Robert Brusca

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The Zew experts are decidedly less upbeat than they were. The Zew financial experts assessments still have roughly the same sorts of rankings that had prevailed earlier with strong rankings on current assessments and more pessimism on outlook rankings with still-elevated inflation readings. But in June especially these ranks have changed, eroding for current assessments and expectations while inflation expectations have softened. The world according to Zew has shifted and may still be shifting.

The Zew assessment of current conditions has taken a huge step back for some countries or areas but not for all. The Euro-Area that has had raw diffusion readings for its macroeconomic situation in the 56 to 57 reading area since January has now dived to show a macroeconomic assessment of 39.9; its weakest since October. But despite this outsized step back, the queue standing for the Area remains high in its 87.7th percentile. Germany, where the monthly macro-assessments have been at 86 or higher since June of last year, has slipped to a reading of 80.6 in June. It has slipped to its weakest reading since April of last year. And some of the weakest German economic readings for orders and industrial output have only been released in the past several days so Zew experts may still have some trimming to do on the German assessment. France's assessment has been reduced by very little this month but it has been slipping for several months. The French assessment has morphed from a reading that was negative in in September of last year to a peak in February of this year and has undergone slippage ever since. Still, France has a queue standing in its 88th percentile at a much lower diffusion value than EMU and Germany but with about the same queue percentile standing. Italy has been sharply downgraded in the wake of its elections to a -32.8 diffusion reading down from -18.5 one month ago. Italy has negative readings since March and has been slipping since January.

The macroeconomic assessment for the US is nearly unchanged on the month, lower by 1.4 points in June compared to May and back within one tick of its April reading. The US maintains a 97 percentile queue standing for its macroeconomic assessment. All this seems to green-light the Fed for its agenda of rate increases but what that will do to exchange rates globally is another matter.

Japan's macroeconomic assessment was knocked back to 19.4 from a 30.2 assessment, Japan's assessment had been in the high twenties to thirties since November of last year but it is down in June and was last lower in October of 2017.

The UK is the only country in the table with an improved macroeconomic reading on the month, although its raw reading is still negative. The UK has a long string of mostly negative readings stemming from its adoption of Brexit. It has had its weakest reading around October of last year but May did bring the UK reading lower and in June the UK, against the global trend, recouped only a small portion of the May drop. On balance it's hard to call the UK much of an exception and it continues to have the one of the weakest queue standing in the table for expected macroeconomic conditions (only Italy is worse off).

The current assessment took large reductions generally but every generalization has its exceptions. The macroeconomic expectations are worse across the board and on average worsened more that did the current assessments. But the expectations have worsened the most for Italy with a 31 point one month drop and then for France with an 11 point one month drop. Italy now has the lowest queue standing (worse historically only 3.3% of the time) followed by the UK with a 13.7 percentile standing, Germany with a 14.6 percentile standing and Japan with a 16 percentile standing. Macroeconomic expectations in the US and France have the strongest queue standing with the US at a 28 percentile reading and France at its 25th percentile. None of these is impressive.

In line with stepped back current conditions and a weaker macroeconomic outlook the outlook for inflation has pulled back in all survey areas. Germany and the US have seen inflation expectations lowered by the most by 15.5 diffusion points in Germany and by 14.4 points in the US. But inflation expectations are still strong with a an 85.8 percentile standing for EMU and an 84 percentile standing in the US and in Germany- France and Italy have even higher inflation expectations standings in their respective 88.7th and 87.3 percentile standings.

On this view you can see what I mean by my opening remarks. While there have been some dramatic changes in terms of diffusion points shed and assessments for Italy have worsened dramatically (but, interestingly, not for inflation) the rankings show more or less the same conditions as those that had prevailed before. Current conditions are still strong, inflation expectations are still high and macroeconomic expectations are weak.

The Zew assessment summary table puts all the queue assessment rankings together for the forecasted variables by country and region. At the table bottom unweighted averages show some key summary statistics. Note that the largest (absolute value) change is for stock market expectations and that Zew experts are looking for a decisive pull back in stocks compared to last month's profile. Short term rates are seen mixed (little changed) while long terms rate levels are seen lower possibly a reaction to the lowered expected inflation outlook.

On balance the Zew readings show degradation in the outlook that is a downgrade of a global nature. It fits in with remarks offered to today by the IMF's Christine Lagarde who warned of a darkening outlook and one that is darkening day by day. I find is it unsettling that Ms. Lagarde has put the US and tariffs as the keystone in this reduced outlook. While I do not disagree that the US stance is a catalyst of sorts for events, the US is only seeking redress for policies that long have given it inferior standing and it is the reluctance of US trade partners to cut the US a better fairer deal that contributes to this being a problem. I understand that role that the US in playing in this process but is anyone of any global standing going to stand up and admit that what we are observing is the demonization of US trade policy but in reality it is nothing more than ‘the pot calling the kettle black.'



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The Zew experts are decidedly less upbeat than they were. The Zew financial experts assessments still have roughly the same sorts of rankings that had prevailed earlier with strong rankings on current assessments and more pessimism on [...]

