Robert Brusca

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090515d.jpg" align="left" border="0">
The EMU region&#8217;s sharp drop in GDP has turned out to be worse
than expected for the region as well as for most countries. Germany is
showing the deepest GDP drop since 1970. The drop that The Netherlands
is experiencing is the sharpest drop in GDP since the end of WWII.
Greece is the sole county in this table with positive growth yr/yr. 
 

GDP continues to decelerate across Europe. We knew these GDP
reports would be weak after viewing the weakness in industrial output
ahead of the release of this GDP report. Germany&#8217;s Q1 decline is so
large it is not looking for much if any further decline in GDP for the
rest of the year. 
 

The Swedish Finance Minister Anders Borg has said that Europe
may be in need of some further stimulus. Of course Europe also labors
under the constraint of the Maastricht rules that restrict fiscal
deficits and cap ratios of government debt to GDP. Not only does Europe
lack a central fiscal authority comparable to its central bank, but the
fragmented nature of fiscal responsibility makes it hard for Europe to
be involved in fiscal stimulus in a coordinated way. Instead of a
central fiscal authority the Maastricht rules stand in to restrict
individual nations from going overboard with fiscal policy actions that
could create too many government liabilities that might undermine the
value of the euro. Of course recessions naturally put pressure on
Maastricht rules since growth slows or declines, pushing tax revenues
down at a time that social safety new spending rises. Countries that
have room under the Maastricht ratios can engage in fiscal stimulus in
times like theses, but often it is the high debt countries that are in
greater need of the stimulus and must risk running afoul of the rules
if they act. 
 

This down turn has exposed problems in the Euro Area. The Euro
Area is asymmetric. Its Central Bank has a mandate for price stability
only. Meanwhile there is no fiscal authority to step in when things get
tough. In this cycle the ECB actually joined in on an coordinated
international rate cut with its inflation rate well over ceiling on the
basis of a forecast that inflation would drop (of course the spot oil
price had dropped sharply and that was not a very risky forecast at the
time). Still it was an action that seemed to violate the rule if not
the spirit of having and inflation ceiling. Europe has not been able to
confront the problem that only the ECB can move fast in a crisis yet
its mandate is price stability. 
 

After seeing these GDP reports markets did not react very
strongly. The weakness in GDP was expected. The degree of weakness has
turned out to be a bit worse than expected. It sill is not clear what
steps Europe will take next and if more fiscal stimulus will be part of
the approach or not. 



<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr><th colspan="8" scope="col">Euro Area and Main G-10 Country GDP Results </th>
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Quarter over quarter-SAAR</td>
<td colspan="4">Year/Year</td>
</tr>
<tr class="grey3">
<td class="firstcol">GDP</td>
<td>Q1-09</td>
<td>Q4-08</td>
<td>Q3-08</td>
<td>Q1-09</td>
<td>Q4-08</td>
<td>Q3-08</td>
<td>Q2-08</td>
</tr>
<tr class="grey2">
<td class="firstcol">EMU-15</td>
<td>-9.6%</td>
<td>-6.3%</td>
<td>-1.0%</td>
<td>-4.6%</td>
<td>-1.5%</td>
<td>0.6%</td>
<td>1.4%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Austria</td>
<td>-8.5%</td>
<td>-2.6%</td>
<td>-1.3%</td>
<td>-4.6%</td>
<td>0.3%</td>
<td>1.8%</td>
<td>2.3%</td>
</tr>
<tr class="grey1">
<td class="firstcol">France</td>
<td>-4.7%</td>
<td>-5.7%</td>
<td>-0.7%</td>
<td>-3.2%</td>
<td>-1.7%</td>
<td>0.1%</td>
<td>1.0%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Germany</td>
<td>-14.4%</td>
<td>-8.6%</td>
<td>-2.1%</td>
<td>-6.9%</td>
<td>-1.8%</td>
<td>0.8%</td>
<td>2.0%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Greece</td>
<td>-4.6%</td>
<td>1.2%</td>
<td>1.5%</td>
<td>0.3%</td>
<td>2.4%</td>
<td>2.7%</td>
<td>3.4%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Italy</td>
<td>-9.4%</td>
<td>-8.3%</td>
<td>-3.2%</td>
<td>-5.9%</td>
<td>-3.0%</td>
<td>-1.3%</td>
<td>-0.3%</td>
</tr>
<tr class="grey1">
<td class="firstcol">The Netherlands</td>
<td>-10.7%</td>
<td>-4.7%</td>
<td>-1.8%</td>
<td>-4.5%</td>
<td>-0.8%</td>
<td>1.8%</td>
<td>3.4%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Portugal</td>
<td>-5.9%</td>
<td>-6.2%</td>
<td>-0.8%</td>
<td>-3.0%</td>
<td>-1.8%</td>
<td>0.4%</td>
<td>0.6%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Spain</td>
<td>-7.0%</td>
<td>-3.8%</td>
<td>-1.2%</td>
<td>-2.9%</td>
<td>-0.7%</td>
<td>0.9%</td>
<td>1.8%</td>
</tr>
<tr class="grey1">
<td class="firstcol">UK</td>
<td>-7.4%</td>
<td>-5.9%</td>
<td>-2.8%</td>
<td>-4.2%</td>
<td>-2.0%</td>
<td>0.4%</td>
<td>1.8%</td>
</tr>
<tr class="grey1">
<td class="firstcol">US</td>
<td>-6.1%</td>
<td>-6.3%</td>
<td>-0.5%</td>
<td>-2.6%</td>
<td>-0.8%</td>
<td>0.7%</td>
<td>2.1%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Japan</td>
<td>#N/A</td>
<td>-12.1%</td>
<td>-1.4%</td>
<td>#N/A</td>
<td>-4.3%</td>
<td>-0.2%</td>
<td>0.5%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Switzerland</td>
<td>#N/A</td>
<td>-1.2%</td>
<td>-0.3%</td>
<td>#N/A</td>
<td>-0.1%</td>
<td>1.3%</td>
<td>2.3%</td>
</tr>
</tbody>
</table>
</body></html>

The EMU region’s sharp drop in GDP has turned out to be worse than expected for the region as well as for most countries. Germany is showing the deepest GDP drop since 1970. The drop that The Netherlands is experiencing is the [...]

EMU GDP Drops Sharply

Tom Moeller

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090515a.jpg" align="left" border="0">
Weak pricing power continues to stem from a shortfall in U. S.
demand. The Bureau of Labor Statistics reported that the Consumer Price
Index was unchanged last month after a 0.1% slip during March. More
indicative of the weakness in pricing power, the year-to-year change in
consumer prices was -0.7%, the biggest since 1955. The April index was
in accord with Consensus expectations for no change in the month.
The weakness in the recent CPI readings owes mostly to lower
food and energy prices. In contrast, "core" pricing has picked up
slightly. The CPI less food &amp; energy rose 0.3% last month after
three consecutive 0.2% increases. These gains lifted the twelve-month
change to 1.9%, which was the firmest since January, and the growth
rate here in 2009 has averaged 2.4% (AR). That four-month growth is up
from a low of 0.5% as of December.
Lower energy prices again restrained overall pricing pressure
last month. The 2.4% decline in April reflected a 2.8% shortfall in
gasoline prices (-39.5% y/y) which added to a 4.0% March drop. Fuel oil
prices also continued downward with a 2.1% drop (-33.5% y/y). The
latest was the ninth consecutive monthly drop and it lowered prices by
one-third during the last twelve. Finally, prices for natural gas
&amp; electricity have fallen in all but one of the last nine
months and year-to-year they are down 1.7%.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090515b.jpg" align="right" border="0">
Lower food &amp; beverage prices also continue to restrain
overall inflationary pressure. Prices slipped for the third straight
month and the y/y change of 3.3% was the weakest since early 2007, down
from a peak of +6.1% last fall. Recent weakness has been led by lower
dairy product prices (-5.1% y/y). Moreover, price gains for meats,
poultry &amp; fish (2.5% y/y) as well as fruits &amp;
vegetables (0.6% y/y) have eased sharply.
Bucking the disinflationary trend have been core
goods prices which rose 0.5% during April after three
consecutive 0.4% increases. Higher tobacco prices account continue to
account for some of that acceleration with a 28.8% y/y increase. But
there has been some modest firming of prices elsewhere. Prices for
household furnishings &amp; operations have risen 1.8% y/y
following price deflation early last year. Apparel prices are up 0.9%
y/y after declines extending back to 1999. Prices of new &amp; used
motor vehicles have risen during the last four months and the y/y
change of -1.7% compares to a rate of decline of 3.5% as of yearend
2008.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090515c.jpg" align="left" border="0">
Gains in core services prices continue to
moderate. The 0.2% uptick last month left the y/y change of 2.3% at its
weakest since 1983. That moderation continues to owe mostly to weakness
in the housing market which caused April shelter prices to rise just
0.2%, putting them up 1.6% y/y. That rise compares to gains above 4.0%
two years ago. Owners equivalent rent of primary residence, a measure
not equivalent to other house price measures, ticked up just 0.1% (2.1%
y/y). The cost of travel did rise 0.5% during April but prices of
lodging away from home are down 5.9% during the last year. Other
service prices rose. The increase in medical care services prices
picked up slightly to 0.4% (3.3% y/y) while education costs rose 0.4%
and the y/y gain remained a firm 5.4%. Public transportation prices
fell again. The 0.8% decline was the eighth drop in a row (-5.9% y/y).
The chained CPI, which adjusts for shifts in consumption
patterns, gained 0.3% while year -to-year prices fell 1.1%. The
increase in chained prices less food and energy eased to 0.2% in the
month.
The consumer price data is available in Haver's USECON
database while detailed figures can be found in the CPIDATA
database.
Seeking Stability: What&#8217;s Next for Banking
Regulation? from the Federal Reserve Bank of Dallas can
be found <a href="http://dallasfed.org/research/eclett/2009/el0903.pdf">
here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80101/@E80101.HTM">Consumer
Price Index</a> (%)</th>
<th scope="col">April</th>
<th scope="col">March</th>
<th scope="col">Y/Y&nbsp;</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">Total&nbsp;</td>
<td>0.0</td>
<td>-0.1</td>
<td>-0.7</td>
<td>3.8</td>
<td>2.9</td>
<td>3.2</td>
</tr>
<tr class="even">
<td class="firstcol">Total less Food &amp; Energy</td>
<td>0.3</td>
<td>0.2</td>
<td>1.9</td>
<td>2.3</td>
<td>2.3</td>
<td>2.5</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp; Goods less Food
&amp; Energy</td>
<td>0.5</td>
<td>0.4</td>
<td>0.9</td>
<td>0.1</td>
<td>-0.4</td>
<td>0.2</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;&nbsp;&nbsp;
Services less Energy</td>
<td>0.2</td>
<td>0.1</td>
<td>2.3</td>
<td>3.1</td>
<td>3.4</td>
<td>3.4</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp; Energy</td>
<td>-2.4</td>
<td>-3.0</td>
<td>-24.5</td>
<td>13.5</td>
<td>5.7</td>
<td>11.0</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp; Food &amp;
Beverages</td>
<td>-0.2</td>
<td>-0.1</td>
<td>3.3</td>
<td>5.4</td>
<td>3.9</td>
<td>2.3</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80113/@E80113.HTM">Chained
CPI: Total (NSA)</a>&nbsp;</td>
<td>0.3</td>
<td>0.2</td>
<td>-1.1 </td>
<td>3.3</td>
<td>2.5</td>
<td>2.9 </td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;Total less Food
&amp; Energy&nbsp;</td>
<td>0.2</td>
<td>0.4</td>
<td>1.4</td>
<td>2.0</td>
<td>2.0</td>
<td>2.2</td>
</tr>
</tbody>
</table>
</body></html>

