Robert Brusca

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070709b.jpg" width="353">
German industrial output rose a firm-looking 1.9% in May, but since that followed a 2.1% drop in April the results were not as expected and were disappointing. These two months follow a mild 0.2% rise in May. As a result in Q2 German IP is falling at a 4.5% annual rate two months into the new quarter. Who would expect with that with such strong orders growth, German IP could be poised to SUBTRACT from GDP in Q2? Well yes, some of the problem is construction and that is an old theme; but the weakness in IP has a broader base. Construction is off at a sharp 30% annual rate in the quarter. Capital goods and intermediate goods output each are off at about a 4% pace and only consumer goods output at +5.2% is up in the new quarter &#150; so far. 
The chart plots IP growth vs orders as a ratio to IP. The ratio of Orders to IP does signal shifts in the growth rate of IP itself. That ratio has been on a long trend since early 2002. After a lull, it is back up strongly since February. However output, which is intrinsically volatile, has backed off in recent months as its growth has slowed. The order/IP ratio says that the pull back is temporary. 
Meanwhile the facts show that IP growth rates have slowed sequentially, not just in the second quarter. That is true for the headline figure for capital goods output and for intermediate goods and for construction. Only consumer goods output is accelerating. Given orders strength we wonder if bottle necks are setting in. Does the ECB traditional inflation pressures have to worry about in Germany? Or is the IP pull back with growth still at 4.6% Yr/Yr simply normal fluctuation in a still strong and rising trend? Orders vs. output trends in Germany will bear watching to illuminate this issue. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
German IP excluding Construction
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Saar exept m/m</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>3-mo</td>
<td>6-mo</td>
<td>12-mo</td>
</tr>
<tr>
<td class="firstcol">IP total</td>
<td>1.9%</td>
<td>-2.1%</td>
<td>0.2%</td>
<td>-0.3%</td>
<td>2.3%</td>
<td>4.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Consumer Goods</td>
<td>1.6%</td>
<td>-1.1%</td>
<td>1.7%</td>
<td>9.0%</td>
<td>2.0%</td>
<td>1.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Capital Goods</td>
<td>2.5%</td>
<td>-2.1%</td>
<td>-0.5%</td>
<td>-0.3%</td>
<td>5.2%</td>
<td>7.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Intermediate Goods</td>
<td>2.3%</td>
<td>-2.9%</td>
<td>1.0%</td>
<td>1.3%</td>
<td>6.1%</td>
<td>7.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Memo</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Auto</td>
<td>0.3%</td>
<td>-4.9%</td>
<td>-7.4%</td>
<td>-39.2%</td>
<td>-14.9%</td>
<td>-3.0%</td>
</tr>
</tbody>
</table>
</body>
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German industrial output rose a firm-looking 1.9% in May, but since that followed a 2.1% drop in April the results were not as expected and were disappointing. These two months follow a mild 0.2% rise in May. As a result in Q2 German [...]

