Robert Brusca

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070430c.jpg" width="353">
The Chicago Fed regional activity index fell sharply from 61.7 to 52.9 in April. At 52.9 the index is below its median value of 54.7 since 1968. Orders are low by comparison with their historic median. Production is, however, quite solid, off modestly month to month and residing above its period median of 59. Employment improved month to month while backlogs slid and went below the breakeven value of 50 down to 48.4.
Why do we care? The main reason we care what the Chicago region prints is that it cycles closely with changes in the national ISM index. As we saw last month, not all Chicago readings are embraced nationally and, as you would expect, extreme regional movements are not harbingers of similar strength nationally. But the general trends of the Chicago index also sketch the trends of the national ISM-MFG. And what is important here is that the Chicago index is in an upswing phase. We do expect that to remain the case with national trends when the national index is released. 
Even so, some odd things are afoot, not just nationally, with regionally erratic MFG readings, but also within some of these PMI surveys. To see Chicago&#146;s strange reading this month we refer to the chart on the right.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070430d.jpg" width="353">
It depicts a usually strong positive relationship between prices paid and supplier delivery lags. Slower delivery lags are a sign of capacity constraints beginning to bind and in such cases price pressures usually mount. When MFG is slack and delivery lags are shorter (weaker supplier index) prices tend to become slack as well. But what we see this month is a huge divergence that is getting worse. Prices paid are under further upward pressure. Meanwhile supplier delivery lags have sunk to diffusion reading of 43.4 which is in the bottom third of that variable&#146;s historic range and in the bottom 17th percentile of its full range of values since 1990.
Supplier deliveries tell us that there is plenty of slack and that deliveries are speeding up. Still we are seeing price pressures. Even the surge in the Chicago PMI last month did not do much to take up slack. Of course production is only above its own median historic reading for two months in row after being below it for five months running. So maybe this is just temporary. But it is a large divergence.
Summing Up. As expected, the Chicago PMI slowed down in April. But going back to the mid-1980s (you can also see this on the chart but its hard to gauge the magnitude) the Chicago PMI has averaged a stronger value than the ISM by about 3 points per month. That correlation would put the ISM just below 50 for April if it holds in the strict month-to-month sense. We don&#146;t expect this. Since Chicago is coming off such a strong month a somewhat soured m/m comparison is not surprising. We do not take the Chicago PMI at face value for April. In March it was so strong, we do not even like moving averages for now. We think that the spike in March was an anomaly but we do think it was a signal and we expect the Chicago and the national ISM indexes to do better in the months ahead.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Chicago Purchasing Index
</tr>
</thead>
<tbody>
<tr class="odd">
<td colspan="9">Chicago</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Index</td>
<td>Orders</td>
<td>Production</td>
<td>Delivery</td>
<td>Inventories</td>
<td>Prices Paid</td>
<td>Employment</td>
<td>Backlogs</td>
</tr>
<tr>
<td class="firstcol">Apr.07</td>
<td>52.9</td>
<td>56.5</td>
<td>62.2</td>
<td>43.4</td>
<td>43.2</td>
<td>64.9</td>
<td>50.5</td>
<td>48.4</td>
</tr>
<tr>
<td class="firstcol">Mar.07</td>
<td>61.7</td>
<td>72.2</td>
<td>64.9</td>
<td>45.8</td>
<td>48.8</td>
<td>59.1</td>
<td>45.0</td>
<td>54.0</td>
</tr>
<tr>
<td class="firstcol">Feb.07</td>
<td>47.9</td>
<td>48.7</td>
<td>51.2</td>
<td>46.5</td>
<td>54.5</td>
<td>63.2</td>
<td>50.6</td>
<td>44.3</td>
</tr>
<tr>
<td class="firstcol">Jan.07</td>
<td>48.8</td>
<td>46.3</td>
<td>53.2</td>
<td>52.2</td>
<td>41.9</td>
<td>54.9</td>
<td>42.8</td>
<td>46.4</td>
</tr>
<tr>
<td class="firstcol">Dec.06</td>
<td>51.6</td>
<td>56.3</td>
<td>49.7</td>
<td>45.7</td>
<td>48.9</td>
<td>56.9</td>
<td>48.2</td>
<td>44.5</td>
</tr>
<tr>
<td class="firstcol">Nov.06</td>
<td>51.2</td>
<td>54.5</td>
<td>52.6</td>
<td>41.9</td>
<td>57.5</td>
<td>59.8</td>
<td>51.0</td>
<td>47.6</td>
</tr>
<tr>
<td class="firstcol">Oct.06</td>
<td>53.0</td>
<td>54.5</td>
<td>53.9</td>
<td>52.9</td>
<td>66.7</td>
<td>62.3</td>
<td>55.3</td>
<td>45.9</td>
</tr>
<tr>
<td class="firstcol">Sep.06</td>
<td>59.5</td>
<td>63.1</td>
<td>67.5</td>
<td>56.4</td>
<td>58.9</td>
<td>69.1</td>
<td>51.6</td>
<td>48.3</td>
</tr>
<tr>
<td class="firstcol">Aug.06</td>
<td>58.4</td>
<td>62.0</td>
<td>59.4</td>
<td>59.4</td>
<td>51.4</td>
<td>75.9</td>
<td>54.9</td>
<td>46.6</td>
</tr>
<tr>
<td class="firstcol">Jul.06</td>
<td>57.5</td>
<td>59.6</td>
<td>62.8</td>
<td>57.1</td>
<td>49.8</td>
<td>86.1</td>
<td>50.7</td>
<td>48.9</td>
</tr>
<tr>
<td class="firstcol">Jun.06</td>
<td>58.0</td>
<td>60.0</td>
<td>58.5</td>
<td>57.0</td>
<td>54.1</td>
<td>87.8</td>
<td>50.6</td>
<td>57.3</td>
</tr>
<tr>
<td class="firstcol">May.06</td>
<td>58.9</td>
<td>63.6</td>
<td>63.7</td>
<td>58.4</td>
<td>52.9</td>
<td>79.5</td>
<td>51.7</td>
<td>53.5</td>
</tr>
<tr>
<td class="firstcol">Apr.06</td>
<td>58.4</td>
<td>61.0</td>
<td>69.4</td>
<td>52.5</td>
<td>54.0</td>
<td>77.4</td>
<td>49.0</td>
<td>45.6</td>
</tr>
<tr>
<td class="firstcol">Mar.06</td>
<td>60.4</td>
<td>62.7</td>
<td>66.4</td>
<td>62.9</td>
<td>56.0</td>
<td>72.4</td>
<td>52.8</td>
<td>51.9</td>
</tr>
<tr>
<td class="firstcol">Feb.06</td>
<td>56.6</td>
<td>57.6</td>
<td>61.2</td>
<td>59.8</td>
<td>56.3</td>
<td>74.3</td>
<td>53.2</td>
<td>51.6</td>
</tr>
</tbody>
</table>
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The Chicago Fed regional activity index fell sharply from 61.7 to 52.9 in April. At 52.9 the index is below its median value of 54.7 since 1968. Orders are low by comparison with their historic median. Production is, however, quite [...]

