Tom Moeller

The consumer price index (CPI-U) was unchanged in February following two consecutive months of 0.4% increase. It compared to expectations for a 0.3% rise and was the weakest since prices were unchanged last August. A slight dip in the [...]

U.S. CPI Total & Core Unchanged

Robert Brusca

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080313i.jpg" align="left" border="0" height="265" width="353">Japan&#8217;s index of industrial
output was revised lower. But the
general growth trend remains in force. Year/year output trends are
fairly stable at a moderate 2% or so rate of growth. Over six months,
trends point lower; over 3 months trends point sharply lower.

All major industrial and product growth sectors show weakness
in the recent one-month and three-month periods. Textiles, investment
goods and mining show the more persisting decelerating trends.

However, different leading indicators tell different stories
about Japan&#8217;s economy and where it is going. The OECD sees an upturn in
progress in six months, as its CLI has turned higher. Japan&#8217;s own
leading index is still locked in a downtrend going back to 2006.
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080313j.jpg" align="right" border="0" height="265" width="353">
The recent surge in the yen comes against this mixed
background. In the past the yen has not been able to rise strongly
unless the domestic economy was doing well. But in this case the yen&#8217;s
rise is the counter part of the dollar&#8217;s ubiquitous fall. The yen may
be driven more by the US and by yen funding unwinds than by Japan&#8217;s own
fundamentals. The BOJ is not talking of intervention, indeed, the
Keidanren, the influential Japan employers union, said it would not ask
for intervention unless the dollar got much stronger.

Japan&#8217;s exports have been holding up and there is some talk of
improved productivity in Japanese companies. But the dollar&#8217;s move up
could put all of this in jeopardy. Year-over-year output trends remain
steady but over shorter horizons we do have something to think about. 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="8" scope="col">Japan
Industrial Production Trends </th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">m/m %</td>
<td colspan="3">Saar %</td>
<td>Yr/Yr</td>
</tr>
<tr class="odd">
<td class="firstcol">seas adjusted</td>
<td>Jan-08</td>
<td>Dec-07</td>
<td>Nov-07</td>
<td>3-mo</td>
<td>6-mo</td>
<td>12-mo</td>
<td>Yr-Ago</td>
</tr>
<tr>
<td class="firstcol">Mining &amp; MFG</td>
<td>-2.2%</td>
<td>1.4%</td>
<td>-1.6%</td>
<td>-9.3%</td>
<td>2.6%</td>
<td>2.2%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">Total Industry</td>
<td>-2.6%</td>
<td>1.7%</td>
<td>-1.3%</td>
<td>-8.6%</td>
<td>3.4%</td>
<td>2.3%</td>
<td>2.6%</td>
</tr>
<tr>
<td class="firstcol">MFG</td>
<td>-2.2%</td>
<td>1.4%</td>
<td>-1.6%</td>
<td>-9.6%</td>
<td>2.6%</td>
<td>2.1%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">Textiles</td>
<td>-3.0%</td>
<td>2.5%</td>
<td>-2.2%</td>
<td>-10.2%</td>
<td>-8.6%</td>
<td>-5.6%</td>
<td>-4.2%</td>
</tr>
<tr>
<td class="firstcol">Transport</td>
<td>-3.2%</td>
<td>2.4%</td>
<td>-2.9%</td>
<td>-14.2%</td>
<td>31.5%</td>
<td>11.6%</td>
<td>4.6%</td>
</tr>
<tr class="odd">
<td colspan="8" class="firstcol">Product Group</td>
</tr>
<tr>
<td class="firstcol">Consumer Goods</td>
<td>-1.7%</td>
<td>2.1%</td>
<td>-2.1%</td>
<td>-6.8%</td>
<td>12.8%</td>
<td>4.0%</td>
<td>-0.8%</td>
</tr>
<tr>
<td class="firstcol">Intermediate Goods</td>
<td>-2.8%</td>
<td>1.3%</td>
<td>-1.1%</td>
<td>-10.3%</td>
<td>3.1%</td>
<td>4.0%</td>
<td>3.8%</td>
</tr>
<tr>
<td class="firstcol">Investment Goods</td>
<td>-0.8%</td>
<td>-0.6%</td>
<td>-1.9%</td>
<td>-12.6%</td>
<td>-8.3%</td>
<td>-3.8%</td>
<td>5.8%</td>
</tr>
<tr>
<td class="firstcol">Mining</td>
<td>-2.9%</td>
<td>1.1%</td>
<td>-5.9%</td>
<td>-27.2%</td>
<td>-15.9%</td>
<td>-5.1%</td>
<td>3.5%</td>
</tr>
<tr>
<td class="firstcol">Electricity &amp; Gas</td>
<td>-1.9%</td>
<td>0.2%</td>
<td>2.0%</td>
<td>1.0%</td>
<td>14.0%</td>
<td>5.3%</td>
<td>-2.8%</td>
</tr>
</tbody>
</table>
</body></html>

Japan’s index of industrial output was revised lower. But the general growth trend remains in force. Year/year output trends are fairly stable at a moderate 2% or so rate of growth. Over six months, trends point lower; over 3 months [...]

