Robert Brusca

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<th scope="col" class="firstcol">&middot; The table below contains the main elements of the Philadelphia Fed regional manufacturing index. At the far right another column introduces a different index. This index is what the Philadelphia Fed index would be if it used ISM weights. But Philadelphia does not do that. Instead, it has a separate survey on managers where they tell you how they feel. Recently they have been candidates for a new Excedrin&#153; headache number &#147;XXX&#148; commercial.</th>
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Philadelphia Fed Diffusion Index
<th scope="col">FAO-Index</th>
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<tr class="odd">
<td class="firstcol">Date</td>
<td>Current Index</td>
<td>Current New Orders</td>
<td>Current Shipment</td>
<td>Deliveries</td>
<td>Inventory</td>
<td>Backlog</td>
<td>Pr:Pd</td>
<td>Pr:Rcd</td>
<td>Current Employment</td>
<td>Worked Hours</td>
<td>INDEX Weighted</td>
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<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>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td></td>
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<td class="firstcol">Apr-07</td>
<td>0.2</td>
<td>2.8</td>
<td>4.3</td>
<td>-11.9</td>
<td>-3.1</td>
<td>-13.7</td>
<td>24.3</td>
<td>5.2</td>
<td>2.5</td>
<td>5.5</td>
<td>-0.6</td>
</tr>
<tr>
<td class="firstcol">Mar-07</td>
<td>0.2</td>
<td>1.9</td>
<td>6.8</td>
<td>-13.2</td>
<td>-3.7</td>
<td>-20.9</td>
<td>21.8</td>
<td>16.3</td>
<td>2.3</td>
<td>-4.9</td>
<td>-1.2</td>
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<td class="firstcol">Feb-07</td>
<td>0.6</td>
<td>-0.5</td>
<td>1.7</td>
<td>-6.3</td>
<td>-1.9</td>
<td>-10.5</td>
<td>15.8</td>
<td>9.4</td>
<td>-0.4</td>
<td>-12.9</td>
<td>-1.7</td>
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<td class="firstcol">Jan-07</td>
<td>8.3</td>
<td>1.3</td>
<td>23.9</td>
<td>-7.1</td>
<td>0.4</td>
<td>-15.4</td>
<td>11.9</td>
<td>11.6</td>
<td>7.9</td>
<td>1.8</td>
<td>5.3</td>
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<td class="firstcol">Dec-06</td>
<td>-2.3</td>
<td>-0.9</td>
<td>14</td>
<td>-4.9</td>
<td>-0.9</td>
<td>-18.6</td>
<td>19</td>
<td>8.9</td>
<td>7.5</td>
<td>-2.3</td>
<td>1.9</td>
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<td class="firstcol">Nov-06</td>
<td>5.4</td>
<td>-1.1</td>
<td>7.8</td>
<td>1.8</td>
<td>5.3</td>
<td>-5.5</td>
<td>25.2</td>
<td>7.4</td>
<td>3</td>
<td>2.3</td>
<td>2.2</td>
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<td class="firstcol">Oct-06</td>
<td>2.3</td>
<td>10.7</td>
<td>6.1</td>
<td>-4.8</td>
<td>10.9</td>
<td>-10.5</td>
<td>32.7</td>
<td>17.2</td>
<td>10.4</td>
<td>-0.4</td>
<td>5.9</td>
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<td class="firstcol">Sep-06</td>
<td>2.3</td>
<td>0.2</td>
<td>-4.4</td>
<td>0</td>
<td>4.7</td>
<td>-3.8</td>
<td>37.8</td>
<td>20</td>
<td>10.3</td>
<td>5.4</td>
<td>0.6</td>
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<td class="firstcol">Aug-06</td>
<td>12.6</td>
<td>12.8</td>
<td>20.3</td>
<td>1.4</td>
<td>6.8</td>
<td>-2</td>
<td>46.6</td>
<td>17.3</td>
<td>8.1</td>
<td>11.7</td>
<td>10.8</td>
</tr>
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<td class="firstcol">Jul-06</td>
<td>6.5</td>
<td>9.9</td>
<td>10.7</td>
<td>-1.3</td>
<td>0.5</td>
<td>-6.5</td>
<td>49.5</td>
<td>17.6</td>
<td>11.7</td>
<td>-2.4</td>
<td>6.7</td>
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<td class="firstcol">Jun-06</td>
<td>12.1</td>
<td>17.2</td>
<td>18.3</td>
<td>0.2</td>
<td>-3.5</td>
<td>-0.7</td>
<td>49.3</td>
<td>16</td>
<td>8.2</td>
<td>8.2</td>
<td>10.6</td>
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<td class="firstcol">May-06</td>
<td>13.6</td>
<td>3.5</td>
<td>14</td>
<td>9</td>
<td>-5.3</td>
<td>-2.8</td>
<td>53.9</td>
<td>11.3</td>
<td>2.9</td>
<td>9.6</td>
<td>5.1</td>
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<td class="firstcol">Apr-06</td>
<td>11.7</td>
<td>12</td>
<td>17.7</td>
<td>-2.9</td>
<td>-9.7</td>
<td>5.6</td>
<td>30.4</td>
<td>15.1</td>
<td>16.3</td>
<td>7.9</td>
<td>9.8</td>
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<td class="firstcol">Mar-06</td>
<td>12.9</td>
<td>21.1</td>