Chicago Index Comes Out of the Stratosphere

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070430a.jpg" width="353">
The trend to spend took a hit in March but the quarter was still strong for the consumer, as we already say in the GDP report. Three-month trends show us that spending is cooling to a 2.2% pace led by a slowdown in nondurable goods where spending dropped to a -0.6% rate of growth. Spending on durable goods still rose a robust 3.5%. Services spending continued its mild acceleration with a three-month rate of growth of 3.3%. Consumer real disposable personal income backed off in the month to a pace of 2.6% (SAAR) compared to a year/year pace of 4.1% and a three- month growth rate that is still at 3.8%.
On balance, these trends are still good and we know that monthly income and spending are subject to some volatility. So monthly declines should be taken in that spirit.
The savings rate continues negative but the rate of decline in the saving rate has switched and although the rate itself is still negative, the savings rate is headed back toward zero and perhaps into positive territory. This trend may reflect less equity extraction on the part of consumers whose houses are losing value but there is no evidence that it is affecting the pace of spending.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070430b.jpg" width="353"> 
If we adjusted the various income components for inflation, we see steady acceleration in all these groups except for nonfarm proprietors. Real income generation trends are on solid footing and that should underpin spending as we move ahead. This trend is more important to consumer spending trends that home values.
Spending trends for goods and service are still solid. Goods spending is decelerating after a very strong increase and while services spending has been more modest it is still mildly accelerating. 
With the flat core PCE deflator this month, inflation is starting to return to the Fed&#146;s comfort zone.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Consumer Spending And Income Trends:
</tr>
</thead>
<tbody>
<tr class="odd">
<td colspan="6">Percentage Changes At Annualized Rates: Various Horizons</td>
</tr>
<tr class="odd">
<td class="firstcol">Inflation-adjusted</td>
<td>1-Mo</td>
<td>3-Mos</td>
<td>6-Mos</td>
<td>1 Year</td>
<td>Q1/Q4</td>
</tr>
<tr>
<td class="firstcol">Consumption</td>
<td>-2.3%</td>
<td>2.2%</td>
<td>3.7%</td>
<td>3.1%</td>
<td>3.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Goods</td>
<td>-0.5%</td>
<td>0.8%</td>
<td>4.5%</td>
<td>3.3%</td>
<td>1.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Durable Goods</td>
<td>1.4%</td>
<td>3.5%</td>
<td>5.5%</td>
<td>4.0%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Nondurable Goods</td>
<td>-1.4%</td>
<td>-0.6%</td>
<td>4.0%</td>
<td>3.0%</td>
<td>1.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Services</td>
<td>-3.4%</td>
<td>3.3%</td>
<td>3.2%</td>
<td>3.0%</td>
<td>4.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Consumer Income</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Real DPI</td>
<td>2.6%</td>
<td>4.6%</td>
<td>4.1%</td>
<td>2.9%</td>
<td>4.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Per Capita</td>
<td>1.8%</td>
<td>3.8%</td>
<td>3.2%</td>
<td>1.9%</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Memo:</td>
<td>Mar 2007</td>
<td>3-Mos</td>
<td>6-Mos</td>
<td>1 Year</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">Savings Rate (Pct)</td>
<td>-0.8</td>
<td>-1.0</td>
<td>-1.1</td>
<td>-1.3</td>
<td>--</td>
</tr>
</tbody>
</table>
<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Real Income Momentum By Type
</tr>
</thead>
<tbody>
<tr class="odd">
<td colspan="4">Annual Rates Of Growth</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>3-mos</td>
<td>6-mos</td>
<td>12-mos</td>
</tr>
<tr>
<td class="firstcol">Personal Income</td>
<td>7.7%</td>
<td>5.4%</td>
<td>3.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wages and Salaries</td>
<td>7.2%</td>
<td>5.9%</td>
<td>2.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Proprietors&#39; Income</td>
<td>0.5%</td>
<td>4.1%</td>
<td>3.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Non Farm (prop)</td>
<td>-3.4%</td>
<td>0.2%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Rental Income</td>
<td>28.4%</td>
<td>21.8%</td>
<td>9.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Dividend Income</td>
<td>11.4%</td>
<td>10.2%</td>
<td>11.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Interest Income</td>
<td>11.5%</td>
<td>11.9%</td>
<td>1.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Transfer payments</td>
<td>7.9%</td>
<td>11.5%</td>
<td>7.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Social Insurance Payments</td>
<td>4.6%</td>
<td>10.1%</td>
<td>7.3%</td>
</tr>
<tr>
<td class="firstcol">Total Non-farm Income</td>
<td>6.1%</td>
<td>7.7%</td>
<td>5.4%</td>
</tr>
</tbody>
</table>
</body>
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The trend to spend took a hit in March but the quarter was still strong for the consumer, as we already say in the GDP report. Three-month trends show us that spending is cooling to a 2.2% pace led by a slowdown in nondurable goods [...]

