Robert Brusca

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071015e.jpg" width="353">
The Bank of France overall index is in the bottom 40 percent of its range with its drop off in September and is barely higher Yr/Yr. Production is in the bottom 20% of its range but the production OUTLOOK is in the top 20 percent of its range. Demand in terms of the order books is firm at just about the top 30 percent of its range but foreign order books are in the bottom 20 percent of their range. New orders are in the bottom 20 percent of their range, with agriculture, an important sector in France, in the bottom 10 percent of its range. 
Hiring is only in the 28th percentile of its range but the outlook is - very surprisingly - a strong reading in the 98th percentile of its range. That is the strongest outlook reading in the survey and that is surprising especially with other outlook readings not nearly as strong. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
<th scope="col" colspan=7>Bank of France Monthly INDUSTRY Survey</th>
</tr>
</thead>
<tbody>
<tr class="grey3">
<td class="firstcol">&nbsp;</td>
<td colspan="3">&nbsp;</td>
<td>12 MO</td>
<td>Since Jan-87</td>
<td>Percentile</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>Sep-07</td>
<td>Aug-07</td>
<td>Jul-07</td>
<td>AVERAGE</td>
<td>Average</td>
<td>rank/range</td>
</tr>
<tr class="grey2">
<td class="firstcol" colspan=7>Production-latest mo</td>

</tr>
<tr>
<td class="firstcol">Total Industry</td>
<td>0.95</td>
<td>9.34</td>
<td>12.73</td>
<td>9</td>
<td>9</td>
<td>19.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Semi-Finished</td>
<td>-7.53</td>
<td>3.32</td>
<td>14.17</td>
<td>7</td>
<td>7</td>
<td>6.0%</td>
</tr>
<tr>
<td class="firstcol">Capital</td>
<td>5.91</td>
<td>10.88</td>
<td>12.84</td>
<td>13</td>
<td>10</td>
<td>19.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Auto</td>
<td>22.37</td>
<td>27.31</td>
<td>2.24</td>
<td>4</td>
<td>8</td>
<td>75.9%</td>
</tr>
<tr>
<td class="firstcol">Consumer</td>
<td>5.7</td>
<td>15.07</td>
<td>19.43</td>
<td>10</td>
<td>12</td>
<td>28.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Agriculture &amp; Food</td>
<td>2.12</td>
<td>4.11</td>
<td>8.1</td>
<td>10</td>
<td>10</td>
<td>16.7%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Production Outlook</td>

</tr>
<tr class="grey9">
<td class="firstcol">Total Industry</td>
<td>12.68</td>
<td>7.9</td>
<td>2.21</td>
<td>9</td>
<td>10</td>
<td>82.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Semi-Finished</td>
<td>19.93</td>
<td>-2.45</td>
<td>-5.6</td>
<td>9</td>
<td>9</td>
<td>98.0%</td>
</tr>
<tr>
<td class="firstcol">Capital</td>
<td>19.32</td>
<td>12.6</td>
<td>7.2</td>
<td>15</td>
<td>12</td>
<td>81.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Auto</td>
<td>25.47</td>
<td>-11.9</td>
<td>-39.5</td>
<td>-5</td>
<td>4</td>
<td>90.3%</td>
</tr>
<tr>
<td class="firstcol">Consumer</td>
<td>6.19</td>
<td>5.32</td>
<td>-0.29</td>
<td>9</td>
<td>14</td>
<td>21.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Agriculture &amp; Food</td>
<td>16.21</td>
<td>11.82</td>
<td>9.9</td>
<td>15</td>
<td>14</td>
<td>81.6%</td>
</tr>
<tr class="grey2">
<td class="firstcol" colspan=7>Demand</td>