<td>23.2</td>
<td>2.5</td>
<td>11.6</td>
<td>4</td>
<td>22.5</td>
<td>15.7</td>
<td>7</td>
<td>7</td>
<td>15.0</td>
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<td class="firstcol">Feb-06</td>
<td>13.2</td>
<td>12.9</td>
<td>23.5</td>
<td>6.6</td>
<td>9.3</td>
<td>10</td>
<td>32.3</td>
<td>18</td>
<td>10.5</td>
<td>7</td>
<td>13.9</td>
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<td class="firstcol">Jan-06</td>
<td>6.4</td>
<td>11.5</td>
<td>19.5</td>
<td>7.8</td>
<td>6.6</td>
<td>0.3</td>
<td>40.2</td>
<td>20.3</td>
<td>11.8</td>
<td>7.4</td>
<td>11.6</td>
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<td class="firstcol">Dec-05</td>
<td>12.8</td>
<td>7.3</td>
<td>5</td>
<td>1.5</td>
<td>3.9</td>
<td>0.8</td>
<td>45.8</td>
<td>28.1</td>
<td>7.5</td>
<td>5.5</td>
<td>5.2</td>
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<td class="firstcol">Nov-05</td>
<td>10.7</td>
<td>13.2</td>
<td>21.5</td>
<td>5.7</td>
<td>3.8</td>
<td>-8.2</td>
<td>53.9</td>
<td>31.8</td>
<td>18.4</td>
<td>12.4</td>
<td>12.2</td>
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<td class="firstcol">Oct-05</td>
<td>5.1</td>
<td>19.8</td>
<td>19</td>
<td>0</td>
<td>-2</td>
<td>-2.9</td>
<td>25.6</td>
<td>12.7</td>
<td>15.9</td>
<td>-1.2</td>
<td>12.6</td>
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<td class="firstcol">Sep-05</td>
<td>8.8</td>
<td>1.3</td>
<td>16.2</td>
<td>-0.7</td>
<td>-0.9</td>
<td>-8.6</td>
<td>50.5</td>
<td>6.6</td>
<td>3.9</td>
<td>2.6</td>
<td>4.0</td>
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<td class="firstcol">Aug-05</td>
<td>10.6</td>
<td>15</td>
<td>14.3</td>
<td>-0.2</td>
<td>-8</td>
<td>3.9</td>
<td>28.1</td>
<td>3.1</td>
<td>7</td>
<td>1</td>
<td>8.7</td>
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<td class="firstcol">Jul-05</td>
<td>10.1</td>
<td>7.2</td>
<td>12</td>
<td>-1.3</td>
<td>-8.7</td>
<td>-8.1</td>
<td>30.4</td>
<td>13.1</td>
<td>2.4</td>
<td>5</td>
<td>3.7</td>
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<td class="firstcol">Jun-05</td>
<td>-1.1</td>
<td>4.8</td>
<td>9.9</td>
<td>-10.8</td>
<td>-0.8</td>
<td>-16</td>
<td>28.3</td>
<td>12.4</td>
<td>8.5</td>
<td>4.3</td>
<td>2.4</td>
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<td class="firstcol">May-05</td>
<td>9.1</td>
<td>16.5</td>
<td>18.8</td>
<td>0</td>
<td>-0.9</td>
<td>-3.6</td>
<td>31</td>
<td>16.5</td>
<td>8.7</td>
<td>-0.7</td>
<td>10.5</td>
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<td class="firstcol">Apr-05</td>
<td>23.2</td>
<td>19.3</td>
<td>28.6</td>
<td>4.1</td>
<td>0</td>
<td>-3.8</td>
<td>49.1</td>
<td>26.6</td>
<td>12.3</td>
<td>15.3</td>
<td>14.8</td>
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<td class="firstcol">Mar-05</td>
<td>14.1</td>
<td>15.3</td>
<td>15.5</td>
<td>1.3</td>
<td>-2.4</td>
<td>-3.3</td>
<td>33.9</td>
<td>18.1</td>
<td>12.2</td>
<td>8</td>
<td>9.9</td>
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<td class="firstcol">Feb-05</td>
<td>20.1</td>
<td>12.3</td>
<td>22.2</td>
<td>3.5</td>
<td>-5.2</td>
<td>-1.8</td>
<td>45</td>
<td>23.6</td>
<td>11.4</td>
<td>7</td>
<td>10.6</td>
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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070419d.jpg" width="353">
What is interesting is that the weighted Philly index and the barometer are related in particular way. The gap between the barometer and weighted index is a directional statement on the economy and functions similar to the Philly future index. On the left we plot the gap (the barometer less the weighted Philly values) vs the barometer itself. 
You can see that gap between what managers say and what the index actually does tracks the direction of the index itself. In other words when managers are more optimistic they offer a barometer reading that is stronger than the component&#146;s weight composite calls for. When conditions are getter weaker, they give a reading that is less buoyant relative to the surveyed components. It turns out that when managers are so pessimistic that the barometer reading is lower than the weighted reading it is a very bad sign for the economy. The good news is that we are not there yet. The bad news is that other Philadelphia measures have already crossed the line and are now worrisome in their degree of weakness.