US Consumer Spending Flounders in March but Trend Still Mostly Firm

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/070427c.jpg" width="353">
Japan&#39;s economy appears in an uncertain position, according to a collection of data released this morning in Tokyo. What seem to be favorable trends turn out to be unsustainable, so evidence of growth is fleeting.
Industrial production perhaps surprised the most, falling 0.6% in March from February and slowing on a year-to-year basis to just 1.6% above March 2006, after gaining 3.1% in February and 4.8% for last year as a whole. Forecasters had looked for industry to raise production in March by an amount about equal to the decline that occurred. The losses in March were widespread across equipment and materials. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070427d.jpg" width="353">
Similarly, household living expenditures had perked up following a late summer decline, but they could not hold the newfound gains, and sank by 1.4% in March. They are now essentially flat with March a year ago. This is not, however, because there is significant weakness in labor markets. March employment was up only 10,000, but that followed a 420,000 increase in February; the numbers of persons employed are up 0.7% from March 2006, stronger than the 0.4% rises in each of the last three years. The unemployment rate has been steady at 4.0% for five consecutive months; a rate lower than this was last seen in the winter of 1998.
Perhaps most exasperating for Japanese government officials, the CPI has started to weaken again. We, as they, were excited over a turn toward rising prices just ahead of the Bank of Japan&#39;s rate increase last July. The year-on-year change in the CPI excluding fresh food -- the preferred &quot;core rate&quot; -- there, shifted to positive in March 2006, then after hesitating, it set a consistent trend of 0.2%-0.3% gains over much of the rest of 2006. This is not rapid, of course, but it gives business some badly needed pricing flexibility. Clothing prices, for instance, picked up, but then moderated in the most recent months. Furniture prices are falling more slowly than they were. But so far this year, the &quot;ex fresh food&quot; core has started to tilt lower. In February, it was down 0.1% on the year earlier and in March, 0.3%. Interpreting this is tough, considering it&#39;s one of the BoJ&#39;s main policy targets. The weakest categories this month are housing, which has declined all along, and transportation, particularly public transportation. Part of the adverse year-on-year comparison is also due to the acceleration of energy prices a year ago. Some of these items are administered prices and energy costs are, of course, burdensome, like a tax. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070427e.jpg" width="353">
So all of these things together: a sudden and unexpected drop in industrial activity, weaker household expenditures and skittish consumer prices facing a firm employment conditions -- make it hard to characterize the strength of Japanese markets and hard for policymakers to key their decision-making. A semiannual outlook released today (available <a href="http://www.boj.or.jp/en/type/release/teiki/tenbo/gor0704.htm">here</a>) featured a reduction in the consumer price forecast for the current fiscal year (ending March 2008) and suggested to many observers that it will be hard to raise interest rates anytime soon. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">JAPAN&nbsp; (Seas. Adj., % Change, ex as noted)</th>
Mar 2007
Feb 2007
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Mo/Mo</td>
<td>Yr/Yr</td>
<td>Mo/Mo</td>
<td>Yr/Yr</td>
</tr>
<tr>
<td class="firstcol">CPI: General</td>
<td>0.0</td>
<td>-0.1</td>
<td>-0.3</td>
<td>-0.2</td>
<td>0.2</td>
<td>-0.3</td>
<td>-0.0</td>
</tr>
<tr>
<td class="firstcol">&nbsp; ex Fresh Food</td>
<td>-0.1</td>
<td>-0.3</td>
<td>-0.2</td>
<td>-0.1</td>
<td>0.1</td>
<td>-0.1</td>
<td>-0.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; ex Food &amp; Energy</td>
<td>-0.2</td>
<td>-0.4</td>
<td>0.0</td>
<td>-0.3</td>
<td>-0.4</td>
<td>-0.4</td>
<td>-0.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Industrial Production</td>
<td>-0.6</td>
<td>1.6</td>
<td>0.7</td>
<td>3.1</td>
<td>4.8</td>
<td>1.1</td>
<td>5.5</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Employment</td>
<td>+10K</td>
<td>0.7</td>
<td>+420K</td>
<td>0.5</td>
<td>0.4</td>
<td>0.4</td>
<td>0.4</td>
</tr>
<tr>
<td class="firstcol">Unemployment Rate</td>
<td>4.0</td>
<td>--</td>
<td>4.0</td>
<td>--</td>
<td>4.1</td>
<td>4.4</td>
<td>4.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Household Living Expenditures*</td>
<td>98.4</td>
<td>0.1</td>
<td>99.8</td>
<td>1.1</td>
<td>98.1</td>
<td>100.0</td>
<td>100.8</td>
</tr>
</tbody>
</table>
</body>
</html>

Japan's economy appears in an uncertain position, according to a collection of data released this morning in Tokyo. What seem to be favorable trends turn out to be unsustainable, so evidence of growth is fleeting. Industrial [...]

Japan's Economy Hits Some Air Pockets; CPI Starts To Fall Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070427b.jpg" width="353">
The Employment Cost Index or ECI is a major US inflation survey. The quarterly index came packaged with a surprise: This quarter benefit costs rose by a very thin 0.1% as wages surged ahead by 1.1%. As a result total compensation was held to a gain of 0.8%, less than expected. But as surely as some are worried about that wage rise they are also curious about the small gain in benefits costs. 
The story for benefits seems to be due to one particular technical issue related to pension contributions. Firms with defined benefit plans have fiduciary responsibility to keep their pensions funded according to some set rules. Since stocks were so strong, the BLS surmises that many firms simply took the run up in prices as their &#145;contribution&#146; and did not inject new funds into the pension plans. This saving results in lower benefit costs to the firm but does not imply any reduction in benefits given to workers. In that sense it is bogus decline if we think in terms of labor costs. We have seen surging stock prices do this on other occasions in the past. On balance we can throw out the benefit number as a one anomaly. 
The problems in this report remain as the rise in wages. And despite the hiatus in benefit costs this quarter we expect the Fed to take the wage component as an authentic a signal of tightening labor markets. The chart above shows quite clearly that the pressures are escalating rapidly and that they are strong in both goods ands services, but strongest in services where international competition plays the smallest role. 
Services wages are rising at an extremely rapid pace. There are still being outpaced by the employment reports average hourly earnings measure (a poorer index) but that only serves to show there is another, albeit less pure wage measure that is showing the same effect. The Fed has been getting the same feed back in its regional Beige Book canvas. How long can the Fed ignore these signals? On balance I think this report will be sort of chilling from the Fed&#146;s perspective. 
The Fed will not be happy over the low growth print for Q1 2007. But there is no denying that wages are rising rapidly and that consumer incomes are growing solidly and the consumer spending is strong and price pressures are still in play. Despite the weak Q1 GDP print I think the Friday reports ( GDP, ECI and U of M final (revised)) put the Fed a half step closer to a rate hike ( yes, HIKE). It will take more information to do it but the Fed must be increasingly nervous about inflation and not so worried about growth after seeing the composition of GDP. Wage pressures, remember, tend to be sticky and longer lasting. These pressures are indeed getting out hand. 
Moreover, although hours worked (in the monthly employment report) only rose at a 1.5% pace in Q1 2007 weak GDP will not allow that to become good news for productivity. With GDP advancing by 1.3% there is not much room for productivity growth and that will put the Fed even more on edge about wage pressures becoming cost pressures and leading to price hikes.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Employment Cost Index Overview of Key Components
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">ECI Trends</td>
<td>07:Q1</td>
<td>06:Q4</td>
<td>07:Q1</td>
<td>06:Q4</td>
<td>06:Q1</td>
</tr>
<tr class="odd">
<td class="firstcol">Civilian</td>
<td colspan="2">% Q/Q</td>
<td colspan="2">% Yr/Yr</td>
<td>% Yr/Yr</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Compensations</td>
<td>0.8</td>
<td>0.9</td>
<td>3.5</td>
<td>3.3</td>
<td>2.8</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Benefits</td>
<td>0.1</td>
<td>1.1</td>
<td>3.1</td>
<td>3.6</td>
<td>3.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wages</td>
<td>1.1</td>
<td>0.7</td>
<td>3.6</td>
<td>3.2</td>
<td>2.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Private</td>
<td colspan="2">% Q/Q</td>
<td colspan="2">% Yr/Yr</td>
<td>% Yr/Yr</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Compensations</td>
<td>0.6</td>
<td>0.8</td>
<td>3.1</td>
<td>3.2</td>
<td>2.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Benefits</td>
<td>-0.3</td>
<td>0.9</td>
<td>2.3</td>
<td>3.1</td>
<td>2.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wages</td>
<td>1.1</td>
<td>0.8</td>
<td>3.5</td>
<td>3.1</td>
<td>2.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Memo:</td>
<td colspan="2">% Q/Q</td>
<td colspan="2">% Yr/Yr</td>
<td>% Yr/Yr</td>
</tr>
<tr>
<td class="firstcol">Average Hourly Earnings</td>
<td>0.9</td>
<td>1.0</td>
<td>4.1</td>
<td>4.1</td>
<td>3.5</td>
</tr>
</tbody>
</table>
</body>
</html>