Zew Assessments Take a Hit in June

Peter D'Antonio

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Retail gasoline prices eased to $2.91 per gallon last week (+23.0% y/y) from $2.94 per gallon during the prior week. This was the second consecutive weekly decline, which probably signals the end of the traditional price increase in anticipation of the summer driving season. Haver Analytics constructs factors adjusting for the seasonal variation in gasoline pump prices. The seasonally-adjusted price fell slightly to $2.74 per gallon.
West Texas Intermediate crude oil prices declined to an average of $65.34 (+40.4% y/y) per barrel last week, which was down from $66.97 per barrel in the week prior and from the recent high of $71.31 per barrel three weeks ago. Brent crude oil prices eased to an average of $75.92 per barrel last week and were $76.43 yesterday.
Natural gas prices increased to an average of $2.88/mmbtu last week (-2.4% y/y) from $2.86/mmbtu and were $2.95 yesterday.
In the four-weeks ending June 1, gasoline demand declined 1.1% y/y, while total petroleum product demand edged up 0.2% y/y. Gasoline inventories declined 0.6% y/y, while inventories of all petroleum products dropped 8.0% y/y. Crude oil input to refineries declined 2.0% y/y in the last four weeks.
These data are reported by the U.S. Department of Energy. The price data can be found in Haver's WEEKLY and DAILY databases. Greater detail on prices, as well as the demand, production and inventory data, along with regional breakdowns, are in OILWKLY.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>
 <thead>
 <tr>
 <th class="firstcol" scope="col" >Weekly Energy Prices</th>
 <th scope="col" >06/11/18</th>
 <th scope="col" >06/04/18</th>
 <th scope="col" >05/28/18</th>
 <th scope="col" >Y/Y %</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd" >
 <td class="firstcol" >Retail Gasoline ($ per Gallon Regular,
 Monday Price)</td>
 <td >2.91</td>
 <td >2.94</td>
 <td >2.96</td>
 <td >23.03</td>
 <td >2.47</td>
 <td >2.31</td>
 <td >2.03</td>
 </tr>
 <tr>
 <td class="firstcol" >Light Sweet Crude Oil, WTI ($ per bbl,
 Previous Week's Average)</td>
 <td >65.34</td>
 <td >66.97</td>
 <td >70.97</td>
 <td >40.40</td>
 <td >50.87</td>
 <td >43.22</td>
 <td >48.90</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Natural Gas ($/mmbtu, LA, Previous
 Week's Average)</td>
 <td >2.88</td>
 <td >2.86</td>
 <td >2.83</td>
 <td >-2.44</td>
 <td >2.96</td>
 <td >2.49</td>
 <td >2.62</td>
 </tr>
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Retail gasoline prices eased to $2.91 per gallon last week (+23.0% y/y) from $2.94 per gallon during the prior week. This was the second consecutive weekly decline, which probably signals the end of the traditional price increase in [...]

U.S. Petroleum Prices Ease Slightly

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UK manufacturing sector IP growth fell sharply in April and declined for the third month in a row. Sequential rates of growth for manufacturing IP are getting progressively weaker and in the quarter-to-date (April’s growth positioned and annualized over the Q1 average). IP growth in the UK is contracting sharply. The decline in UK IP was unexpected but it fits in with a rash of IP weakness across Europe that also dove-tails with weakening European PMI gauges. And this is happening in a big week of central bank meetings where it is expected that central bankers will declare themselves to be on the yellow brick road to growth and adopt more policy normalcy…but should they?

The European and global economies are dealing with any number of subtle shocks at the moment. I call them ‘subtle’ because while some of them are a subtle as a blow by a sledgehammer they are also effects that stem from fears of events that have not yet happened. It is always difficult to judge how far ahead of an act markets or economies are going to react. It is not clear what discount factor will be applied to events that have not yet happened and especially to events that speculatively may not even come to fruition. And we have such things hanging in the balance now.


Special events 
The most pressing concern for the UK is the transition under Brexit. This is a well-known phenomenon with a relatively firm transition period. But while the transition point is relatively well pinned down, the new terms and conditions of life under a Brexit regime are not determined. Markets reacting to Brexit are reacting to the unknown and in some cases firms are switching the domicile of their business to ensure that whatever Brexit brings they will be able to continue to perform. More subtle are the restive populist political movements in Europe especially in Italy where the Five Star Movement has become the dominant political party. After some saber rattling about leaving EMU, adopting the lira, or initiating a referendum on EU and EMU membership and wanting debt forgiveness the Five Star coalition with the Northern League has put the toothpaste back into the tube but there is no certainty about how long this coalition that has nurtured some harsh language in the past will continue to be passive. Finally there are the new US pressures over trade and the clear and present dangers of tariff threats and Europe’s own threats of reprisals against the US. This also includes ongoing US angst about funding so much of Europe’s defense when many nations of Europe do not pay their way in NATO as they had once agreed.

The CBI on Brexit 
On the issue of Brexit, the Confederation of British Industry (CBI), has weighed in today; it warns that the UK economy will shift to a slower gear this year and that risks have risen that growth will remain undernourished because of the Brexit transition. The CBI says it has cut its growth forecasts for the year, because of heavy snowfall in the opening months of 2018 and lingering fears over Brexit. The group now expects the growth rate for the British economy to slow to 1.4%, from 1.8% last year. GDP growth is expected to slip again, to 1.3% the next year, as the UK bids a fond (or not so fond) farewell to the EU.

Add in the ills from the ongoing and heightened trade spat with the US that became intensified by the G7 summit and there are ample reasons to expect that businesses might not be planning and investing for a better future despite solid global growth and broadly lowered rates of unemployment globally.

