Tom Moeller

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The housing market remains in good shape. The Composite
Housing Market Index from the National Association of Home Builders-Wells Fargo
increased 7.2% to 74 during December, the highest level since July 1999, up 7.2%
y/y. Expectations had been for a rise to 70. For all of this year, the index
increased 11.2% following last year's 3.8% rise. The NAHB figures are seasonally
adjusted. During the last ten years, there has been a 67% correlation between
the y/y change in the home builders index and the y/y change in housing starts.

The index of present sales conditions in the housing market
rose 5.2% to 81 (8.0% y/y), also the highest level since 1999. The index for
conditions in the next six months improved 3.9% (1.3% y/y) to 79.

Home builders reported that the traffic of prospective buyers
index jumped to the highest level since December 1998, up 11.5% y/y.

Amongst the regional indexes, the index for the Midwest
surged 16.9% (15.2% y/y) while the index for the West rose 10.4% (-1.2% y/y).
For the South, the index improved 4.2% (7.1% y/y), but the index for the
Northeast declined 13.1% (-7.0% y/y).

The NAHB has compiled the Housing Market Index since 1985. It
reflects survey questions asking builders to rate market conditions as
&quot;good,&quot; &quot;fair,&quot; &quot;poor&quot; or &quot;very high&quot; to
&quot;very low.&quot; The figure is thus a diffusion index with numerical
results six over 50 indicating a predominance of &quot;good&quot; readings. The
weights assigned to the individual index components are .5920 for single-family
detached sales, present time, .1358 for single-family detached sales, next
months and .2722 for traffic of prospective buyers. The results are included in
Haver's SURVEYS database. The expectations figure is available in Haver's
MMSAMER database.

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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" >National Association of Home
 Builders</th>
 <th scope="col" >Dec</th>
 <th scope="col" >Nov</th>
 <th scope="col" >Oct</th>
 <th scope="col" >Dec Y/Y</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Composite Housing Market Index, SA (All
 Good=100)</td>
 <td >74</td>
 <td >69</td>
 <td >68</td>
 <td >7.2%</td>
 <td >68</td>
 <td >61</td>
 <td >59</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Single-Family Sales: Present</td>
 <td >81</td>
 <td >77</td>
 <td >75</td>
 <td >8.0</td>
 <td >74</td>
 <td >67</td>
 <td >64</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Single-Family Sales: Next Six
 Months</td>
 <td >79</td>
 <td >76</td>
 <td >78</td>
 <td >1.3</td>
 <td >76</td>
 <td >67</td>
 <td >66</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Traffic of Prospective Buyers</td>
 <td >58</td>
 <td >50</td>
 <td >48</td>
 <td >52</td>
 <td >50</td>
 <td >45</td>
 <td >43</td>
 </tr>
 </tbody>
 </table>
 
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The housing market remains in good shape. The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo increased 7.2% to 74 during December, the highest level since July 1999, up 7.2% y/y. Expectations [...]

U.S. Home Builder Index Strengthens

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The Empire State Manufacturing Index of General Business
Conditions in December fell to 18.0 following an unrevised decline to 19.4
during November. The latest level was the lowest since July, but continued to
indicate expansion in factory sector activity. During all of this year, the
index rose to 16.1 from roughly -2.5 during the prior two years. The latest
level matched expectations in the Action Economics Forecast Survey. These data,
reported by the Federal Reserve Bank of New York, reflect business conditions in
New York, northern New Jersey and southern Connecticut.

Based on these figures, Haver Analytics calculates a
seasonally adjusted index that is comparable to the ISM series. The adjusted
figure held steady at 55.3, but remained near its recent high. During the last
ten years, the index posted a 63% correlation with the change in real GDP.

The component series exhibited mixed performance m/m. The new
orders series eased, but was greatly improved versus the 2016 low. The unfilled
orders and the inventories indexes also declined. Moving higher were the
shipments and delivery times series. The latter index still registered fairly
quick delivery speeds.

The employment index declined m/m to the lowest level since
July. Nevertheless, the index registered positive payroll growth for the year
following the 2016 decline. During the last ten years, there has been a 69%
correlation between the employment index and the m/m change in factory sector
payrolls. Seventeen percent of respondents reported a higher payroll level while
twelve percent reported a decline. The employee workweek reading has been near
zero for three months at the lowest level since January, off sharply versus its March high.

The prices paid series improved moderately and remained up
sharply versus the 2015 low. Thirty-one percent of respondents indicated paying
higher prices, while one percent reported them lower. The prices received index
rose moderately, but has trended sideways this year.

Expectations of business conditions six months ahead fell
from its twelve-month high. New orders fell sharply but employment surged.
Expected prices paid also strengthened.

The Empire State figures are diffusion indexes, which are
calculated by subtracting the percent of respondents reporting declines from
those reporting gains. The data are available in Haver's SURVEYS
database. The ISM-adjusted headline index dates back to 2001. The Action
Economics Forecasts can be found in Haver's AS1REPNA database.

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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" >Empire State Manufacturing
 Survey</th>
 <th scope="col" >Dec</th>
 <th scope="col" >Nov</th>
 <th scope="col" >Oct</th>
 <th scope="col" >Dec'16</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >General Business Conditions (Diffusion
 Index, %, SA)</td>
 <td >18.0</td>
 <td >19.4</td>
 <td >30.2</td>
 <td >7.6</td>
 <td >16.1</td>
 <td >-2.5</td>
 <td >-2.3</td>
 </tr>
 <tr>
 <td class="firstcol" >General Business Conditions Index (ISM
 Adjusted, &gt;50=Increasing Activity, SA)</td>
 <td >55.3</td>
 <td >55.3</td>
 <td >55.6</td>
 <td >48.5</td>
 <td >54.6</td>
 <td >48.2</td>
 <td >48.9</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" ></td>
 <td ></td>
 <td ></td>
 <td ></td>
 <td ></td>
 <td ></td>
 <td ></td>
 <td ></td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; New Orders</td>
 <td >18.5</td>
 <td >20.7</td>
 <td >18.0</td>
 <td >10.4</td>
 <td >14.6</td>
 <td >-0.7</td>
 <td >-5.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Shipments</td>
 <td >22.4</td>
 <td >18.4</td>
 <td >27.5</td>
 <td >8.6</td>
 <td >15.9</td>
 <td >1.8</td>
 <td >4.0</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Unfilled Orders</td>
 <td >-8.7</td>
 <td >-4.6</td>
 <td >2.3</td>
 <td >-10.4</td>
 <td >1.9</td>
 <td >-8.8</td>
 <td >-10.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Delivery Time</td>
 <td >4.3</td>
 <td >-2.3</td>
 <td >3.1</td>
 <td >-7.8</td>
 <td >6.1</td>
 <td >-4.8</td>
 <td >-5.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Inventories</td>
 <td >1.4</td>
 <td >4.6</td>
 <td >-7.8</td>
 <td >-13.9</td>
 <td >1.5</td>
 <td >-9.6</td>
 <td >-7.1</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Number of Employees</td>
 <td >5.1</td>
 <td >11.5</td>
 <td >15.6</td>
 <td >-12.2</td>
 <td >8.0</td>
 <td >-5.0</td>
 <td >2.7</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Average Employee Workweek</td>
 <td >0.0</td>
 <td >-0.8</td>
 <td >0.0</td>
 <td >-7.0</td>
 <td >4.6</td>
 <td >-5.4</td>
 <td >-5.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Prices Paid</td>
 <td >29.7</td>
 <td >24.6</td>
 <td >27.3</td>
 <td >22.6</td>
 <td >29.0</td>
 <td >15.7</td>
 <td >8.8</td>
 </tr>
 <tr>
 <td class="firstcol" >Expectations 6 Months Ahead</td>
 <td >46.6</td>
 <td >49.9</td>
 <td >44.8</td>
 <td >49.7</td>
 <td >42.5</td>
 <td >29.0</td>
 <td >30.3</td>
 </tr>
 </tbody>
 </table>
 