</tr>
<tr>
<td class="firstcol">Overall order books</td>
<td>24.76</td>
<td>26.14</td>
<td>28.52</td>
<td>26</td>
<td>4</td>
<td>69.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Foreign Orders</td>
<td>5.04</td>
<td>12.01</td>
<td>12.98</td>
<td>12</td>
<td>9</td>
<td>19.2%</td>
</tr>
<tr class="grey2">
<td class="firstcol" colspan=7>New Orders</td>

</tr>
<tr>
<td class="firstcol">Total Industry</td>
<td>1.9</td>
<td>12.46</td>
<td>17.01</td>
<td>12</td>
<td>10</td>
<td>17.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Semi-Finished</td>
<td>-4.76</td>
<td>7.21</td>
<td>16.18</td>
<td>9</td>
<td>8</td>
<td>15.1%</td>
</tr>
<tr>
<td class="firstcol">Capital</td>
<td>8.29</td>
<td>8.63</td>
<td>12.97</td>
<td>14</td>
<td>9</td>
<td>15.5%</td>
</tr>
<tr class="grey2">
<td class="firstcol" colspan=7>Auto</td>

</tr>
<tr>
<td class="firstcol">Consumer</td>
<td>4.72</td>
<td>12.92</td>
<td>19.12</td>
<td>12</td>
<td>13</td>
<td>18.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Agriculture &amp; Food</td>
<td>2.84</td>
<td>13.92</td>
<td>15</td>
<td>14</td>
<td>12</td>
<td>9.9%</td>
</tr>
<tr class="grey2">
<td class="firstcol" colspan=7>Stocks: Finished Gds</td>

</tr>
<tr>
<td class="firstcol">Total Industry</td>
<td>0.43</td>
<td>0</td>
<td>-0.43</td>
<td>-2</td>
<td>-2</td>
<td>90.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Semi-Finished</td>
<td>1.46</td>
<td>-1.91</td>
<td>-2.29</td>
<td>-3</td>
<td>-2</td>
<td>82.9%</td>
</tr>
<tr>
<td class="firstcol">Capital</td>
<td>0.82</td>
<td>-3.81</td>
<td>-4.44</td>
<td>0</td>
<td>-3</td>
<td>64.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Auto</td>
<td>-16.03</td>
<td>-10.12</td>
<td>-4.21</td>
<td>-5</td>
<td>-3</td>
<td>24.4%</td>
</tr>
<tr>
<td class="firstcol">Consumer</td>
<td>0.11</td>
<td>4.44</td>
<td>2.76</td>
<td>-1</td>
<td>0</td>
<td>49.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Agriculture &amp; Food</td>
<td>-0.19</td>
<td>5.07</td>
<td>4.32</td>
<td>1</td>
<td>0</td>
<td>50.5%</td>
</tr>
<tr>
<td class="firstcol">Capacity Utilization</td>
<td>85.19</td>
<td>83.07</td>
<td>85.25</td>
<td>85</td>
<td>85</td>
<td>72.0%</td>
</tr>
<tr class="grey2">
<td class="firstcol" colspan=7>Hiring</td>

</tr>
<tr>
<td class="firstcol">Latest Month</td>
<td>-1.59</td>
<td>-0.29</td>
<td>0.01</td>
<td>0</td>
<td>-1</td>
<td>28.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Outlook</td>
<td>0.35</td>
<td>-2.22</td>
<td>-4.79</td>
<td>-4</td>
<td>-5</td>
<td>98.0%</td>
</tr>
<tr>
<td class="firstcol">Industry Sentiment Index</td>
<td>104.78</td>
<td>106.63</td>
<td>108.49</td>
<td>107</td>
<td>106</td>
<td>38.7%</td>
</tr>
</tbody>
</table>
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The Bank of France overall index is in the bottom 40 percent of its range with its drop off in September and is barely higher Yr/Yr. Production is in the bottom 20% of its range but the production OUTLOOK is in the top 20 percent of [...]