<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070419e.jpg" width="353">
The Philadelphia Fed&#146;s future barometer is a good example of what is disturbing. It has very regular cyclical properties, as you can see. Generally it turns negative before recession. Often it is actually rebounding even before the onset of recession or shortly after the onset of recession. In 2007 it is giving off all the recession signals except for having broken the zero line on the graph. However, we can form a second gap index for the future components just as did for current conditions. And that index performs just as the current conditions index performs. When plotted it has cut though the zero line and rebounded as it does in recession periods. 
Next we show how the current gap indicator tracks the future barometer from the Philadelphia Fed. It is not too surprising that managers who respond to the survey are CONSISTENT in calling future conditions better at the same time they are evaluating current conditions to be better than their own assessment of the main business components at the time of survey.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070419f.jpg" width="353"> 
The point of all this discussion is to head off some of the criticism of this indicator. There are some economists who do not like it or trust it and think the Philadelphia survey is too small and too unreliable. But what is interesting about it is how the various components of the survey give off compatible signals and how those signals have been so closely correlated in the past with the cycles in the NATIONAL ECONOMY. It is and has been a better NATIONAL indicator than the ISM. 
I have not been a pessimist about the prospects for this economy. But the Philadelphia Fed MFG survey with all its consistent slow-down signals is not giving us any room to be very optimistic. I also run a specific recession diagnostic off this index and it has been forecasting a national recession for several months running. That is not a finding that has found favor. The Philadelphia Fed survey has, using my method, been fighting off a recession signal starting back in March of 2005. It has turned that signal on and off several times since, but it now has six monthly recession signals in a row. Historically the lead time from this index&#146;s signal to the onset of recession is 13 to 18 months. So we are touch longer than that from the first signal, but then signals are still in the offing. 
Alan Greenspan has spoken of recession and called the probability about one-third and then said he thought that the economy would grow. Other economists have noted that a one-third probability of recession is not that high. But now I have this Philadelphia Fed index that is so persistent in emitting this signal that it is all a bit frightening. We also have persistent, but not yet deep weakness in the LEI (Leading economic Index). Jobless claims have recently ratcheted higher. While housing measures seem to have stabilized and job growth still seems at least firm (strong enough to drive the unemployment rate down!) the economy is indeed sending out some very mixed signals. If it were food it be Chinese: sweet and sour. 
We have noted the wide disparity in the various regional indicators. Maybe Philadelphia is going to prove to be not so representative of the nation in 2006 and 2007 as it was in the past. But it is certainly giving off weak signals and there is nothing in the index to reassure us. 
The Philadelphia barometer has been below the level of 9 for six months running. The orders index has not been above 2.8 in that period. Shipments have held up a lot better but they are still below the mid point of their normal range of values and well below their average and median readings. But employees hired and hours-worked are still above average and median norms. Job data are of course, notorious for lagging. 
Even so&#133;. what does not SMELL like recession about this report is&#150; like the LEI- the fact that the rate of change is so slow. The Philadelphia Fed report says that the MFG economy is just sitting there and has been doing so for six months. Is this a regional problem or a national trend? Will manufacturing drag the economy down or will services hold it up? On this score I am still betting on services but recent economic reports have not been kind to this view. The regional disparities give us some reason to distrust the Philadelphia track record as a national bellwether. But we do that at our own risk. Remember, the famous last words are, &#145;this time it will be different.&#146;

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What is interesting is that the weighted Philly index and the barometer are related in particular way. The gap between the barometer and weighted index is a directional statement on the economy and functions similar to the Philly [...]