The Employment Cost Index or ECI is a major US inflation survey. The quarterly index came packaged with a surprise: This quarter benefit costs rose by a very thin 0.1% as wages surged ahead by 1.1%. As a result total compensation was [...]

ECI Wages Jump; Benefits Whimper

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070427a.jpg" width="353">
GDP growth &#145;surprised&#146; on the slow side for 2007Q1 coming in at a pace of 1.3%. The Yr/yr pace slowed, too, to 2.1% a sharp slowdown from 3.1% Y/Y just last quarter. 
Despite the low growth print of the headline, GDP was anything but weak. Consumer spending came in with a gain of 3.8% quite strong and in the 25th%-tile of all its contributions to GDP growth since 1980. With consumer spending running hard at 3.8% it would be difficult to believe that to boost GDP the Fed would want to cut rates and spur even stronger spending. As it is, the rate of unemployment is falling. Now the issue for GDP is that, for the moment, there are some special subtractions in play that are keeping real spending growth in the various GDP sectors from hitting the bottom line. It is these subtractions we need to turn our attention to.
The subtractions from GDP in Q1 were not a surprise. Residential structures took nearly one percentage point from GDP growth by itself. As large as this is for such a small sector of the economy (only 4.5% of GDP) it was its smallest subtraction by this beleaguered sector in three quarters. It is obviously too small to continue to have this sort of outsized impact on GDP. Since the sector is only 4.5% of GDP it could only subtract a percentage point from GDP growth for four years in a row before it would be reduced itself to only 0.5% of GDP itself. Housing cannot and will not continue to be such a negative. 
While housings weakness could spill over to in other ways it seems that people&#146;s tendency to rely on home equity increases to support spending have been exaggerated, this according to a new study Alan Greenspan had a hand in. With the upward revisions to U of M Consumer sentiment on Friday (4/27/07) the erosion in consumer attitudes seems to have been stabilized as well. Spill over form housing no longer seems to be such a risk. 
Also subtracting from GDP are inventories. They have subtracted from growth in five of the past eight quarters. But this is their weakest rise in six quarters. Inventories have already done a lot of their adjusting or so it seems especially With consumption so strong, surely this sort of inventory paring won&#146;t go on for long. 
The ongoing subtraction from GDP is GDP net exports. They have contributed positively to growth in only six quarters (out of 29 quarters) since the end of 1999. The net export drain is a persistent drain on US product and on US incomes. The other drains are temporary or cyclical in nature. For this reason and more the net export drain is particularly troublesome. Despite a very weak dollar (read &#145;a highly competitive dollar&#146;) and reported strong growth in Europe and in China US exports FELL in 2007-Q1. Generally what happens to the trade account is that US imports are strong due to strong US growth and they outpace exports. But this quarter US imports are weak due to weak US growth and exports fell pushing the deficit up. It does not make sense for US exports to be so weak and to me, at least, this is the most troubling aspect of this GDP report. 
The chart above shows several measures of US domestic activity in GDP. We show real consumer spending (PCE) and the consumer income that support such spending (real disposable personal income). We also plot final sales of domestic products. As an overlay on this mapping we chart the unemployment rate that continues to fall. Very clearly US activity- however you define it- is strong enough to drive the rate of unemployment lower. This is the main reason why despite evidence of a slowing in GDP the Fed will not want to touch stimulus with a ten foot pole.
We have been through the accounting of GDP and see the measures that account for most of the GDP slippage. We can tell that there are certain leakages that relate to certain problems or issues in the economy. We can even assess some of them to be temporary. But we cannot deny the impact they had on GDP in the quarter. Despite the slowdown in GDP we find there is growing wage pressure and dropping unemployment. While the Fed is not comfortable with GDP growth slowing and certainly is quite uncomfortable with GDP at 1.3% (annualized) &#150; even for one quarter - it can see that the economy, despite its weak headline, is growing quite fast enough. This GDP report helps to explain the Fed&#146;s dilemma like nothing else could. Despite the slowing in GDP and the low growth rate, inflation pressures are worsening and the rate of unemployment is dropping. What is the Fed supposed to do about all that? It&#146;s not supposed to happen that way. <a name="A"></a>Note: Stagflation 