German IP is Up but Less than Expected and is Lagging Orders Growth

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070709a.jpg" width="353">
Economy watchers survey results are in the lower quarter or third of their respective five year ranges. The NTC Manufacturing survey is in the bottom one percentile of its range. Teikoku Results for Manufacturing are weakening, but still stronger in relative terms, in the top third of their range 
Japan is still having a hard time getting its economic traction. Its Economy Watchers Index fell in June and is further below 50; the future index fell below 50 for the first time in six months. 
The NTC MFG index for Japan has been weak and sliding, as it has dropped for five months in a row. It was last weaker than its current value in June of 2003. 
The Teikoku indices are weighted diffusion readings and readings for MFG are even weaker than for the NTC barometer in absolute levels; but relative to its own range the reading is higher than for NTC. Still the Teikoku indices show a rapid drop in the sector readings in recent months. In the past three months various sectors have dropped 10 percentile points to 15 percentile to 20 percentile points (retailing) in terms of relative standings. Cleary Japan&#146;s economy is having some difficulties and we see that in the exchange rate. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Key Japanese surveys
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="4">Raw readings of each survey</td>
<td colspan="3">Percent of 5Yr range*</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
</tr>
<tr>
<td class="firstcol">Diffusion</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">Economy Watchers</td>
<td>46.0</td>
<td>46.8</td>
<td>49.7</td>
<td>50.8</td>
<td>25.7%</td>
<td>44.4%</td>
<td>59.8%</td>
</tr>
<tr>
<td class="firstcol">Employment</td>
<td>51.2</td>
<td>50.7</td>
<td>57.1</td>
<td>56.3</td>
<td>27.5%</td>
<td>35.6%</td>
<td>63.1%</td>
</tr>
<tr>
<td class="firstcol">Future</td>
<td>48.4</td>
<td>50.0</td>
<td>51.9</td>
<td>51.3</td>
<td>34.9%</td>
<td>52.9%</td>
<td>68.0%</td>
</tr>
<tr>
<td class="firstcol">NTC MFG</td>
<td>50.4</td>
<td>51.4</td>
<td>52.3</td>
<td>52.5</td>
<td>0.9%</td>
<td>30.2%</td>
<td>41.4%</td>
</tr>
<tr class="even">
<td class="firstcol">Econ Trends (Teikoku&#39;/50 neutral/weighted diffusion)</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">MFG</td>
<td>44.6</td>
<td>45.2</td>
<td>47.0</td>
<td>47.2</td>
<td>69.7%</td>
<td>76.2%</td>
<td>85.1%</td>
</tr>
<tr>
<td class="firstcol">Retail</td>
<td>39.2</td>
<td>39.6</td>
<td>41.1</td>
<td>41.1</td>
<td>52.7%</td>
<td>64.3%</td>
<td>74.3%</td>
</tr>
<tr>
<td class="firstcol">Wholesale</td>
<td>42.1</td>
<td>42.8</td>
<td>44.3</td>
<td>44.6</td>
<td>68.0%</td>
<td>75.6%</td>
<td>83.5%</td>
</tr>
<tr>
<td class="firstcol">Services</td>
<td>48.6</td>
<td>49.1</td>
<td>50.3</td>
<td>49.9</td>
<td>83.0%</td>
<td>88.4%</td>
<td>93.6%</td>
</tr>
<tr>
<td class="firstcol">Construction</td>
<td>36.8</td>
<td>37.7</td>
<td>38.4</td>
<td>38.7</td>
<td>77.5%</td>
<td>84.4%</td>
<td>89.2%</td>
</tr>
<tr>
<td colspan="8">100 is high; Zero is low</td>
</tr>
</tbody>
</table>
</body>
</html>

Economy watchers survey results are in the lower quarter or third of their respective five year ranges. The NTC Manufacturing survey is in the bottom one percentile of its range. Teikoku Results for Manufacturing are weakening, but [...]

