is not a great worry for US policymakers; although it comes at time when their inflation fighting hackles are up, it is a trend that is moving in the WRONG direction.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Export and Import Prices
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">&nbsp;</td>
<td colspan="3">M/MO</td>
<td colspan="3">Saar</td>
</tr>
<tr class="grey3">
<td class="firstcol">IMPORTS</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>12-Mo</td>
</tr>
<tr class="grey2">
<td class="firstcol">ALL Imports</td>
<td>1.3%</td>
<td>1.5%</td>
<td>0.4%</td>
<td>13.3%</td>
<td>7.2%</td>
<td>1.9%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Excl Petrol</td>
<td>0.2%</td>
<td>0.3%</td>
<td>0.0%</td>
<td>1.9%</td>
<td>3.7%</td>
<td>2.9%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Petrol</td>
<td>6.5%</td>
<td>8.1%</td>
<td>1.7%</td>
<td>87.7%</td>
<td>25.1%</td>
<td>-1.8%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Foods, Feeds and Beverages</td>
<td>1.4%</td>
<td>-0.2%</td>
<td>0.2%</td>
<td>6.2%</td>
<td>8.9%</td>
<td>8.8%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Industrial Supplies</td>
<td>3.7%</td>
<td>4.5%</td>
<td>1.0%</td>
<td>43.6%</td>
<td>19.9%</td>
<td>3.2%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Capital goods</td>
<td>-0.4%</td>
<td>-0.2%</td>
<td>-0.3%</td>
<td>-3.9%</td>
<td>-1.5%</td>
<td>-0.4%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Motor Vehicles &amp; Parts</td>
<td>0.0%</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.8%</td>
<td>0.4%</td>
<td>0.9%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Consumer Goods excl Autos</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.0%</td>
<td>0.8%</td>
<td>1.6%</td>
<td>1.9%</td>
</tr>
<tr class="grey4">
<td class="firstcol">&nbsp;</td>
<td colspan="3">M/MO</td>
<td colspan="3">Saar</td>
</tr>
<tr class="grey1">
<td class="firstcol">EXPORTS</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>12-Mo</td>
</tr>
<tr class="grey2">
<td class="firstcol">ALL Exports</td>
<td>0.3%</td>
<td>0.6%</td>
<td>0.8%</td>
<td>7.3%</td>
<td>6.6%</td>
<td>4.9%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Agriculture</td>
<td>-1.3%</td>
<td>2.0%</td>
<td>2.8%</td>
<td>15.0%</td>
<td>24.0%</td>
<td>19.0%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Non Agriculture</td>
<td>0.4%</td>
<td>0.5%</td>
<td>0.6%</td>
<td>6.6%</td>
<td>5.3%</td>
<td>3.9%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Foods, Feeds and Beverages</td>
<td>-0.8%</td>
<td>2.3%</td>
<td>3.2%</td>
<td>20.1%</td>
<td>24.9%</td>
<td>20.2%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Industrial Supplies</td>
<td>1.3%</td>
<td>1.7%</td>
<td>2.0%</td>
<td>22.2%</td>
<td>15.4%</td>
<td>10.2%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Capital goods</td>
<td>-0.1%</td>
<td>-0.1%</td>
<td>0.0%</td>
<td>-0.8%</td>
<td>0.4%</td>
<td>0.5%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Motor Vehicles &amp; Parts</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.1%</td>
<td>1.1%</td>
<td>1.3%</td>
<td>1.3%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Consumer Goods excl Autos</td>
<td>0.5%</td>
<td>0.0%</td>
<td>0.0%</td>
<td>1.9%</td>
<td>2.7%</td>
<td>2.6%</td>
</tr>
</tbody>
</table>
</body>
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Even for the consumer where excluding food and energy trends have been mild and are not accelerating much of the acceleration in international prices is still there and quite clear. The chart on the left applies consumer price weights [...]