This GDP report has prompted some to raise of the specter of stagflation. Is this what stagflation is? Stagflation may be a difficult topic to wrap your brain around, but we can answer this question with some degree of clarity.
NO! and on the other hand&#133;NO! &#150;that&#146;s just be clear about it.
People who are calling this stagflation are confused.
While it may seem like stagflation with the GDP growth rate falling and inflation rising stagflation is not really about rising inflation and slowing growth (even though the name says Stag-flation). Instead stagflation is about stubbornly high inflation and insufficient growth.
For stagflation, inflation need not be accelerating; it just needs to be &#145;high.&#146; Growth need not be decelerating; it simply needs to be insufficient&#146;.
The US economy may be losing steam and it may have slowed but growth is NOT insufficient. Corporate profits are doing well and DJIA has just made a series of all-time record highs. Other market indices are on 6-yr highs plus the RATE OF UNEMPLOYMENT is low and has been falling. 
When unemployment starts to rise and inflation is stubbornly high or rising we can open this question of stagflation. But let me say this: I have seen stagflation and this is not stagflation. 
As for inflation, inflation may be rising, and it may be above the Fed&#146;s comfort zone, but it is hardly high.
The problem with branding this as stagflation is that we have NO &#145;stag&#146; at all and very little &#145;flation&#146;.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Contributions to GDP Growth
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>PCE</td>
<td>Services</td>
<td>Goods</td>
<td>Non Residential Structure</td>
<td>Residential Structure</td>
<td>Equipment % Software</td>
<td>Inventory</td>
<td>Net Exports</td>
<td>Government</td>
</tr>
<tr>
<td class="firstcol">Q1-07</td>
<td>2.66</td>
<td>1.51</td>
<td>1.15</td>
<td>0.07</td>
<td>-0.97</td>
<td>0.14</td>
<td>-0.30</td>
<td>-0.52</td>
<td>0.18</td>
</tr>
</tbody>
</table>
<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
US GDP Summary
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">GDP Growth</td>
<td>2006 Q1</td>
<td>2006 Q2</td>
<td>2006 Q3</td>
<td>2006 Q4</td>
<td>2007 Q1</td>
<td>Current</td>
</tr>
<tr class="odd">
<td class="firstcol">Actual/A,P,F</td>
<td>Actual</td>
<td>Actual</td>
<td>Actual</td>
<td>Actual</td>
<td>Advance</td>
<td>Yr/Yr</td>
</tr>
<tr>
<td class="firstcol">Real GDP</td>
<td>5.6%</td>
<td>2.6%</td>
<td>2.0%</td>
<td>2.5%</td>
<td>1.3%</td>
<td>2.1%</td>
</tr>
<tr>
<td class="firstcol">PCE</td>
<td>4.8%</td>
<td>2.6%</td>
<td>2.8%</td>
<td>4.2%</td>
<td>3.8%</td>
<td>3.4%</td>
</tr>
<tr>
<td class="firstcol">Durables</td>
<td>19.8%</td>
<td>-0.1%</td>
<td>6.4%</td>
<td>4.4%</td>
<td>7.3%</td>
<td>4.5%</td>
</tr>
<tr>
<td class="firstcol">Nondurables</td>
<td>5.9%</td>
<td>1.4%</td>
<td>1.5%</td>
<td>5.9%</td>
<td>2.9%</td>
<td>2.9%</td>
</tr>
<tr>
<td class="firstcol">Services</td>
<td>1.6%</td>
<td>3.7%</td>
<td>2.8%</td>
<td>3.4%</td>
<td>3.7%</td>
<td>3.4%</td>
</tr>
<tr>
<td class="firstcol">Business Invst.</td>
<td>13.7%</td>
<td>4.4%</td>
<td>10.0%</td>
<td>-3.1%</td>
<td>2.0%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">Structures</td>
<td>8.8%</td>
<td>20.3%</td>
<td>15.7%</td>
<td>0.9%</td>
<td>2.1%</td>
<td>9.4%</td>
</tr>
<tr>
<td class="firstcol">Equipment</td>
<td>15.6%</td>
<td>-1.4%</td>
<td>7.7%</td>
<td>-4.8%</td>
<td>1.9%</td>
<td>0.8%</td>
</tr>
<tr>
<td class="firstcol">Housing</td>
<td>-0.3%</td>
<td>-11.1%</td>
<td>-18.6%</td>
<td>-19.8%</td>
<td>-17.0%</td>
<td>-16.7%</td>
</tr>
<tr>
<td class="firstcol">Inventories ($B)*</td>
<td>$41.2</td>
<td>$53.7</td>
<td>$55.4</td>
<td>$22.4</td>
<td>$14.8</td>
<td>$31.8</td>
</tr>
<tr>
<td class="firstcol">Farm</td>
<td>$4.3</td>
<td>$1.9</td>
<td>$2.5</td>
<td>$2.4</td>
<td>$3.0</td>
<td>$1.2</td>
</tr>
<tr>
<td class="firstcol">Nonfarm</td>
<td>$36.8</td>
<td>$52.2</td>
<td>$53.3</td>
<td>$20.0</td>
<td>$11.3</td>
<td>($45.2)</td>
</tr>
<tr>
<td class="firstcol">Net Exports ($B)**</td>
<td>($636.6)</td>
<td>($624.2)</td>
<td>($628.8)</td>
<td>($582.6)</td>
<td>($597.8)</td>
<td>$38.8</td>
</tr>
<tr>
<td class="firstcol">Exports</td>
<td>14.0%</td>
<td>6.2%</td>
<td>6.8%</td>
<td>10.6%</td>
<td>-1.2%</td>
<td>5.5%</td>
</tr>
<tr>
<td class="firstcol">Imports</td>
<td>9.1%</td>
<td>1.4%</td>
<td>5.6%</td>
<td>-2.6%</td>
<td>2.3%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">Government</td>
<td>4.9%</td>
<td>0.8%</td>
<td>1.7%</td>
<td>3.4%</td>
<td>0.9%</td>
<td>1.7%</td>
</tr>
<tr>
<td class="firstcol">Real Final Sales</td>
<td>5.6%</td>
<td>2.1%</td>
<td>1.9%</td>
<td>3.7%</td>
<td>1.6%</td>
<td>2.3%</td>
</tr>
<tr>
<td colspan="7">For Yr/Yr: * average, ** Change from Yr ago Qtr</td>
</tr>
</tbody>
</table>
</body>
</html>

GDP growth surprised on the slow side for 2007Q1 coming in at a pace of 1.3%. The Yr/yr pace slowed, too, to 2.1% a sharp slowdown from 3.1% Y/Y just last quarter. Despite the low growth print of the headline, GDP was anything but [...]