Weak pricing power continues to stem from a shortfall in U. S. demand. The Bureau of Labor Statistics reported that the Consumer Price Index was unchanged last month after a 0.1% slip during March. More indicative of the weakness in [...]

U.S. CPI Unchanged in April; Year-to-Year Drop of 0.7% Is Largest Since 1955

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090515a.jpg" align="left" border="0">
Weak pricing power continues to stem from a shortfall in U. S.
demand. The Bureau of Labor Statistics reported that the Consumer Price
Index was unchanged last month after a 0.1% slip during March. More
indicative of the weakness in pricing power, the year-to-year change in
consumer prices was -0.7%, the biggest since 1955. The April index was
in accord with Consensus expectations for no change in the month.
The weakness in the recent CPI readings owes mostly to lower
food and energy prices. In contrast, "core" pricing has picked up
slightly. The CPI less food &amp; energy rose 0.3% last month after
three consecutive 0.2% increases. These gains lifted the twelve-month
change to 1.9%, which was the firmest since January, and the growth
rate here in 2009 has averaged 2.4% (AR). That four-month growth is up
from a low of 0.5% as of December.
Lower energy prices again restrained overall pricing pressure
last month. The 2.4% decline in April reflected a 2.8% shortfall in
gasoline prices (-39.5% y/y) which added to a 4.0% March drop. Fuel oil
prices also continued downward with a 2.1% drop (-33.5% y/y). The
latest was the ninth consecutive monthly drop and it lowered prices by
one-third during the last twelve. Finally, prices for natural gas
&amp; electricity have fallen in all but one of the last nine
months and year-to-year they are down 1.7%.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090515b.jpg" align="right" border="0">
Lower food &amp; beverage prices also continue to restrain
overall inflationary pressure. Prices slipped for the third straight
month and the y/y change of 3.3% was the weakest since early 2007, down
from a peak of +6.1% last fall. Recent weakness has been led by lower
dairy product prices (-5.1% y/y). Moreover, price gains for meats,
poultry &amp; fish (2.5% y/y) as well as fruits &amp;
vegetables (0.6% y/y) have eased sharply.
Bucking the disinflationary trend have been core
goods prices which rose 0.5% during April after three
consecutive 0.4% increases. Higher tobacco prices account continue to
account for some of that acceleration with a 28.8% y/y increase. But
there has been some modest firming of prices elsewhere. Prices for
household furnishings &amp; operations have risen 1.8% y/y
following price deflation early last year. Apparel prices are up 0.9%
y/y after declines extending back to 1999. Prices of new &amp; used
motor vehicles have risen during the last four months and the y/y
change of -1.7% compares to a rate of decline of 3.5% as of yearend
2008.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090515c.jpg" align="left" border="0">
Gains in core services prices continue to
moderate. The 0.2% uptick last month left the y/y change of 2.3% at its
weakest since 1983. That moderation continues to owe mostly to weakness
in the housing market which caused April shelter prices to rise just
0.2%, putting them up 1.6% y/y. That rise compares to gains above 4.0%
two years ago. Owners equivalent rent of primary residence, a measure
not equivalent to other house price measures, ticked up just 0.1% (2.1%
y/y). The cost of travel did rise 0.5% during April but prices of
lodging away from home are down 5.9% during the last year. Other
service prices rose. The increase in medical care services prices
picked up slightly to 0.4% (3.3% y/y) while education costs rose 0.4%
and the y/y gain remained a firm 5.4%. Public transportation prices
fell again. The 0.8% decline was the eighth drop in a row (-5.9% y/y).
The chained CPI, which adjusts for shifts in consumption
patterns, gained 0.3% while year -to-year prices fell 1.1%. The
increase in chained prices less food and energy eased to 0.2% in the
month.
The consumer price data is available in Haver's USECON
database while detailed figures can be found in the CPIDATA
database.
Seeking Stability: What’s Next for Banking
Regulation? from the Federal Reserve Bank of Dallas can
be found <a 
 href="http://dallasfed.org/research/eclett/2009/el0903.pdf">
here</a>.

<table border="0" cellspacing="0" width="100%">
 <colgroup><col><col><col><col><col><col></colgroup>
 <thead><tr>
 <th scope="col" class="firstcol"><a 
 href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80101/@E80101.HTM">Consumer
Price Index</a> (%)</th>
 <th scope="col">April</th>
 <th scope="col">March</th>
 <th scope="col">Y/Y&nbsp;</th>
 <th scope="col">2008</th>
 <th scope="col">2007</th>
 <th scope="col">2006</th>
 </tr>
 </thead>
 <tbody>
 <tr class="even">
 <td class="firstcol">Total&nbsp;</td>
 <td>0.0</td>
 <td>-0.1</td>
 <td>-0.7</td>
 <td>3.8</td>
 <td>2.9</td>
 <td>3.2</td>
 </tr>
 <tr class="even">
 <td class="firstcol">Total less Food &amp; Energy</td>
 <td>0.3</td>
 <td>0.2</td>
 <td>1.9</td>
 <td>2.3</td>
 <td>2.3</td>
 <td>2.5</td>
 </tr>
 <tr class="even">
 <td class="firstcol">&nbsp; Goods less Food
&amp; Energy</td>
 <td>0.5</td>
 <td>0.4</td>
 <td>0.9</td>
 <td>0.1</td>
 <td>-0.4</td>
 <td>0.2</td>
 </tr>
 <tr class="even">
 <td class="firstcol">&nbsp;&nbsp;&nbsp;
Services less Energy</td>
 <td>0.2</td>
 <td>0.1</td>
 <td>2.3</td>
 <td>3.1</td>
 <td>3.4</td>
 <td>3.4</td>
 </tr>
 <tr class="even">
 <td class="firstcol">&nbsp; Energy</td>
 <td>-2.4</td>
 <td>-3.0</td>
 <td>-24.5</td>
 <td>13.5</td>
 <td>5.7</td>
 <td>11.0</td>
 </tr>
 <tr class="even">
 <td class="firstcol">&nbsp; Food &amp;
Beverages</td>
 <td>-0.2</td>
 <td>-0.1</td>
 <td>3.3</td>
 <td>5.4</td>
 <td>3.9</td>
 <td>2.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol">&nbsp;</td>
 <td>&nbsp;</td>
 <td>&nbsp;</td>
 <td>&nbsp;&nbsp;</td>
 <td>&nbsp;</td>
 <td>&nbsp;</td>
 <td>&nbsp;</td>
 </tr>
 <tr>
 <td class="firstcol"><a 
 href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80113/@E80113.HTM">Chained
CPI: Total (NSA)</a>&nbsp;</td>
 <td>0.3</td>
 <td>0.2</td>
 <td>-1.1 </td>
 <td>3.3</td>
 <td>2.5</td>
 <td>2.9 </td>
 </tr>
 <tr class="even">
 <td class="firstcol">&nbsp;Total less Food
&amp; Energy&nbsp;</td>
 <td>0.2</td>
 <td>0.4</td>
 <td>1.4</td>
 <td>2.0</td>
 <td>2.0</td>
 <td>2.2</td>
 </tr>
 </tbody>
</table>
EMU GDP Drops Sharply 
by <a href="/comment/Brusca.html">Robert
Brusca</a> May 15, 2009


<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090515d.jpg" align="left" border="0">
The EMU region’s sharp drop in GDP has turned out to be worse
than expected for the region as well as for most countries. Germany is
showing the deepest GDP drop since 1970. The drop that The Netherlands
is experiencing is the sharpest drop in GDP since the end of WWII.
Greece is the sole county in this table with positive growth yr/yr. 
 