Japan's Industrial Sector Slows Down, Does the Economy?

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080313h.jpg" align="left" border="0" height="265" width="353">
Japan&#8217;s seasonally adjusted headline sales spurted over six
months then slowed over three months. The three-month slowdown however
is at a slightly slower pace than year-to-year sales. On the
quarter-to-date sales are better than their year/yearr pace and better
than their three-month pace.

For not seasonally adjusted data, Japan&#8217;s January retail sales
also jumped over six months compared to 12 months ago, but over the
recent three months sales were much weaker and generally back to their
year/year pace (a little better). In the current quarter too, Japan
retail sales are advancing at a pace close to the pace they posted over
the past year. These trends apply to most retail sales components.

Motor vehicles are one category that is an exception to some
of these generalities. MV sales did spurt over six months and slowed
from that pace over 3 months but the three-month pace has remained
above the year/year pace and as a result the quarter to date pace is
also elevated. But since MV sales are volatile it is never possible to
know if it is spurting and will have legs or will dissipate or even
reverse. Japan&#8217;s economy has been engaged in a long slowdown. But
recently several of its cyclical measures have shown some upside. Auto
sales may be another one of those new bright signs.


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="9" scope="col">Japan
Retail Sales Trends </th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Jan-08</td>
<td>Dec-07</td>
<td>Nov-07</td>
<td>3-mo</td>
<td>6-mo</td>
<td>12-mo</td>
<td>Yr-Ago</td>
<td>Q-to-Date</td>
</tr>
<tr>
<td class="firstcol">Total</td>
<td>0.6%</td>
<td>-0.8%</td>
<td>0.7%</td>
<td>1.8%</td>
<td>7.2%</td>
<td>1.2%</td>
<td>-4.7%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">Motor Vehicles</td>
<td>2.9%</td>
<td>-0.8%</td>
<td>0.1%</td>
<td>8.5%</td>
<td>17.7%</td>
<td>5.6%</td>
<td>-14.2%</td>
<td>14.7%</td>
</tr>
<tr>
<td class="firstcol">Food &amp; Beverage</td>
<td>0.2%</td>
<td>-0.2%</td>
<td>-0.1%</td>
<td>-0.5%</td>
<td>2.6%</td>
<td>0.4%</td>
<td>2.4%</td>
<td>0.1%</td>
</tr>
<tr>
<td class="firstcol">Fabric apparel &amp;
accessories</td>
<td>1.2%</td>
<td>-2.6%</td>
<td>1.5%</td>
<td>0.0%</td>
<td>6.2%</td>
<td>0.0%</td>
<td>-24.6%</td>
<td>-0.7%</td>
</tr>
<tr>
<td class="firstcol">Rest of Retail</td>
<td>0.2%</td>
<td>-0.9%</td>
<td>1.2%</td>
<td>1.9%</td>
<td>7.8%</td>
<td>0.9%</td>
<td>-3.0%</td>
<td>0.1%</td>
</tr>
</tbody>
</table>
</body></html>

Japan’s seasonally adjusted headline sales spurted over six months then slowed over three months. The three-month slowdown however is at a slightly slower pace than year-to-year sales. On the quarter-to-date sales are better than [...]