Can’t Tell a Book - or GDP – by its Cover, or Headline

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070427a.jpg" width="353">
GDP growth &#145;surprised&#146; on the slow side for 2007Q1 coming in at a pace of 1.3%. The Yr/yr pace slowed, too, to 2.1% a sharp slowdown from 3.1% Y/Y just last quarter. 
Despite the low growth print of the headline, GDP was anything but weak. Consumer spending came in with a gain of 3.8% quite strong and in the 25th%-tile of all its contributions to GDP growth since 1980. With consumer spending running hard at 3.8% it would be difficult to believe that to boost GDP the Fed would want to cut rates and spur even stronger spending. As it is, the rate of unemployment is falling. Now the issue for GDP is that, for the moment, there are some special subtractions in play that are keeping real spending growth in the various GDP sectors from hitting the bottom line. It is these subtractions we need to turn our attention to.
The subtractions from GDP in Q1 were not a surprise. Residential structures took nearly one percentage point from GDP growth by itself. As large as this is for such a small sector of the economy (only 4.5% of GDP) it was its smallest subtraction by this beleaguered sector in three quarters. It is obviously too small to continue to have this sort of outsized impact on GDP. Since the sector is only 4.5% of GDP it could only subtract a percentage point from GDP growth for four years in a row before it would be reduced itself to only 0.5% of GDP itself. Housing cannot and will not continue to be such a negative. 
While housings weakness could spill over to in other ways it seems that people&#146;s tendency to rely on home equity increases to support spending have been exaggerated, this according to a new study Alan Greenspan had a hand in. With the upward revisions to U of M Consumer sentiment on Friday (4/27/07) the erosion in consumer attitudes seems to have been stabilized as well. Spill over form housing no longer seems to be such a risk. 
Also subtracting from GDP are inventories. They have subtracted from growth in five of the past eight quarters. But this is their weakest rise in six quarters. Inventories have already done a lot of their adjusting or so it seems especially With consumption so strong, surely this sort of inventory paring won&#146;t go on for long. 
The ongoing subtraction from GDP is GDP net exports. They have contributed positively to growth in only six quarters (out of 29 quarters) since the end of 1999. The net export drain is a persistent drain on US product and on US incomes. The other drains are temporary or cyclical in nature. For this reason and more the net export drain is particularly troublesome. Despite a very weak dollar (read &#145;a highly competitive dollar&#146;) and reported strong growth in Europe and in China US exports FELL in 2007-Q1. Generally what happens to the trade account is that US imports are strong due to strong US growth and they outpace exports. But this quarter US imports are weak due to weak US growth and exports fell pushing the deficit up. It does not make sense for US exports to be so weak and to me, at least, this is the most troubling aspect of this GDP report. 
The chart above shows several measures of US domestic activity in GDP. We show real consumer spending (PCE) and the consumer income that support such spending (real disposable personal income). We also plot final sales of domestic products. As an overlay on this mapping we chart the unemployment rate that continues to fall. Very clearly US activity- however you define it- is strong enough to drive the rate of unemployment lower. This is the main reason why despite evidence of a slowing in GDP the Fed will not want to touch stimulus with a ten foot pole.
We have been through the accounting of GDP and see the measures that account for most of the GDP slippage. We can tell that there are certain leakages that relate to certain problems or issues in the economy. We can even assess some of them to be temporary. But we cannot deny the impact they had on GDP in the quarter. Despite the slowdown in GDP we find there is growing wage pressure and dropping unemployment. While the Fed is not comfortable with GDP growth slowing and certainly is quite uncomfortable with GDP at 1.3% (annualized) &#150; even for one quarter - it can see that the economy, despite its weak headline, is growing quite fast enough. This GDP report helps to explain the Fed&#146;s dilemma like nothing else could. Despite the slowing in GDP and the low growth rate, inflation pressures are worsening and the rate of unemployment is dropping. What is the Fed supposed to do about all that? It&#146;s not supposed to happen that way. Note: Stagflation 
This GDP report has prompted some to raise of the specter of stagflation. Is this what stagflation is? Stagflation may be a difficult topic to wrap your brain around, but we can answer this question with some degree of clarity.
NO! and on the other hand&#133;NO! &#150;that&#146;s just be clear about it.
People who are calling this stagflation are confused.
While it may seem like stagflation with the GDP growth rate falling and inflation rising stagflation is not really about rising inflation and slowing growth (even though the name says Stag-flation). Instead stagflation is about stubbornly high inflation and insufficient growth.
For stagflation, inflation need not be accelerating; it just needs to be &#145;high.&#146; Growth need not be decelerating; it simply needs to be insufficient&#146;.
The US economy may be losing steam and it may have slowed but growth is NOT insufficient. Corporate profits are doing well and DJIA has just made a series of all-time record highs. Other market indices are on 6-yr highs plus the RATE OF UNEMPLOYMENT is low and has been falling. 
When unemployment starts to rise and inflation is stubbornly high or rising we can open this question of stagflation. But let me say this: I have seen stagflation and this is not stagflation. 
As for inflation, inflation may be rising, and it may be above the Fed&#146;s comfort zone, but it is hardly high.
The problem with branding this as stagflation is that we have NO &#145;stag&#146; at all and very little &#145;flation&#146;.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Contributions to GDP Growth
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>PCE</td>
<td>Services</td>
<td>Goods</td>
<td>Non Residential Structure</td>
<td>Residential Structure</td>
<td>Equipment % Software</td>
<td>Inventory</td>
<td>Net Exports</td>
<td>Government</td>
</tr>
<tr>
<td class="firstcol">Q1-07</td>
<td>2.66</td>
<td>1.51</td>
<td>1.15</td>
<td>0.07</td>
<td>-0.97</td>
<td>0.14</td>
<td>-0.30</td>
<td>-0.52</td>
<td>0.18</td>
</tr>
</tbody>
</table>
<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
US GDP Summary
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">GDP Growth</td>
<td>2006 Q1</td>
<td>2006 Q2</td>
<td>2006 Q3</td>
<td>2006 Q4</td>
<td>2007 Q1</td>
<td>Current</td>
</tr>
<tr class="odd">
<td class="firstcol">Actual/A,P,F</td>
<td>Actual</td>
<td>Actual</td>
<td>Actual</td>
<td>Actual</td>
<td>Advance</td>
<td>Yr/Yr</td>
</tr>
<tr>