BOF Survey Moves Lower and is Barely Higher Yr/Yr

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071015c.jpg" width="353">
Weakening growth in U.S. sales has necessitated a dramatic slowing of growth in business inventories during the last year. 
Annual growth in business sales has more than halved to 3% as of August. That decline has been led by weaker growth in manufacturers&#39; sales to 2.4% from 8.5% one year ago and slower growth in merchant wholesale sales to 6.8% y/y from 12.3%. 
Retailer&#39;s sales have held up relatively well at 5.0% over the last year versus 6.2% during all of 2006, though that year&#39;s strength was concentrated early in the year and then fell off. 
Total business inventories rose 0.1% in August. Y/Y growth, a measure of the trend, dropped down to 3.0%, half that for all of 2006. 
Retail inventories grew 0.5% (2.6% y/y) in August. The inventories of motor vehicles &amp; parts dealers were relatively firm at 1.5% (1.3% y/y) in August but that is down from 12.8% y/y growth twelve months ago. Excluding autos, retail inventories were unchanged in August and twelve month growth of 3.3% was about even with 2006, but both were down from 7.9% at the beginning of 2005. Furniture inventories fell slightly in August and twelve month growth of 1.5% has dropped from 4.2% last August and 11.1% at the beginning of 2005. At clothing &amp; accessory stores, August inventories were about unchanged m/m and twelve month growth of 5.8% compares to 13.2% at the beginning of the year.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071015d.jpg" width="353">
Wholesale inventories increased 0.1% and y/y growth of 4.4% is half that of last year. Petroleum inventories were about unchanged versus last year versus 60% growth at the beginning of 2006. Still, less petroleum wholesale inventories are up 4.5% which is about half the twelve month growth for all of last year.
Factory inventories actually fell slightly in August as part of a weakening trend since last year which has brought twelve month growth down to 2.4% from 8.5% at the middle of last year.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED06/@ED0601/@ED0601.HTM">Business Inventories</a></th>
<th scope="col">August</th>
<th scope="col">July</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>0.1%</td>
<td>0.5%</td>
<td>3.0%</td>
<td>5.9%</td>
<td>6.2%</td>
<td>7.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail</td>
<td>0.5%</td>
<td>1.0%</td>
<td>2.6%</td>
<td>3.2%</td>
<td>2.8%</td>
<td>6.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Retail excl. Autos</td>
<td>0.0%</td>
<td>0.1%</td>
<td>3.3%</td>
<td>4.5%</td>
<td>4.5%</td>
<td>7.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale</td>
<td>0.1%</td>
<td>0.2%</td>
<td>4.4%</td>
<td>8.6%</td>
<td>7.4%</td>
<td>9.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>-0.1%</td>
<td>0.1%</td>
<td>2.4%</td>
<td>6.4%</td>
<td>8.9%</td>
<td>7.7%</td>
</tr>
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Weakening growth in U.S. sales has necessitated a dramatic slowing of growth in business inventories during the last year. Annual growth in business sales has more than halved to 3% as of August. That decline has been led by weaker [...]