Japan Retail Sales: A Jump Then a Slowing

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080313f.jpg" width="353">
The U.S. government ran a budget deficit of $175.6B last month, quite a bit higher than last year&#39;s February deficit of $120B.
For the first five months of FY08 the government ran a budget deficit of $263.3B versus a deficit of 162.2B during the first five months of FY07.
For the fiscal year to date, growth in federal receipts slowed to just 1.3%, down from 9.3% growth during the first five months of FY07. Lower stock prices and the weaker economy with its slower employment growth stalled growth in individual income tax receipts (44% of total receipts) at 0.7% from 12.8% last FYTD. Withheld income taxes grew 5.3%, half the rate of gain last year, but non-withheld taxes grew just 3.6% versus 20.9% growth during the five months of FY07.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080313g.jpg" width="353">
Corporate income taxes (13% of total receipts) fell 4.8% due to lower corporate profits. During FY07 they rose 16.5% during the first five months. Unemployment insurance receipts fell 6.1% due to lower employment growth.
U.S. net outlays grew 10.2% early this fiscal year and that was nearly four times the growth early in FY07. Growth in defense spending (19% of total outlays) surged to 27.8% while Medicare expenditures (12% of outlays) surged 47.3%. Growth in social security spending (21% of outlays) held about steady at 4.8% but interest expense fell 1.5% as interest rates backed down a bit.
The Government&#39;s financial data is available in Haver&#39;s USECON database.

<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/@E1/@E106/@E10602/@E106021.HTM">US Government Finance</a> &nbsp;</th>
<th scope="col">February</th>
<th scope="col">January</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>-$175.6B</td>
<td>$17.8B</td>
<td>-$120.0B (2/07)</td>
<td>-$162.0B</td>
<td>-$248.2B</td>
<td>-$318.7B</td>
</tr>
<tr>
<td class="firstcol">Net Revenues</td>
<td>$105.7B</td>
<td>$255.2B</td>
<td>-12.1%</td>
<td>6.7%</td>
<td>11.8%</td>
<td>14.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Net Outlays</td>
<td>$281.3B</td>
<td>$237.4B</td>
<td>17.1%</td>
<td>2.8%</td>
<td>7.4%</td>
<td>7.6%</td>
</tr>
</tbody>
</table>
</body>
</html>

The U.S. government ran a budget deficit of $175.6B last month, quite a bit higher than last year's February deficit of $120B. For the first five months of FY08 the government ran a budget deficit of $263.3B versus a deficit of 162.2B [...]

U.S. Budget Deficit Deeper Due to Revenue Shortfall & Spending Surge

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080313d.jpg" width="353">
Overall import prices during February gained only 0.2% after a very firm, little revised 1.6% January increase. Expectations had been for a stronger 0.8% rise last month.
Petroleum prices fell an unexpected 0.5% after a 4.8% surge in January. That decline helped industrial materials prices to rise just 0.2%, but crude petroleum prices look to be up 8.0% this month versus February.
Less petroleum import prices were strong again last month and rose 0.6%. The lower foreign exchange value of the dollar has pushed the y/y increase in these prices to 4.5%, the strongest rate of increase since 1995. 
 During the last ten years there has been a 66% (negative) correlation between the nominal trade-weighted exchange value of the US dollar vs. major currencies and the y/y change in non oil import prices. The correlation is a reduced 47% against a broader basket of currencies.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080313e.jpg" width="353">
Prices for industrial supplies &amp; materials excluding petroleum surged again, last month by 2.5% (12.5% y/y) led by another surge in chemical prices (23.9% y/y). Finished metal prices also have been strong (12.4% y/y) as have been paper prices (2.3% y/y). They are recovering after deflation last year. The detailed import price series can be found in the Haver USINT database. 
Capital goods import prices rose just 0.1% (0.9% y/y) but that y/y gain follows a 0.4% increase last year and a 0.7% decline in 2006. Prices of computers, peripheral and semiconductors fell 0.5% last month (-5.0% y/y). Less the high tech sector, capital goods prices rose 0.3% (3.4% y/y) and here again the y/y increase is well elevated from a 2.7% rise last year and a 1.4% 2006 gain.
Finally, prices for nonauto consumer goods imports rose 0.3% in February (2.1% y/y) and the y/y rise in prices is now up from a 1.6% 2007 increase and a 0.4% uptick during 2006. Apparel prices are well up (2.0% y/y), double the rise of last year.
Total export prices have been quite strong with the 6.8% y/y gain led by a 30.8% jump in agricultural prices. That is followed by an accelerated 4.6% y/y gain in nonagricultural export prices which rose 3.6% last year. 
Today&#39;s remarks by Treasury Secretary Henry M. Paulson, Jr. can be found <a href="http://www.treas.gov/press/releases/hp872.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E807/@E807.HTM">Import/Export Prices (NSA)</a></th>
<th scope="col">February</th>
<th scope="col">January</th>
<th scope="col">Y/Y</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Import - All Commodities</td>
<td>0.2%</td>
<td>1.6%</td>
<td>13.6%</td>
<td>4.2%</td>
<td>4.9%</td>
<td>7.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Petroleum</td>
<td>-0.5%</td>
<td>4.8%</td>
<td>60.9%</td>
<td>11.6%</td>
<td>20.6%</td>
<td>37.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Non-petroleum</td>
<td>0.6%</td>
<td>0.7%</td>
<td>4.5%</td>
<td>2.7%</td>
<td>1.7%</td>
<td>2.7%</td>
</tr>
<tr>
<td class="firstcol">Export- All Commodities</td>
<td>0.9%</td>
<td>1.2%</td>
<td>6.8%</td>
<td>4.9%</td>
<td>3.6%</td>
<td>3.2%</td>
</tr>
</tbody>
</table>