Philadelphia Index Remains Near Zero

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<th scope="col" class="firstcol">&middot; The LEI is weak and faltering. One very reliable signal from the LEI is its year/year growth rate. Since the early 1960s, with one exception, significant year/year declines have foreshadowed the onset of recession. The sole exception was in 1966. Although in January 1996 a minor year/year&nbsp; reading of -0.1% also was recorded. Currently the LEI is off by 0.8% year/year &#150; a worrisome signal.</th>
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Leading Economic Indicators
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<td class="firstcol">&nbsp;</td>
<td>LEADING</td>
<td>COINCIDENT</td>
<td>LAGGING</td>
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<td colspan="4">Month-to-month</td>
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<td class="firstcol">Mar-07</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.1%</td>
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<td class="firstcol">Feb-07</td>
<td>-0.6%</td>
<td>0.2%</td>
<td>0.2%</td>
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<td class="firstcol">Jan-07</td>
<td>-0.3%</td>
<td>-0.1%</td>
<td>0.0%</td>
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<td class="firstcol">Dec-06</td>
<td>0.6%</td>
<td>0.3%</td>
<td>0.7%</td>
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<td colspan="4">SAAR</td>
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<td class="firstcol">3-Mos</td>
<td>-2.9%</td>
<td>1.0%</td>
<td>0.9%</td>
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<td class="firstcol">6-Mos</td>
<td>-0.3%</td>
<td>1.8%</td>
<td>4.0%</td>
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<td class="firstcol">12-Mos</td>
<td>-0.8%</td>
<td>1.7%</td>
<td>3.2%</td>
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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070419a.jpg" width="353">
However, the signal for recession is not only a weakening in the LEI but also in the coincident index of economic indicators (COIN). The COIN is weakening only by a very small amount and at a very moderate pace, in effect blunting the weakening signal from the LEI itself&#133;at least so far. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070419b.jpg" width="353"> 
 The blown up chart on the right allows closer inspection of the recent LEI and COIN trends. The ongoing and disturbing weakens in the LEI is clear, although its RATE OF DESCENT is not very pre-recession-like. The faltering in the COIN index after a spurt earlier in the year is also put in its less worrisome context, at least for the moment. 



<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070419c.jpg" width="353">
 Moreover...if we look at short-term (3-month) growth rates of the COIN components, they still seem to be relatively firm. The coincident index does appear to be about to collapse. It seems still solid. 
 On balance what we have is evidence of ongoing weakness in the economy. The slippage of the year/year LEI growth rate, below zero and into negative territory, is very disturbing by itself given the reliability of that growth rate as a recession indicator. Yet the LEI itself is slipping at a very slow &#150; almost slow-motion - speed compared to other pre-recession periods. More to the point, for recession to occur the coincident index must decline and the components of that index are showing no sign of doing that. The coincident index itself has undergone some slowing but the index is a product of its components and even three-month growth rates of its components still look quite solid.Verdict: worry but do not grieve for growth. A downturn still looks less than probable.

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However, the signal for recession is not only a weakening in the LEI but also in the coincident index of economic indicators (COIN). The COIN is weakening only by a very small amount and at a very moderate pace, in effect blunting the [...]