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The Empire State Manufacturing Index of General Business Conditions in December fell to 18.0 following an unrevised decline to 19.4 during November. The latest level was the lowest since July, but continued to indicate expansion in [...]

Empire State Factory Sector Index Slips

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The Federal Reserve indicated that industrial production rose
0.2% during November (3.4% y/y) following a 1.2% October rise, revised from 0.9%.
A 0.3% increase had been expected in the Action Economics Forecast Survey.&nbsp;
The Fed indicated that without a rebound in oil &amp; gas extraction activity
from Hurricane Nate, total November industrial production would have been unchanged.

Factory sector output improved 0.2% last month (2.3% y/y)
following a 1.4% rise. The increase was led by a 0.6% increase (3.1% y/y) in
production of construction supplies that followed a 0.5% gain. Output of
business equipment rose 0.5% (5.2% y/y) after surging during each of the prior
two months. Information processing equipment production strengthened 0.9% (2.4%
y/y) after a 0.5% increase. Consumer goods output declined 0.4% (+2.2% y/y)
after a 1.2% jump. Motor vehicle &amp; parts production inched 0.1% higher (0.1%
y/y) after surging in each of the prior three months. Computer, video &amp;
audio production rose 0.9% (6.3% y/y) after three months of strength, but
appliance, furniture &amp; carpeting production fell moderately (-2.0% y/y), as
it has for most of the year. In the nondurable goods sector, apparel output fell
0.8% (-9.0% y/y), extending a decades-long decline. Chemical production eased
0.2% (+1.7% y/y) after a 1.1% rise. Paper production fell 1.6% (-6.4% y/y),
reversing a 1.0% October rise.

Materials production rose 0.6% (4.1% y/y) after a 1.4% jump,
on the strength of a 1.0% increase (3.4% y/y) in durable materials production.

In the special aggregate groupings, selected high-technology
product output rose 0.3% (1.6% y/y), after two increases of roughly 1.0%.
Computer &amp; peripheral production held steady (23.7% y/y), and semiconductor
and related component production gained 0.6% (0.7% y/y). Factory sector
production, excluding the auto &amp; high-tech sectors, increased 0.2% (2.6%
y/y) following a 1.5% rise.

Capacity utilization rose to 77.1% from 77.0%, its highest
level since April 2015. Factory sector utilization strengthened to 76.4%, its
highest point since May 2008. Total factory sector capacity rose 0.7% y/y.

Industrial production and capacity data are included in
Haver's USECON database, with additional detail in the IP database. The
expectations figure is in the AS1REPNA database.

Workforce Development in Today's Economy from Fed
Governor Lael Brainard is available <a href="https://www.federalreserve.gov/newsevents/speech/brainard20171213a.htm">here</a>.

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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" >Industrial Production (SA, %
 Change)</th>
 <th scope="col" >Nov</th>
 <th scope="col" >Oct</th>
 <th scope="col" >Sep</th>
 <th scope="col" >Nov Y/Y</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 <th scope="col" >2014</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Total Output</td>
 <td >0.2</td>
 <td >1.2</td>
 <td >0.3</td>
 <td >3.4</td>
 <td >-1.2</td>
 <td >-0.7</td>
 <td >3.1</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Manufacturing</td>
 <td >0.2</td>
 <td >1.4</td>
 <td >0.2</td>
 <td >2.3</td>
 <td >-0.0</td>
 <td >0.1</td>
 <td >1.2</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;&nbsp; Consumer Goods</td>
 <td >-0.4</td>
 <td >1.2</td>
 <td >0.0</td>
 <td >2.2</td>
 <td >0.6</td>
 <td >2.3</td>
 <td >0.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;&nbsp; Business Equipment</td>
 <td >0.5</td>
 <td >1.2</td>
 <td >1.5</td>
 <td >5.2</td>
 <td >-1.8</td>
 <td >-0.9</td>
 <td >1.9</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;&nbsp; Construction Supplies</td>
 <td >0.6</td>
 <td >0.5</td>
 <td >1.9</td>
 <td >3.1</td>
 <td >1.3</td>
 <td >0.5</td>
 <td >3.4</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Materials</td>
 <td >0.6</td>
 <td >1.4</td>
 <td >0.0</td>
 <td >4.1</td>
 <td >-2.3</td>
 <td >-1.4</td>
 <td >5.1</td>
 </tr>
 <tr>
 <td class="firstcol" >Utilities</td>
 <td >-1.9</td>
 <td >2.0</td>
 <td >-1.3</td>
 <td >2.3</td>
 <td >-0.3</td>
 <td >-0.7</td>
 <td >1.4</td>
 </tr>
 <tr>
 <td class="firstcol" >Mining</td>
 <td >2.0</td>
 <td >-0.6</td>
 <td >1.7</td>
 <td >9.4</td>
 <td >-9.1</td>
 <td >-4.3</td>
 <td >10.7</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Capacity Utilization (%)</td>
 <td >77.1</td>
 <td >77.0</td>
 <td >76.2</td>
 <td >75.5</td>
 <td >75.7</td>
 <td >76.8</td>
 <td >78.6</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Manufacturing</td>
 <td >76.4</td>
 <td >76.3</td>
 <td >75.2</td>
 <td >75.1</td>
 <td >75.1</td>
 <td >75.5</td>
 <td >75.4</td>
 </tr>
 </tbody>
 </table>
 
</body></html>

The Federal Reserve indicated that industrial production rose 0.2% during November (3.4% y/y) following a 1.2% October rise, revised from 0.9%. A 0.3% increase had been expected in the Action Economics Forecast Survey. The Fed [...]

U.S. Industrial Production Gain Impacted by Post Hurricane Rebound

Robert Brusca

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The bellwether in Japan's Tankan report is the performance of large manufacturing firms. Japan's large manufacturers pushed the outer edge of the envelope to score the second highest reading since the quarterly survey began in 2003 with a Tankan reading that rose to 25 in Q4 2017 from 22 in Q3 2017. The large MFG-Co. Tankan reading had started 2017 at a reading of 12. It has more than doubled through the course of this year.