Economy Watchers Index Edges Lower and Future Index Weakens

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070709a.jpg" width="353">
Economy watchers survey results are in the lower quarter or third of their respective five year ranges. The NTC Manufacturing survey is in the bottom one percentile of its range. Teikoku Results for Manufacturing are weakening, but still stronger in relative terms, in the top third of their range 
Japan is still having a hard time getting its economic traction. Its Economy Watchers Index fell in June and is further below 50; the future index fell below 50 for the first time in six months. 
The NTC MFG index for Japan has been weak and sliding, as it has dropped for five months in a row. It was less weak than its current value in June of 2003. 
The Teikoku indices are weighted diffusion readings, and the readings for MFG are even weaker than for the NTC barometer in absolute levels; but relative to its own range the reading is higher than for NTC. Still the Teikoku indices show a rapid drop in the sector readings in recent months. In the past three months various sectors have dropped 10 percentile points to 15 percentile to 20 percentile points (retailing) in terms of relative standings. Cleary Japan&#146;s economy is having some difficulties and we see that in the exchange rate. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Key Japanese surveys
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="4">Raw readings of each survey</td>
<td colspan="3">Percent of 5Yr range*</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
</tr>
<tr>
<td class="firstcol">Diffusion</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">Economy Watchers</td>
<td>46.0</td>
<td>46.8</td>
<td>49.7</td>
<td>50.8</td>
<td>25.7%</td>
<td>44.4%</td>
<td>59.8%</td>
</tr>
<tr>
<td class="firstcol">Employment</td>
<td>51.2</td>
<td>50.7</td>
<td>57.1</td>
<td>56.3</td>
<td>27.5%</td>
<td>35.6%</td>
<td>63.1%</td>
</tr>
<tr>
<td class="firstcol">Future</td>
<td>48.4</td>
<td>50.0</td>
<td>51.9</td>
<td>51.3</td>
<td>34.9%</td>
<td>52.9%</td>
<td>68.0%</td>
</tr>
<tr>
<td class="firstcol">NTC MFG</td>
<td>50.4</td>
<td>51.4</td>
<td>52.3</td>
<td>52.5</td>
<td>0.9%</td>
<td>30.2%</td>
<td>41.4%</td>
</tr>
<tr class="even">
<td class="firstcol">Econ Trends (Teikoku&#39;/50 neutral/weighted diffusion)</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">MFG</td>
<td>44.6</td>
<td>45.2</td>
<td>47.0</td>
<td>47.2</td>
<td>69.7%</td>
<td>76.2%</td>
<td>85.1%</td>
</tr>
<tr>
<td class="firstcol">Retail</td>
<td>39.2</td>
<td>39.6</td>
<td>41.1</td>
<td>41.1</td>
<td>52.7%</td>
<td>64.3%</td>
<td>74.3%</td>
</tr>
<tr>
<td class="firstcol">Wholesale</td>
<td>42.1</td>
<td>42.8</td>
<td>44.3</td>
<td>44.6</td>
<td>68.0%</td>
<td>75.6%</td>
<td>83.5%</td>
</tr>
<tr>
<td class="firstcol">Services</td>
<td>48.6</td>
<td>49.1</td>
<td>50.3</td>
<td>49.9</td>
<td>83.0%</td>
<td>88.4%</td>
<td>93.6%</td>
</tr>
<tr>
<td class="firstcol">Construction</td>
<td>36.8</td>
<td>37.7</td>
<td>38.4</td>
<td>38.7</td>
<td>77.5%</td>
<td>84.4%</td>
<td>89.2%</td>
</tr>
<tr>
<td colspan="8">100 is high; Zero is low</td>
</tr>
</tbody>
</table>
German IP is Up but Less than Expected and is Lagging Orders Growth 
by <a href="/comment/Brusca.html">Bob Brusca</a> July 9, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070709b.jpg" width="353">
German industrial output rose a firm-looking 1.9% in May, but since that followed a 2.1% drop in April the results were not as expected and were disappointing. These two months follow a mild 0.2% rise in May. As a result in Q2 German IP is falling at a 4.5% annual rate two months into the new quarter. Who would expect with that with such strong orders growth, German IP could be poised to SUBTRACT from GDP in Q2? Well yes, some of the problem is construction and that is an old theme; but the weakness in IP has a broader base. Construction is off at a sharp 30% annual rate in the quarter. Capital goods and intermediate goods output each are off at about a 4% pace and only consumer goods output at +5.2% is up in the new quarter &#150; so far. 
The chart plots IP growth vs orders as a ratio to IP. The ratio of Orders to IP does signal shifts in the growth rate of IP itself. That ratio has been on a long trend since early 2002. After a lull, it is back up strongly since February. However output, which is intrinsically volatile, has backed off in recent months as its growth has slowed. The order/IP ratio says that the pull back is temporary. 