This is much bigger than Brexit and the UK 
My view of much of this is that we are still transitioning from the Post War period. World War II was devastating thing to the European area and to much of Asia. The US was never geographically a site of conflict. In the post war period a lot of effort was made to rebuild relationships and to repair physical properties ranging from factories to infrastructure to simple housing. There were also massive population relocations, post-war. The US cut the combatants- both allies and former enemies some slack is setting up post war trade relationships. Europe that has always been more socialistic than the US and was allowed to keep some market protections that the US did not demand for itself in trade, But now the Post War period is far behind us. While Europeans are used to this system and their special exceptions (like imposing tariffs on US goods when the US imposes no tariffs on theirs) the time for special treatment is past. Each and every G7 country with the possible exception of the UK runs consistent and stable trade surpluses in their bilateral trade with the US. Exchange rates do not change to remove or ameliorate this condition. The affluent US market is a source of demand for everyone to tap. But the US is not as rich or as competitive as it once was- especially not at current exchange rate levels.

Moreover, the once-accepted view of "unilateral Free trade" espoused by many US economists has proved itself an Achilles heel for US growth. With the US running a system of free trade for imports but others engaged in less than free trade on US exports and with exchange rates not being allowed to adjust to clear imbalances the US has become specialized in demand while Asia has become a supply center for the global economy. AND that is NOT what free trade means. It is not what ‘specialization’ means. Donald Trump’s desire to restore better-balanced two way trade flows is not being embraced overseas where changes will be needed. And as we see today with French farmers setting up blockades because imported palm oil will be allowed to be mixed in local gasoline stocks Europeans are activists protecting their ‘historic’ interests justified or not. A Bosnian blockade is also in play in Europe over high fuel prices. Europe does suffer economic activism over change. In France PM Macron has suffered through a persistent nationwide rail strike as he has tried to introduce modernization and as workers resist. Europe is hopelessly stuck in the socialistic Post War period and attempts to jolt it out of its niche find the European press referring to Trump’s plea for Free trade as ‘spew’ (here for an example from Reuters).

US President Donald Trump seems to make enemies much faster than he makes friends. He is arrogant, narcissistic and ham-handed in his political dealings. But none of that makes him wrong in this policy pursuit. While the US has ample reason to lash out at the way its trade is affected, Trump’s choice of National Security to protect metals trade pushes the envelope of logic. But maybe that is his plan as well, to use an outlandish WTO-allowed trick to drive his point home about how the US has been treated and cheated. Sometimes it is better simply not to try to understand Mr. Trump, but to treat him and his actions as simply existential.

Any way you slice it the US has been the protector of Europe for 60-years on. Angela Merkel dissed Mr. Trump as a ‘bad ally’ for his taunts suggesting that US obligations under NATO were in some way malleable when he first took office. He made it clear that he expected European and German obligations would be paid in to support of NATO as they had agreed. And after that spat and after calling the US a ‘bad ally’ Germany this year is CHOOSING to run a budget surplus instead of paying in its full share to its NATO commitment. So who is the real bad ally here? Who are the real unfair traders? Why does Trump’s rooting around in the legacy of Post War custom and practice makes him a bad guy? Oh his demeanor? Yes I get it. But what about the substance of the issues at hand? How does Europe justify any notion of ‘retaliation for all the support that the US given it and continues to give it? And is it any wonder that firms are pulling back in the UK and elsewhere in the wake of this kind of selfishness? If Trump is ‘spewing’ by pointing out Europe’s structural intransigence, what is Europe guilty of? And is Europe really going to try to hide from its lapsed responsibilities by playing tit-for-tat each time the US does something to try to even the very uneven playing field that is made clear every month when new trade figures report further European surpluses in trade with the US?


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UK manufacturing sector IP growth fell sharply in April and declined for the third month in a row. Sequential rates of growth for manufacturing IP are getting progressively weaker and in the quarter-to-date (April’s growth positioned [...]

A Souring of UK IP and The Outlook

Tom Moeller

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The Industrial Materials Price Index from the Foundation for
International Business and Economic Research (FIBER) improved 1.3% during the
last four weeks and 12.9% during the last year. Industrial materials prices
overall have risen by roughly one-third versus the early-2016 low. A 1.9% y/y
increase in industrial sector output prompted the gain as it followed 1.7% growth during 2017.
Price increases have been broad-based.
Prices in&nbsp; the miscellaneous group exhibited the
most strength with a 3.0% gain during the
last four weeks and a 13.4% rise during the past year. Framing lumber prices
strengthened 10.9% last month, up by nearly one half y/y. Prices for
structural panels improved 6.2% during the last four weeks and rose 42.8% during the last year.
Lower prices for natural rubber offset some of this strength with a 3.6% decline
last month and remained down 2.7% y/y. In the metals sector, prices
firmed 1.7% during the last month and improved 21.1% y/y. The gain was led by an
8.6% rise (20.1% y/y) in the cost of lead as well as a 4.2% increase (27.7% y/y)
in zinc prices. Copper scrap costs strengthened 3.6% m/m and 25.8% y/y.
Offsetting these gains was a 3.7% one-month fall (+27.6% y/y) in steel scrap
prices as well as a 0.6% four-week easing (+21.3% y/y) in aluminum prices. In the textile group,
prices overall improved 0.9% (2.5% y/y).
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Cotton prices surged 7.2% over the last month (18.8% y/y), but burlap prices fell
1.5% m/m and were down 2.5% during the past year. In the crude
oil &amp; benzene sector, prices declined 2.3% last month, but rose 15.0% y/y.
Crude oil prices declined 7.3% m/m to an average $65.34 per barrel, but were up
by more than one-third y/y. Benzene prices rose by 2.6% in the last four weeks
(13.5% y/y).&nbsp;&nbsp;
Further strength in prices overall may be coming. The
consensus forecast for industrial output from the National Association for
Business Economics (NABE) calls for a 3.8% rise in 2018 and 2.8% growth in 2019.
During the last ten years, there has been 50% correlation between the
three-month change in prices and the change in U.S. industrial output. In
addition, factory sector production in the European Union and Japan continues to
improve.
Commodity price data can be found in Haver's DAILY,
WEEKLY, USECON and CMDTY databases. The NABE forecast is in the SURVEYS
database.