U.S. Leading Indicator Weak

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/070418a.jpg" width="353">
The US Treasury&#39;s monthly investment data, called &quot;Treasury International Capital&quot; data or &quot;TIC&quot;, are increasingly watched for trends in foreign investors&#39; interest in US capital markets. Data for February were released this Monday past. Net purchases of securities by foreign investors appear to have fallen to $58.1 billion from $98.8 billion in January and $93.4 billion in February 2006. The reduction in February consists of smaller net purchases of federal agency (GSE) debt and US equities than in January, modestly offset by slight increases in Treasuries and corporate bonds. US investors also bought slightly more in foreign securities in February. So in the securities markets, less foreign capital came into the US and a bit more US capital went out.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070418c.jpg" width="353">
These data contain two important lessons that caution us against making too much of one month&#39;s figures. First, they obviously move around a lot. Foreign purchases of domestic securities were $116.8 billion in January and dropped to &quot;only&quot; $77.9 billion in February. This included the largest ever monthly swing in net purchases of federal agencies, -$33.2 billion, while net purchases of corporate bonds were the fifth largest they had ever been. And even though purchases of equities diminished, they remain quite large by historical comparison. The monthly data on security purchases run back to 1977.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070418b.jpg" width="353">
At the same time, these figures do just cover security purchase and sale transactions. But there are other financial flows, of course. Since last November 16 (see our commentary for that date), the Treasury has highlighted more information on these in a new &quot;TIC Monthly Report on Cross-Border Financial Flows&quot;. This table includes &quot;other securities acquisition&quot;, which tends to run negative as periodic principal payments are made on pass-through securities; stock swaps are also in this category and can run both ways as multinational corporations alter ownership structures. Also included in the Treasury&#39;s summary table are non-security transactions: short-term custody holdings and changes in banks&#39; dollar-denominated liabilities. Both of these can be highly variable, and indeed, the latter item, Line 6 in the table below, swung from a net outflow of $22.4 billion in January to an inflow of $30.4 billion in February.
Thus, overall, the influx of capital to the US did not decrease in February, but it increased, to $94.5 billion from $79.6 billion in January and $77.5 billion a year ago. We have argued before and would repeat, that in these monthly capital flow data, the items that &quot;balance&quot; the &quot;balance of payments&quot; are in fact the transitory ones, the cash moving around the world financial system as trade flows are paid for and companies shift deposits to countries where they have upcoming expenditures. Security purchases represent entirely different kinds of business decisions and may not necessarily be tied to the trade or current account deficits. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Net Foreign Purchases fromUS Residents, Bil $</th>
<th scope="col">Feb 2007</th>
<th scope="col">Jan 2007</th>
<th scope="col">Feb 2006</th>
Monthly Averages
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Last 12 Months</td>
<td>2006</td>
<td>2005</td>
<td>2004</td>
</tr>
<tr>
<td class="firstcol">&quot;Headline&quot;: Net Foreign Purchases&nbsp;= 1 + 2</td>
<td>58.1</td>
<td>98.8</td>
<td>93.4</td>
<td>73.6</td>
<td>74.3</td>
<td>69.9</td>
<td>63.6</td>
</tr>
<tr>
<td class="firstcol">1. Domestic Securities</td>
<td>77.9</td>
<td>116.8</td>
<td>105.0</td>
<td>95.1</td>
<td>94.8</td>
<td>84.3</td>
<td>76.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Treasuries</td>
<td>17.0</td>
<td>15.2</td>
<td>19.4</td>
<td>17.4</td>
<td>16.5</td>
<td>28.2</td>
<td>29.3</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Agencies</td>
<td>2.0</td>
<td>35.8</td>
<td>30.1</td>
<td>22.3</td>
<td>24.1</td>
<td>18.3</td>
<td>18.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Corporate Bonds</td>
<td>45.4</td>
<td>43.0</td>
<td>37.7</td>
<td>43.4</td>
<td>41.7</td>
<td>31.0</td>
<td>25.8</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Equities</td>
<td>13.5</td>
<td>22.8</td>
<td>17.8</td>
<td>12.0</td>
<td>12.5</td>
<td>6.8</td>
<td>2.4</td>
</tr>
<tr>
<td class="firstcol">2. Foreign Securities&nbsp;</td>
<td>-19.8</td>
<td>-17.9</td>
<td>-11.5</td>
<td>-21.5</td>
<td>-20.6</td>
<td>-14.4</td>
<td>-12.7</td>
</tr>
<tr>
<td class="firstcol">3. &quot;Other Acquisition&quot;*</td>
<td>-15.0</td>
<td>-15.1</td>
<td>-9.0</td>
<td>-13.3</td>
<td>-12.8</td>
<td>-11.7</td>
<td>-3.2</td>
</tr>
<tr>
<td class="firstcol">4. Net Foreign Acquisition (1+2+3)</td>
<td>43.2</td>
<td>83.7</td>
<td>84.4</td>
<td>60.3</td>
<td>61.5</td>
<td>58.3</td>
<td>60.4</td>
</tr>
<tr>
<td class="firstcol">5. Short-Term Liabilities</td>
<td>20.8</td>
<td>17.9</td>
<td>-10.6</td>
<td>14.1</td>
<td>11.2</td>
<td>-4.0</td>
<td>15.8</td>
</tr>
<tr>
<td class="firstcol">6. Change in Bank Liabilities</td>
<td>30.4</td>
<td>-22.0</td>
<td>3.7</td>
<td>10.8</td>
<td>13.9</td>
<td>1.4</td>
<td>5.3</td>
</tr>
<tr class="odd">
<td class="firstcol">7. Total TIC Flows**&nbsp; </td>
<td>94.5</td>
<td>79.6</td>
<td>77.5</td>
<td>85.2</td>
<td>86.6</td>
<td>55.7</td>
<td>81.6</td>
</tr>
</tbody>
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The US Treasury's monthly investment data, called "Treasury International Capital" data or "TIC", are increasingly watched for trends in foreign investors' interest in US capital markets. Data for February were released this Monday [...]