GDP continues to decelerate across Europe. We knew these GDP
reports would be weak after viewing the weakness in industrial output
ahead of the release of this GDP report. Germany’s Q1 decline is so
large it is not looking for much if any further decline in GDP for the
rest of the year. 
 

The Swedish Finance Minister Anders Borg has said that Europe
may be in need of some further stimulus. Of course Europe also labors
under the constraint of the Maastricht rules that restrict fiscal
deficits and cap ratios of government debt to GDP. Not only does Europe
lack a central fiscal authority comparable to its central bank, but the
fragmented nature of fiscal responsibility makes it hard for Europe to
be involved in fiscal stimulus in a coordinated way. Instead of a
central fiscal authority the Maastricht rules stand in to restrict
individual nations from going overboard with fiscal policy actions that
could create too many government liabilities that might undermine the
value of the euro. Of course recessions naturally put pressure on
Maastricht rules since growth slows or declines, pushing tax revenues
down at a time that social safety new spending rises. Countries that
have room under the Maastricht ratios can engage in fiscal stimulus in
times like theses, but often it is the high debt countries that are in
greater need of the stimulus and must risk running afoul of the rules
if they act. 
 

This down turn has exposed problems in the Euro Area. The Euro
Area is asymmetric. Its Central Bank has a mandate for price stability
only. Meanwhile there is no fiscal authority to step in when things get
tough. In this cycle the ECB actually joined in on an coordinated
international rate cut with its inflation rate well over ceiling on the
basis of a forecast that inflation would drop (of course the spot oil
price had dropped sharply and that was not a very risky forecast at the
time). Still it was an action that seemed to violate the rule if not
the spirit of having and inflation ceiling. Europe has not been able to
confront the problem that only the ECB can move fast in a crisis yet
its mandate is price stability. 
 

After seeing these GDP reports markets did not react very
strongly. The weakness in GDP was expected. The degree of weakness has
turned out to be a bit worse than expected. It sill is not clear what
steps Europe will take next and if more fiscal stimulus will be part of
the approach or not. 


<table border="0" cellspacing="0" width="100%">
 <colgroup></colgroup>
 <thead><tr>
 <th colspan="8" scope="col">Euro Area
and Main G-10 Country GDP Results </th>
 </tr>
 </thead>
 <tbody>
 <tr class="grey4">
 <td class="firstcol">&nbsp;</td>
 <td colspan="3">Quarter over quarter-SAAR</td>
 <td colspan="4">Year/Year</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol">GDP</td>
 <td>Q1-09</td>
 <td>Q4-08</td>
 <td>Q3-08</td>
 <td>Q1-09</td>
 <td>Q4-08</td>
 <td>Q3-08</td>
 <td>Q2-08</td>
 </tr>
 <tr class="grey2">
 <td class="firstcol">EMU-15</td>
 <td>-9.6%</td>
 <td>-6.3%</td>
 <td>-1.0%</td>
 <td>-4.6%</td>
 <td>-1.5%</td>
 <td>0.6%</td>
 <td>1.4%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">Austria</td>
 <td>-8.5%</td>
 <td>-2.6%</td>
 <td>-1.3%</td>
 <td>-4.6%</td>
 <td>0.3%</td>
 <td>1.8%</td>
 <td>2.3%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">France</td>
 <td>-4.7%</td>
 <td>-5.7%</td>
 <td>-0.7%</td>
 <td>-3.2%</td>
 <td>-1.7%</td>
 <td>0.1%</td>
 <td>1.0%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">Germany</td>
 <td>-14.4%</td>
 <td>-8.6%</td>
 <td>-2.1%</td>
 <td>-6.9%</td>
 <td>-1.8%</td>
 <td>0.8%</td>
 <td>2.0%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">Greece</td>
 <td>-4.6%</td>
 <td>1.2%</td>
 <td>1.5%</td>
 <td>0.3%</td>
 <td>2.4%</td>
 <td>2.7%</td>
 <td>3.4%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">Italy</td>
 <td>-9.4%</td>
 <td>-8.3%</td>
 <td>-3.2%</td>
 <td>-5.9%</td>
 <td>-3.0%</td>
 <td>-1.3%</td>
 <td>-0.3%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">The Netherlands</td>
 <td>-10.7%</td>
 <td>-4.7%</td>
 <td>-1.8%</td>
 <td>-4.5%</td>
 <td>-0.8%</td>
 <td>1.8%</td>
 <td>3.4%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">Portugal</td>
 <td>-5.9%</td>
 <td>-6.2%</td>
 <td>-0.8%</td>
 <td>-3.0%</td>
 <td>-1.8%</td>
 <td>0.4%</td>
 <td>0.6%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">Spain</td>
 <td>-7.0%</td>
 <td>-3.8%</td>
 <td>-1.2%</td>
 <td>-2.9%</td>
 <td>-0.7%</td>
 <td>0.9%</td>
 <td>1.8%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">UK</td>
 <td>-7.4%</td>
 <td>-5.9%</td>
 <td>-2.8%</td>
 <td>-4.2%</td>
 <td>-2.0%</td>
 <td>0.4%</td>
 <td>1.8%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">US</td>
 <td>-6.1%</td>
 <td>-6.3%</td>
 <td>-0.5%</td>
 <td>-2.6%</td>
 <td>-0.8%</td>
 <td>0.7%</td>
 <td>2.1%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">Japan</td>
 <td>#N/A</td>
 <td>-12.1%</td>
 <td>-1.4%</td>
 <td>#N/A</td>
 <td>-4.3%</td>
 <td>-0.2%</td>
 <td>0.5%</td>
 </tr>
 <tr class="grey1">
 <td class="firstcol">Switzerland</td>
 <td>#N/A</td>
 <td>-1.2%</td>
 <td>-0.3%</td>
 <td>#N/A</td>
 <td>-0.1%</td>
 <td>1.3%</td>
 <td>2.3%</td>
 </tr>
 </tbody>
</table>
U.S. Factory Production Shortfall
Eases 
by <a href="/comment/Moeller.html">Tom
Moeller</a> May 15, 2009


<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090515g.jpg" align="left" border="0">
The severity of the downturn in industrial output eased last
month, according to the industrial production figures published by the
Federal Reserve. Output, which includes mining and utilities, declined
an expected and moderate 0.5%, which was by far the smallest decline of
this recession. The drop followed declines between one and four percent
during the prior several months. Declines in the factory sector alone
have eased as well. The 0.3% April shortfall was the smallest since
February and compares to monthly declines between one and three percent
during this recession.
Output of consumer goods overall was unchanged last month and
the year-to-date rate of decline eased to 7.3%. Last month, production
of autos actually increased, though it's down at a 44.4% rate this
year. Conversely, furniture output posted a 2.8% decline last month and
it's down at a 23.7% rate so far this year as consumers continue to shy
away from purchases of large durable goods. Apparel output fell 1.3%
and the three-month rate of -17.3% is half that of its worst. Even the
pace of the decline in the production of business equipment seems to
have eased with a 0.5% decline, though the three-month rate was near
its worst at -23.6%. The downturn in the housing market continued to
lower output of construction supplies. It fell 1.1% and the three-month
rate of decline eased to a "modest" 23.4%. <img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090515h.jpg" align="right" border="0">
Even in the high-tech sector the rate of decline in output
slowed. Here, industrial production fell 0.8% last month and at a
reduced 13.5% rate during the last four. Less high tech, overall
industrial production fell a reduced 0.4% last month and the annual
rate of change eased to -15.3%.
O.K., so the slowing pace of output declines is largely in
autos and the high-tech sector. But outside of these two sectors,
output moderated to a 0.5% decline last month, less than one-third the
March drop. The three-month rate of decline was still near its worst at
a -13.4% annual rate.
Excess capacity grew even further last month. Capacity
utilization fell to 69.1%, a record low for the series which dates to
1966. Utilization in the factory sector dropped even harder
to 65.7% from a peak near 80% back in 2007. The latest rate was a
record low since WW II.
The industrial production data are available in Haver's USECON
database.
Ties that Bind: Bilateral Trade's Role in
Synchronizing Business Cycles from the Federal Reserve
Bank of Dallas is available <a 
 href="http://dallasfed.org/research/eclett/2009/el0901.pdf">
here</a>.