U.S. Business Inventories'Increase Down With Slower Sales Growth

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071015a.jpg" width="353">
For Fiscal Year 2007, the U.S. government&#39;s budget deficit narrowed sharply to 162.8B versus a deficit during FY 2006 of 248.2B. For the third consecutive year, the deficit&#39;s narrowing occurred as revenue growth surged ahead of outlays.
As a percentage of GDP the budget deficit last year totaled roughly 1.5%, down sharply from 3.6% in 2004. Receipts rose sharply to 18.8% of GDP, about equal to the long term average.
For forecasts of the deficit in coming fiscal years, the administration&#39;s latest Midsession Review of the Budget can be found <a href="http://www.whitehouse.gov/omb/budget/fy2008/pdf/08msr.pdf"> here</a>.
The Government&#39;s financial data is available in Haver&#39;s USECON database. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071015b.jpg" width="353">
Net revenues last fiscal year grew 6.7% y/y, quite a slowdown from 11.8% growth during FY06. Growth in individual income tax receipts (44% of total receipts), however, held firm at 11.5%. Withheld taxes grew 9.4% during FY07 but non-withheld taxes rose a much stronger 13.0% due to estimated capital gains. Corporate income taxes (13% of total receipts) lagged and rose just 4.6% while a slowdown in employment growth raised employment contributions by just 4.3% versus a 5.7% gain during FY06 and 8.5% during FY05.
U.S. net outlays grew just 2.8% during last fiscal year, a slowdown from 7.4% during FY06. Defense spending (19% of total outlays) picked up a bit and rose 6.1%. Medicare expenditures (12% of outlays) again surged by 13.8% after a 10.5% jump during FY06. Social security spending (21% of outlays) picked up slightly to 6.9% but growth in the government&#39;s interest expense declined to rose by 5.0% y/y.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E1/@E106/@E10602/@E106021.HTM">US Government Finance</a> &nbsp;</th>
<th scope="col">September</th>
<th scope="col">July</th>
<th scope="col">Y/Y</th>
<th scope="col">FY 2007</th>
<th scope="col">FY 2006</th>
<th scope="col">FY 2005 &nbsp;</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Budget Balance</td>
<td>$111.6B</td>
<td>$-117.0B</td>
<td>$56.2B (9/06)</td>
<td>-$162.8B</td>
<td>-$248.2B</td>
<td>-$318.7B</td>
</tr>
<tr>
<td class="firstcol">Net Revenues</td>
<td>$285.4B</td>
<td>$166.5B</td>
<td>0.7%</td>
<td>6.7%</td>
<td>11.8%</td>
<td>14.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Net Outlays</td>
<td>$173.8B</td>
<td>$283.5B</td>
<td>-23.5%</td>
<td>2.8%</td>
<td>7.4%</td>
<td>7.6%</td>
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For Fiscal Year 2007, the U.S. government's budget deficit narrowed sharply to 162.8B versus a deficit during FY 2006 of 248.2B. For the third consecutive year, the deficit's narrowing occurred as revenue growth surged ahead of [...]