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	<colgroup><col><col><col><col><col><col><col><col></colgroup>
 <tbody>
 <tr>
 <th class="firstcol" scope="col" >FIBER Industrial Materials
 Price Index (%)</th>
 <th scope="col" >1-Mth</th>
 <th scope="col" >3-Mth</th>
 <th scope="col" >6-Mth</th>
 <th scope="col" >12-Mth</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </tbody>
 <tbody>
 <tr>
 <td class="firstcol" >All Items</td>
 <td >1.3</td>
 <td >1.7</td>
 <td >8.2</td>
 <td >12.9</td>
 <td >6.7</td>
 <td >19.2</td>
 <td >-16.3</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" >&nbsp;Textiles</td>
 <td >0.9</td>
 <td >0.5</td>
 <td >2.6</td>
 <td >2.5</td>
 <td >3.0</td>
 <td >2.8</td>
 <td >2.2</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Cotton (cents per pound)</td>
 <td >7.2</td>
 <td >8.6</td>
 <td >23.0</td>
 <td >18.8</td>
 <td >9.8</td>
 <td >10.2</td>
 <td >2.6</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" >&nbsp;Metals</td>
 <td >1.7</td>
 <td >2.0</td>
 <td >8.6</td>
 <td >21.1</td>
 <td >18.6</td>
 <td >32.9</td>
 <td >-27.8</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Aluminum ($ per metric ton)</td>
 <td >-0.6</td>
 <td >8.9</td>
 <td >13.6</td>
 <td >21.3</td>
 <td >26.0</td>
 <td >13.0</td>
 <td >-19.2</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Copper Scrap (cents per
 pound)</td>
 <td >3.6</td>
 <td >2.1</td>
 <td >5.6</td>
 <td >25.8</td>
 <td >29.3</td>
 <td >17.3</td>
 <td >-27.0</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Steel Scrap ($ per ton)</td>
 <td >-3.7</td>
 <td >6.9</td>
 <td >31.7</td>
 <td >27.6</td>
 <td >16.8</td>
 <td >74.5</td>
 <td >-53.8</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" >&nbsp;Crude Oil &amp; Benzene</td>
 <td >-2.3</td>
 <td >1.8</td>
 <td >2.8</td>
 <td >15.0</td>
 <td >8.1</td>
 <td >20.4</td>
 <td >-19.4</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Crude Oil (WTI, $ per Barrel)</td>
 <td >-7.3</td>
 <td >6.6</td>
 <td >14.5</td>
 <td >39.3</td>
 <td >10.9</td>
 <td >44.3</td>
 <td >-35.8</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" >&nbsp;Miscellaneous</td>
 <td >3.0</td>
 <td >2.3</td>
 <td >15.2</td>
 <td >13.4</td>
 <td >-0.5</td>
 <td >21.7</td>
 <td >-18.0</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Framing Lumber ($ per 1000
 board ft.)</td>
 <td >10.9</td>
 <td >13.7</td>
 <td >33.5</td>
 <td >44.8</td>
 <td >20.0</td>
 <td >12.9</td>
 <td >-16.4</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Natural Rubber (cents per
 pound)</td>
 <td >-3.6</td>
 <td >-0.2</td>
 <td >9.3</td>
 <td >-2.7</td>
 <td >-29.6</td>
 <td >89.4</td>
 <td >-22.5</td>
 </tr>
 </tbody>
</table>


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The Industrial Materials Price Index from the Foundation for International Business and Economic Research (FIBER) improved 1.3% during the last four weeks and 12.9% during the last year. Industrial materials prices overall have risen [...]