<table border="0" cellspacing="0" width="100%">
 <colgroup><col><col><col><col><col><col></colgroup>
 <thead><tr>
 <th scope="col" class="firstcol">INDUSTRIAL
PRODUCTION (SA, %)</th>
 <th scope="col">April</th>
 <th scope="col">March</th>
 <th scope="col">Y/Y</th>
 <th scope="col">2008</th>
 <th scope="col">2007</th>
 <th scope="col">2006</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd">
 <td class="firstcol">Total Output </td>
 <td>-0.5</td>
 <td>-1.7</td>
 <td>-12.5</td>
 <td>-2.2</td>
 <td>1.5</td>
 <td>2.3</td>
 </tr>
 <tr>
 <td class="firstcol">&nbsp;&nbsp; Manufacturing</td>
 <td>-0.3</td>
 <td>-2.1</td>
 <td>-14.5</td>
 <td>-3.2</td>
 <td>1.4</td>
 <td>2.5</td>
 </tr>
 <tr>
 <td class="firstcol">&nbsp;&nbsp;&nbsp;&nbsp;
Consumer Goods</td>
 <td>0.0</td>
 <td>-0.3</td>
 <td>-6.6</td>
 <td>-2.6</td>
 <td>0.9</td>
 <td>0.4</td>
 </tr>
 <tr>
 <td class="firstcol">&nbsp;&nbsp;&nbsp;&nbsp;
Business Equipment</td>
 <td>-0.5</td>
 <td>-2.9</td>
 <td>-13.9</td>
 <td>-1.1</td>
 <td>2.7</td>
 <td>9.4</td>
 </tr>
 <tr>
 <td class="firstcol">&nbsp;&nbsp;&nbsp;&nbsp;
Construction Supplies</td>
 <td>-1.1</td>
 <td>-2.8</td>
 <td>-20.0</td>
 <td>-6.3</td>
 <td>-2.0</td>
 <td>2.3</td>
 </tr>
 <tr>
 <td class="firstcol">&nbsp; Utilities</td>
 <td>0.5</td>
 <td>1.8</td>
 <td>-3.2</td>
 <td>0.3</td>
 <td>3.4</td>
 <td>-0.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol">Capacity Utilization</td>
 <td>69.1</td>
 <td>69.4</td>
 <td>79.2 (April '08)</td>
 <td>77.6</td>
 <td>80.6</td>
 <td>80.9</td>
 </tr>
 </tbody>
</table>

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<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090514a.jpg">
A stutter-step was taken by the U.S. job market last week. Initial claims for unemployment insurance increased 32,000 to 637,000 and that recovered all of the prior week&#39;s decline. Nevertheless, claims remained down sharply from their March high of 674,000. The four-week average of claims, which smoothes out some of the volatility in the weekly numbers, ticked up to 630,500, still near the lowest level since mid-February. Initial claims of 610,000 was the Consensus expectation for claims last week.<img align="right" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090514b.jpg">
The Labor Department indicated that the largest increases in initial claims for the week ending May 2 were in Illinois (+2,052), Kansas (+2,025), Puerto Rico (+1,781), Indiana (+1,051), and Ohio (+1,013), while the largest decreases were in New York (-13,386), Michigan (-10,952), North Carolina (-8,988), Massachusetts (-3,705), and Connecticut (-2,802).
Layoffs may have eased, but the pace of rehiring of unemployed workers remains depressed. Continuing claims for unemployment insurance increased again to another record high of 6,560,000 and they remain twice the year ago level. The series dates back to 1966. The four-week average of continuing claims also rose to another record of 6,337,250. Continuing claims provide some indication of workers&#39; ability to find employment and they lag the initial claims figures by one week.
The lack of hiring continued to push the insured unemployment rate higher to 4.9%. That level was more than double last April and the highest level since 1983. During the last ten years there has been a 93% correlation between the level of the insured unemployment rate and the overall rate of unemployment published by the Bureau of Labor Statistics.Clearly, the latest weekly figure understates labor market distress in some states. The highest insured unemployment rates in the week ending April 25 were in Michigan (7.8 percent), Oregon (7.5), Pennsylvania (6.5), Wisconsin (6.4), Nevada (6.3), Idaho (6.1), Puerto Rico (5.9), Vermont (5.8), Alaska (5.7), and Rhode Island (5.7).
The unemployment insurance claim data is available in Haver&#39;s WEEKLY database.
Comparing patterns of default among prime and subprime mortgages from the Federal Reserve Bank of Chicago is available <a href="http://www.chicagofed.org/publications/economicperspectives/ep_2qtr2009_part2_amromin_paulson.pdf">here.</a>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><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>&nbsp;</th>
<th scope="col">05/09/09</th>
<th scope="col">05/02/09</th>
<th scope="col">04/25/09</th>
<th scope="col">Y/Y</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006&nbsp;</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>637</td>
<td>635</td>
<td>635</td>
<td>69.9%</td>
<td>420</td>
<td>321</td>
<td>313</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>6,560</td>
<td>6,358</td>
<td>114.2%</td>
<td>3,342</td>
<td>2,552</td>
<td>2,459</td>
</tr>
</tbody>
</table>
</body>
</html>

A stutter-step was taken by the U.S. job market last week. Initial claims for unemployment insurance increased 32,000 to 637,000 and that recovered all of the prior week's decline. Nevertheless, claims remained down sharply from their [...]

U.S. Initial Weekly Claims For Jobless Insurance Rebound But Still Trending Lower

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090514f.jpg" align="left" border="0">
GDP: more reports coming - The bulk of the euro-countries&#8217; GDP
reports will begin to be released on Friday. For now we have the Q/Q
number for Spain and a release for the UK (an EU member country) and a
comparison available to the US. France&#8217;s Finance Minister, Christine
Lagarde, is on record saying that the French GDP result will be &#8216;bad.&#8217;
She has not put a figure to that. Germany has been releasing results
and projections for tax revenues that increasingly are falling behind
what was anticipated, tipping off the weakness in German GDP. France is
headed to bust the Maastricht rules for fiscal deficits. Spain&#8217;s GDP
has made the largest quarterly drop and Yr/Yr drop in four decades as
its property boom gone-bust is taking its toll on the economy. Spain&#8217;s
4 million people out of work account for about 70% of the increase in
all of the euro area. And&#8230;Spain&#8217;s adjustment is still in progress. 
 

Europe&#8217;s IP has been horrifically weak -- The large EMU
economies have already posted weak results for industrial output with
that sector showing declines at horrifically negative growth rates in
the first quarter, clustering around -30% annualized and ranging from
-25% to -45% <a href="http://haver.com/COMMENT/090513B.HTM">here.</a> 
 
 

Euro FX rate is resilient - For all of that weakness the euro
exchange rate has held up pretty well and even advanced, reversing its
recent down cycle. The chart (above) shows the level of the EMU area&#8217;s
real effective exchanger rate up 25.5% from its year 2000 level. This
rate compares the euro&#8217;s many bilateral values compressing them to a
single number using trade-weights, (hence it is &#8216;effective&#8217;, or
&#8216;multilateral&#8217;). It also accounts for inflation differences in doing so
(hence it is &#8216;real&#8217;). The euro is off peak but it is still strong. 
 

Euro is still &#8216;strong&#8217; -- Counting from all its monthly values
since 1973, the synthetic euro stands at about the 79Th percentile of
its range of values. The synthetic euro uses actual euro weighting
against non euro currencies and hypothetically calculates what the euro
exchange rate would have been had the EMU currency value arrangement
been in existence since 1973. On this basis the value of the euro is in
the top 20th percentile of its range. That is a relatively strong
showing, despite its recent backtracking. 
 

Relativity has helped to stabilize the euro -- In April of
2008 the synthetic euro reached its &#8216;all time&#8217; high for this same
period. It since has dropped and regained some momentum. While the euro
area remains quite weak with output still declining with vigor,
currency values are a relative thing. The rest of the world is
experiencing output declines as well. But the declines in US output,
plus the well-publicized banking problems and investment losses in
certain classes of dollar assets, have harmed the aura of security
surrounding the dollar and the US. In truth &#8216;the US&#8217; has been more of
an issue than &#8216;the dollar.&#8217; 
 

Relativity and perception - In fact, European banks are
troubled as well. I will not try and make any comparative statement on
their health. But international agencies are urging European
authorities to do more to help them. Germany has just taken steps to
bolster the Landesbanks and to set up a German &#8216;bad bank.&#8217; In France
authorities have promised to back stop French banks. After the failure
of the US investment bank Lehman Brothers, the US has taken steps to
prop up banks as well although small- to moderate-sized banks have been
allowed to go out of business. Those are not usually the sorts of banks
that would affect overseas investors. A big issue for investors has
been the threat to Fannie Mae and Freddie Mac which they once saw as a
gold standard and from losses on various mortgage backed securities in
the US as well as to losses in equities and directly in real estate,
each of which has a more global dimension. 
 