</html>

Overall import prices during February gained only 0.2% after a very firm, little revised 1.6% January increase. Expectations had been for a stronger 0.8% rise last month. Petroleum prices fell an unexpected 0.5% after a 4.8% surge in [...]

U.S. Total Import Prices Eased, Nonoil Strongest Since 1995

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080313c.jpg" width="353">
Initial claims for unemployment insurance were unchanged last week at 353,000 from the prior week&#39;s level which was revised up slightly. The figure about matched Consensus expectations and it left the early March level of claims slightly below the February average.
A claims level below 400,000 typically has been associated with growth in nonfarm payrolls. During the last ten years there has been a (negative) 76% correlation between the level of initial claims and the m/m change in nonfarm payroll employment.
The four week moving average of initial was about unchanged w/w at 358,500 (9.4% y/y).
Continuing claims for unemployment insurance moved higher again. A 7,000 increase during the latest week followed a 26,000 gain during the prior period which was unrevised. Insured unemployment stood at its highest level since Summer 2005. The figure provides some indication of workers&#39; ability to find employment.
The continuing claims numbers lag the initial claims figures by one week.
The insured rate of unemployment remained at 2.1% for the sixth consecutive week.

<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/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a>&nbsp;</th>
<th scope="col">03/07/08</th>
<th scope="col">02/29/08</th>
<th scope="col">Y/Y</th>
<th scope="col">2007</th>
<th scope="col">2006&nbsp;</th>
<th scope="col">2005</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>&nbsp;353</td>
<td>353</td>
<td>12.4%</td>
<td>322</td>
<td>313</td>
<td>331</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,835</td>
<td>9.8%</td>
<td>2,551</td>
<td>2,459</td>
<td>2,662</td>
</tr>
</tbody>
</table>
</body>
</html>

Initial claims for unemployment insurance were unchanged last week at 353,000 from the prior week's level which was revised up slightly. The figure about matched Consensus expectations and it left the early March level of claims [...]

U.S. Weekly Initial Claims for Unemployment Insurance Unchanged

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080313a.jpg" width="353">
During February, U.S. retail sales fell an unexpected 0.6%, below the Consensus forecast for a 0.2% gain. Weak retail sales were generally expected during the last two months. The weakness didn&#39;t come in the initial January report but it was clearly evident in February. The sales decline reversed January&#39;s 0.4% gain which was little revised.
Sales of motor vehicles &amp; parts provided much of the surprise to the reports for last month and for January. They fell 1.9% in February, reversing an unexpected 0.2% January gain. Expectations for both months were based on unit sales reports of a 0.3% m/m increase in February and a 5.4% January decline.
Retail sales excluding autos last month fell 0.2% after a 0.5% January increase that was revised up slightly. A 0.5% December drop also was revised deeper. The February decline was short of Consensus expectations for a 0.2% rise.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080313b.jpg" width="353">
A 1.0% decline in sales at gasoline service stations was in line with a 0.5% drop in retail gasoline prices last month. So far in March gasoline prices are up roughly 5.5% m/m. Less gasoline &amp; autos, February retail sales fell 0.1% and the January result was revised up.
Sales of discretionary items were mixed last month. Apparel store sales rose 0.2% (2.3% y/y) after an upwardly revised 2.2% January increase. Furniture, home furnishings &amp; appliance store sales, however, fell 0.4% (-2.1% y/y) and they are down 2.8% during the last three months. Sales of electronics &amp; appliances fell 0.4% (+0.5% y/y). Sales at general merchandise stores rose 0.4% (3.6% y/y) after little change during January.
Sales of nonstore retailers (internet &amp; catalogue) fell 0.1% (+1.8% y/y) during February, for the third consecutive monthly decline, and earlier months&#39; figures were revised lower.
Sales of building materials &amp; garden equipment continued their recent decline and fell 0.7% (-4.2% y/y). Since their peak early in 2006 these sales are down 8.3%.
Food &amp; beverage store sales fell 0.2% (+4.3% y/y) last month. Restaurant &amp; drinking place sales fell 0.4% (+4.6% y/y).