<td class="firstcol">Real GDP</td>
<td>5.6%</td>
<td>2.6%</td>
<td>2.0%</td>
<td>2.5%</td>
<td>1.3%</td>
<td>2.1%</td>
</tr>
<tr>
<td class="firstcol">PCE</td>
<td>4.8%</td>
<td>2.6%</td>
<td>2.8%</td>
<td>4.2%</td>
<td>3.8%</td>
<td>3.4%</td>
</tr>
<tr>
<td class="firstcol">Durables</td>
<td>19.8%</td>
<td>-0.1%</td>
<td>6.4%</td>
<td>4.4%</td>
<td>7.3%</td>
<td>4.5%</td>
</tr>
<tr>
<td class="firstcol">Nondurables</td>
<td>5.9%</td>
<td>1.4%</td>
<td>1.5%</td>
<td>5.9%</td>
<td>2.9%</td>
<td>2.9%</td>
</tr>
<tr>
<td class="firstcol">Services</td>
<td>1.6%</td>
<td>3.7%</td>
<td>2.8%</td>
<td>3.4%</td>
<td>3.7%</td>
<td>3.4%</td>
</tr>
<tr>
<td class="firstcol">Business Invst.</td>
<td>13.7%</td>
<td>4.4%</td>
<td>10.0%</td>
<td>-3.1%</td>
<td>2.0%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">Structures</td>
<td>8.8%</td>
<td>20.3%</td>
<td>15.7%</td>
<td>0.9%</td>
<td>2.1%</td>
<td>9.4%</td>
</tr>
<tr>
<td class="firstcol">Equipment</td>
<td>15.6%</td>
<td>-1.4%</td>
<td>7.7%</td>
<td>-4.8%</td>
<td>1.9%</td>
<td>0.8%</td>
</tr>
<tr>
<td class="firstcol">Housing</td>
<td>-0.3%</td>
<td>-11.1%</td>
<td>-18.6%</td>
<td>-19.8%</td>
<td>-17.0%</td>
<td>-16.7%</td>
</tr>
<tr>
<td class="firstcol">Inventories ($B)*</td>
<td>$41.2</td>
<td>$53.7</td>
<td>$55.4</td>
<td>$22.4</td>
<td>$14.8</td>
<td>$31.8</td>
</tr>
<tr>
<td class="firstcol">Farm</td>
<td>$4.3</td>
<td>$1.9</td>
<td>$2.5</td>
<td>$2.4</td>
<td>$3.0</td>
<td>$1.2</td>
</tr>
<tr>
<td class="firstcol">Nonfarm</td>
<td>$36.8</td>
<td>$52.2</td>
<td>$53.3</td>
<td>$20.0</td>
<td>$11.3</td>
<td>($45.2)</td>
</tr>
<tr>
<td class="firstcol">Net Exports ($B)**</td>
<td>($636.6)</td>
<td>($624.2)</td>
<td>($628.8)</td>
<td>($582.6)</td>
<td>($597.8)</td>
<td>$38.8</td>
</tr>
<tr>
<td class="firstcol">Exports</td>
<td>14.0%</td>
<td>6.2%</td>
<td>6.8%</td>
<td>10.6%</td>
<td>-1.2%</td>
<td>5.5%</td>
</tr>
<tr>
<td class="firstcol">Imports</td>
<td>9.1%</td>
<td>1.4%</td>
<td>5.6%</td>
<td>-2.6%</td>
<td>2.3%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">Government</td>
<td>4.9%</td>
<td>0.8%</td>
<td>1.7%</td>
<td>3.4%</td>
<td>0.9%</td>
<td>1.7%</td>
</tr>
<tr>
<td class="firstcol">Real Final Sales</td>
<td>5.6%</td>
<td>2.1%</td>
<td>1.9%</td>
<td>3.7%</td>
<td>1.6%</td>
<td>2.3%</td>
</tr>
<tr>
<td colspan="7">For Yr/Yr: * average, ** Change from Yr ago Qtr</td>
</tr>
</tbody>
</table>
ECI Wages Jump; Benefits Whimper 
by <a href="/comment/Brusca.html">Robert Brusca</a> April 27, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070427b.jpg" width="353">
The Employment Cost Index or ECI is a major US inflation survey. The quarterly index came packaged with a surprise: This quarter benefit costs rose by a very thin 0.1% as wages surged ahead by 1.1%. As a result total compensation was held to a gain of 0.8%, less than expected. But as surely as some are worried about that wage rise they are also curious about the small gain in benefits costs. 
The story for benefits seems to be due to one particular technical issue related to pension contributions. Firms with defined benefit plans have fiduciary responsibility to keep their pensions funded according to some set rules. Since stocks were so strong, the BLS surmises that many firms simply took the run up in prices as their &#145;contribution&#146; and did not inject new funds into the pension plans. This saving results in lower benefit costs to the firm but does not imply any reduction in benefits given to workers. In that sense it is bogus decline if we think in terms of labor costs. We have seen surging stock prices do this on other occasions in the past. On balance we can throw out the benefit number as a one anomaly. 
The problems in this report remain as the rise in wages. And despite the hiatus in benefit costs this quarter we expect the Fed to take the wage component as an authentic a signal of tightening labor markets. The chart above shows quite clearly that the pressures are escalating rapidly and that they are strong in both goods ands services, but strongest in services where international competition plays the smallest role. 
Services wages are rising at an extremely rapid pace. There are still being outpaced by the employment reports average hourly earnings measure (a poorer index) but that only serves to show there is another, albeit less pure wage measure that is showing the same effect. The Fed has been getting the same feed back in its regional Beige Book canvas. How long can the Fed ignore these signals? On balance I think this report will be sort of chilling from the Fed&#146;s perspective. 
The Fed will not be happy over the low growth print for Q1 2007. But there is no denying that wages are rising rapidly and that consumer incomes are growing solidly and the consumer spending is strong and price pressures are still in play. Despite the weak Q1 GDP print I think the Friday reports ( GDP, ECI and U of M final (revised)) put the Fed a half step closer to a rate hike ( yes, HIKE). It will take more information to do it but the Fed must be increasingly nervous about inflation and not so worried about growth after seeing the composition of GDP. Wage pressures, remember, tend to be sticky and longer lasting. These pressures are indeed getting out hand. 
Moreover, although hours worked (in the monthly employment report) only rose at a 1.5% pace in Q1 2007 weak GDP will not allow that to become good news for productivity. With GDP advancing by 1.3% there is not much room for productivity growth and that will put the Fed even more on edge about wage pressures becoming cost pressures and leading to price hikes.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Employment Cost Index Overview of Key Components
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">ECI Trends</td>
<td>07:Q1</td>
<td>06:Q4</td>
<td>07:Q1</td>
<td>06:Q4</td>
<td>06:Q1</td>
</tr>
<tr class="odd">
<td class="firstcol">Civilian</td>
<td colspan="2">% Q/Q</td>
<td colspan="2">% Yr/Yr</td>
<td>% Yr/Yr</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Compensations</td>
<td>0.8</td>
<td>0.9</td>
<td>3.5</td>
<td>3.3</td>
<td>2.8</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Benefits</td>
<td>0.1</td>
<td>1.1</td>
<td>3.1</td>
<td>3.6</td>
<td>3.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wages</td>
<td>1.1</td>
<td>0.7</td>
<td>3.6</td>
<td>3.2</td>
<td>2.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Private</td>
<td colspan="2">% Q/Q</td>
<td colspan="2">% Yr/Yr</td>
<td>% Yr/Yr</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Compensations</td>
<td>0.6</td>
<td>0.8</td>
<td>3.1</td>
<td>3.2</td>
<td>2.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Benefits</td>
<td>-0.3</td>
<td>0.9</td>
<td>2.3</td>
<td>3.1</td>
<td>2.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wages</td>
<td>1.1</td>
<td>0.8</td>
<td>3.5</td>
<td>3.1</td>
<td>2.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Memo:</td>
<td colspan="2">% Q/Q</td>
<td colspan="2">% Yr/Yr</td>
<td>% Yr/Yr</td>
</tr>
<tr>
<td class="firstcol">Average Hourly Earnings</td>
<td>0.9</td>
<td>1.0</td>
<td>4.1</td>
<td>4.1</td>
<td>3.5</td>
</tr>
</tbody>
</table>
</body>
</html>