The Fed and monetary policy prospects: While the US dollar
remains backed by a careful and watchful US monetary policy the Fed&#8217;s
balance sheet has expanded greatly. US inflation is still tempered but
some harbor concerns about the future. The most recent rumblings come
from a Fed conference in Sea Island Georgia where John Taylor, inventor
of &#8216;The Taylor Rule,&#8217; has suggested that, according to that rule, the
Fed is close to needing to hike rates. 
 

Underpinning the dollar: Currencies are underpinned by their
central banks and the policies they follow, particularly when it comes
to inflation. The US central bank has undertaken to stock pile a hoard
of private sector assets as collateral as it has provided financial
assistance to the beleaguered US financial sector. In Europe the ECB
has just agreed to do the same to a much more modest extent overriding
German opposition within the ECB. Certainly the asset quality at the
central bank is an issue for the credit worthiness of the bank itself.
But the real issue is it what a bank&#8217;s policies mean for the evolution
of inflation. There, some see a link between this asset quality and
future inflation. Given the odd sort of business cycle we have had in
the US that point is much more debatable. For the moment that asset
quality issue favors the ECB and the euro. But does it really matter? 
 

Private asset values matter too -- The asset price declines in
the US have been varied and, because more foreign money has been
invested in the US, more foreign investors have been burned on their
&#8216;dollar&#8217; exposures. While that is not a foreign exchange issue per se,
it is when viewed in a broader sense. Foreign money will not flow in
unless it has a place to be invested. Up to this point there has been
no other place to go other than to the US. More money has been lost in
US based investments than in dollar exposures- indeed the dollar has
risen since the crisis began. What is interesting is that there are
concerns about the dollar - even though we have not yet had dollar
problems attached to this crisis. The real concerns are about recycling
savings surpluses and those are not dollar issues per se. 
 

Earlier experiences with &#8216;recycling of savings surpluses&#8217; --
In the early 1970s surplus funds from OPECs price hikes went to banks
for recycling. They proved to be poor custodians as a binge of
international lending, much of it to Latin America, went bust. Next,
Japan&#8217;s surpluses helped to fuel a rise in US indebtedness and a global
stock market boom until the turn off the century. The fallout from that
was a rise in the yen that eviscerated Japan&#8217;s competitiveness that
thrust it into a lost decade of growth while Japan outsourced to regain
its industrial standing. The recent recycling was funneled more
directly though various securities markets (not just equity markets) as
China&#8217;s surpluses grew then as oil prices jolted savings in OEPC and
other oil-producing countries. The consequences again have been
devastating. Perhaps the lesson here is more about sudden international
shifts in savings imbalances than about currencies and the dollar in
particular. So far the dollar has weathered the storm well and has even
risen in value. The real problem for the global financial system and
its financial intermediaries has been the inability to weather sudden
shifts in various national savings rates be they in OPEC nations,
China, Japan or elsewhere. (In the case of Japan is was more a case of
a shift of funds on the margin to a country with an already high saving
rate.) 
 

Europe: better or just less exposed? Had relatively more
international funds been invested in Germany or in France in this cycle
similar losses would have been experienced there since real estate and
asset prices have declines there more or less in step with the losses
in the US. But since the US was amore advanced in securitization, that
market lent itself more readily to an influx of foreign investors who
now must deal with the consequences. 
 

Outlook: Looking ahead the issue for the euro&#8217;s value is going
to be much more about growth, inflation and rate-of-return issues than
about safety and soundness. Stock markets already are being led higher
by their cyclical components as the &#8216;low beta&#8217; or &#8216;safe&#8217; stock market
sectors languish. Investors who were &#8216;once bit, twice shy&#8217; with their
dollar assets are going to have to decide if the US has become a safe
place to invest again or they will have to look elsewhere. It they look
elsewhere, will that place be any safer than the US, if global saving
imbalances are allowed to grow again? These decisions carry with them
exchange rate implications. If the &#8216;Chinas&#8217; of the world want to (and
are allowed to) preserve their competitiveness positions Vs the dollar
they need to continue to push funds into the US to support current
dollar levels. Otherwise, switching funds to other countries will drop
the dollar&#8217;s value and hike the exchange rate of the yuan undercutting
their competitiveness. There is no de-linking these issues. Decisions
have consequences and consequences breed new decisions. There is no
doubt that the lessons of this cycle have important implications for
the period ahead and for the evolution of asset values. The question is
if those implications make the US and other places a safer place for
foreign monies or if foreign monies will now begin to deploy elsewhere.
And if they deploy elsewhere will that be to a destination of greater
safety or just to make a &#8216;new&#8217; mistake in the future? 
 

The currency values should tell much of the story of the
shifts in these flows of funds in the times ahead. 
 



<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr><th colspan="8" scope="col">E-Zone and main G-10 country GDP Results </th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Quarter over quarter-Saar</td>
<td colspan="4">Year/Year</td>
</tr>
<tr class="odd">
<td class="firstcol">GDP</td>
<td>Q1-09</td>
<td>Q4-08</td>
<td>Q3-08</td>
<td>Q1-09</td>
<td>Q4-08</td>
<td>Q3-08</td>
<td>Q2-08</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>-7.0%</td>
<td>-3.8%</td>
<td>-1.2%</td>
<td>-2.9%</td>
<td>-0.7%</td>
<td>0.9%</td>
<td>1.8%</td>
</tr>
<tr>
<td class="firstcol">UK</td>
<td>-7.4%</td>
<td>-5.9%</td>
<td>-2.8%</td>
<td>-4.2%</td>
<td>-2.0%</td>
<td>0.4%</td>
<td>1.8%</td>
</tr>
<tr>
<td class="firstcol">US</td>
<td>-6.1%</td>
<td>-6.3%</td>
<td>-0.5%</td>
<td>-2.6%</td>
<td>-0.8%</td>
<td>0.7%</td>
<td>2.1%</td>
</tr>
</tbody>
</table>
</body></html>

GDP: more reports coming - The bulk of the euro-countries’ GDP reports will begin to be released on Friday. For now we have the Q/Q number for Spain and a release for the UK (an EU member country) and a comparison available to the US. [...]

Real Euro Digs In Its Heels Despite Weak Growth

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090514c.jpg" align="right" border="0" height="265" width="353">U.S.
producer prices for finished goods rose 0.3% last month following their
1.2% downdraft during March. The latest rise outpaced Consensus
expectations for a 0.1% uptick. It did not, however, represent a
broad-based firming of the recent weakness in pricing power. In fact
pricing power was very limited.&nbsp;· Finished food prices jumped
1.5% m/m led by firm gains in beef (-4.2% y/y) &amp; vegetable
(1.3% y/y) prices as well as a notable 43.7% surge in egg prices (-4.0%
y/y). That surge was, however, just recovering declines during the
prior two months.
Energy prices ticked 0.1% lower (-25.2% y/y) after
their 5.5% decline during March. Finished gasoline prices rose 2.6%
which reversed just a piece of a 13.1% decline in March (-46.7% y/y).
That monthly increase was offset, however, by a 6.2% decline in natural
gas prices (-18.1% y/y).
 Prices of core finished consumer goods rose
another 0.2%. <img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090514d.jpg" align="right" border="0" height="265" width="353">The gain
left the y/y increase at a respectable 3.8% but
the trend has been moving lower since the end of last year. Durable
consumer goods prices increased 0.3% after having been unchanged during
March but, here again, the trend rate of gain has eased. On a
three-month basis prices have risen at a 2.0% annual rate versus a 6.4%
rise last October. The three-month gain in core nondurable goods prices
also has eased to 3.4% (AR), half the peak rate of increase last fall.
Finally, capital equipment prices have started to fall. The April
decline of 0.1% added to a 0.2% March drop and that was enough to pull
the three-month change negative versus a 5%+ rate of increase as of
last fall.
 Falling again were prices for intermediate goods and that
should foreshadow even lower finished goods prices. Intermediate goods
prices dropped another 0.5% pulling the year-to-year change to still
another record rate of decline of 10.4%. Excluding food &amp;
energy prices continued to move lower, last month by 0.9% which was
their seventh monthly decline. Pricing here has been so weak that the
3.8% y/y decline was a record drop for the series which dates back to
1974.
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090514e.jpg" align="right" border="0" height="265" width="353">The crude
materials PPI prices rose for the first
month since last summer. The modest 3.0% rise reflected higher food
prices which still are down a sharp 18.7% y/y. Core pricing power
continued to reflect the weak economy and prices fell 0.6%. They
remained down by more than one-third versus last year due to lower
metals and chemicals prices.
 The Producer Price Index data is
available in Haver's USECON database. More detailed
data is in the PPI and in the PPIR
databases.
Rethinking the Implications of Monetary Policy:
How a Transactions Role for Money Transforms the Predictions of Our
Leading Models from the Federal Reserve Bank of Philadelphia
can be found <a href="http://www.philadelphiafed.org/research-and-data/publications/business-review/2009/q1/brq109_implications-of-monetary-policy.pdf">here.</a>&nbsp;&nbsp;
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E802/@E80201/@E80201.HTM">Producer
Price Index</a> (%)</th>
<th scope="col">April</th>
<th scope="col">March</th>
<th scope="col">Y/Y</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Finished Goods</td>
<td>0.3</td>
<td>-1.2</td>
<td>-3.5</td>
<td>6.4</td>
<td>3.9</td>
<td>2.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.1</td>
<td>0.0</td>
<td>3.4</td>
<td>3.4</td>
<td>2.0</td>
<td>1.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>-0.5</td>
<td>-1.5</td>
<td>-10.4</td>
<td>10.5</td>
<td>4.0</td>
<td>6.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>-0.9</td>
<td>-0.3</td>
<td>-3.8</td>
<td>7.6</td>
<td>2.8</td>
<td>6.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Crude Goods</td>
<td>3.0</td>
<td>-0.3</td>
<td>-39.9</td>
<td>21.2</td>
<td>11.9</td>
<td>1.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>-0.6</td>
<td>-1.6</td>
<td>&nbsp;-39.7</td>
<td>15.0</td>
<td>15.6</td>
<td>20.8</td>
</tr>
</tbody>
</table>