FIBER: Industrial Commodity Prices Strengthen

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Wholesale trade inventories increased 0.1% (5.8 y/y) during
April following a 0.2% March gain, revised from 0.3%. The April rise matched the
increase reported in the advance report released on May 30 and compared to no
change expected in the Informa Global Markets Survey.
Durable goods inventories increased 0.2% (6.2% y/y) in April
following a 0.7% rise in March. The 6.2% y/y gain compared to moderate inventory
decumulation early in 2016. Electrical product inventories increased 0.2% (7.8%
y/y) after two months of 1.0% gain while machinery inventories held steady (5.4%
y/y) following a 0.2% rise. Computer equipment inventories increased 0.9% (-1.0%
y/y) after a 2.2% decline. Inventories of nondurable goods were unchanged (5.2%
y/y) following a 0.6% decline. A 0.8% increase (-0.9% y/y) in inventories of
grocery products reversed a 0.9% fall. Apparel inventories were off 0.6% (-1.1%
y/y) after a 0.4% decline. Petroleum inventories surged 3.1% (7.3% y/y) with
higher prices while inventories of paper products declined 1.3% (+4.6% y/y), and
reversed two months of increase.
Sales at the wholesale level gained 0.8% (7.8% y/y) during
April following a 0.4% March increase which was strengthened from last month's
report. Revised data indicate strong growth through last year. A 0.4% April rise
had been expected in the Action Economics Forecast Survey.
Durable goods sales increased 0.8% (7.8% y/y) after a 0.4%
increase. Motor vehicle sales declined 0.7% (+6.2% y/y) after two months of
strong rise. Electrical product sales fell 1.5% (+6.1% y/y), following a 0.8%
rise. Machinery sales surged 1.9% (12.4% y/y) after a 0.1% dip, and furniture
sales jumped 1.6% (2.3% y/y) following a 1.9% fall. Nondurable product sales
strengthened 0.7% (7.5% y/y) after a 0.8% rise. Petroleum product sales gained
1.5% (22.5% y/y) after a 1.0% gain. Apparel sales fell 2.9% (+4.1% y/y) after
holding steady, but chemical product sales surged 2.0% (12.7 y/y) after a 1.2%
fall.
The inventory-to-sales ratio at the wholesale level eased to
1.28 in April after three months at 1.29. It remained well below its most recent
high of 1.38 in February 2016.
The I/S ratio for durable goods eased to 1.59 from 1.60. It
remains well below its most recent peak of 1.74 in January 2016. The furniture
I/S fell sharply to 1.86 from a recent high of 1.92. The machinery and equipment
I/S ratio also plummeted to a six year low of 2.57, well below the 3.02 high in
early-2016. The I/S ratio for nondurable goods declined to 0.98 from 0.99. It
was below the 1.09 ratio two years ago. The petroleum industry I/S ratio rose
slightly m/m but remained near its lowest level since 2014, down from the 0.63
high in early 2016. The I/S ratio in the chemical industry was similarly
depressed and the apparel industry ratio has been steady near 2.10 for two years.
The wholesale trade figures are available in Haver's USECON
database. The expectations figure for inventories is contained in the MMSAMER
database. Expectations for sales are from the Action Economics Database.

 <thead>
 <tr>
 <th class="firstcol" scope="col" width="958">Wholesale Sector - NAICS
 Classification (%)</th>
 <th scope="col" width="129">Apr</th>
 <th scope="col" width="130">Mar</th>
 <th scope="col" width="130">Feb</th>
 <th scope="col" width="130">Y/Y</th>
 <th scope="col" width="130">2017</th>
 <th scope="col" width="130">2016</th>
 <th scope="col" width="130">2015</th>
 </tr>
 </thead>
 
 <tr class="odd">
 <td class="firstcol" width="958">Inventories</td>
 <td align="center" width="129">0.1</td>
 <td align="center" width="130">0.2</td>
 <td align="center" width="130">0.8</td>
 <td align="center" width="130">5.8</td>
 <td align="center" width="130">3.6</td>
 <td align="center" width="130">2.2</td>
 <td align="center" width="130">1.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="958">Sales</td>
 <td align="center" width="129">0.8</td>
 <td align="center" width="130">0.4</td>
 <td align="center" width="130">0.9</td>
 <td align="center" width="130">7.8</td>
 <td align="center" width="130">7.4</td>
 <td align="center" width="130">-1.3</td>
 <td align="center" width="130">-4.92</td>
 </tr>
 
 <tr class="odd">
 <td class="firstcol" width="958">I/S Ratio</td>
 <td align="center" width="129">1.28</td>
 <td align="center" width="130">1.29</td>
 <td align="center" width="130">1.29</td>
 <td align="center" width="130">1.30 (Apr.'17)</td>
 <td align="center" width="130">1.29</td>
 <td align="center" width="130">1.35</td>
 <td align="center" width="130">1.33</td>
 </tr>
 


&nbsp;
U.S. Home Affordability Continues to Fall 
by <a href="http://haver.com/comment/Moeller.html">Tom Moeller</a>&nbsp;
June 8, 2018
The National Association of Realtors reported that the
Composite Index of Home Affordability declined 8.8% y/y during April to 145.8,
the lowest level since October 2008. The index was 32.0% below its peak in
January 2013. During the last ten years, there has been a 60% correlation
between the affordability index level and the y/y change in existing
single-family home
sales.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;