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">&nbsp;</th>
<th scope="col">February</th>
<th scope="col">January</th>
<th scope="col">Y/Y</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol"><a href="http://www.haverselect.com/dlx/usecon/@ED/@ED04/@ED0401/@ED0401.HTM">Retail Sales &amp; Food Services</a></td>
<td>-0.6%</td>
<td>0.4%</td>
<td>2.6%</td>
<td>4.0%</td>
<td>6.2%</td>
<td>6.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Excluding Autos</td>
<td>-0.2%</td>
<td>0.5%</td>
<td>4.4%</td>
<td>4.5%</td>
<td>7.4%</td>
<td>7.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Less Gasoline</td>
<td>-0.1%</td>
<td>0.2%</td>
<td>2.4%</td>
<td>4.3%</td>
<td>7.2%</td>
<td>6.6%</td>
</tr>
</tbody>
</table>
</body>
</html>

During February, U.S. retail sales fell an unexpected 0.6%, below the Consensus forecast for a 0.2% gain. Weak retail sales were generally expected during the last two months. The weakness didn't come in the initial January report but [...]

U.S. Retail Sales Fell Unexpectedly, Discretionary Sales Mixed

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

US production rebounded in Q2, but demand continued to slow

US leader, Germany trailer for real GDP growth over past 3 years

Negative US inflation surprises leading G10 down

Deflation continues in China

Incoming data surprising on downside in US; positive surprises elsewhere

FOMC expects more inflation and less growth than in March

With escalation of Israel/Iran conflict, geopolitical risk has recently surged while US trade policy uncertainty has ebbed

Renewed supply chain pressures point to a rebound in global inflation ahead

Apart from Japan, Blue Chip forecasters look for further significant monetary policy easing

Apart from the US, productivity is moribund

Financial market concerns ebb even though policy uncertainty continues to soar

US tariff revenues nearly doubled in April

Even with expected tariff-induced increases in inflation, BCFF forecasters look for a more aggressive round of monetary easing

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

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Andrew Cates

**Capacity pressures in the US and Europe**
Output gaps in advanced economies (the US and euro area) are estimated to have narrowed sharply in recent months and could be on the verge of turning negative. This reflects a prior period of weaker growth and a growing degree of slack in the economy—conditions that typically translate into softer inflation and heightened pressure on central banks to ease policy. Labour markets are certainly showing greater signs of weakness in the US. A big caveat to this is that estimating output gaps is inherently difficult, especially after recent supply shocks and structural shifts in labour markets. Still, most real-time indicators now suggest aggregate demand is slipping below potential. And that, alongside weakening job data, is strengthening the case for further policy easing and hints at continued disinflation in the months ahead.

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**The US housing market**
US housing has long been a bellwether for broader economic conditions, largely because of its deep ties to credit creation, household balance sheets, and interest rates. That’s why the latest data showing a renewed slump in builder sentiment and a more sustained drop in house price momentum has been of note. With mortgage rates still elevated and lending standards – as we discuss below – still tight, the housing sector looks increasingly fragile—raising fresh concerns about the durability of US growth.

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**US bank lending standards**
This week’s latest Fed Senior Loan Officer Survey confirms that US credit conditions remain restrictive. Banks are still tightening lending standards for companies and consumers while loan demand continues to weaken—a pattern historically associated with periods of economic downturn. Although the net percentage of banks tightening standards has eased somewhat from 2023 peaks (see chart below), it remains elevated, and credit demand is now falling across most categories, from small business to commercial real estate. This tightening in credit supply and fall in demand suggests that monetary policy is still transmitting forcefully through the banking sector.

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**Global growth momentum** 
Until recently, global economic surprises and sentiment surveys were broadly supportive, suggesting the global cycle still had momentum. But this week’s Sentix survey revealed a renewed drop in expectations for August. That decline, coupled with a fading Citi Economic Surprise Index, hints that global momentum may be weakening again. As forward-looking indicators start to roll over, investors and policymakers alike should be alert to a potential shift toward a more pronounced downturn.

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**Global shipping costs and supply chain pressures** 
One additional area of heightened investor concern of late has been the potential inflationary fallout from recent US tariff measures. But so far, there is little evidence – at the global level - to suggest that global supply chains or freight costs have been meaningfully disrupted. The Baltic Exchange Dry Index and the NY Fed’s Global Supply Chain Pressure Index both remain relatively subdued, indicating that logistics bottlenecks have not re-emerged.