</body></html>

U.S. producer prices for finished goods rose 0.3% last month following their 1.2% downdraft during March. The latest rise outpaced Consensus expectations for a 0.1% uptick. It did not, however, represent a broad-based firming of the [...]

U.S. PPI Firms With Higher Food Prices, Core Price Gains Still Trending Lower

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<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090514a.jpg">
A stutter-step was taken by the U.S. job market last week. Initial claims for unemployment insurance increased 32,000 to 637,000 and that recovered all of the prior week&#39;s decline. Nevertheless, claims remained down sharply from their March high of 674,000. The four-week average of claims, which smoothes out some of the volatility in the weekly numbers, ticked up to 630,500, still near the lowest level since mid-February. Initial claims of 610,000 was the Consensus expectation for claims last week.
The Labor Department indicated that the largest increases in initial claims for the week ending May 2 were in Illinois (+2,052), Kansas (+2,025), Puerto Rico (+1,781), Indiana (+1,051), and Ohio (+1,013), while the largest decreases were in New York (-13,386), Michigan (-10,952), North Carolina (-8,988), Massachusetts (-3,705), and Connecticut (-2,802).<img align="right" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090514b.jpg">
While initial claims for jobless insurance benefits have been trending higher around the country, the increases versus last year are quite notable in several states. Year-to-year, claims have roughly doubled in Texas, Michigan, Massachusetts, Maine, Ohio, New Hampshire, and Connecticut. In many other states claims have risen by one-half including New York, New Jersey, Pennsylvania, Washington, Maryland and Wisconsin.
Layoffs may have eased, but the pace of rehiring of unemployed workers remains depressed. Continuing claims for unemployment insurance increased again to another record high of 6,560,000 and they remain twice the year ago level. The series dates back to 1966. The four-week average of continuing claims also rose to another record of 6,337,250. Continuing claims provide some indication of workers&#39; ability to find employment and they lag the initial claims figures by one week.
The lack of hiring continued to push the insured unemployment rate higher to 4.9%. That level was more than double last April and the highest level since 1983. During the last ten years there has been a 93% correlation between the level of the insured unemployment rate and the overall rate of unemployment published by the Bureau of Labor Statistics.Clearly, the latest weekly figure understates labor market distress in some states. The highest insured unemployment rates in the week ending April 25 were in Michigan (7.8 percent), Oregon (7.5), Pennsylvania (6.5), Wisconsin (6.4), Nevada (6.3), Idaho (6.1), Puerto Rico (5.9), Vermont (5.8), Alaska (5.7), and Rhode Island (5.7).
The unemployment insurance claim data is available in Haver&#39;s WEEKLY database. The state data is available in the REGIONAL database.
Comparing patterns of default among prime and subprime mortgages from the Federal Reserve Bank of Chicago is available <a href="http://www.chicagofed.org/publications/economicperspectives/ep_2qtr2009_part2_amromin_paulson.pdf">here.</a>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><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>&nbsp;</th>
<th scope="col">05/09/09</th>
<th scope="col">05/02/09</th>
<th scope="col">04/25/09</th>
<th scope="col">Y/Y</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006&nbsp;</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>637</td>
<td>635</td>
<td>635</td>
<td>69.9%</td>
<td>420</td>
<td>321</td>
<td>313</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>6,560</td>
<td>6,358</td>
<td>114.2%</td>
<td>3,342</td>
<td>2,552</td>
<td>2,459</td>
</tr>
</tbody>
</table>
</body>
</html>

U.S. Initial Weekly Claims ForJobless Insurance Rebound But Still Trending Lower

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

US production rebounded in Q2, but demand continued to slow

US leader, Germany trailer for real GDP growth over past 3 years

Negative US inflation surprises leading G10 down

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Kathleen Stephansen, CBE

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Mortgage applications rose 14.1% w/w (76.8% y/y) in the week ending January 16, after soaring 28.5% w/w (55.1% y/y) in the week ending January 9, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Applications for loans to purchase a house rose 5.1% w/w (19.1% y/y) in the week ending January 16, after rising 15.9% w/w (14.0% y/y) in the week ending January 9.  Applications for loan refinancing jumped 20.4% w/w (182.9% y/y) in the latest week, following a surge of 40.1% w/w (128.1% y/y) in the January 9 week.

The effective interest rate on a 30-year fixed-rate loan fell 3bps to 6.32% in the week ending January 16 from 6.35% in the week ending January 9. The rate on 15-year fixed-rate mortgages dropped 4bps to 5.71% in the latest week from 5.75% in the prior week. The 30-year Jumbo rate also fell 4bps to 6.50% in the January 16 week from 6.54% in the January 9 week. The rate on a 5-year ARM rose 5bps to 5.65% in the latest week from 5.60% in the January 9 week.

The share of applications for refinancing an existing loan rose to 61.9% of total applications in the January 16 week from 60.2% in the week ending January 9. The adjustable-rate mortgage (ARM) share of activity rose to 7.1% in the week ending January 16 from 7.0% in the week ending January 9.

The average size of a mortgage loan rose 2.9% w/w (11.1% y/y) to $415,300 in the week ending January 16, after rising 6.3% w/w (9.9% y/y) to $403,600 in the week ending January 9. The average size of a purchase loan edged down 0.7% w/w (+1.3% y/y) to $437,100 in the latest week after rising 7.7% w/w (4.9% y/y) to $440,300 in the January 9 week. The average size of a loan to refinance a mortgage rose 6.0% w/w (39.4% y/y) to $401,900 in the week ending January 16, after rising 6.0% w/w (27.8% y/y) to $379,200 in the week ending January 9.

The Mortgage Bankers Association Survey covers 75% of all U.S. retail residential mortgage applications and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. The base period and value for all indexes is March 16, 1990=100. The figures for weekly mortgage applications and interest rates are available in Haver’s **SURVEYS** database.

- Purchase and refinancing loan applications posted healthy rises in the latest week.
- Effective interest rate on 30-year fixed loans fell to 6.32%.
- Average loan size rose.

U.S. Mortgage Applications Continue to Surge in the Week of January 16

260120E.jpg

The ZEW survey for January showed improvement all around with both economic expectations and macroeconomic conditions showing improvements in the United States, Germany, and the euro area.

The economic situation in January in the euro area improved to a reading of -18.1 from -28.5 in December. In Germany, the reading improved to -72.7 from -81 in December, while in the United States the reading improved to +17.7 from -0.6 in December. The message here clearly is the month-to-month improvement. Still, the January readings leave the assessments of conditions in these three areas as quite different. The percentile-queue standings place each one of these topical readings in their queue of data back to December 1992, expressing the standing in percentile terms. Viewed in this way, the euro area has a 57.2 percentile standing, the U.S. has nearly a 45-percentile standing, while Germany has a 22.6 percentile standing, leaving each of these areas in their own distinctive positions relative to their historic norms. The euro area has a firm and above-median ranking since the reading is above the 50th percentile (where the median is located). The U.S. is slightly weaker than that, with a reading that's marginally below its median. Germany has a reading between the lower quartile and the one-fifth mark of its historic data, branding it as weak.

Macroeconomic expectations find that Germany in January moved up to a positive reading of 59.6 from 45.8 in December. The U.S. also improved, moving up to -3 from -12 in December. The macro-expectations find Germany and the U.S. in very different places with German expectations in an 80.4 percentile of their queue, placing them in the top 20% while the U.S. has a 45-percentile standing, below its historic median and essentially the same relative position as its current situation ranking. In contrast, Germany has a weak current economic assessment versus a stronger expectations assessment.