U.S. Budget Deficit Narrowed Sharply

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/071012j.jpg" width="353">
The awarding of the Nobel Peace Prize to Al Gore and the United Nations Intergovernmental Panel on Climate Change brings environmental issues to specific public attention once again. The news prompted us to browse Haver&#39;s offerings for information on climate and energy. We are a bit surprised, though we shouldn&#39;t be, to see how many different databases contain relevant data. Here are some select items.
An obvious place to begin is OGJ, the Oil &amp; Gas Journal database of its own and Department of Energy series. One section of this we haven&#39;t looked at much is &quot;Other Energy&quot;. It includes the intriguing item &quot;Renewable Energy Production and Consumption&quot;. The data, available through June, show that these sources constitute about 9.5% of total energy production in the US. Hydroelectric power and &quot;wood, waste and alcohol&quot; are most of this, at about 4-1/4% each. Other, more esoteric types are small but expanding rapidly: each geothermal and wind and solar have recently been about 0.3% of total energy production. This is a tiny fraction, but it has increased by about 75% over the past five years, with most of the advance in wind and solar.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071012k.jpg" width="353">
Another fact evident in the first graph here is that total energy consumption in the US has been about flat in recent periods. These data are not seasonally adjusted, but we can get around that to make our analysis more intelligible. We can aggregate the monthly energy consumption data to quarterly totals using the &quot;A&quot; function in the Haver DLXVG3 software and then take a 4-quarter moving total. The numerical result here is a convenient figure, right at 100 quadrillion BTU. The peak was 100.683 quads in Q3 2005; after a dip in 2006, Q2 this year was 100.637 quads. But GDP has grown over this period; in Q2 2007 its 4-quarter moving average (a figure comparable to our BTU calculation) was 4.5% higher than in Q3 2005. So the energy productivity of the economy has increased noticeably over this span: almost the same amount of energy yielded more economic activity.
We&#39;re hearing a lot about biofuels [a word, by the way, that I just added to the Microsoft Office spell-check dictionary!], and one thing we can say is that they have contributed to higher prices for grain. In the DAILY database, we find spot and futures prices for corn, and we can see plainly how they have lurched higher from about this time last year. However, the price of ethanol is yet to establish a smooth trading pattern. The futures market for it began on the Chicago Board of Trade on March 23, 2005, with the nearby (1st expiring) contract closing at $1.22/gallon. It shot up by mid-2006 to $4.23 and today closed at $1.575. Clearly, underlying supply and demand for ethanol have not gone up by three-and-a-half times and back down by two-thirds. So traders, both hedgers and speculators, have yet to find their footing in the rapidly changing economic, financial and scientific environment. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071012l.jpg" width="353">
Finally, what about climate. After all, that is what concerns Mr. Gore the most. What can Haver&#39;s data tell us? We have average temperature and precipitation data, monthly back to 1921, in USECON for the &quot;Lower 48&quot; and in REGIONAL for individual regions and states. A quick way to see trends here is a moving average that&#39;s in a multiple of 12 months; 5 years seems easy. Looks that there&#39;s been some very slight tendency for wetter weather in the latter years and also the warming trend we hear so much about. Obviously these data just cover the US, so we can&#39;t speak here to the global situation, but the move in this country over the past 25 years seems more distinctive than might be attributable to mere chance. Being proper econometricians -- or at least cautious ones -- we&#39;ll be sure to say we haven&#39;t tested that proposition. And it would quite clearly need testing. Moreover, this only says the trend is up. It does not examine why that might be the case.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071012m.jpg" width="353">
These paragraphs only scratch the surface of the information in Haver&#39;s data collections that covers environmental questions. Previous commentary here has covered miles driven and compared that to GDP growth, a result we called &quot;driving productivity&quot;. We have seasonally adjusted some of the weekly EIA data and those are in WEEKLY. And of course, there are the highly useful Energy Intelligence databases on world oil supply and demand and natural gas weekly and monthly data. There are electric power prices in several databases. So we can help you assess numerous questions on energy, alternative energy and uses of energy and the ramifications of developments for economic growth and inflation. And you can bet our database managers will be adding more all the time. Indeed, let us know what&#39;s most important for you.


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The awarding of the Nobel Peace Prize to Al Gore and the United Nations Intergovernmental Panel on Climate Change brings environmental issues to specific public attention once again. The news prompted us to browse Haver's offerings [...]