Meanwhile the facts show that IP growth rates have slowed sequentially, not just in the second quarter. That is true for the headline figure for capital goods output and for intermediate goods and for construction. Only consumer goods output is accelerating. Given orders strength we wonder if bottle necks are setting in. Does the ECB traditional inflation pressures have to worry about in Germany? Or is the IP pull back with growth still at 4.6% Yr/Yr simply normal fluctuation in a still strong and rising trend? Orders vs. output trends in Germany will bear watching to illuminate this issue. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
German IP excluding Construction
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Saar exept m/m</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>3-mo</td>
<td>6-mo</td>
<td>12-mo</td>
</tr>
<tr>
<td class="firstcol">IP total</td>
<td>1.9%</td>
<td>-2.1%</td>
<td>0.2%</td>
<td>-0.3%</td>
<td>2.3%</td>
<td>4.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Consumer Goods</td>
<td>1.6%</td>
<td>-1.1%</td>
<td>1.7%</td>
<td>9.0%</td>
<td>2.0%</td>
<td>1.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Capital Goods</td>
<td>2.5%</td>
<td>-2.1%</td>
<td>-0.5%</td>
<td>-0.3%</td>
<td>5.2%</td>
<td>7.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Intermediate Goods</td>
<td>2.3%</td>
<td>-2.9%</td>
<td>1.0%</td>
<td>1.3%</td>
<td>6.1%</td>
<td>7.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Memo</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Auto</td>
<td>0.3%</td>
<td>-4.9%</td>
<td>-7.4%</td>
<td>-39.2%</td>
<td>-14.9%</td>
<td>-3.0%</td>
</tr>
</tbody>
</table>
 Germany's Trade Balance Improves in May: Exports to Asia and the U.S. Still below Peak Levels  
by <a href="/comment/Curley.html">Louise Curley</a> July 9, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070709d.jpg" width="353">
Germany&#39;s trade balance increased by 1.72 billion euros in May from April. Although exports declined by 0.56 billion euros, imports declined even more--2.28 billion euros. Exports reached a peak of 80.79 billion euros in October 2006. Since then, they have tended to fluctuate narrowly around a slightly lower level. Imports show a similar pattern, as can be seen in the first chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070709c.jpg" width="353">
Much of Germany&#39;s trade is with its European neighbors, and of its neighbors, countries in the Euro Area are Germany&#39;s major trading partners. In 2006, German exports to the Euro Area accounted for 43% of total exports and imports from the Euro Area were 39% of total imports.Trading among these countries is unaffected by changes in the value of the euro.
The rise in the euro has, no doubt, dampened the demand for German exports in countries outside the Euro Area. As can be seen in the second chart, exports to the Non Euro Area fell sharply last fall. Since then, exports to the Non Euro Area of Europe have recovered more quickly than those to Asia and the United States. Data on trade by county are only available through April.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">GERMANY:&nbsp; TRADE IN GOODS ( Bil. Euros)</th>
<th scope="col">May 07</th>
<th scope="col">Apr&nbsp; 07&nbsp;</th>
<th scope="col">Mar 06&nbsp;</th>
<th scope="col">Feb 06&nbsp;</th>
<th scope="col">Jan 06&nbsp;</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Exports</td>
<td>79.27</td>
<td>79.83</td>
<td>79.08</td>
<td>80.27</td>
<td>78.83</td>
<td>893.85</td>
<td>783.73</td>
<td>726.66</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports</td>
<td>61.71</td>
<td>63.99</td>
<td>63.48</td>
<td>65.60</td>
<td>63.03</td>
<td>731.61</td>
<td>625.91</td>
<td>572.67</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance</td>
<td>15.56</td>
<td>15.84</td>
<td>15.60</td>
<td>14.67</td>
<td>15.80</td>
<td>162.24</td>
<td>157.82</td>
<td>153.99</td>
</tr>
<tr>
<td class="firstcol"> Export by Area </td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Euro Area</td>
<td>--</td>
<td>34.61</td>
<td>34.61</td>
<td>34.83</td>
<td>34.27</td>
<td>660.47</td>
<td>580.01</td>
<td>538.73</td>
</tr>
<tr class="odd">
<td class="firstcol">Non Euro Area Europe</td>
<td>--</td>
<td>26.05</td>
<td>25.17</td>
<td>25.44</td>
<td>25.17</td>
<td>280.36</td>
<td>238.40</td>
<td>220.06</td>
</tr>
<tr class="odd">
<td class="firstcol">Asia</td>
<td>--</td>
<td>9.32</td>
<td>8.94</td>
<td>9.42</td>
<td>9.00</td>
<td>107.07</td>
<td>90.10</td>
<td>84.22</td>
</tr>
<tr class="odd">
<td class="firstcol">United States</td>
<td>--</td>
<td>5.97</td>
<td>5.84</td>
<td>6.37</td>
<td>6.06</td>
<td>78.05</td>
<td>68.85</td>
<td>64.13</td>
</tr>
</tbody>
</table>
</body>
</html>