Export and Import Prices Trends Show Growing Pressure

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070613a.jpg" width="353">
There was a minor upward revision to sales in March. Now in May sales rose by 1.4% and 1.3% excluding motor vehicles. These are strong numbers even when the 3.8% rise in gas station sales is factored out. Virtually all major retail sales aggregates are gaining momentum after a Q1 lull beset with odd holiday shifts and some unfortunate weather developments. 
In the quarter to date total retail sales are rising at a 7.3% pace. Excluding Motor vehicles, sales are up at a 7.9% pace. Excluding motor vehicle sales and gas station sales the pace is at 5.3% and that number will have a very small price deflator associated with it since much of the energy is removed when gas station sales are taken out. 
On balance retail sales are NOW strong in the new quarter. Inflation is moderate, so much of this translates into real sales. The overall CPI rose by 0.4% in April when the core rose by 0.2%. Deflating the headline sales pace by 2.5% (annual rate) leaves growth in the range of 4.8% to 5.3% in real terms. It is a good start to Q2 for the consumer - better than was expected. If we take inflation at April&#146;s 0.4% headline pace as the deflator, the annualized overall pace of real retail sales drops to the 2.5% to 2.9% range in Q2 - that is s till very solid and likely an overreaction to inflation&#146;s impact. 

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<tr>
<td><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070613b.jpg" width="353"> <img border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070613c.jpg" width="353"></td>
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<th scope="col" class="firstcol"> &middot; The growth numbers cut by various retailing segments are universally strong in May and in the three months ended in May. Nondurable goods growth rates, already strong, are accelerating and that is even if gasoline station sales with their energy impact are omitted. Durable goods purchases are strengthening too. Even building materials trends are accelerating. Furniture and electronics sales are a relative laggard in the sector. But the message is pretty clear. The upturn in consumer spending is very, very broad-based in May. And comparisons with 6-month and 12-month trends (see the second and third charts) make it clear that this is not a recoup from a weak patch in earlier months. The strength is real.</th>
</tr>
</thead>

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Retail Sales Trends
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">Retail:</td>
<td>Mo/Mo</td>
<td colspan="4">Seasonally Adjusted Annual Rate</td>
</tr>
<tr class="odd">
<td class="firstcol">Totals</td>
<td>2007 May</td>
<td>3-Mo</td>
<td>6Mo</td>
<td>Yr/Yr</td>
<td>Yr Ago:Y/Y</td>
</tr>
<tr>
<td class="firstcol">Retail &amp; Food Service</td>
<td>1.4%</td>
<td>9.6%</td>
<td>8.2%</td>
<td>5.0%</td>
<td>7.1%</td>
</tr>
<tr>
<td class="firstcol">Retail Excl Motor Vehicles &amp; Parts</td>
<td>1.3%</td>
<td>10.1%</td>
<td>8.8%</td>
<td>4.6%</td>
<td>9.0%</td>
</tr>
<tr>
<td class="firstcol">Retail Excl Motor Vehicles &amp; Parts &amp; Gas</td>
<td>1.0%</td>
<td>6.6%</td>
<td>6.1%</td>
<td>4.7%</td>
<td>7.7%</td>
</tr>
<tr class="even">
<td class="firstcol">Retail:</td>
<td>Mo/Mo</td>
<td colspan="4">Seasonally Adjusted Annual Rate</td>
</tr>
<tr class="odd">
<td class="firstcol">Durables</td>
<td>2007 May</td>
<td>3-Mo</td>
<td>6Mo</td>
<td>Yr/Yr</td>
<td>Yr Ago:Y/Y</td>
</tr>
<tr>
<td class="firstcol">Total-Durables</td>
<td>1.7%</td>
<td>6.7%</td>
<td>5.1%</td>
<td>4.1%</td>
<td>3.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Building Materials</td>
<td>2.1%</td>
<td>6.6%</td>
<td>3.5%</td>
<td>-1.7%</td>
<td>10.8%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Motor Vehicles &amp; Parts</td>
<td>1.8%</td>
<td>7.9%</td>
<td>6.2%</td>
<td>6.6%</td>
<td>0.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; MV Dealers</td>
<td>1.9%</td>
<td>7.6%</td>
<td>6.1%</td>
<td>6.8%</td>
<td>0.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Furniture, Electronics</td>
<td>0.8%</td>
<td>2.1%</td>
<td>2.9%</td>
<td>3.8%</td>
<td>8.1%</td>
</tr>
<tr class="even">
<td class="firstcol">Retail:</td>
<td>Mo/Mo</td>
<td colspan="4">Seasonally Adjusted Annual Rate</td>
</tr>
<tr class="odd">
<td class="firstcol">NonDurables</td>
<td>2007 May</td>
<td>3-Mo</td>
<td>6Mo</td>
<td>Yr/Yr</td>
<td>Yr Ago:Y/Y</td>
</tr>
<tr>
<td class="firstcol">Total-Nondurables</td>
<td>1.3%</td>
<td>11.2%</td>
<td>9.9%</td>
<td>5.4%</td>
<td>8.8%&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Food &amp; Beverages</td>
<td>0.3%</td>
<td>5.7%</td>
<td>6.6%</td>
<td>6.1%</td>
<td>4.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Health</td>
<td>0.8%</td>
<td>8.0%</td>
<td>5.2%</td>
<td>6.9%</td>
<td>7.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Gasoline</td>
<td>3.8%</td>
<td>40.6%</td>
<td>31.4%</td>
<td>3.7%</td>
<td>19.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Clothing</td>
<td>2.7%</td>
<td>13.4%</td>
<td>11.0%</td>
<td>7.8%</td>
<td>6.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Sport Goods</td>
<td>1.8%</td>
<td>15.1%</td>
<td>8.4%</td>
<td>2.5%</td>
<td>5.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; General Merchandises</td>
<td>1.0%</td>
<td>5.7%</td>
<td>5.5%</td>
<td>4.6%</td>
<td>5.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Non Store Retailers</td>
<td>0.1%</td>
<td>0.0%</td>
<td>11.2%</td>
<td>7.7%</td>
<td>15.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Miscellaneous Retail</td>
<td>0.9%</td>
<td>8.0%</td>
<td>5.2%</td>
<td>6.9%</td>
<td>7.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Non Durables Excl Gas</td>
<td>0.8%</td>
<td>7.0%</td>
<td>6.8%</td>
<td>5.7%</td>
<td>7.2%</td>
</tr>
<tr class="even">
<td class="firstcol">Services</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Food Services &amp; Drinking</td>
<td>0.7%</td>
<td>9.2%</td>
<td>5.7%</td>
<td>5.6%</td>
<td>8.1%</td>
</tr>
</tbody>
</table>
</body>
</html>