Higher prices have reduced affordability. The median sales
price of an existing home strengthened 5.5% y/y to $259,900. The price rise was
accompanied by a higher average mortgage rate of 4.66%, up from a 3.43% in
December 2012. Together, principal &amp; interest payments rose to $1,073 or 17.1%
of median income, the highest percentage since August 2007. That percentage
compared to a low of 11.7% early in 2013. Growth in median family income slowed
to 2.8% y/y from 3.9% during all of 2016.
The Housing Affordability Index equals 100 when median family
income qualifies for an 80% mortgage on a median priced existing single-family
home. A rising index indicates more buyers can afford to enter the home-buying
market. Data on Home Affordability can be found in Haver's REALTOR
database. Interest rate data can be found in the WEEKLY and DAILY
databases.
<table width="1871" class="centered" border="0" cellSpacing="0">
 <thead>
 <tr>
 <th class="firstcol" 0801 width="839">Housing Affordability</th>
 <th 0801 align="center" width="146">Apr</th>
 <th 0801 align="center" width="147">Mar</th>
 <th 0801 align="center" width="147">Feb</th>
 <th 0801 align="center" width="147">Apr Y/Y</th>
 <th 0801 align="center" width="147">2017</th>
 <th 0801 align="center" width="147">2016</th>
 <th 0801 align="center" width="147">2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" 0801 width="839">Composite Index</td>
 <td 0801 align="center" width="146">145.8</td>
 <td 0801 align="center" width="147">150.0</td>
 <td 0801 align="center" width="147">160.1</td>
 <td 0801 align="center" width="147">-8.8%</td>
 <td 0801 align="center" width="147">158.5</td>
 <td 0801 align="center" width="147">168.2</td>
 <td 0801 align="center" width="147">168.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 width="839">&nbsp; Median Sales Price (Existing
 Single Family Home)</td>
 <td 0801 align="center" width="146">$259,900</td>
 <td 0801 align="center" width="147">$251,500</td>
 <td 0801 align="center" width="147">$242,600</td>
 <td 0801 align="center" width="147">5.5%</td>
 <td 0801 align="center" width="147">$247,508</td>
 <td 0801 align="center" width="147">$233,642</td>
 <td 0801 align="center" width="147">$221,350</td>
 </tr>
 <tr>
 <td class="firstcol" 0801 width="839">&nbsp; Monthly Mortgage Rate&nbsp;&nbsp;</td>
 <td 0801 align="center" width="146">4.66%</td>
 <td 0801 align="center" width="147">4.63%</td>
 <td 0801 align="center" width="147">4.42%</td>
 <td 0801 align="center" width="147">4.11%</td>
 <td 0801 align="center" width="147">4.20%</td>
 <td 0801 align="center" width="147">3.88%</td>
 <td 0801 align="center" width="147">4.03%</td>
 </tr>
 <tr>
 <td class="firstcol" 0801 width="839">&nbsp; Principal and Interest
 Payment</td>
 <td 0801 align="center" width="146">$1,073</td>
 <td 0801 align="center" width="147">$1,035</td>
 <td 0801 align="center" width="147">$974</td>
 <td 0801 align="center" width="147">12.6%</td>
 <td 0801 align="center" width="147">$967</td>
 <td 0801 align="center" width="147">$880</td>
 <td 0801 align="center" width="147">$849</td>
 </tr>
 <tr>
 <td class="firstcol" 0801 width="839">&nbsp; Median Family Income</td>
 <td 0801 align="center" width="146">$75,093</td>
 <td 0801 align="center" width="147">$74,944</td>
 <td 0801 align="center" width="147">$74,828</td>
 <td 0801 align="center" width="147">2.8%</td>
 <td 0801 align="center" width="147">$73,545</td>
 <td 0801 align="center" width="147">$70,941</td>
 <td 0801 align="center" width="147">$68,267</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 width="839">&nbsp; Payment as a Percent of
 Income</td>
 <td 0801 align="center" width="146">17.1</td>
 <td 0801 align="center" width="147">16.6</td>
 <td 0801 align="center" width="147">15.6</td>
 <td 0801 align="center" width="147">15.6</td>
 <td 0801 align="center" width="147">15.8</td>
 <td 0801 align="center" width="147">14.9</td>
 <td 0801 align="center" width="147">14.9</td>
 </tr>
 </tbody>
</table>





</html>

Wholesale trade inventories increased 0.1% (5.8 y/y) during April following a 0.2% March gain, revised from 0.3%. The April rise matched the increase reported in the advance report released on May 30 and compared to no change expected [...]

U.S. Wholesale Inventories Inch Higher; Sales Strengthen

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Wholesale trade inventories increased 0.1% (5.8 y/y) during
April following a 0.2% March gain, revised from 0.3%. The April rise matched the
increase reported in the advance report released on May 30 and compared to no
change expected in the Informa Global Markets Survey.

Durable goods inventories increased 0.2% (6.2% y/y) in April
following a 0.7% rise in March. The 6.2% y/y gain compared to moderate inventory
decumulation early in 2016. Electrical product inventories increased 0.2% (7.8%
y/y) after two months of 1.0% gain while machinery inventories held steady (5.4%
y/y) following a 0.2% rise. Computer equipment inventories increased 0.9% (-1.0%
y/y) after a 2.2% decline. Inventories of nondurable goods were unchanged (5.2%
y/y) following a 0.6% decline. A 0.8% increase (-0.9% y/y) in inventories of
grocery products reversed a 0.9% fall. Apparel inventories were off 0.6% (-1.1%
y/y) after a 0.4% decline. Petroleum inventories surged 3.1% (7.3% y/y) with
higher prices while inventories of paper products declined 1.3% (+4.6% y/y), and
reversed two months of increase.

Sales at the wholesale level gained 0.8% (7.8% y/y) during
April following a 0.4% March increase which was strengthened from last month's
report. Revised data indicate strong growth through last year. A 0.4% April rise
had been expected in the Action Economics Forecast Survey.