The Tankan is a broad survey of manufacturing and nonmanufacturing that also divides these sectors into large, medium and small company cohorts. It is the large manufacturers that the Japanese look to as bellwethers. This quarter, manufacturers in each size category saw improvements. Nonmanufacturing was unchanged for larger firms but saw improvements in each of the smaller size-classes.

Among large firms in nonmanufacturing, one of eight-reporting industry classifications showed improvement to fresh all-time high readings in Q4. The nonmanufacturing sector saw declines in five of eight subsectors with improvements in the other three. Improving on the quarter were wholesaling, retailing and transportation.

The two large company sectors did so well that the total industry index reached an all-time high level in Q4 2017.

The Tankan also features a series of outlook surveys. The outlook is for the next quarter, in this case for Q1 2018. The manufacturing outlook index stays at 19 in Q1 2018, unchanged from its Q4 2017 level. The nonmanufacturing outlook index moves up to 20 from 19. With those readings, the all industry index is unchanged at 19 for Q1 2018. All of the outlook indexes have strong rankings and standings in their historic high-low ranges and as queue placements in their historic rank of values. All of these measures have standings in their 84th percentile or better on the two measures of percentile of range or percentile of rank (queue).

On balance, it is an encouraging Tankan report. The current readings are excellent and the outlook is steady at a high reading. Compared to its standing in the first quarter, the manufacturing outlook has more than doubled while the nonmanufacturing outlook has simply moved steadily higher until it plateaued in Q1 2018. The Tankan is a reading of positive reinforcement to the policies being run at the Bank of Japan. The BOJ has endured a lot of criticism for its policies, but it can look back at the evolution of the Tankan over the past several years and enjoy some measure of satisfaction from its performance.


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The bellwether in Japan's Tankan report is the performance of large manufacturing firms. Japan's large manufacturers pushed the outer edge of the envelope to score the second highest reading since the quarterly survey began in 2003 [...]

Japan's Tankan Improves to Tie Second Best Reading Since 2003

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Import prices rose increased 0.7% in November (3.1% y/y)
following a 0.1% October uptick, revised from 0.2% reported initially. The
latest gain matched expectations in the Action Economics Forecast Survey. These
figures are not seasonally adjusted.

The strength in import prices was led by a 7.2% jump (24.1%
y/y) in petroleum prices. Nonpetroleum import prices inched 0.1% higher (1.4%
y/y) for a second straight month. Industrial supplies &amp; materials prices
jumped 3.6% (14.1% y/y) after a 0.6% rise. Industrial supplies prices excluding
petroleum gained 1.5% (8.2% y/y) following a 0.5% rise. Auto prices rose 0.1%
(-0.5% y/y) after a 0.2% slip, while nonauto consumer goods prices also gained
0.1% (0.2% y/y) following two consecutive monthly declines. Capital goods prices
held steady (0.6% y/y for a third straight month. Foods, feeds &amp; beverage
prices declined 1.7% (-0.4% y/y) after a 0.4% fall.

Export prices increased 0.5% last month (3.1% y/y) following
a 0.1% uptick. A 0.3% rise had been expected.

Higher nonagricultural prices paced the increase with a 0.6%
gain (3.2% y/y) after a 0.1% dip. Agricultural prices declined 0.6% (+2.1% y/y)
after a 1.9% rise. Industrial supplies &amp; materials costs gained 2.1% (8.0%
y/y) following a 1.0% decline. Industrial supplies prices excluding fuels rose
1.8% (3.6% y/y) following a 0.3% drop. Foods, feeds &amp; beverage prices
declined 1.0% (+2.2% y/y) after a 2.1% rise. Capital goods prices eased 0.1%
(+1.6% y/y), the first decline in over a year. Auto prices also slipped 0.1%
(+0.4% y/y) after no change during the prior two months. Consumer goods prices
excluding autos held steady (-0.7% y/y) after a 0.1% dip.

The import and export price series can be found in Haver's USECON
database. Detailed breakdowns into individual types of commodities, equipment
and many types of nondurable goods are available in the USINT database.
The expectations figure from the Action Economics Forecast Survey is in the AS1REPNA database.

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 <th class="firstcol" scope="col" ><a href="http://www.haverselect.com/dlx/USECON/@E8/@E807/@E807.HTM">Import/Export
 Prices (NSA, %)</a></th>
 <th scope="col" >Nov</th>
 <th scope="col" >Oct</th>
 <th scope="col" >Sep</th>
 <th scope="col" >Nov Y/Y</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 <th scope="col" >2014</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Imports - All Commodities</td>
 <td >0.7</td>
 <td >0.1</td>
 <td >0.8</td>
 <td >3.1</td>
 <td >-3.3</td>
 <td >-10.2</td>
 <td >-1.1</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Petroleum</td>
 <td >7.2</td>
 <td >0.5</td>
 <td >6.5</td>
 <td >24.1</td>
 <td >-19.7</td>
 <td >-46.0</td>
 <td >-5.6</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Nonpetroleum</td>
 <td >0.1</td>
 <td >0.1</td>
 <td >0.3</td>
 <td >1.4</td>
 <td >-1.5</td>
 <td >-2.8</td>
 <td >0.1</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Exports - All Commodities</td>
 <td >0.5</td>
 <td >0.1</td>
 <td >0.8</td>
 <td >3.1</td>
 <td >-3.2</td>
 <td >-6.3</td>
 <td >-0.5</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Agricultural</td>
 <td >-0.6</td>
 <td >1.9</td>
 <td >-0.7</td>
 <td >2.1</td>
 <td >-5.4</td>
 <td >-13.3</td>
 <td >-2.7</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Nonagricultural</td>
 <td >0.6</td>
 <td >-0.1</td>
 <td >0.9</td>
 <td >3.2</td>
 <td >-3.0</td>
 <td >-5.5</td>
 <td >-0.3</td>
 </tr>
 </tbody>
 </table>
 
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Import prices rose increased 0.7% in November (3.1% y/y) following a 0.1% October uptick, revised from 0.2% reported initially. The latest gain matched expectations in the Action Economics Forecast Survey. These figures are not [...]

U.S. Import and Export Prices Strengthen

Carol Stone, CBE

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Total business inventories decreased 0.1% in October (3.5% y/y) after being basically flat in September; the September total was revised downward ever so slightly from its initial report. Total sales at retailers, wholesalers and manufacturers gained 0.6% (6.5% y/y), moderating after September's 1.6% surge, which was revised from 1.4% reported initially. The decline in inventories and the rise in sales put the inventory/sales ratio at 1.35, down from 1.36 in September and 1.39 in October 2016. This latest I/S ratio is the lowest since December 2014.