Inflation expectations weaken across the board in January, with the euro area falling to -7.6 from -4.6 in December, Germany falling to -6.0 from -1.7 and the U.S. falling to 44.2 from 54.9. The ZEW experts see a disinflationary environment, and they see that despite the pickup in current conditions and improved macroeconomic expectations. Expectations in the U.S. have a 61.1 percentile standing; the German and the euro area readings are much weaker and closer together, with the German standing at its 31.2 percentile and the euro area at its 25.8 percentile.

On the back of these expectations, short-term interest rates in the euro area are less weak, with the January reading at -7.7, up from -10.8 in December. The U.S. has a -65.6 reading, stronger than Decembers -73.9. On a ranking basis, the euro area’s short-term rates have a 37.4 percentile standing The U.S. has a 9.3 percentile standing. The interest rate assessment is that short-term rates are going to be modest to lower over the outlook.

Long-term interest rates in Germany and the U.S. weaken slightly in January from December to 44.5 in January for Germany, compared to 49.2 in December, and in the U.S., there is a very modest ‘decimal point’ change to 44.1 in January from 44.9 in December. German long-term rates have a 58.8 percentile standing while the U.S. has rates at about a 50-percentile standing, placing them just about on top of their historic median. Neither one of these expectations has long-term expectations different from historic norms.

Stock market expectations from December to January, however, are little changed and mostly weaker, with the euro area gauge falling to 35.2 from 41.3 in December. The German gauge slips to 35.9 from 36.3 in December. The January gauge for the U.S. is ticking slightly higher to 31.5 January from 30.2 in December. The rankings for the January gauges show the U.S. above its median at a 59.3 percentile mark, the euro area slightly below its median with a 44.9 percentile reading; the German stock market still scores as the weakest at a 39.7 percentile standing.

260120.jpg

On balance, there are improvements expected in the macroeconomic realm as well as improvements detected in the current economic situation. Inflation is expected to remain tame; short-term interest rates are expected to continue declining, while long-term interest rates are going to be showing some pressure or in the case of the U.S. will continue to oscillate around current levels or firm slightly. Stock market conditions in the U.S. are modestly higher than their historic norms; however, the euro area stocks are in for modest weakness; German stocks weakened and are historically weak. Looking ahead, the thing to do is to watch the market metrics in particular to see how the recent U.S.-European rift over Greenland is going to play out in markets and how much it's going to affect expectations. That's the newest trend in play. How quickly they forget drug running boat sinkings, Maduro’s capture, threats on Iran, and cage rattling the Fed Chair. It’s all about Greenland now- at least for now, don’t blink!

ZEW Survey Shows Advancement All Around

Tian Yong Woon

This week, we dive into several key developments across Asia. China’s Q4 GDP marked a further extension of its recent growth slowdown, yet full-year growth still came in exactly at the government’s 5% target for 2025 (chart 1). That said, the road ahead remains challenging, as December’s data delivered a mixed set of outcomes. Encouragingly, new external inroads, starting with Canada’s opening up of EV trade with China, could pave the way for additional opportunities (chart 2). In semiconductors, the latest US tariff measures proved far more limited in scope than initially feared, helping to explain the muted market reaction to the announcement (chart 3). Relatedly, commitments by major Taiwanese chipmakers to expand investment in the US have brought Washington and its largest chip supplier closer together, culminating in a US–Taiwan trade deal (chart 4).

In Japan, attention has turned to the possibility of a snap Lower House election in February. The interim political uncertainty, alongside expectations around future policy, has weighed on the yen and pushed Japanese yields higher (chart 5), with some observers increasingly concerned about the narrowing window to pass the FY2026 budget by April, given the likely dissolution of the Lower House. In South Korea, President Lee’s recent visits to China and Japan point to improving bilateral ties, although he continues to navigate a delicate balancing act amid still-elevated China–Japan tensions. Domestically, elevated house prices and high household debt continue to limit the scope for further monetary policy easing (chart 6).

**China**
Alongside its regular slate of monthly economic releases, China unveiled its Q4 GDP figures earlier today, with the economy expanding by 4.5% y/y during the quarter. While Q4 growth continues the recent trend of deceleration seen over the past few quarters, the outcome brings China’s full-year growth for 2025 right in line with the government’s 5% target (chart 1). This defied expectations among some investors that the economy would fall short. This outcome aligns with earlier discussions that China remained within reach of its growth target despite slowing momentum. That said, the outlook ahead remains challenging. December’s monthly data painted a mixed picture, with declines in fixed asset investment accelerating and retail sales growth cooling further, even as industrial production growth remained relatively resilient.

260119T1.jpg

On China’s external developments, another high-profile outcome followed Canadian Prime Minister Carney’s visit to Beijing. Canada and China unveiled a trade deal lowering tariffs on Canada’s imports of 49,000 Chinese EVs to 6.1% from 100%, in exchange for China easing tariffs on Canadian agricultural products. Carney remarked that China is now a “more predictable” trading partner than the US and that “a new world order” is taking hold. These comments likely reflect longstanding trade frictions between the US and Canada, as US President Trump has sought to renegotiate what he views as unfair trade arrangements. The new Canada–China agreement is also expected to catalyse significant Chinese joint-venture investment in Canada over the coming years. The move marks a notable shift for Canada, which has traditionally been an exceptionally close partner of the US, not only economically (chart 2). That Ottawa has inked a trade deal with Beijing while US–China tensions remain elevated represents a clear break from its previous stance and has, unsurprisingly, drawn criticism from Washington.

260119T2.jpg

**US semiconductor tariffs**
Turning to US-originated developments, President Trump signed a proclamation last week imposing a 25% tariff on certain advanced computing chips, including Nvidia’s H200 and AMD’s MI325X. The tariff will not apply to chips imported to support the buildout of the US tech supply chain or to strengthen domestic manufacturing capacity for semiconductor derivatives. The move stops short of a blanket tariff on all AI chips and semiconductor imports, easing—at least for now—initial investor concerns and likely explaining the market’s relatively muted reaction to the announcement (chart 3). A broader tariff would have had far more severe implications, given the  US economy’s substantial imports of semiconductor goods. In the case of Nvidia’s H200—designed to comply with US export restrictions and primarily targeted at the Chinese market—the tariff appears intended to capture a 25% levy before the chips are shipped onward to China. That said, China’s demand response remains uncertain, particularly as the H200 is reportedly banned in China.

260119T3.jpg

Not long after the tariff announcement, the US and Taiwan — the largest source of US semiconductor imports, as shown in chart 4 — were reported to have reached a trade deal. Under the agreement, Taiwanese chipmakers such as TSMC that expand production in the US will face lower tariffs on semiconductors and related manufacturing equipment, with duty-free treatment applying to some imports. In addition, tariffs on most other Taiwanese exports to the US will be reduced to 15% from 20%. In return, Taiwanese companies will invest $250 billion in the US, including an expanded manufacturing footprint by TSMC in Arizona, aimed at boosting domestic production of semiconductors, energy, and AI. As illustrated in chart 4, Taiwan already dominates US semiconductor imports, with its share having risen sharply in recent years and far outstripping contributions from other major suppliers such as Southeast Asian economies and South Korea.

260119T4.gif

**Japan snap elections**
Turning to Japan, the country is drumming up for an anticipated February Lower House snap election as Prime Minister Takaichi looks poised to capitalize on her strong approval ratings to secure a firmer parliamentary footing. In reaction, opposition parties have already started galvanizing for the expected upcoming electoral fight, with the opposition Constitutional Democratic Party (CDP) and the ruling party’s former coalition partner, Komeito, having announced a plan to form a new Centrist Reform Alliance (CRA) to fight the current ruling bloc. Given this interim bout of uncertainty, there is now some doubt cast on whether Japan’s budget this year can be debated robustly and passed in time by April 2026 (when the new fiscal year starts), especially if the Lower House gets dissolved soon, meaning less parliamentary time will be available for the purpose. Tracking such developments, the yen had extended its recent slide, whilst Japanese yields have firmed further (chart 5).

260119T5.jpg

**South Korea**
Lastly, we turn to South Korea, where President Lee has embarked on visits to China and Japan that point to a warming of regional ties. In China, Lee’s meeting with President Xi yielded agreements to restore strategic dialogue channels and deepen cooperation in areas such as critical minerals, with Lee calling for a “full restoration” of bilateral relations. In Japan, his visit similarly signalled a thaw in ties following previous periods of tension. Overall, South Korea appears to be seeking closer relations with its two major Asian neighbours even as China–Japan tensions remain elevated. Domestically, however, while the semiconductor sector has benefited from the AI-driven upswing, South Korea continues to face challenges such as elevated house prices and high household debt. These factors have constrained the scope for further monetary policy easing (chart 6).