Mr. Gore's Nobel Prize Occasions a Look at Haver's Energy & Environment Data

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071012i.jpg" width="353">
The graph on the left paints a clear picture of French inflation turning higher in September 2007.And year/year inflation did just that. Yet inflation in France is not really accelerating. The year/year jump is due to an adverse base effect - the fact that a year ago inflation had fallen making this month&#146;s year/year a tougher comparison. When we instead look at 3-month inflation compared to 6-month inflation we see that the rate of inflation is back down from 2.7% to 1.8%.. Diffusion calculations also confirm that inflation remains under wraps. Diffusion calculates the percentage of main sectors in which inflation has accelerated in a period. What we find is that for the 3-month to 6-month inflation comparisons diffusion is 27.3 which is below the neutral level of 50. Indeed at this level we can see that inflation is in fact decelerating in many more sectors than it is accelerating. Inflation in France seems under control despite the unfortunate accompanying chart.It is more unfortunate that the chart is the main way that inflation watchers view inflation.
The table below shows the diversity in French inflation trends with one main thing in common: that inflation is mostly decelerating at least from 6 months to 3 months.Year-over-year, most sectors confirm that inflation IS higher although the headline is barely higher at 1.6% compared to 1.5% a year ago. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" colspan=8"France HICP and CPI details</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Mo/Mo %</td>
<td colspan="3">Saar %</td>
<td>Yr/Yr</td>
</tr>
<tr class="grey2">
<td class="firstcol">&nbsp;</td>
<td>Sep-07</td>
<td>Aug-07</td>
<td>Jul-07</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>12-Mo</td>
<td>Yr Ago</td>
</tr>
<tr class="odd">
<td class="firstcol">HICP Total</td>
<td>0.1%</td>
<td>0.3%</td>
<td>0.0%</td>
<td>1.8%</td>
<td>2.7%</td>
<td>1.6%</td>
<td>1.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Core</td>
<td>#N/A</td>
<td>0.3%</td>
<td>0.0%</td>
<td>#N/A</td>
<td>#N/A</td>
<td>#N/A</td>
<td>1.2%</td>
</tr>
<tr class="grey2">
<td colspan=8 class="firstcol">CPI</td>
</tr>
<tr class="odd">
<td class="firstcol">All</td>
<td>0.0%</td>
<td>0.3%</td>
<td>0.1%</td>
<td>1.6%</td>
<td style="color:red;">2.4%</td>
<td>1.5%</td>
<td>1.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">CPI ex F&amp;E</td>
<td>0.1%</td>
<td>0.4%</td>
<td>0.1%</td>
<td style="color:red;">2.2%</td>
<td style="color:red;">2.2%</td>
<td>1.5%</td>
<td>1.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Food</td>
<td>0.6%</td>
<td>0.7%</td>
<td>-0.2%</td>
<td>4.8%</td>
<td style="color:red;">5.0%</td>
<td>1.3%</td>
<td>2.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Alcohol</td>
<td>0.7%</td>
<td>2.9%</td>
<td>0.3%</td>
<td style="color:red;"> 16.5%</td>
<td style="color:red;">10.2%</td>
<td style="color:red;">3.9%</td>
<td>0.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Clothing &amp; Shoes</td>
<td>0.4%</td>
<td>0.3%</td>
<td>-0.7%</td>
<td>-0.2%</td>
<td>0.3%</td>
<td style="color:red;">0.9%</td>
<td>0.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Rent &amp; Utilities</td>
<td>0.3%</td>
<td>0.1%</td>
<td>0.2%</td>
<td>2.5%</td>
<td style="color:red;">3.5%</td>
<td>2.7%</td>
<td>3.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">Health Care</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.4%</td>
<td style="color:red;">2.5%</td>
<td style="color:red;">0.7%</td>
<td style="color:red;">0.3%</td>
<td>0.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Transport</td>
<td>0.1%</td>
<td>-0.4%</td>
<td>0.2%</td>
<td>-0.5%</td>
<td style="color:red;">3.0%</td>
<td style="color:red;">2.4%</td>
<td>0.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Communication</td>
<td>0.2%</td>
<td>0.5%</td>
<td>0.0%</td>
<td style="color:red;">2.8%</td>
<td style="color:red;">0.7%</td>
<td style="color:red;">0.2%</td>
<td>-6.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Recreation &amp; Culture</td>
<td>-0.7%</td>
<td>-0.1%</td>
<td>-0.2%</td>
<td>-3.8%</td>
<td>-1.8%</td>
<td style="color:red;">-1.5%</td>
<td>-1.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Education</td>
<td>-0.1%</td>
<td>0.1%</td>
<td>0.2%</td>
<td>0.9%</td>
<td>1.7%</td>
<td>2.1%</td>
<td>2.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Restaurant &amp; Hotel</td>
<td>-1.0%</td>
<td>0.8%</td>
<td>0.5%</td>
<td>1.3%</td>
<td>2.3%</td>
<td style="color:red;">2.8%</td>
<td>2.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Other</td>
<td>0.2%</td>
<td>0.1%</td>
<td>0.0%</td>
<td>1.3%</td>
<td style="color:red;">2.0%</td>
<td>1.9%</td>
<td>3.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Diffusion</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>27.3%</td>
<td>63.6%</td>
<td>63.6%</td>
<td>&nbsp;</td>
</tr>
<tr class="grey2">
<td class="firstcol">Type:</td>
<td colspan="3">Diffusion Compared to</td>
<td>6-mo</td>
<td>12-mo</td>
<td>Yr-Ago</td>
<td>&nbsp;</td>
</tr>
</tbody>
</table>
</body>
</html>

The graph on the left paints a clear picture of French inflation turning higher in September 2007.And year/year inflation did just that. Yet inflation in France is not really accelerating. The year/year jump is due to an adverse base [...]