Durable goods sales increased 0.8% (7.8% y/y) after a 0.4%
increase. Motor vehicle sales declined 0.7% (+6.2% y/y) after two months of
strong rise. Electrical product sales fell 1.5% (+6.1% y/y), following a 0.8%
rise. Machinery sales surged 1.9% (12.4% y/y) after a 0.1% dip, and furniture
sales jumped 1.6% (2.3% y/y) following a 1.9% fall. Nondurable product sales
strengthened 0.7% (7.5% y/y) after a 0.8% rise. Petroleum product sales gained
1.5% (22.5% y/y) after a 1.0% gain. Apparel sales fell 2.9% (+4.1% y/y) after
holding steady, but chemical product sales surged 2.0% (12.7 y/y) after a 1.2% fall.

The inventory-to-sales ratio at the wholesale level eased to
1.28 in April after three months at 1.29. It remained well below its most recent
high of 1.38 in February 2016.

The I/S ratio for durable goods eased to 1.59 from 1.60. It
remains well below its most recent peak of 1.74 in January 2016. The furniture
I/S fell sharply to 1.86 from a recent high of 1.92. The machinery and equipment
I/S ratio also plummeted to a six year low of 2.57, well below the 3.02 high in
early-2016. The I/S ratio for nondurable goods declined to 0.98 from 0.99. It
was below the 1.09 ratio two years ago. The petroleum industry I/S ratio rose
slightly m/m but remained near its lowest level since 2014, down from the 0.63
high in early 2016. The I/S ratio in the chemical industry was similarly
depressed and the apparel industry ratio has been steady near 2.10 for two years.

The wholesale trade figures are available in Haver's USECON
database. The expectations figure for inventories is contained in the MMSAMER
database. Expectations for sales are from the Action Economics Database.

<a href="/comment/180608h.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/180608h.png"></a>
 <a href="/comment/180608i.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/180608i.png"></a>

<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >Wholesale Sector - NAICS
 Classification (%)</th>
 <th scope="col" >Apr</th>
 <th scope="col" >Mar</th>
 <th scope="col" >Feb</th>
 <th scope="col" >Y/Y</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd">
 <td class="firstcol" >Inventories</td>
 <td>0.1</td>
 <td>0.2</td>
 <td>0.8</td>
 <td>5.8</td>
 <td>3.6</td>
 <td>2.2</td>
 <td>1.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Sales</td>
 <td>0.8</td>
 <td>0.4</td>
 <td>0.9</td>
 <td>7.8</td>
 <td>7.4</td>
 <td>-1.3</td>
 <td>-4.92</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >I/S Ratio</td>
 <td>1.28</td>
 <td>1.29</td>
 <td>1.29</td>
 <td>1.30 (Apr.'17)</td>
 <td>1.29</td>
 <td>1.35</td>
 <td>1.33</td>
 </tr>
 </tbody>
 </table>
 
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German trends but more broadly European trends are pointing lower. Germany's IP drop is formally listed as ‘unexpected.' But after four months in a row of orders declining one has to wonder why would a drop in output be unexpected with that legacy? Clearly there has been some denial in the mx so beware of that. It is probably a phenomenon that is broader than just denial about weakness in German industrial output.

German IP fell across the board in April falling by 1% overall by 2.1% for consumer goods output, by 1.3% for capital goods, and by 2% for intermediate goods. The sequential growth rates from 12-months to 6-months to 3-months generally show a moderate 12-month expansion, a slightly greater 6-month pace then a collapse into decisive decline across the board over three-months. Intermediate goods pose a slight exception to these output trends; they show monotonically declining rates of growth across these horizons.

The construction sector in Germany is a true exception to those trends. Construction shows positive rates of growth on all horizons. Trends in that sector tilt slightly upward. The strongest growth rate is for six months; the three-month growth rate is faster than 12-month growth. Still the year-on-year growth rate in construction is 2.8% not that much stronger than for IP overall that is at 2%.

In the quarter to date all German sector growth rates are negative but again construction is an exception and it is knocking down an amazing 40% annual rate expansion early in Q2. In its public sector Germany is prioritizing the running of a budget surplus and it is planning to cut back on infrastructure spending this year. That could slow down spending in this sector.

Across Europe IP is weak over the last three-months. With eight other European nations reporting IP at this time, we find declines in half of them in April. But it is the broader trend that is disturbing. Over 3-months six of eight show declines in IP; only one, The Netherlands, logs a ‘slow' pace of decline at -2.1%. Spain and Ireland show declines at annual rates of around -30 percent. Moreover, over six months there are declines in five of eight reporters. And the pace of decline is generally large.

Only the Netherlands logs a growth rate over six months that is "strong" at a pace of 4.4%. Norway shows a +1.8% pace and Sweden registers a 0.9% positive pace. After that the rest are all declines. As we also saw for Germany, the 12-month growth rate shows smooth sailing.

Only Ireland has a decline in IP over 12-months (and a relatively severe decline at that). Spain and The Netherlands show growth of over 4% over 12-months, Portugal is at 3.8%, Sweden at 3.5% and France at 3%. The annual figures look just fine. That simply underscores the switch that we have seen in a short period of time to go from growth rates that average (unweighted) 2.1% over 12-months to annualized rates that average -9.8% over three-months.

Both Germany and the rest of Europe are seeing a step-down in growth. Whether it is the fear of trade sanctions and trade warfare or something else is hard to tell. There has been acceleration in place from 2016 through 2017 but at the turn of 2018 there was really something else that happened and redirected growth. The PMI gauges have captured the turnaround. But the ECB is still set to ponder a full exit from its batch of stimulus programs.