Carol Stone, CBE

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070706d.jpg" width="353">
Sometimes it&#39;s easy to dismiss manufacturing activity in the West. Asian producers have come on so strong in the last several years that one might think European and North American manufacturing is fading away. But this is not so. Activity in the US has slowed the last several months, but new orders are still maintaining better than 5% annual growth over the past five years in nominal terms. In Europe, a volume measure published by Eurostat is rising at a similar pace. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070706e.jpg" width="353">
The most recent evidence of continued industrial vitality in the West comes from Germany, where new factory orders surged in May by 3.2%. This more than reversed a dip in April of 1.6%. These orders stand 7.5% ahead of a year ago, on top of last year&#39;s overall growth of 9.0%. Foreign customers are increasing their demand for German products, particularly those outside the Euro-Zone. Total foreign orders were up 4.4% in May, with gains among Euro partners of 3.6% and 5.1% elsewhere. Domestic orders were up 2.2% in the latest month.
Year-ago co<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070706f.jpg" width="353">mparisons suggest that growth in foreign orders is far outstripping that in domestic orders. The latter are up just 3.8% from May 2006, while orders from Euro-Zone customers are up 9.6% and from non-Euro-Zone, 12.4%. But what these figures really show is volatility. To smooth some of this out, we can examine the performance of moving averages. With the new, oncoming DLXVG3, we can perform nested-function calculations, so we can take a moving average and then do a percent change on the smoothed series. We illustrate that in the second and third graphs, with, first the 6-month moving averages and then the 12-month growth in those moving averages. We see that domestic orders have accelerated to over 8% on this basis, catching up to growth in foreign orders. The last time domestic orders were this strong was in 2000, just at the peak of the tech boom.
<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070706g.jpg" width="353">At the same time, the continuing strength in foreign orders, particularly those outside the Euro-Zone, seems surprising in view of the recent strengthening of the euro. So we looked at this relationship too, with the same year-to-year % change in the 6-month moving average. We find a rather nice, negative relationship with the effective euro exchange rate for the so-called &quot;narrow&quot; group of countries, deflated by the PPIs, which we assume would be a relevant price index for judging the competitiveness of manufacturers. The correlation ratio is -68%. We can improve that slightly, to -70%, by leading the exchange rate variable by 1 month, so that as customers examine their situation, the current exchange rate may have a modest impact on action they take the following month. We see here that the recent experience of orders gains is not really out of line with the exchange rate: as our exchange rate growth variable has started to flatten, orders growth has started to pick up, maintaining the negative reaction. The relationship is in the growth rates, not just the levels.
The German orders data are contained in the main country-source database GERMANY and also in Haver&#39;s own G10. US orders data were referenced from USECON and the European totals and exchange rate are from EUROSTAT. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">GERMANY:&nbsp; Manufacturers&#39; New Orders</th>
<th scope="col">May 2007*</th>
<th scope="col">Apr 2007*</th>
<th scope="col">Mar 2007*</th>
<th scope="col">Year Ago</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total (2000=100)</td>
<td>130.6</td>
<td>126.5</td>
<td>128.5</td>
<td>117.4*</td>
<td>119.0</td>
<td>109.1</td>
<td>104.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; % Change</td>
<td>3.2</td>
<td>-1.6</td>
<td>1.1</td>
<td>7.5</td>
<td>9.0</td>
<td>4.9</td>
<td>6.8</td>
</tr>
<tr>
<td class="firstcol">Domestic</td>
<td>2.2</td>
<td>-1.2</td>
<td>1.9</td>
<td>3.8</td>
<td>7.0</td>
<td>1.6</td>
<td>4.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Euro-Zone</td>
<td>3.6</td>
<td>-1.5</td>
<td>-1.0</td>
<td>9.6</td>
<td>7.7</td>
<td>8.0</td>
<td>9.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Non-Euro-Zone</td>
<td>5.1</td>
<td>-2.3</td>
<td>1.4</td>
<td>12.4</td>
<td>13.8</td>
<td>8.7</td>
<td>9.8</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>2.4</td>
<td>-1.8</td>
<td>2.5</td>
<td>4.7</td>
<td>10.5</td>
<td>2.3</td>
<td>6.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Capital Goods</td>
<td>3.8</td>
<td>-2.0</td>
<td>0.2</td>
<td>10.3</td>
<td>8.6</td>
<td>6.9</td>
<td>8.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Consumer Goods</td>
<td>4.0</td>
<td>1.6</td>
<td>0.2</td>
<td>4.6</td>
<td>4.8</td>
<td>4.3</td>
<td>1.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Memo: Euro**</td>
<td>0.2</td>
<td>1.0</td>
<td>0.5</td>
<td>3.2</td>
<td>0.4</td>
<td>-1.6</td>
<td>2.6</td>
</tr>
</tbody>
</table>
</body>
</html>

Sometimes it's easy to dismiss manufacturing activity in the West. Asian producers have come on so strong in the last several years that one might think European and North American manufacturing is fading away. But this is not so. [...]

Who Says Manufacturing Growth Is All in Asia? German Factory Orders Up Markedly in May