Treasury TIC Data Show Reduced Security Purchases, but More Inflows of Other Capital

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070417c.jpg" width="353">
German investors surprised the economic community with a spurt of optimism. The balance of those looking for better conditions six months ahead over those looking for worsening conditions rose to 16.5% in April from 5.8% in March. In spite of the rise, however, the balance is well below that of 62.7% in April, 2006 and also well below the long term average of 33.1%.
Investors continue to be impressed with current conditions. The balance of those seeing improvement in current conditions over those seeing deterioration rose to 76.9%, an all time high, from 69.2% in March and from 2.9% in April, 2006. The first chart shows the balances for current conditions and for the outlook since December 1981, when the series began.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070417d.jpg" width="353">
Contributing, no doubt, to the increased optimism regarding current conditions among German investors has been the continued improvement in the economy in the first months of this year. The imposition of a 3 point increase in the Value Added Tax that went into effect on January 1, 2007 has apparently had a less deleterious effect on the economy than had been feared. Retail sales declined 3.9% in January, but rose 1.26% in February. The unemployment rate of registered workers declined to 9.2% in March from 9.8% in December. Industrial production was up 7.57% in February over the corresponding month of 2006 and, on the same basis, in January, 7.24%, compared with an increase of 5.88% for all of 2006 over 2005. Unemployment rates and the year over year increases in industrial production are shown in second chart shows.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070417e.jpg" width="353">
As noted above, the expectations balance is well below the long term average of 33.1%. Perhaps one of the factors that may account for the subdued expectations is the strength in the Euro and what it may mean for exports. It was export demand increasing 2.10 points that offset the 1.2 point decline in domestic demand in the final quarter of the year. The third chart shows the contributions to growth of exports and domestic demand over the last five years. Perhaps one of the questions troubling investors is whether the decline in unemployment is such that it will lead to an increase in consumer demand that could offset a decline in exports. 

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/GERMANY/@D8/@D8.HTM">&nbsp;GERMANY ZEW INDICATOR</a></th>
<th scope="col">Apr 07</th>
<th scope="col">Mar 07</th>
<th scope="col">Apr 06</th>
<th scope="col">M/M Dif</th>
<th scope="col">Y/Y Dif</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
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</thead>
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<td class="firstcol">Expectations (% Balance)</td>
<td>16.5</td>
<td>5.8</td>
<td>62.7</td>
<td>10.7</td>
<td>-46.2</td>
<td>22.3</td>
<td>34.8</td>
<td>44.6</td>
</tr>
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<td class="firstcol">Current Conditions (% Balance)</td>
<td>76.9</td>
<td>69.2</td>
<td>2.9</td>
<td>7.7</td>
<td>74.0</td>
<td>18.3</td>
<td>-61.8</td>
<td>-67.7</td>
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German investors surprised the economic community with a spurt of optimism. The balance of those looking for better conditions six months ahead over those looking for worsening conditions rose to 16.5% in April from 5.8% in March. In [...]

German Investors' Optimism Surprises but the Optimism Is Subdued

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<th scope="col" class="firstcol">&middot; The table below shows the percent changes in starts and permits on different horizons without compounding. It shows that each measure except for the large projects (5 of more) is above its three-month average in March. This finding tends to reinforce the sense that there is some stability developing in the sector. &nbsp;To be sure, all measures are down over 3 months and 12 months. Two-to-four unit projects alone are flat or up compared to six months. Firmness on the three-month horizon is mostly in the Midwest where there is a 23% bounce (annualized) and in the South where a -12% annual rate trims the -33% annual rate drop over 6 months.&nbsp;</th>
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<colgroup></colgroup>
<thead>
<tr>
March 2007
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">Seas Adj Annual Rate</td>
<td colspan="2">Total</td>
<td colspan="2">One Unit</td>
<td colspan="2">2- 4 Units</td>
<td colspan="2">5 or more</td>
</tr>
<tr class="even">
<td class="firstcol">In 000&#39;s of Units</td>
<td>Starts</td>
<td>Permits</td>
<td>Starts</td>
<td>Permits</td>
<td>Starts</td>
<td>Permits</td>
<td>Starts</td>
<td>Permits</td>
</tr>
<tr class="odd">
<td class="firstcol">This Month:</td>
<td>1,518</td>
<td>1,544</td>
<td>1,218</td>
<td>1,114</td>
<td>38</td>
<td>72</td>
<td>262</td>
<td>358</td>
</tr>
<tr class="odd">
<td class="firstcol">3-month avg</td>
<td>1,474</td>
<td>1,549</td>
<td>1,177</td>
<td>1,112</td>
<td>31</td>
<td>73</td>
<td>267</td>
<td>363</td>
</tr>
<tr class="odd">
<td class="firstcol">1-month % chg</td>
<td>0.8%</td>
<td>0.8%</td>
<td>2.0%</td>
<td>1.4%</td>
<td>22.6%</td>
<td>0.0%</td>
<td>-6.8%</td>
<td>-0.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">3-month % chg</td>
<td>-7.0%</td>
<td>-4.3%</td>
<td>-2.2%</td>
<td>-4.6%</td>
<td>-22.4%</td>
<td>-4.0%</td>
<td>-22.7%</td>
<td>-3.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">6-month % chg</td>
<td>-11.9%</td>
<td>-5.7%</td>
<td>-12.6%</td>
<td>-8.6%</td>
<td>31.0%</td>
<td>0.0%</td>
<td>-13.2%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">yr/yr % chg</td>
<td>-23.0%</td>
<td>-25.9%</td>
<td>-24.6%</td>
<td>-28.4%</td>
<td>5.6%</td>
<td>-13.3%</td>
<td>-18.4%</td>
<td>-19.9%</td>
</tr>
</tbody>
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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070417f.jpg" width="353">
We plot the trends by region to show the common patterns. Each region shows a long down slope reflecting the lasting weakness in housing across the nation. But then most regions show some stability - or at least a hint of it. 
There is an outright bounce in the Midwest and somewhat slower erosion in the West. The South is still declining but is also slowing its pace of decline. The Northeast is unclear, having bounced in January, probably on the weather, then having started a new slide since then, but still not quite making a new low. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070417g.jpg" width="353"> 
On balance, housing is still having troubles. The rise in starts this month came about only because of a DOWNWARD revision to the previous month. Had February not been revised lower the new level in March would have been a decline from February since the preliminary February reading was higher than the level of starts that now prevails in March. Even so the clearest evidence we have is that the pace of decline is slowing and that for the moment two of the three types of starts and the overall are above their 3-month average. Housing is still faltering but no longer seems to have the downward momentum. It&#146;s sort of like a horror movie seen the second time around -- no longer any surprises and you&#146;ve already seen the worst of it. But unlike the movie the second time around, you still don&#146;t know where this one is going. Not for sure.