The global economy does have a lot up in the air. The US threat of tariffs is more than just a threat. The US has long been the butt of international trade abuse and Donald Trump has vowed to put a stop to it – it was part of the platform on which he ran for office. The rest of Europe is not in the right as much as they think. They just like the way things have been and like the exceptions they have been allowed...and want it to continue. With US wages stagnant and too many low wage jobs being created in the US Donald Trump is no longer willing to have the US milked for its income to shore up other economies. He wants something more like what FREE TRADE is supposed to produce: equal opportunities. Every G7 member runs a long bilateral trade surplus Vs the US except the UK. Germany has the highest current account surplus as a ratio to its GDP of any industrialized economy. And with that Germany is running a budget surplus and does not plan on paying its share into NATO defenses this year.

Yes, the US is "isolated" but it is hardly in the wilderness. I think Europeans need some perspective before they decide to gang up on the US. They may outnumber the US, and in GDP they maybe an equal, but in terms of intransigence THEY are the violators much more than the US a country that is only seeking redress from advantages Europe has had through much of the Post-War period.


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German trends but more broadly European trends are pointing lower. Germany's IP drop is formally listed as ‘unexpected.' But after four months in a row of orders declining one has to wonder why would a drop in output be unexpected [...]

German IP Follows Orders Lower...Much of Europe Joins Trend

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The National Association of Realtors reported that the
Composite Index of Home Affordability declined 8.8% y/y during April to 145.8,
the lowest level since October 2008. The index was 32.0% below its peak in
January 2013. During the last ten years, there has been a 60% correlation
between the affordability index level and the y/y change in existing
single-family home sales.

Higher prices have reduced affordability. The median sales
price of an existing home strengthened 5.5% y/y to $259,900. The price rise was
accompanied by a higher average mortgage rate of 4.66%, up from a 3.43% in
December 2012. Together, principal &amp; interest payments rose to $1,073 or 17.1%
of median income, the highest percentage since August 2007. That percentage
compared to a low of 11.7% early in 2013. Growth in median family income slowed
to 2.8% y/y from 3.9% during all of 2016.
The Housing Affordability Index equals 100 when median family
income qualifies for an 80% mortgage on a median priced existing single-family
home. A rising index indicates more buyers can afford to enter the home-buying
market. Data on Home Affordability can be found in Haver's REALTOR
database. Interest rate data can be found in the WEEKLY and DAILY
databases.


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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>
 <thead>
 <tr>
 <th class="firstcol" 0801 >Housing Affordability</th>
 <th 0801 >Apr</th>
 <th 0801 >Mar</th>
 <th 0801 >Feb</th>
 <th 0801 >Apr Y/Y</th>
 <th 0801 >2017</th>
 <th 0801 >2016</th>
 <th 0801 >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" 0801 >Composite Index</td>
 <td 0801 >145.8</td>
 <td 0801 >150.0</td>
 <td 0801 >160.1</td>
 <td 0801 >-8.8%</td>
 <td 0801 >158.5</td>
 <td 0801 >168.2</td>
 <td 0801 >168.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 >&nbsp; Median Sales Price (Existing
 Single Family Home)</td>
 <td 0801 >$259,900</td>
 <td 0801 >$251,500</td>
 <td 0801 >$242,600</td>
 <td 0801 >5.5%</td>
 <td 0801 >$247,508</td>
 <td 0801 >$233,642</td>
 <td 0801 >$221,350</td>
 </tr>
 <tr>
 <td class="firstcol" 0801 >&nbsp; Monthly Mortgage Rate&nbsp;&nbsp;</td>
 <td 0801 >4.66%</td>
 <td 0801 >4.63%</td>
 <td 0801 >4.42%</td>
 <td 0801 >4.11%</td>
 <td 0801 >4.20%</td>
 <td 0801 >3.88%</td>
 <td 0801 >4.03%</td>
 </tr>
 <tr>
 <td class="firstcol" 0801 >&nbsp; Principal and Interest
 Payment</td>
 <td 0801 >$1,073</td>
 <td 0801 >$1,035</td>
 <td 0801 >$974</td>
 <td 0801 >12.6%</td>
 <td 0801 >$967</td>
 <td 0801 >$880</td>
 <td 0801 >$849</td>
 </tr>
 <tr>
 <td class="firstcol" 0801 >&nbsp; Median Family Income</td>
 <td 0801 >$75,093</td>
 <td 0801 >$74,944</td>
 <td 0801 >$74,828</td>
 <td 0801 >2.8%</td>
 <td 0801 >$73,545</td>
 <td 0801 >$70,941</td>
 <td 0801 >$68,267</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 >&nbsp; Payment as a Percent of
 Income</td>
 <td 0801 >17.1</td>
 <td 0801 >16.6</td>
 <td 0801 >15.6</td>
 <td 0801 >15.6</td>
 <td 0801 >15.8</td>
 <td 0801 >14.9</td>
 <td 0801 >14.9</td>
 </tr>
 </tbody>
</table>
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The National Association of Realtors reported that the Composite Index of Home Affordability declined 8.8% y/y during April to 145.8, the lowest level since October 2008. The index was 32.0% below its peak in January 2013. During the [...]

U.S. Home Affordability Continues to Fall

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.

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**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.

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**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.

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**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.

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**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.

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**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.

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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

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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.

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**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

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**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.

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- 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

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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.

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- 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

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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

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