By distribution sector, inventories at retailers were flat in October (up 2.7% y/y), following their 0.9% decrease in September. Motor vehicle and parts dealers' stocks fell 0.7% (+3.9% y/y). Excluding that large motor vehicle segment - 35.6% of total retail inventories so far this year - other retailers' inventories rose 0.4% in October (2.1% y/y). The largest October increase was at building materials, garden equipment & supplies stores, 0.6% (3.8% y/y). Food & beverage stores had a 0.4% rise (2.9% y/y), general merchandise stores, 0.2% (-1.1% y/y) and clothing and accessories stores, 0.1% (-0.7% y/y). Inventories at furniture & appliance stores declined 0.6% in October (+1.7% y/y). At other distribution sectors, inventories at merchant wholesalers fell 0.5% (+3.9% y/y) in October after edging up 0.1% in September; those at manufacturers rose 0.2% (3.8% y/y) following September's 0.6% increase.

On the sales front, as described elsewhere on Haver.com today, retailers' sales in October gained 0.6% (+5.2% y/y); excluding the motor vehicle sector, they rose 0.4% (+5.0% y/y). Wholesale sales advanced 0.7% (+8.4% y/y) and manufacturers' shipments increased 0.6% (+5.8% y/y).

The lower inventory/sales ratio for total business In October was mirrored in the retail and wholesale sectors; that in manufacturing was flat. For retailers, the ratio edged down to 1.43 in October from 1.44 in September; it had been 1.47 in October 2016. Excluding motor vehicle dealers, the ratio was unchanged at 1.22 in the month and compared to 1.27 a year ago. For motor vehicle dealers specifically, the ratio dropped to 2.13 from 2.17 in September; it had the same 2.17 reading in October 2016. Furniture & appliance stores also saw a sizable drop, to 1.52 in October from 1.56 the month before and 1.57 the year before. The ratio in clothing stores was 2.37, down from 2.39 in September and 2.44 in the year-ago month. For wholesalers, the ratio was 1.25 in October, modestly lower than September's 1.26, with a more noticeable decrease from the year-ago 1.30. Manufacturers' inventory/sales ratio was 1.37, the same as September's 1.37 and modestly lower than 1.39 a year ago.


The manufacturing and trade data are in Haver's USECON database.

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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" >Manufacturing &amp; Trade</th>
 <th scope="col" >Oct</th>
 <th scope="col" >Sep</th>
 <th scope="col" >Aug</th>
 <th scope="col" >Oct Y/Y</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 <th scope="col" >2014</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Business Inventories (% chg)</td>
 <td >-0.1</td>
 <td >-0.0</td>
 <td >0.6</td>
 <td >3.5</td>
 <td >2.3</td>
 <td >1.8</td>
 <td >3.4</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Retail</td>
 <td >0.0</td>
 <td >-0.9</td>
 <td >0.6</td>
 <td >2.7</td>
 <td >3.8</td>
 <td >4.7</td>
 <td >3.0</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Retail excl. Motor Vehicles</td>
 <td >0.4</td>
 <td >-0.1</td>
 <td >0.3</td>
 <td >2.1</td>
 <td >1.8</td>
 <td >3.8</td>
 <td >2.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Merchant Wholesalers</td>
 <td >-0.5</td>
 <td >0.1</td>
 <td >0.8</td>
 <td >3.9</td>
 <td >2.5</td>
 <td >1.2</td>
 <td >5.8</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Manufacturing</td>
 <td >0.2</td>
 <td >0.6</td>
 <td >0.6</td>
 <td >3.8</td>
 <td >0.8</td>
 <td >-0.1</td>
 <td >1.6</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" colSpan="8">Business Sales (% chg)</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Total</td>
 <td >0.6</td>
 <td >1.6</td>
 <td >0.8</td>
 <td >6.5</td>
 <td >-0.1</td>
 <td >-3.2</td>
 <td >2.8</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Retail</td>
 <td >0.6</td>
 <td >2.3</td>
 <td >-0.1</td>
 <td >5.2</td>
 <td >2.7</td>
 <td >1.9</td>
 <td >4.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Retail excl. Motor Vehicles</td>
 <td >0.4</td>
 <td >1.6</td>
 <td >0.5</td>
 <td >5.0</td>
 <td >2.3</td>
 <td >0.4</td>
 <td >3.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Merchant Wholesalers</td>
 <td >0.7</td>
 <td >1.4</td>
 <td >1.9</td>
 <td >8.4</td>
 <td >-0.5</td>
 <td >-4.9</td>
 <td >3.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Manufacturing</td>
 <td >0.6</td>
 <td >1.1</td>
 <td >0.6</td>
 <td >5.8</td>
 <td >-2.0</td>
 <td >-5.8</td>
 <td >1.3</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" colSpan="8">I/S Ratio</td>
 </tr>
 <tr>
 <td class="firstcol" >Total</td>
 <td >1.35</td>
 <td >1.36</td>
 <td >1.38</td>
 <td >1.39</td>
 <td >1.40</td>
 <td >1.38</td>
 <td >1.31</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Retail</td>
 <td >1.43</td>
 <td >1.44</td>
 <td >1.49</td>
 <td >1.47</td>
 <td >1.48</td>
 <td >1.45</td>
 <td >1.43</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Retail excl. Motor Vehicles</td>
 <td >1.22</td>
 <td >1.22</td>
 <td >1.24</td>
 <td >1.27</td>
 <td >1.27</td>
 <td >1.26</td>
 <td >1.23</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Merchant Wholesalers</td>
 <td >1.25</td>
 <td >1.26</td>
 <td >1.28</td>
 <td >1.30</td>
 <td >1.33</td>
 <td >1.32</td>
 <td >1.21</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Manufacturing</td>
 <td >1.37</td>
 <td >1.37</td>
 <td >1.38</td>
 <td >1.39</td>
 <td >1.41</td>
 <td >1.39</td>
 <td >1.31</td>
 </tr>
 </tbody>
 </table>
 
</body></html>

Total business inventories decreased 0.1% in October (3.5% y/y) after being basically flat in September; the September total was revised downward ever so slightly from its initial report. Total sales at retailers, wholesalers and [...]

U.S. Business Inventories Decrease Slightly as Sales Show Moderate Advance

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Initial claims for unemployment insurance fell to 225,000
(-7.8% y/y) in the week ended December 9 from an unrevised 236,000 in the prior
week. Expectations had been for 237,000 claims in the Action Economics Forecast
Survey. The four-week moving average declined to 234,750. During the last ten
years, there has been a 74% correlation between the level of initial claims and
the m/m change in nonfarm payrolls.

Continuing claims for unemployment insurance fell to 1.886
million (-6.7% y/y) in the week ended December 2 from 1.913 million in the week
prior. The four-week moving average of claimants rose slightly to 1.919 million,
but remained near the lowest level since January 1974.

The insured unemployment rate slipped to the record low of 1.3%.

Insured rates of unemployment varied across the country. For
the week ended November 25, near the low end of the range were South Dakota
(0.44%), Indiana (0.49%), Nebraska (0.53%), Virginia (0.68%), Georgia (0.76%)
and Colorado (0.84%). At the high end were Massachusetts (1.60%), New York
(1.65%), Illinois (1.73%), Pennsylvania (1.94%), California (2.30%) and New
Jersey (2.38%). These state data are not seasonally adjusted.