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We plot the trends by region to show the common patterns. Each region shows a long down slope reflecting the lasting weakness in housing across the nation. But then most regions show some stability - or at least a hint of it. There is [...]

U.S. Housing Starts Hit a Plateau

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<th scope="col" class="firstcol">&middot; Industrial production fell by 0.2% in March as utilities output pulled back but manufacturing output advanced by a strong 0.7% led by a gain of 0.9% in durable goods output. March saw a decline in consumer goods output, materials production was flat and there was a rise of 0.8% in business equipment output. &middot; But for the quarter as a whole and on trend, industrial production is a story of firming consumer output offset by plunging demand for equipment on the part of business with materials output vacillating about unchanged. Manufacturing output rose by 1.5% in Q1 given the strong productivity there that was not enough to create job growth in the sector. &middot; Looking at the just completed quarter we find industrial production is higher for most measures. So the National ISM report is correct to be above 50. There is a great deal of regional disparity according to various regional manufacturing surveys. We see that in the variety of conditions across industry groups there is a great deal of variation as well. Consumer durables output in the quarter rose at a 0.1% pace as auto output fell. Consumer nondurable output rose by a robust 6% pace with energy output up at a 12% pace. Business equipment output fell in the quarter but computer and office equipment production rose by 34.3%. Materials output was mixed, up by 0.5% in the quarter but up by 1.9% for durable goods and off by 1.7% for nonenergy nondurable goods. Overall auto production fell by 0.1% in Q1 but truck production expanded at a 52% annual rate. &nbsp; </th>
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<colgroup></colgroup>
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<tr>
Industrial Production
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Monthly Percent Changes</td>
<td colspan="3">At Annual Rates of Change</td>
<td>SAAR</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Month-to-month Percent Change</td>
<td>3-Month</td>
<td>6-Month</td>
<td>Year/Year</td>
<td>07-Q1</td>
</tr>
<tr class="odd">
<td class="firstcol">Industrial Output</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>Jan-07</td>
<td>%Change</td>
<td>%Change</td>
<td>%Change</td>
<td>Pct Change</td>
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<tr>
<td class="firstcol">All Prod &amp; Materials</td>
<td>-0.2%</td>
<td>0.8%</td>
<td>-0.4%</td>
<td>1.1%</td>
<td>0.5%</td>
<td>2.3%</td>
<td>1.6%</td>
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<td class="firstcol">All Products</td>
<td>-0.3%</td>
<td>1.0%</td>
<td>-0.4%</td>
<td>1.1%</td>
<td>1.2%</td>
<td>2.5%</td>
<td>2.0%</td>
</tr>
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<td class="firstcol">Final Products</td>
<td>-0.3%</td>
<td>1.2%</td>
<td>-0.5%</td>
<td>1.4%</td>
<td>2.3%</td>
<td>3.4%</td>
<td>3.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Manufacturing only</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">MFG - NAICS</td>
<td>0.7%</td>
<td>0.1%</td>
<td>-0.6%</td>
<td>0.7%</td>
<td>0.5%</td>
<td>2.7%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; MFG - Durables</td>
<td>0.8%</td>
<td>0.2%</td>
<td>-1.1%</td>
<td>-0.3%</td>
<td>0.7%</td>
<td>3.5%</td>
<td>0.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; MFG - Nondurables</td>
<td>0.5%</td>
<td>0.0%</td>
<td>0.0%</td>
<td>1.9%</td>
<td>0.2%</td>
<td>1.9%</td>
<td>3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Consumer Goods</td>
<td>-0.6%</td>
<td>1.7%</td>
<td>0.0%</td>
<td>4.1%</td>
<td>2.4%</td>
<td>2.1%</td>
<td>4.5%</td>
</tr>
<tr>
<td class="firstcol">Durables</td>
<td>0.6%</td>
<td>1.7%</td>
<td>-2.9%</td>