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Asia

Economic Letter from Asia: Shifting Gears

Winnie Tapasanun

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Industrial production (IP) rose a more-than-expected 0.4% m/m in December following a 0.4% rise in November (+0.2% initially) and a 0.3% decline in October (-0.1% previously), data from the Federal Reserve Board showed. December marked the third m/m gain in four months. A 0.1% m/m December increase had been expected in the Action Economics Forecast Survey. The year-on-year growth rate slowed to 2.0% in December, the lowest since September, from 2.5% in November; this compared with a 0.3% y/y decline in December 2024. The December IP index at 102.3 was 3.1% above a low of 99.2 in January 2024. IP rose 0.2% q/q in Q4 2025 after a 0.6% q/q gain in Q3 2025, increasing at a 0.7% annualized rate following a 2.3% Q3 annualized pace. In 2025, IP rose 1.3% after declines of 0.7% in 2024 and 0.2% in 2023.

By **industry groups**, manufacturing production grew 0.2% (2.0% y/y) in December, up for the third time in four months, following a 0.3% increase in November (0.0% initially) and a 0.6% drop in October (-0.4% previously). Durable goods production edged up 0.1% (3.1% y/y) in December, the first m/m increase since September, after a 0.1% downtick in November. Within durables, the following categories rose m/m in December, including output rises of 2.4% (3.5% y/y) in primary metals, 1.7% (1.3% y/y) in electrical equipment, appliances & components, 1.5% (17.2% y/y) in aerospace & miscellaneous transportation equipment, 0.8% (-2.2% y/y) in furniture & related products, 0.2% (4.8% y/y) in machinery, and 0.1% (7.4% y/y) in computer & electronic products. Notably, aircraft & parts production climbed 2.1% (30.0% y/y), the third m/m increase in four months, reversing a 2.1% November drop. To the downside, the following durable goods categories fell m/m in December, including drops of 2.3% (-5.5% y/y) in wood products, 1.1% (-2.8% y/y) in motor vehicles & parts, 1.1% (-1.0% y/y) in nonmetallic mineral products, 0.1% (+2.6% y/y) in fabricated metal products, and 0.1% (-3.7% y/y) in miscellaneous durables goods.

Nondurable goods production increased 0.3% (1.0% y/y) in December, the third m/m gain in four months, after a 0.8% rebound in November. The December increase reflected m/m output rises of 1.8% (2.1% y/y) in petroleum & coal products, 0.5% (1.9% y/y) in food, beverages & tobacco, and 0.3% (-0.2% y/y) in plastics & rubber products. In contrast, the following nondurable goods categories declined m/m in December, including output drops of 1.3% (-0.8% y/y) in textiles & product mills, 1.1% (-0.5% y/y) in apparel & leather goods, 0.3% (-3.1% y/y) in paper, 0.3% (-3.4% y/y) in printing & related support activities, and 0.1% (+1.6% y/y) in chemicals.

Utilities output recovered 2.6% (2.3% y/y) in December, the third m/m rise in four months, following a 0.3% decline in November (-0.4% initially), reflecting a 1.2% rebound (1.3% y/y) in electric utilities output and a 12.0% jump (8.7% y/y) in natural gas utilities output. Mining activity, however, fell 0.7% (+1.7% y/y), the third m/m slide in four months, after an unrevised 1.7% November gain.

By **market groups**, business equipment output advanced 0.8% (10.1% y/y) in December, up for the third time in four months, after a 0.3% increase in November. Consumer goods output rose 0.7% (0.7% y/y) after a 0.7% November rebound, reflecting a 0.7% decline (-3.5% y/y) in durable consumer goods and a 1.1% gain (1.8% y/y) in nondurable consumer goods. Materials production grew 0.2% (1.7% y/y), the third m/m increase in four months, after a 0.5% November rise. In contrast, construction supplies production fell 0.3% (+1.3% y/y) in December, the second m/m fall in three months, reversing a 0.3% increase in November.

In **special classifications**, factory output of selected high-tech industries increased 0.7% (10.9% y/y) in December, the third successive m/m gain, following a downwardly revised 0.5% rise in November (+1.1% initially). Manufacturing production excluding selected high-tech industries rose 0.2% (1.7% y/y) in December after a 0.3% gain in November, and manufacturing production excluding selected high-tech and motor vehicles & parts rose 0.3% (2.1% y/y) after a 0.4% increase; both measures posted their third m/m gain in four months.

Capacity utilization rose to 76.3% in December, the highest since July, from 76.1% in November (76.0% initially). The Action Economics Forecast Survey forecasted 76.0%. The December reading was 3.2 percentage points below its long-run (1972–2024) average. Manufacturing capacity utilization held at 75.6% in December and November (75.4% previously); the December rate was 2.6 percentage points below its long-run average.

Industrial production and capacity data are in Haver’s **USECON** database. Additional detail on production and capacity utilization can be found in the **IP** database. The expectations figures come from the **AS1REPNA** database.

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- December IP +0.4% (+2.0% y/y), third m/m rise in four months, led by a 2.6% gain in utilities.
- Manufacturing +0.2% (+2.0% y/y), w/ durables +0.1% and nondurables +0.3%.
- Selected high-tech +0.7%, third consecutive m/m rise; motor vehicles -1.1%, fourth straight m/m fall.
- Mining -0.7%, third m/m decline in four months.
- Key categories in market groups mostly increase.
- Capacity utilization at a five-month-high 76.3%; mfg. capacity utilization steady at 75.6%.

U.S. Industrial Production Increases in December on Utilities Rebound

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The European Monetary Union has concluded a year of weak-to-moderate growth with inflation largely toeing the line. As always, the inflation picture is more complicated than a simple statement. When we look at inflation, we look at the headline, we look at the core, to make sure that the volatile food & energy elements aren't dominating the index, and then we look across some of the main participants to see if the trend for inflation is shared broadly across the largest countries in the Monetary Union. When we apply those kinds of standards, the grading for the year is reduced. However, based on the headline alone, it was an excellent year for the ECB.

**Headline Inflation in 2025**
Headline inflation in 2025 rose by 2%, exactly on the target of the European Central Bank. It rose over six months at a 2% annual rate and then concluded the year over the last three months, rising at a 1.6% annual rate with some margin below the target set by the central bank itself.

**Country Headline Inflation Trends**
On a country basis, the performance is not nearly as good. While year-on-year results look pretty good, with Germany at 2%, France at 0.7% and Italy at 1.3%, Spain comes in at 3.1%. So the three largest monetary union economies come in at or below 2% with Spain as a rogue observation. When we look further at the sequence of inflation within the year, we see Germany at 2% over 12 months, rising to 3.1% over 6 months, rising further to 4% over 3 months. Inflation is accelerating at the end of the year even as Germany hits the target! This is something to keep an eye on. For France, the inflation rate also accelerates slightly but stays below the bar of 2% over three months, six months, and 12 months. For Italy, inflation is decelerating from 1.3% over 12 months to -0.3% over six months, and then inflation in Italy is contracting at a 1.9% annual rate over three months. Spanish inflation shows clear trouble with a 3.1% 12-month pace, rising to 4.6% at an annual rate over six months, and rising further to 5.9% at an annual rate over three months.

**Core Inflation**
For core inflation, the Monetary Union’s consolidated numbers are not yet compiled. However, for the four largest economies, we do have core or ex-energy inflation. For Germany, it's inflation excluding energy. On that basis, German inflation is 2.2% over 12 months, it rises to 2.7% over six months, then falls back to a 2% annual pace over three months All-in-all not a bad performance. For France, core inflation is below 2% over 12 months, six months, and three months. In Italy, once again, we see inflation decelerating: Italian inflation is 2% over 12 months - right on the ECB target. It falls to a 1.3% annual rate over six months and then falls further to a 0.3% annual rate over three months. For Spain, the core has another very difficult story for the Monetary Union. Inflation is 2.7% over 12 months, it rises to 3.1% over six months and stays at an annual rate of about 3% over three months. This is too high and it looks stubborn, particularly because it is the core.

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**Across the Big Four**
On balance, what we see is that the ECB grades-out well, based on headline inflation and based on its sequential performance for the European economic union as a whole. But large countries, show headline inflation building some steam particularly in the largest economy, Germany, and in Spain, the smallest of the BIG-4 economies. Inflation is once again mixed in the Monetary Union with German and Spanish inflation too high and with French and Italian inflation running either at or below the 2% mark and with Italy showing a tendency towards weaker prices for both the headline and the core. The change in prices over these various periods shows inflation gets the most help from oil prices over 12 months where Brent, measured in euros, falls by 22.6%; over six months Brent prices fall by 37% at an annual rate; and over three months Brent oil prices are unchanged, so that the headline isn't getting help at all from oil prices except through lagged effects.

**Summing Up**
Meanwhile, there are some signs of stronger growth taking root in Europe, especially in Germany with better industrial production being logged and with German industrial production looking significantly stronger than the PMI data, suggesting that perhaps PMI data are missing something about the rebound that is developing. Nonetheless, it was a good year for inflation and the ECB; however, it doesn't exactly end the year in the catbird’s seat. On the other hand, it does not end the year behind the curve. There are scattered pressures and needs among member countries which always makes monetary policy difficult. When some countries need higher interest rates and others need lower interest rates, the ECB is in a difficult spot. Clearly, Spain and Germany are experiencing different phenomenon than France and Italy. That could be the policy challenge for the year ahead.

Economy in Brief: 2009

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