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070706h.jpg" width="353">
French exports have relatively long lived and broad based declining trends across industries. This is very different from the German results also reported today that showed such strong orders from overseas. While Germany may have special business ties and niches of strength that help to insulate it from the strong euro, France does not seem to be so lucky. While Mr Sarkozy is out there trying to balance one budget (or to postpone putting it in balance) it looks like he has another deficit reading that is ready to split at the seams, this one for trade.
French trends show that despite their proximity and shared currency France and Germany are as different as night and day in some respects. While German order trends for capital goods are very strong, for France actual exports are dropping by 12.3% at an annual rate in the three months ended in May and are lower by 6.3% Yr/Yr. This compares to German foreign order rise of double digits on both those horizons for capital goods. Clearly France is facing a very different situation than Germany. And after also sharing the same business cycle and fiscal issues for a time these two economies are now going their separate ways. Germany has its fiscal situation under control and its MFG sector riding high; and France is trying to postpone its promised adjustment &#150; with the Germans as some of its biggest critics &#150; and its industrial competitiveness seems to be slipping. 
It is not as simply as saying there is a capital spending boom in Europe and Germany. If that were so, wouldn&#146;t fellow Euro-zone member France get its share? France is not taking part. Rather Germany, as the most competitive Euro-zone member, is the country that will be the last to feel the effects of the strong euro. German will enjoy a competitive advantage for a while after others have lost it. Is that where we are today? Is that why Germany is still doing well while others are not?
Italy and Spain already are showing some signs of weakness. For Spain it is a clear loss of momentum in industrial output that drops the hint. For Italy weakness is a little more broad-based. The OECD leading indicators still have France on an upswing, but that may be more domestic in nature. France&#146;s external sector seems to be lacking, judging from export trends. Clearly this is a good time to look at the various Euro-zone countries as distinct entities and see which of them &#150; if any - is hurting from the strong Euro. This will be a theme in the coming months.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
French Trade Trends for Goods
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="2">m/m%</td>
<td colspan="3">% SAAR</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>May-07</td>
<td>Apr-07</td>
<td>3M</td>
<td>6M</td>
<td>12M</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance*</td>
<td>-&#128;&#128; 3,015.00</td>
<td>-&#128;&#128; 2,493.00</td>
<td>-&#128;&#128; 2,364.33</td>
<td>-&#128;&#128; 2,402.33</td>
<td>-&#128;&#128; 2,310.42</td>
</tr>
<tr class="odd">
<td colspan="6">Exports</td>
</tr>
<tr class="odd">
<td class="firstcol">All Export</td>
<td>-1.0%</td>
<td>-1.4%</td>
<td>-5.5%</td>
<td>-4.0%</td>
<td>-1.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Capital Goods</td>
<td>-6.5%</td>
<td>0.6%</td>
<td>-12.3%</td>
<td>-9.6%</td>
<td>-6.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Motor Vehicles</td>
<td>-2.4%</td>
<td>-1.4%</td>
<td>-13.1%</td>
<td>-6.4%</td>
<td>-5.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Consumer Goods</td>
<td>-0.2%</td>
<td>-0.6%</td>
<td>-0.4%</td>
<td>-3.7%</td>
<td>0.4%</td>
</tr>
<tr class="odd">
<td colspan="6">IMPORTS</td>
</tr>
<tr class="odd">
<td class="firstcol">All Import</td>
<td>-0.6%</td>
<td>2.0%</td>
<td>-2.4%</td>
<td>0.5%</td>
<td>1.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">Capital Goods</td>
<td>0.6%</td>
<td>-0.1%</td>
<td>-16.7%</td>
<td>1.0%</td>
<td>-2.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Motor Vehicles</td>
<td>-0.1%</td>
<td>-1.4%</td>
<td>-4.2%</td>
<td>9.1%</td>
<td>3.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Consumer Goods</td>
<td>-0.2%</td>
<td>-0.2%</td>
<td>-3.2%</td>
<td>-4.1%</td>
<td>2.6%</td>
</tr>
<tr>
<td colspan="4">*Eur Blns; mo or period average</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
</tbody>
</table>
</body>
</html>

French exports have relatively long lived and broad based declining trends across industries. This is very different from the German results also reported today that showed such strong orders from overseas. While Germany may have [...]

French Trade Deteriorates While German Foreign Orders Soar

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070706b.jpg" width="353">
Nonfarm payrolls grew by 132,000 during June, an increase that slightly beat the Consensus forecast for a 125,000 rise. In addition, the prior two months&#39; gains were upwardly revised by a collective 75,000.
The unemployment rate held steady last month at 4.5%. Household employment increased 197,000 (1.2%) following a 157,000 gain in May. The labor force jumped 310,000 (1.1% y/y), the largest gain this year. As a result, the labor force participation rate rose to 66.6%.
From the establishment survey, the job gain of 132,000 left the average gain in payrolls this year at 145,000 versus last year&#146;s average of 189,000. Private service sector jobs rose just 95,000 (2.0% y/y), versus last year&#146;s average gain of 154,000. Retail employment actually fell 24,200 (0.5% y/y) during June and the average this year has been a meager 7,000 per month after an outright decline of 2,000 per month during 2006. In the financial sector jobs grew just 1,000 (1.4% y/y) for an average 5,000 this year versus 16,000 last year. Professional &amp; business services employment fell 9,000 and the average monthly gain this year has been 13,000, about a quarter of last year&#146;s 42,000.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070706c.jpg" width="353">
Factory sector payrolls fell again, by 18,000 (-1.3 y/y) but construction employment rose by 12,000 (-0.1% y/y). The average, though, during this year is a 1,000 per month decline versus an average 11,000 increase per month gain in 2006.
Government payrolls increased 40,000 (1.5% y/y) and in 2007 have risen an average 30,000, up from the per month average last year of 20,000.
Average hourly earnings increased 0.3% as factory sector earnings rose 0.2% (2.7% y/y and private service producing earnings rose a firm 0.4% (4.0% y/y). The monthly average increase in overall average hourly earnings this year has been 0.3% versus, down from 0.4% per month last year. 
 Inflation and Unemployment: A Layperson&#146;s Guide to the Phillips Curve from the Federal Reserve Bank of Richmond is available <a href="http://www.richmondfed.org/publications/economic_research/annual_report/2006/pdf/ar.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/@EB/@EB01/@EB01.HTM">Employment</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Payroll Employment</td>
<td>132,000</td>
<td>190,000</td>
<td>1.5%</td>
<td>1.9%</td>
<td>1.7%</td>
<td>1.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Manufacturing</td>
<td>-18,000</td>
<td>-7,000</td>
<td>-1.3%</td>
<td>-0.2%</td>
<td>-0.6%</td>
<td>-1.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Average Weekly Hours</td>
<td>33.9</td>
<td>33.8</td>
<td>33.9 (June &#39;06)</td>
<td>33.8</td>
<td>33.8</td>
<td>33.7</td>
</tr>
<tr>
<td class="firstcol">Average Hourly Earnings</td>
<td>0.3%</td>
<td>0.4%</td>
<td>3.9%</td>
<td>3.9%</td>
<td>2.8%</td>
<td>2.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment Rate</td>
<td>4.5%</td>
<td>4.5%</td>
<td>4.6% (June &#39;06)</td>
<td>4.6%</td>
<td>5.1%</td>
<td>5.5%</td>
</tr>
</tbody>
</table>
</body>
</html>