Data on weekly unemployment insurance are contained in
Haver's WEEKLY database and they are summarized monthly in USECON.
Data for individual states are in REGIONW. The expectations figure is
from the Action Economics Forecast Survey, carried in the AS1REPNA database.

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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" >Unemployment Insurance (SA, 000s)</th>
 <th>12/09/17</th>
 <th>12/02/17</th>
 <th>11/25/17</th>
 <th>Y/Y %</th>
 <th>2016</th>
 <th>2015</th>
 <th>2014</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Initial Claims</td>
 <td >225</td>
 <td >236</td>
 <td >238</td>
 <td >-7.8</td>
 <td >263</td>
 <td >278</td>
 <td >308</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Continuing Claims</td>
 <td >--</td>
 <td >1,886</td>
 <td >1,913</td>
 <td >-6.7</td>
 <td >2,136</td>
 <td >2,267</td>
 <td >2,599</td>
 </tr>
 <tr>
 <td class="firstcol" >Insured Unemployment Rate (%)</td>
 <td >--</td>
 <td >1.3</td>
 <td >1.4</td>
 <td >
 1.5 
 (Nov. 2016)
 </td>
 <td >1.6</td>
 <td >1.7</td>
 <td >2.0</td>
 </tr>
 </tbody>
 </table>
 
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Initial claims for unemployment insurance fell to 225,000 (-7.8% y/y) in the week ended December 9 from an unrevised 236,000 in the prior week. Expectations had been for 237,000 claims in the Action Economics Forecast Survey. The [...]

U.S. Initial Unemployment Insurance Applications Decline

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	 EMU and Germany Gain While France Takes Small Step Back; Central Bankers Conclude Their End-of-Year Jubilee and Shine a Light on the Future
 
 
 
 

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Both sectors are rising but manufacturing is clearly on a tear 
The Markit PMIs are strong again as all headline and sector readings in the table are in the top 10% of the group of readings released since January 2012. Headline, goods, services, EMU, German, French, or Japan manufacturing - all cuts at growth assessment- all are in exquisite form. French, German and EMU manufacturing are all on their highest readings since January 2012. The sequential moving averages for the EMU PMI as well for its two sectors are showing steady advancement with stronger readings over sequentially shorter periods. All headline and sectors in the EMU and its two largest members show this same sequential push to higher ground with the exception of the German services sector that does sag with weaker reading over six months than over 12 months but then recovers its momentum as its three-month average rises above even its 12-month average.

Europe does appear to be gaining momentum and solidity to its expansion. A report from the European Automobile Manufacturers' Association showed Thursday that passenger car registrations grew 5.9% year-on-year in November, the same rate as in October. This is a good solid gain and an important aspect of consumption.

China also added some data to the mix today as its retail sales in November gained by 10.2% over November 2016 and China's industrial production rose by 6.1% also over its year-ago value. Both series logged the sorts of gains that had been expected of them.

Central bankers meet 
It was day for central banks to put a cherry on top and finish off their year's work. European stocks are off on the day in the wake of all the actions and bond yields are mostly higher, too. Yesterday stocks has reacted well to the news of the expected 25-basis-point Federal Reserve rate hike and to the report that the Republicans had an agreement on their pending tax deal.

The two main central bank actions today by the European Central Bank and the Bank of England saw bankers marking time. The Swiss National Bank also met and stayed on hold along with central banks of Turkey, the Philippines, Norway and PBOC.

BOE and BOJ: In its last meeting the BOE had hiked rates for the first time in a decade back in November. Despite that, in this meeting, the BOE stood down from a rate hike agenda and kept all aspects of policy on an even keel. The BOE faces one of the most difficult tasks of any of the major monetary center banks at this time as current data show there is and has been an inflation overshoot. But the U.K. is engaged in ongoing Brexit negotiations and the U.K. economy is expected to be weaker in the wake of its Brexit deal. What should the BOE do? Perhaps the only central bank with any sort of similar challenge is the Bank of Japan that is fighting powerful structural forces of demographics and a huge debt load while it is trying to put the risk of deflation down for good and, like every other central bank, hit its inflation target. In the meantime, the U.K. faces data that have continued to be strong with inflation overshooting and unemployment at its lowest mark since the mid-1970s. Retail sales, apparently, are on solid footing and with a good Christmas shopping season in hand. However, also giving the BOE some latitude is the fact that wages continue to lag inflation. Despite what might appears to be full employment, wage pressures are not an issue and the actual labor market condition in the wake of Brexit and what will be substantial jobs losses is also a matter of some uncertainty. Faced with all those issues, risks and choices, the BOE decided to mark time.

ECB: The ECB, too, had announced at its previous meeting in November that it would be reducing its asset purchases beginning in 2018; it has followed that move with a decision to stand pat in December on its past policy path. The ECB Governing Council, headed by ECB President Mario Draghi, left the key interest rates unchanged in its final policy-session for this year. The main refi rate is currently at a record low 0% and the deposit rate at -0.40%. The marginal lending facility rate is 0.25%. The ECB reiterated its statement that it expected key interest rates to remain at their current levels for an extended period of time and for that to run 'well past' the ending of its program of net asset purchases. Most private forecasters are not looking for rate hikes until 2019.

The PBOC...can we call this a rate hike? China's central bank unexpectedly lifted its rates in its open market operation on Thursday after the Federal Reserve tightened its policy rates. Chinese economic data released on Thursday showed that industrial production growth weakened in November (as expected) as measures taken to control pollution took a toll. Meanwhile, retail sales grew as expected at pace near 10%. The People's Bank of China raised its 7-day and 28-day reverse repo rates by 5 basis points to 2.50% and 2.80%, respectively. A similar action was last taken in mid-March. The bank raised the rate on its medium-term lending facility by 5 basis points to 3.25%. I cannot fathom what a 5bp rate hike means or why a central bank would bother with such a miniscule move. Possibly it is meant to signal that more aggressive hikes are possible. There is no doubt that the PBOC lives in its own world and does things its own way.

Central bank forecasts? 
The ECB did raise its growth and inflation forecasts on Thursday. Growth next year is now seen at 2.3% versus an earlier 1.8% forecast. Growth in 2019 is expected to slow to 1.9% and then slow further to a pace of 1.7% in 2020. Inflation is expected at 1.5% in 2017 and to stay below target even slowing to 1.4% in 2018. The 2019 pace is expected to pick up to 1.5% and then to step up again to 1.7% by end-2020 (ECB forecast table <a href="https://www.ecb.europa.eu/pub/pdf/other/ecb.projections201712_eurosystemstaff.en.pdf?bf597ce202630bb04fc089592d02b6f9">here</a>). Today the German research institute, the IFO, also presented an outlook for Germany that sees a significant bump up in growth for the year ahead; the IFO is shifting its forest for German growth up to 2.6% from 2% where it had been previously. Yesterday the Fed had released its SEP (summary of economic projections) which I refer as 'policycasts' instead of forecasts. The SEP process is peculiar. Fed members have to submit their outlooks which contain each member's views of how rates will respond over the period out to 2020. I don't so much call these forests because they somewhat oddly force each member to keep the Fed on its policy track so that by 2020 each forest has to end up with 'low' unemployment and about 2% inflation. It is a bit of backwards way of making a forecast, but it fits the Fed's purposes. Still, the trimmed median of the submitted policycasts of Fed members showed about the same rate profile as in the past, the same inflation tracking, but like the ECB, stronger growth

On balance, between the Fed, and the ECB the world is projected to be a pretty tranquil place over the next few years. Of course, the BOE is dealing with the most bumps in the road with inflation that is much higher than in the U.S. or in the euro area and with some real question marks about how growth will evolve. However, the U.S. and EMU are well settled on their low inflation outlook and also on a period in which growth is going to pick up significantly. That environment should help the U.K. and the BOE.