French Inflation Turns Higher But Not Really...

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071012h.jpg" align="left" border="0" height="265" width="353">
The year/year ex-construction PPI continues to head lower, while the
six-month measure has seen some steady pressure and recent
quasi-plateauing. But the three- month PPI is heading strongly lower.
On balance, the Euro Area PPI seems to be well-behaved.
The trends are well-behaved across components as well. Only consumer
goods prices at the producer level are showing any acceleration in the
recent three months among major categories. Capital good prices are
decelerating as are intermediate and energy goods. Manufacturing as a
whole shows prices decelerating and the PPI ex-energy is also
decelerating. The EMU PPI is well contained.
At the country level, Germany and Italy show the same sort of
compliant patterns in their respective PPIs. The EU&#8217;s UK demonstrates
some flare up in the overall PPI but still shows a PPI ex energy with
decelerating trends. These are encouraging trends but this is not the
ECB&#8217;s prime inflation measure. That one, the HICP, has been showing
some pressure lately. But the lack of pressure at the PPI level is
still good news &#8211; at least through August.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
<th colspan=7 scope="col">Euro Area and UK PPI Trends</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="2">M/M</td>
<td colspan="4">Saar</td>
</tr>
<tr class="grey2">
<td class="firstcol">Euro Area13</td>
<td>Aug-07</td>
<td>Jul-07</td>
<td>3-Mo</td>
<td>6-MO</td>
<td>Yr/Yr</td>
<td>Y/Y Yr Ago</td>
</tr>
<tr>
<td class="firstcol">Total ex Construction</td>
<td>0.1%</td>
<td>0.3%</td>
<td>1.7%</td>
<td style="color: red;">3.2%</td>
<td>1.7%</td>
<td>5.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Excl Energy</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.5%</td>
<td style="color: red;">3.2%</td>
<td>2.9%</td>
<td>3.6%</td>
</tr>
<tr>
<td class="firstcol">Capital Goods</td>
<td>0.0%</td>
<td>0.1%</td>
<td>0.6%</td>
<td>0.9%</td>
<td style="color: red;">1.6%</td>
<td>1.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Consumer Goods</td>
<td>0.5%</td>
<td>0.4%</td>
<td style="color: red;">4.4%</td>
<td style="color: red;">3.3%</td>
<td style="color: red;">2.3%</td>
<td>1.9%</td>
</tr>
<tr>
<td class="firstcol">Intermediate &amp; Capital Goods</td>
<td>0.1%</td>
<td>0.1%</td>
<td>1.3%</td>
<td>3.0%</td>
<td>3.3%</td>
<td>4.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Energy</td>
<td>-0.7%</td>
<td>0.4%</td>
<td>-1.2%</td>
<td style="color: red;">3.3%</td>
<td>-2.2%</td>
<td>12.6%</td>
</tr>
<tr>
<td class="firstcol">MFG</td>
<td>0.1%</td>
<td>0.3%</td>
<td>2.4%</td>
<td style="color: red;">4.8%</td>
<td>2.2%</td>
<td>4.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Germany</td>
<td>0.1%</td>
<td>-0.1%</td>
<td>0.7%</td>
<td style="color: red;">1.7%</td>
<td>1.0%</td>
<td>5.9%</td>
</tr>
<tr>
<td class="firstcol">ex Energy</td>
<td>0.3%</td>
<td>0.1%</td>
<td>2.2%</td>
<td style="color: red;">2.8%</td>
<td>2.6%</td>
<td>3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Italy</td>
<td>0.1%</td>
<td>0.3%</td>
<td>2.0%</td>
<td style="color: red;">3.7%</td>
<td>1.9%</td>
<td>6.6%</td>
</tr>
<tr>
<td class="firstcol">ex Energy</td>
<td>0.3%</td>
<td>0.2%</td>
<td>2.1%</td>
<td style="color: red;">3.2%</td>
<td>3.1%</td>
<td>4.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">UK</td>
<td>-0.6%</td>
<td>0.7%</td>
<td style="color: red;">2.6%</td>
<td>-2.3%</td>
<td>-0.1%</td>
<td>8.4%</td>
</tr>
<tr>
<td class="firstcol">UK ex Energy</td>
<td>0.2%</td>
<td>0.4%</td>
<td>2.5%</td>
<td>2.7%</td>
<td style="color: red;">3.0%</td>
<td>3.0%</td>
</tr>
<tr class="grey1">
<td colspan="7" class="firstcol">Euro Area 13 Harmonized PPI excluding Construction</td>