Nonfarm payrolls grew by 132,000 during June, an increase that slightly beat the Consensus forecast for a 125,000 rise. In addition, the prior two months' gains were upwardly revised by a collective 75,000. The unemployment rate held [...]

June Payrolls Beat Forecasts. Prior Months Revised Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070705e.jpg" width="353">
Japan&#146;s May rise in its LEI is the second in a two months technically, but is still not very impressive. Most growth rates still show it declining (see chart and table). However, over two years the index does post an annualized rate of growth of +0.2%. Japan&#146;s economy has been vexing in this cycle.
After a period of weakness Japan posted a rise in its LEI and of course in the underlying conditions that this index represents. The LEI&#146;s growth rate from October 2001 to July of 2004 was at an annual rate of 7.1%, pretty impressive. But then it peaked dipped and expanded again. The next result was that from the peak to next peak from roughly July 2004 &#150; May 2006 the growth of the index dropped off to a pace of 2.6%. Then really bad things began to happen as from that second peak in May 2006 the index fell to a low in March 2007 at 101.4 During that period the LEI was dropping at very fast 8.3% pace. Still the period of decline was less than a year. From the bottom of the LEI&#146;s trough back in October of 2001 the LEI is still growing but at a much more modest pace of 2.9%.
While the two-month rebound in the LEI is not definitive or a reliable guide of the future it did arrest this extended period of decline the LEI.
During this period Japan has continued to be dogged by deflation and its growth statistics have continued to be irregular, as the LEI attests. But the BOJ has been making noise as though it nonetheless wanted to hike interest rates. While the LEI does not tell a comprehensive story on the economy it does tell a capsulated story and one that should be viewed as cautionary with respect to growth conditions in Japan.
Japan at one time turned the corner fast but then it slowed and has since backtracked. Weakness in the yen attests to the mixed situation there and how investors view it. While we do not like to see governments telling central banks the kind of policies they want it is understandable in this environment that Japan&#146;s governing party is wary of the BoJ&#146;s apparent intent to go back to a rate hiking cycle so soon.
The BOJ and the Japanese government are ever mindful of the demographics and fiscal difficulties that lie ahead for them. If anything these concerns have kept them too eager to restrict fiscal policy (by hiking taxes) and too quick to raise interest rates (or too slow to cut them). Japan remains a country with the opposite policy tendencies to most Western nations even if it faces many of the same problems.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
 Japan&#39;s LEI and its Trends
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Levels</td>
<td colspan="4">Growth (saar)</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td> May-07</td>
<td> Apr-07</td>
<td> Mar-07</td>
<td> 3M0</td>
<td> 6M0</td>
<td> 12Mo</td>
<td> 24MO</td>
</tr>
<tr>
<td class="firstcol">LEI</td>
<td>102.2</td>
<td>101.5</td>
<td>101.4</td>
<td>-2.7%</td>
<td>-4.4%</td>
<td>-5.4%</td>
<td>0.2%</td>
</tr>
</tbody>
</table>
</body>
</html>

Japans May rise in its LEI is the second in a two months technically, but is still not very impressive. Most growth rates still show it declining (see chart and table). However, over two years the index does post an annualized rate [...]