Summing up 
It is interesting that the view on inflation has remained so contained despite this now-synchronized global growth cycle and despite the pick-up in growth that is underway rather broadly in the context of that cycle. But the U.S. has been raising rates (albeit slowly) for about two years now; the BOE has just begun to withdraw at least some stimulus and the ECB plans to start its trimming of securities purchases beginning in 2018. All of this amounts to some degree of leaning against the improved thrust of global growth. At the same time, despite excellent unemployment conditions in the U.S., the U.K., and Germany, as well as, improving trends in the EMU area, wages generally have continued to lag inflation and continue to be less affected by the state of the local labor market and by the local environment for inflation than in the past. The global forces of technology and the force of stepped up trade competition are still at work after all. Despite a very positive tranquil and reassuring set of projections from the Fed and the ECB, for the period ahead what remains to be seen is what really will happen. With central banks even the best laid plans sometimes go awry. For now we can bask in the glow of a warm and friendly outlook. But with so many trends shifting and so many geopolitical relations under stress it's also a good time to remain wary of what the future will bring.


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Both sectors are rising but manufacturing is clearly on a tear The Markit PMIs are strong again as all headline and sector readings in the table are in the top 10% of the group of readings released since January 2012. Headline, goods, [...]

Highest EMU and German PMI Readings Since 2011

Surging orders for computers and electronics propelling durable goods orders

Next year's inflation forecasts are on the rise and above target

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

Elevated energy prices putting intense upward pressure on input prices around the globe

US is big leader in global surge in private AI investment

Larger-than-usual income tax refunds this year are supporting consumer spending

Sharply rising share of AI-related jobs

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

Recent pickup in US defense orders could help support overall growth ahead

Cost of transporting crude oil has soared to series high

Market-based inflation expectations have not yet reflected recent surge in oil prices

Global equity markets are fearing a major economic disruption from soaring oil prices

Is recent drop in sentiment signaling softer growth ahead?

With the Iran conflict, geopolitical risk has soared to alarming levels

Soaring AI-related investment in US underpinning strong contribution of business spending to overall growth

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

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

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Total job openings edged up 0.1% m/m (+3.9% y/y) to 7.594 million in May from a downwardly revised 7.585 million in April (previously 7.618 million), according to the Job Openings and Labor Turnover Survey. Even with only a small rise, the level of openings in May was the highest since May 2024. Accordingly, the job openings rate (the ratio of openings to nonfarm employment plus openings) was unchanged at 4.6% in May. The April and May readings for the job openings rate were the highest since November 2024. In May, the number of unemployed fell while the number of openings edged up. Consequently, the number of openings rose further above the number of unemployed for the second consecutive month, another sign that previously observed softening in labor market conditions may be reversing.

Private sector openings were essentially unchanged in May from April, edging up 2,000 (+4.3% y/y) with the private job openings rate unchanged at 4.8%. The sluggishness in private openings in May was due entirely to a 119,000 decline in private education and health care openings. However, this followed a total increase of 298,000 in March and April. Openings increased in all other major sectors, led by a 95,000 increase in openings in leisure and hospitality. Openings were up 32,000 in construction, 33,000 in manufacturing, and 37,000 in trade and transportation. Total government openings rose 7,000 in May after an upwardly revised 63,000 jump in April (previously +47,000).

Total hiring slipped 0.9% m/m (-3.0% y/y) to 5.170 million in May from an upwardly revised 5.215 million in April (previously 5.116 million). This was the third monthly decline in hiring in the past four months. The hiring rate was unchanged in May at 3.3%. Private sector hiring fell 1.6% m/m (-3.5% y/y) in May, also the third monthly decline in the past four months. The weakness in hiring in May was concentrated in trade and transportation (-56,000) and in construction (-24,000). Manufacturing posted a small decline while professional and business services, and private education and health care posted small increases. Leisure and hospitality hiring rose 15,000, the second monthly increase in the past three months. Total government hiring increased 32,000 in May.

Total separations increased 1.3% (-3.5% y/y) to 5.101 million in May from an upwardly revised 5.038 million in April (previously 4.978 million). Both quits (+22,000) and layoffs (+41,000) increased in May with no change in other separations. The separation rate in May was unchanged at 3.2%. Private separations also rose 1.3% m/m (+62,000, -2.9% y/y) in May. Private quits increased 37,000, private layoffs rose 27,000, while other private separations declined 2,000. The rise in private layoffs was concentrated in construction (+47,000), trade and transportation (+52,000), and private education and healthcare (+52,000). Layoffs declined 18,000 in manufacturing, fell 37,000 in professional and business services, and decreased 50,000 in leisure and hospitality. Even with the rise in private quits in May, they have been trending down in 2026, implying that workers are feeling less comfortable with their employment prospects and hence are choosing to remain in their current jobs.

On the whole, employers remain cautious in hiring. Furthermore, workers are sufficiently unsure of their alternative employment prospects that they are refraining from leaving their current position. Still, openings have gradually risen since the end of last year after having gradually fallen throughout 202 and once again exceed the number of unemployed.

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

- Openings edged up 9,000 but to the highest level since May 2024.
- However, hiring fell 45,000 for the third monthly decline in the past four months.
- Separations rose 63,000 with increases in both quits and layoffs.

U.S. JOLTS: Openings and Hiring Little Changed in May

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Headline indexes for the European Monetary Union improved in June to a reading of 95.0 from 93.7 in May. The index had been stronger at 96.4 in March; however, it fell to 93.3 in April, recovered slightly to 93.7 in May, and has now reached 95.0. While still below its March high, the index has made progress in the wake of the outbreak of war-like conditions and the closure of the Strait of Hormuz.

**Sector performance**
The industrial reading for the sector, at -8, has a 36.3 percentile standing, which better than the headline index for the Monetary Union with a 25.4 percentile standing. The EMU-wide sector index, consumer confidence, improved to a net diffusion reading of -17.7 in June from -19 in May, but that still leaves it with a very weak 8.1 percentile standing, the lowest among sector readings. Retailing improved to a net diffusion reading of -10 in June from -11 in May and posted a 38.1 percentile standing. The construction sector deteriorated, falling back to -5 from -4 in May; it has been undergoing steady degradation since at least March, but it still has a 68.4 percentile standing. It is the only sector with a percentile standing above 50, placing it above its historic median. The services sector had a net diffusion reading of +3, identical to its May reading and has a 24-percentile standing.