</tr>
<tr class="grey1">
<td colspan="7" class="firstcol">The EA 13 countries are Austria, Belgium, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,
Portugal, Slovenia and Spain.</td>

</tr>

</tbody>
</table>
</body></html>

The year/year ex-construction PPI continues to head lower, while the six-month measure has seen some steady pressure and recent quasi-plateauing. But the three- month PPI is heading strongly lower. On balance, the Euro Area PPI seems [...]

Euro Area PPI Behaves in August

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071012g.jpg" width="353">
The University of Michigan&#39;s preliminary reading of consumer sentiment in early October fell 1.7% to 82.0 after no change in September and a huge 7.7% drop in August. The decline exceeded Consensus expectations for a reading of 84.0.
Lower consumer expectations accounted for all of the fall. The decline offset a slight improvement in September.
Long term, expectations about personal finances and business conditions during the next year fell for the sixth month this year out of ten. Expectations about business conditions rose slightly but hardly offset huge declines in the prior two months.
The view of the current economic conditions improved due to a slight increase in the view of current personal finances. The perspective of current buying conditions also improved slightly.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071012f.jpg" width="353">
The assessment of government policy in October recovered the declines during the prior two months.
The University of Michigan survey is not seasonally adjusted.The reading is based on telephone interviews with about 500 households at month-end.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM">University of Michigan</a></th>
<th scope="col">October (Prelim.)</th>
<th scope="col">September</th>
<th scope="col">October&nbsp; y/y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Consumer Sentiment</td>
<td>82.0</td>
<td>83.4</td>
<td>-12.4% </td>
<td>87.3</td>
<td>88.5</td>
<td>95.2</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>98.2</td>
<td>97.9</td>
<td>-8.5%</td>
<td>105.1</td>
<td>105.9</td>
<td>105.6</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Expectations</td>
<td>71.6</td>
<td>74.1</td>
<td>-15.6%</td>
<td>75.9</td>
<td>77.4</td>
<td>88.5</td>
</tr>
</tbody>
</table>
</body>
</html>

The University of Michigan's preliminary reading of consumer sentiment in early October fell 1.7% to 82.0 after no change in September and a huge 7.7% drop in August. The decline exceeded Consensus expectations for a reading of 84.0. [...]

Michigan Consumer Sentiment Down

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

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

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

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

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

US economy expected to outperform other major economies in 2025

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

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

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

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

Policy uncertainty has surged since the US national elections.

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

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

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Winnie Tapasanun

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

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

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

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

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

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

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

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

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

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

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

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

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

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Globally Manufacturing Weakens

Andrew Cates

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

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

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

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

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

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

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

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Charts of the Week: Tariff Truce, Tenuous Trust

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

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

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

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

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

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

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

Economy in Brief: October 2007

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