Japan’s LEI Rose in May: Signal Still Uncertain

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

Wage growth slowing in the US and Euro area; elevated and sticky in the UK

Stagflation-lite: Blue Chip forecasts below-trend growth and elevated inflation

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

US and Japan ended 2024 on solid ground in contrast to Europe

US economy expected to outperform other major economies in 2025

Only modest evidence of AI-related surge in US productivity growth

Previous Trump tariffs fading. A boost from new tariffs ahead?

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

Underperforming German economy generating increased policy uncertainty relative to Europe and the US

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

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

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

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

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

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

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

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

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

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

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

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

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

Winnie Tapasanun

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

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

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

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

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

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

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

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

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

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The global manufacturing data showed broad weakening in April as conditions weakened across more than half of the contributing early reporters in the S&P survey of manufacturing. Of the 18 early reporting countries, more than half of them showed deceleration over six months and 12 months. Over three months, only 8 of 18 showed deterioration and that's about as good as it got in this report. In the current month, month-to-month changes showed more than half of the survey contributors showing weaker results than the month before. In the S&P framework, manufacturing improved month-to-month for the U.S.; however, looking at sequential averages for the U.S., U.K., European monetary union, Canada, and Japan, we see a steady weakening and results over 12 months, over six months versus 12 months, and for three months versus 6 months. The highly developed countries are not doing particularly well.

Asian economies are also showing slight deterioration but doing a little better than the developed countries in general.

Only five of the 18 reporting countries have queue percentile standings in their data back to January 2021 that are above their medians. Readings at or above the 50% mark are at or above the median standing. Canada is showing the weakest manufacturing result on record over this span, in terms of its queue percentile standing which is at 0 in the current month.

I showed the graphic for the Baltic dry goods index in this report rather than statistics on the manufacturing PMI data because the Baltic data, which reflect shipping volume for dry goods - that is excluding things like oil - is weak but it's only in the neighborhood where it's been for some time. There has been a great deal of talk about how tariffs may have impacted trade flows, expected trade flows, shipping, shipping rates, and the like. However, according to the Baltic dry goods index, there isn't much evidence that this is occurring right now and affecting the current data. That may still lie ahead but for now it's not baked in the cake.

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Globally Manufacturing Weakens

Andrew Cates

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

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

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

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

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

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

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

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Charts of the Week: Tariff Truce, Tenuous Trust

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U.S. light vehicle sales dropped 2.9% (+6.5% y/y) to 17.31 million units (SAAR) in April after surging 10.8% to 17.82 million units in March. The retreat in April vehicle sales accompanied a 1.7% y/y rise in real disposable income through March, which compared to 2.0% growth last year.

Sales declines were broad-based last month. Light truck sales fell 1.3% (+9.9% y/y) during April to 14.34 million units (SAAR), after rising 12.4% in March. Purchases of domestically-made light trucks declined 1.2% (+11.9% y/y) to 11.02 million units, after jumping 12.5% in March. Sales of imported light trucks fell 1.8% (+4.4% y/y) to 3.32 million units, following an 11.6% March surge.

Trucks’ record 82.8% share of the light vehicle market last month compared to 81.5% in March and 80.3% in April of last year. The share averaged 80.3% during all of 2024 versus 53.3% ten years earlier.

Auto sales also declined last month, down 9.5% (-7.5%) to 2.97 million units (SAAR) following a 3.5% March rise. The decline reversed all of the increase over the prior two months. Purchases of domestically-produced cars fell 9.8% (-4.3% y/y) last month to 2.22 million units, after rising 3.8% in March. Sales of imported autos declined 9.6% (-15.7% y/y) to 0.75 million units, following a 2.5% March increase.

Imports' 23.5% share of the U.S. light vehicle market was little changed from 23.6% in March and compared to a May 2023 low of 22.9% and a high of 26.3% in November of 2023. Imports' share of the passenger car market held steady at 25.3% last month and compared to 27.7% in April of last year. It reached a high of 38.7% in September 2021. Imports' share of the light truck market eased to 23.2% last month after falling to 23.3% in March.

U.S. vehicle sales figures can be found in Haver's **USECON** database. Additional detail by manufacturer is in the I**NDUSTRY** database.

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- Light truck sales pull back, while auto sales tumble.
- Both domestic and imported sales decline.
- Imports' market share slips further.

Economy in Brief: July 2007

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German IP is Up but Less than Expected and is Lagging Orders Growth

Economy Watchers Index Edges Lower and Future Index Weakens

Economy Watchers Index Edges Lower and Future Index Weakens

Who Says Manufacturing Growth Is All in Asia? German Factory Orders Up Markedly in May

French Trade Deteriorates While German Foreign Orders Soar

June Payrolls Beat Forecasts. Prior Months Revised Up

June Payrolls Beat Forecasts. Prior Months Revised Up

Japan’s LEI Rose in May: Signal Still Uncertain