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070426c.jpg" width="353">
French industry perceives its business climate as the best in over six years, according to the monthly survey by the French government statistics office INSEE. The &quot;business climate index&quot; stands at 111 this month, that is, 11% above companies&#39; long-run average. It rose 2 points from March and is 4 points ahead of 2006 as a whole. Among major factors, the trend in industrial production swung from a net balance of -2 in February and March to +9 this month, the first positive reading since last November. That is, the proportion of companies seeing an uptrend in production outnumbered those seeing a decline by 9 percentage points. Order books in particular are seen at +5 this month, a third consecutive positive count and the highest since April 2001. Foreign orders have had a positive balance for over a year, but until recently that has been more than offset by domestic weakness. So finally, domestic markets are improving enough to permit overall growth, rather than completely offsetting the foreign component.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070426d.jpg" width="353">
Apparently growth in output is not expected to produce an acceleration in sales prices. Instead, perhaps, companies view stronger output as accompanying restraint in price increases. The &quot;likely sales price development&quot; among manufacturers moderated back to +4 for April from +10 in March. In Q1, this measure averaged +10, the highest quarterly figure since Q2 1995, but if April&#39;s reading is sustained, it would suggest a recognition by business that the generally tenuous environment necessitates holding the line on price increases.
Among French service industries, the business climate has eased a bit this month to 108 from 110 in March. This sector has experienced a remarkably steady climate for just about three years, with a tight range of 104 to 111. Similarly, the companion measure of the &quot;overall outlook&quot; has ranged from -2 to +7 in the same time span, although the last 15 months or so give a hint of uptrend. This is reflected in &quot;sales expected over next 3 months&quot;, which has averaged +14 in February, March and April, up from 12 in 2006 and 11 in 2005.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070426b.jpg" width="353">
These firms do not generally expect to raise their prices. Their expectations for sales price increases have a balance of -2 for this month, and while there have not been any large negative readings, the only positive reading in the last year-and-a-half was a +1 in December. This mildly negative trend results from a mildly increasing trend for consumers and a declining path for business services. There is certainly little thought that demand will be strong enough to allow rising cost increases to be blithely passed on to customers.
&quot;Services&quot; in this survey have a more restricted definition than in most other data collections; here, they include real estate activities, business operations services and services for individuals. This last consists of travel agencies, hotels, restaurants, recreation, domestic services and the like. Notably, the category excludes transportation, finance and wholesale and retail trade.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/FRANCE/@F09/@F09.HTM">FRANCE</a><a href="http://www.haverselect.com/dlx/FRANCE/@F09/@F09.HTM">, </a> SA, %-Balance,&nbsp; except as noted*</th>
<th scope="col">Apr 2007</th>
<th scope="col">Mar 2007</th>
<th scope="col">Feb 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">Industry Business Climate Indicator*</td>
<td>111</td>
<td>109</td>
<td>108</td>
<td>109</td>
<td>107</td>
<td>101</td>
<td>104</td>
</tr>
<tr>
<td class="firstcol">Industrial Production Trend Outlook</td>
<td>9</td>
<td>-2</td>
<td>-2</td>
<td>3</td>
<td>5</td>
<td>-12</td>
<td>5</td>
</tr>
<tr class="odd">
<td class="firstcol">Order Books</td>
<td>5</td>
<td>4</td>
<td>1</td>
<td>-5</td>
<td>-6</td>
<td>-17</td>
<td>-14</td>
</tr>
<tr>
<td class="firstcol">Sales Prices Next 3 Mos.</td>
<td>4</td>
<td>10</td>
<td>8</td>
<td>1</td>
<td>6</td>
<td>0</td>
<td>1</td>
</tr>
<tr class="odd">
<td class="firstcol">Services Business Climate Indicator*</td>
<td>108</td>
<td>110</td>
<td>108</td>
<td>105</td>
<td>108</td>
<td>106</td>
<td>105</td>
</tr>
<tr>
<td class="firstcol">Overall Outlook</td>
<td>7</td>
<td>6</td>
<td>6</td>
<td>2</td>
<td>4</td>
<td>-0</td>
<td>-0</td>
</tr>
<tr class="odd">
<td class="firstcol">Sales Next 3 Mos.</td>
<td>14</td>
<td>15</td>
<td>13</td>
<td>12</td>
<td>12</td>
<td>11</td>
<td>8</td>
</tr>
<tr>
<td class="firstcol">Prices Next 3 Mos.</td>
<td>-2</td>
<td>-1</td>
<td>-1</td>
<td>-3</td>
<td>-2</td>
<td>1</td>
<td>2</td>
</tr>
</tbody>
</table>
</body>
</html>

French industry perceives its business climate as the best in over six years, according to the monthly survey by the French government statistics office INSEE. The "business climate index" stands at 111 this month, that is, 11% above [...]

French Business Climate Improves for Manufacturers this Month; Service Companies Experience Slight Updrift

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

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

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

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

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

AI boosting US investment in data centers

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

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

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

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

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

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

Equity market exuberance outpacing macroeconomic data

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

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Andrew Cates

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

260205Z1.jpg

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

260205Z2.jpg

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

260205Z3.jpg

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

260205Z4.jpg

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

260205Z5.jpg

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

260205Z6.jpg

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

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

260206E.jpg

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

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

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

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

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

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

260206.jpg

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

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

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

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

Germany

German IP Reveals Chaotic Trends

Winnie Tapasanun

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

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

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

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

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

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

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

Sandy Batten

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

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

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

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

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

U.S. Initial Unemployment Claims Surged in Latest Week

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

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

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

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

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

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

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

Economy in Brief: 2007

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