<td>-2.6%</td>
<td>0.2%</td>
<td>-1.2%</td>
<td>0.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Automotive Production</td>
<td>0.4%</td>
<td>3.7%</td>
<td>-5.4%</td>
<td>-6.0%</td>
<td>1.4%</td>
<td>-3.1%</td>
<td>-0.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Excl Automotive Production</td>
<td>0.7%</td>
<td>0.0%</td>
<td>-0.6%</td>
<td>0.5%</td>
<td>-0.9%</td>
<td>0.6%</td>
<td>0.6%</td>
</tr>
<tr>
<td class="firstcol">Nondurables</td>
<td>-1.0%</td>
<td>1.6%</td>
<td>1.0%</td>
<td>6.3%</td>
<td>3.1%</td>
<td>3.2%</td>
<td>6.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Nonenergy</td>
<td>0.6%</td>
<td>0.5%</td>
<td>-0.1%</td>
<td>4.0%</td>
<td>4.8%</td>
<td>3.9%</td>
<td>4.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Consumption Energy</td>
<td>-6.1%</td>
<td>5.4%</td>
<td>4.5%</td>
<td>13.5%</td>
<td>-2.2%</td>
<td>0.7%</td>
<td>12.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Business Equip.</td>
<td>0.8%</td>
<td>0.3%</td>
<td>-2.2%</td>
<td>-4.5%</td>
<td>3.3%</td>
<td>7.4%</td>
<td>-0.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Transportation</td>
<td>0.2%</td>
<td>-0.1%</td>
<td>-1.4%</td>
<td>-5.2%</td>
<td>6.0%</td>
<td>7.6%</td>
<td>0.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Computer &amp; Office Equipment</td>
<td>3.5%</td>
<td>3.3%</td>
<td>2.4%</td>
<td>38.2%</td>
<td>30.6%</td>
<td>28.3%</td>
<td>34.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Excl Technology &amp; Transportation</td>
<td>0.8%</td>
<td>-0.2%</td>
<td>-2.2%</td>
<td>-6.4%</td>
<td>2.3%</td>
<td>6.7%</td>
<td>-2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Materials</td>
<td>0.0%</td>
<td>0.5%</td>
<td>-0.4%</td>
<td>0.7%</td>
<td>-0.5%</td>
<td>2.1%</td>
<td>0.5%</td>
</tr>
<tr>
<td class="firstcol">Durables</td>
<td>1.0%</td>
<td>-0.2%</td>
<td>0.1%</td>
<td>3.5%</td>
<td>-0.2%</td>
<td>3.6%</td>
<td>1.9%</td>
</tr>
<tr>
<td class="firstcol">Nondurables excl energy</td>
<td>0.6%</td>
<td>0.1%</td>
<td>-1.2%</td>
<td>-2.3%</td>
<td>-1.7%</td>
<td>0.3%</td>
<td>-1.7%</td>
</tr>
<tr>
<td class="firstcol">Energy</td>
<td>-2.2%</td>
<td>2.3%</td>
<td>-0.1%</td>
<td>-0.4%</td>
<td>0.2%</td>
<td>1.6%</td>
<td>0.7%</td>
</tr>
</tbody>
</table>
 



<img align="left" height="331" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/0704172.gif" v:shapes="_x0000_i1026" width="533">
The chart on the left shows the trends for output by main manufacturing sector. As consumer output has steadied and strengthened, the business sector has been unraveling. This is an unpleasant picture and has been quite unexpected. We still do not know what is holding business back. 

</body>
</html>

The chart on the left shows the trends for output by main manufacturing sector. As consumer output has steadied and strengthened, the business sector has been unraveling. This is an unpleasant picture and has been quite unexpected. We [...]

U.S. IP is Up But Still is a Mixed Up Sector

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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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

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

Winnie Tapasanun

260205X15.jpg

260205Y15.jpg

**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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260205D15.jpg

- 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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260205B2.jpg

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.

260205C2.jpg

260205D2.jpg

- 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

260205E.jpg

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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Philadelphia Index Remains Near Zero

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Treasury TIC Data Show Reduced Security Purchases, but More Inflows of Other Capital

German Investors' Optimism Surprises but the Optimism Is Subdued

U.S. Housing Starts Hit a Plateau

U.S. IP is Up But Still is a Mixed Up Sector