There was a minor upward revision to sales in March. Now in May sales rose by 1.4% and 1.3% excluding motor vehicles. These are strong numbers even when the 3.8% rise in gas station sales is factored out. Virtually all major retail [...]

Quite Simply the Retail Data and Trends Tell the Story

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

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

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

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

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

AI boosting US investment in data centers

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

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

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

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

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

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

Equity market exuberance outpacing macroeconomic data

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

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Andrew Cates

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

260205Z1.jpg

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

260205Z2.jpg

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

260205Z3.jpg

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

260205Z4.jpg

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

260205Z5.jpg

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

260205Z6.jpg

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

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

260206E.jpg

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

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

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

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

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

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

260206.jpg

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

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

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

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

Germany

German IP Reveals Chaotic Trends

Winnie Tapasanun

260205X15.jpg

260205Y15.jpg

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

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

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

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

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

260205C15.jpg

260205D15.jpg

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

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

Sandy Batten

260205A2.jpg

260205B2.jpg

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

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

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

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

260205C2.jpg

260205D2.jpg

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

U.S. Initial Unemployment Claims Surged in Latest Week

260205E.jpg

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

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

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

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

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

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

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

Economy in Brief: 2007

Jump to:

European PPIs: Energy Hits Early in Germany and Relief Is Already Evident; Estonia and Slovenia Postpone Impact, [...]

German Financial Community Turns Less Optimistic

The US Current Account Deficit Rises Slightly in 2007

Brazil's Q1 GDP Growth Eases, but Remains Surprisingly Buoyant; Fixed Investment Leads

U.S. Inventory Cycle: At Its End?

Export and Import Prices Trends Show Growing Pressure

Quite Simply the Retail Data and Trends Tell the Story

Quite Simply the Retail Data and Trends Tell the Story