**Sector index ranking**
The sector readings clearly show that the monetary union is exhibiting a number of sectors with subpar growth; beyond ‘subpar,’ many are quite weak. The exception is—and has been for some time—the construction sector, which continues to perform above average and post an above-median metric. It is, perhaps surprising that we often think of consumer confidence as being relatively forward-looking, but in this schematic, consumer confidence is the weakest of the sectors; in fact, like statistics from the U.S., we find the same prevailing situation with consumer readings exceptionally weak. These weak consumer readings coexist with much stronger retailing readings and stronger industrial readings, although both of those are below their historic medians in Europe. This report is a sort of gut check for what consumer confidence means; it may not be as important as we used to think it was. Although the business cycle at this juncture seems to be concentrated more on the supply side and on recovery in the business community, that effect compounded by the influence of AI is much stronger in the U.S. than in Europe.

**Country detail – Large economies**
The country detail shows 16 of 20 early reporting countries with only one of the top four countries showing a decline month-to-month, and that's France. France recorded a 0.2% decline in June, while Germany posted a 1.9% increase, Italy gained 1.3%, and Spain rose 0.7%. Spain had the lone small decrease in May, while in April all of the large countries showed significant monthly declines in their overall indexes in the wake of the onset of the war with Iran.

**Smaller economies in EMU**
Apart from the Big Four economies, 12 other EMU members report in June; of those, 5 showed month-to-month declines in their country level indexes. This was up from three showing declines in May, although it was a vast improvement from April, when all of the country indexes turned negative and generated substantial month-to-month declines, except for Slovakia and Lithuania.

**Big Four economy rankings**
Among the Big Four economies, the strongest ranking reading in June is Spain at a 52.3 percentile standing, followed by Italy at a 41.6 percentile standing, France at a 22.7 percentile standing, and Germany at an 18.7 percentile standing.

**Other economy rankings**
Among the other 12 countries, the percentile standing readings range from a high of 76.1% for Greece to a low of 9.3% for Austria. Five of 12 of the smaller EMU members have percentile standings of 50% or greater, putting them above their historic medians, while the other 7 have rankings that range from a high of 44.6% in Portugal to a low of 9.3% in Austria.

**Summing up**
Conditions in the monetary union have improved over the last two months after a substantial stumble in the wake of the war in the Middle East with Iran and the closure of the Strait of Hormuz. However, the rebound in the European recovery is in gear; it is slow and measured. Conditions are still weak on balance.

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Europe

EU Indexes Show European Improvement in June

Tian Yong Woon

In this week's Letter, we explore the significant pullback in oil prices that followed the US-Iran memorandum of understanding and consider its broader economic implications. The agreement saw a fragile ceasefire ensue and a gradual resumption of shipping flows through the Strait of Hormuz (chart 1). We acknowledge that this major pullback will certainly be welcome to policymakers across the region and beyond. Previously elevated energy prices had added to the fiscal burdens of governments and sharpened the dilemma facing central banks (chart 2). That dilemma pits the need to rein in inflation against the risk of choking off economic growth. That said, while one source of inflationary pressure seems to be ebbing, another looks to be emerging on the horizon. It stems from a potential "Super El Niño" event, which meteorologists have been warning about for some time now. Asia sits at the centre of such risks, as past strong El Niño events have directly and adversely affected crop production (chart 3). The impact is not limited to potential surges in headline inflation via food supply shocks, especially in Asia. It extends directly to growth as well (chart 4), given the nontrivial share of GDP that agriculture still commands in many Asian economies (chart 5). Should price pressures simply rotate from energy to food, government subsidies may follow suit (chart 6). Central bankers, for their part, may find themselves unable to ease off the tightening pedal just yet. Some Asian economies, however, would still manage to offset such a growth shock through other engines. Electronics and semiconductors, buoyed by the current AI upcycle, offer one such cushion for the more fortunate. For others, lacking such offsets, the agricultural hit may simply have to be borne in full.

**The US-Iran conflict and oil prices**
The recent memorandum of understanding between the US and Iran, aimed at working towards a final deal, has already brought visible relief to crude oil markets (chart 1). This relief has held despite the renewed tensions that have followed the agreement, which markets seem to have largely looked past. The easing in prices should go a long way towards unwinding the inflation concerns that elevated oil prices had previously stoked. Much of the pullback reflects anticipation of the substantial supply now expected to return to global markets. Yet some shipping trackers, such as the IMF's, already point to a marked pickup in traffic through the Strait of Hormuz. Even so, those volumes still remain well below the levels seen before the conflict began in the region. 

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**Oil prices and inflation in Asia**
Should this normalisation of shipping flows through the Strait of Hormuz persist, it would support a corresponding easing in oil prices and energy inflation. That moderation in energy costs would, in turn, help bring down broader headline inflation across the economy. As chart 2 shows, energy has been a large contributor to headline inflation in recent years, though other important forces have been at play too. Such an outcome, in which restored oil supply cools energy inflation, would be a welcome development for central bankers. They face the delicate task of reining in price pressures without tightening policy so far that growth stalls or tips into contraction. That said, while one driver of price pressures now seems to be ebbing, albeit not without the risk of renewed tensions, another source of inflation is building on the horizon.

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**Risks of a “Super El Niño”**
As meteorological agencies have warned for some time, the world may be on the cusp of a Super El Niño. The probability of such an event has risen sharply in recent months. Were it to materialise, it would unleash a range of disruptions from the second half of this year, chief among them shifts in weather and climate patterns that can severely dent crop yields. Asian staples such as rice, wheat and palm oil are especially exposed, since strong El Niño events tend to bring drier conditions and reduced rainfall, in turn cutting output across affected economies in the region. Chart 3 illustrates just how tightly some crops are bound to these conditions: SOI readings correlate closely with certain economies' production, notably Thailand's rice harvest, underscoring how dependent such output remains on the weather. These supply shortfalls would then feed inflationary pressures through the food channel. So central bankers may not be able to rest entirely easy following the easing of tensions between the US and Iran, finding themselves wrestling with a fresh set of emerging inflation risks instead.

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Delving deeper, an examination of recent strong El Niño episodes against the growth of Asian economies' agricultural sectors shows that extreme weather weighs not just on food prices but on economic growth itself. As chart 4 shows, previous major El Niño episodes—notably in 2014–16 and 2023–24—were associated with weaker agricultural growth across parts of Asia, with India and Thailand appearing particularly vulnerable. This is understandable, since these episodes coincided with reduced crop production and, in turn, lower crop revenue. Should these past episodes serve as a gauge and given that the coming event is potentially the worst on record, these economies stand to suffer once more should it hit as hard as feared.

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Beyond the sensitivity of individual economies to extreme El Niño events, vulnerability also depends on the size of the agricultural sector itself. Economies where agriculture accounts for a larger share of output are naturally more exposed to weather-related disruptions. As chart 5 shows, economies such as India, Indonesia and, to a lesser extent, Vietnam carry a comparatively higher share of agriculture in their GDP, which presents a further source of risk. That said, this dimension should not be read in isolation, since the eventual impact would turn on a combination of factors: the degree of exposure, the intensity of El Niño's effect on each economy's agricultural output, and the actual weather conditions that come to pass.

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Bringing it all together, the recent de-escalation between the US and Iran and the early normalisation of flows through the Strait of Hormuz are certainly welcome news. Businesses, consumers and policymakers alike stand to benefit from the relief that lower energy prices would bring. Yet the formation of extreme El Niño conditions presents a looming inflation risk over the months ahead. It may displace energy as the dominant driver, shifting the pressure from the energy channel to the food channel. For Asia's central bankers, this could mean they are unable to ease off the tightening pedal just yet (chart 6). Food inflation may simply pick up where energy inflation leaves off, keeping price pressures elevated for longer. Regional governments, too, may have to redirect funds from energy subsidies to food subsidies should the supply shock play out. On growth, however, the picture may prove more uneven across the region than a single narrative suggests. Economies exposed to the current AI upcycle could keep leaning on those sectors for continued support. Those less exposed, by contrast, may simply have to absorb the hit to agriculture with little to offset it.

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Asia

Economic Letter from Asia: Oil Down, Emerging Risks

Winnie Tapasanun

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The U.S. international trade deficit in goods ballooned to a larger-than-expected $105.75 billion in May after narrowing to $83.01 billion in April, according to the advance estimate from the U.S. Census Bureau. The May reading marked the third widening in the goods trade deficit in four months, exceeding a $91.55 billion shortfall in May 2025. A deficit of $84.0 billion for May had been expected by the Action Economics Forecast Survey. The deficit reached a low of $61.44 billion in October 2025 (the smallest since February 2020) and a record high of $158.73 billion in March 2025. On a quarterly basis, the deficit averaged $94.38 billion so far in Q2'26 versus $81.96 billion in Q1'26.

Total goods exports fell 5.4% m/m (+14.7% y/y) to $207.67 billion in May, the first monthly fall since December and a three-month low, following a 3.8% rise to a record-high $219.52 billion in April. Exports were up 27.7% from a June 2023 low. The m/m fall in exports in May reflected declines of 9.2% (-5.0% y/y) in nonfood consumer goods excluding autos, 7.0% (+23.2% y/y) in industrial supplies & materials, 6.8% (+19.5% y/y) in other goods, and 5.0% (+14.8% y/y) in capital goods excluding autos. To the upside, exports of foods, feeds & beverages (+3.9%; +19.1% y/y) and automotive vehicles & parts (+0.5%; -3.6% y/y) rebounded m/m in May.

Total goods imports, up for the fourth consecutive month, rose 3.6% m/m (15.0% y/y) to $313.43 billion in May, after a 2.0% increase to $302.53 billion in April, marking the highest level since the March 2025 record high of $340.11 billion. Imports were up 25.0% from a March 2023 low. The m/m rise in imports in May was broad-based across all end-use categories, led by an 11.5% gain (22.0% y/y) in other goods, followed by increases of 6.3% (1.4% y/y) in automotive vehicles & parts, 5.7% (-9.1% y/y) in nonfood consumer goods excluding autos, 4.8% (11.7% y/y) in industrial supplies & materials, 4.3% (-0.2% y/y) in foods, feeds & beverages, and 0.4% (41.9% y/y) in capital goods excluding autos. 

The advance international trade data can be found in Haver's **USECON** database. The expectation figure is from the Action Economics Forecast Survey, which is in **AS1REPNA**.

- Deficit: $105.75 bil. in May, up $22.75 bil. (+27.4%) from April’s $83.01 bil.
- Exports -5.4%, first m/m decline since Dec., led by a 9.2% drop in nonauto consumer goods exports.
- Imports +3.6%, fourth straight m/m rise to highest level since Mar. ’25, driven by an 11.5% gain in imports of other goods.

U.S. Goods Trade Deficit Balloons in May, Largest Since March ’25

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In June, there's a slight divergence in the performance of industry climate and service sector climate, although broadly the two sectors have seen their composite indexes moving in more or less the same direction. Since 2024, the industry survey has moved up slightly after falling faster than the services gauge. The services survey has been locked in a slow trend of deterioration, largely since it reached a peak in 2021 in the wake of COVID.

The industry climate gauge has a 30.8 percentile standing, but the recent production trend, while declining, logs a more substantial 42.8 percentile standing. Contributing survey members find their own industry ‘likely trend’ much weaker, at a 21.2 percentile standing. Demand overall, however, has standings above the 50th percentile, putting overall and foreign orders & demand each above their respective medians for this period of ranking back to 2001. Inventories have a strong 81-percentile ranking. Prices are extremely strong, with 87-percentile and 86-percentile standings for respondents for their personal industry trend for prices as well as for the overarching manufacturing sector estimate of prices. Higher prices seem to be the one thing that everyone can agree on by a large margin.

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As for services, the service climate index improved slightly to 93.4 in June from 92.6 in May. The three-month moving average was weaker in June than in May as well; the 12-month moving average has been stuck at its current level for a number of months. The outlook in June improved slightly to a reading of -12 from -15 in May, but the outlook ranking is still a weak 26.8 percentile standing. The three-month expectations and observations of past sales trends haven't changed much in the last two months, but there has been a slight improvement for sales expectations. However, both sales metrics have low 20th percentile standings. Sales prices have deteriorated slightly in June compared to May for both the observed and the expected trends, but prices have standings above their 50th percentiles, logging above-median performance. Employment over the last three months has weakened noticeably, and expected employment is weaker by a small amount.

In terms of rankings, all of the sector rankings are below the 50th percentile on all of these observations, including the climate headline except for sales prices where both the past three-month observed trend and the expected trend have readings above their respective 50th percentiles, indicating past and expected price pressures in excess of normal.

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**Assessment**
On balance, the readings for the French industry, manufacturing sector and services are not encouraging. In addition, concerns about prices linger. The services sector, those concerns seem moderate compared to the concerns in manufacturing.

The hot war continues between Ukraine and Russia, while in the Middle East there was talk of some improvement and a potential peace deal between the United States and Iran, but every time there is some talk of a breakthrough, there appears to be a breakdown. In the most recent development, Iran has asserted its right to control traffic through the Strait of Hormuz, and it's not clear how that demand would ever be consistent with the U.S. allowing a ceasefire. It appears that Iran may have traded its irreconcilable demand for nuclear weapons for a more pragmatic and real-world argument—that it will control the traffic through the Strait of Hormuz simply because it can—and it still is doing exactly that, even after all the destruction it suffered.

Stopping Iran from controlling the Strait would take a commitment to restart the war. All this makes me personally more pessimistic. I think Iran sees the need for Trump to cut a deal and stop the war before the U.S. mid-term elections, and it is pressing that need to its advantage. Trading its nuclear ambitions for real world control of the Strait would elevate Iran’s power from being dangerous but ethereal to a real world event with constant consequences.