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**China’s excess capacity**
China’s economic influence remains pivotal in shaping global goods inflation. The latest data show that producer prices in China continue to contract, extending a prolonged period of deflation that reflects both domestic weakness and excess industrial capacity. This ongoing slack not only suppresses China’s export prices but also exerts downward pressure on global manufacturing input costs. At a time when central banks (most notably in the US) are weighing the risk of reacceleration in inflation, China’s persistent deflation in upstream prices acts as a powerful counterforce—reinforcing the view that goods inflation risks could remain subdued for now.

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Last week’s weaker-than-expected US labour market report—marked by sluggish payroll growth, rising unemployment, and downward revisions to prior months—sparked a notable shift in financial markets. Bond yields fell sharply as investors repriced the outlook for Fed easing, with rate cut expectations brought forward. This recalibration arguably reflects growing awareness of mounting downside risks across the US and broader global economy. Several indicators reinforce this view. Output gaps in many major economies are narrowing or turning negative, signalling that demand is falling short of potential (chart 1). The US housing market looks fragile, amidst weak builder sentiment and falling prices (chart 2). US bank lending standards are still restrictive, with implications for credit availability, household and business investment, and overall economic momentum (chart 3). Some (though not all) global sentiment surveys have softened, and positive growth surprises are now fading. Meanwhile, and despite earlier fears, US tariffs have not triggered renewed supply chain stress or inflationary pressures (chart 5). Add to that the ongoing deflation in China’s producer prices, and the macro narrative could be tilting more decisively toward slower growth and diminishing inflation risks—leaving policymakers with more space to continue easing monetary policy (chart 6).

Charts of the Week: Downside Risks

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Mortgage applications increased 3.1% (17.8% y/y) in the week ending August 1, after declining 3.8% in the prior week, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Applications for loan refinancing jumped 5.2% (17.5% y/y) last week, following three straight weeks of decline. Applications for loans to purchase a home rose 1.5% (18.0% y/y) last week, following a 5.8% decline in the week of July 25.

The effective interest rate on a 30-year fixed-rate loan slipped to 6.94% in the week ending August 1, from 7.00% in the prior week. It was the lowest rate since the first week of April. The rate on 15-year fixed-rate mortgages declined to 6.19% in the latest week from 6.28% in the week of July 25. The rate on 30-year Jumbo loans dropped to 6.82% last week from 6.89% one week earlier. The rate on a 5-year ARM dropped to 6.25% in the week of August 1 after rising to 6.40% in the prior week. It was above a low of 5.84% in the week of September 13, 2024.

The share of applications for refinancing an existing loan rose to 41.5% of total applications in the week ending August 1, from 40.7% in the prior week. The adjustable-rate mortgage (ARM) share of activity rose to 8.50% in the latest week from 8.30% in the week of July 25.

The average size of a mortgage loan rose 1.9% (0.6% y/y) to $381,400 in the week of August 1, following a 0.7% rise in the prior week. The average size of a purchase loan rose 0.7% (1.3% y/y) to $432,300 in the latest week after gaining 0.6% in the week ending July 27. The average size of a loan to refinance a mortgage rose 5.2% (-0.8% y/y) to $309,800 last week, after rising 2.3% in the prior week.

The Mortgage Bankers Association Survey covers 75% of all U.S. retail residential mortgage applications and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. The base period and value for all indexes is March 16, 1990=100. The figures for weekly mortgage applications and interest rates are available in Haver’s **SURVEYS** database.

- Loan refinancing jumps as purchase applications edge higher.
- Effective fixed-interest rate eases on 30-year loans. 
- Average loan size increases again.

U.S. Mortgage Applications Rise Last Week as Interest Rates Slip

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German orders expressed in real terms fell by 1% in June after falling by 0.8% in May. Foreign orders fell by 3% month-to-month after rising 3.8% in May. Domestic orders came back to life rising by 2.2% in June but only after a sharp 7.5% drop in May; that drop had been preceded by a 2.8% increase in April. The gyration and trend performance of orders is still choppy and, for the most part, weak.

**Order trends**
Sequential growth rates show that overall orders for Germany (still expressed in real terms) rose by 0.6% over 12 months; however, they fall at 4.7% annual rate over six months and fall at a 0.5% annual rate over three months. Foreign orders rise by 7.4% over 12 months; over six months the gain is at a 13.7% annual rate, and over three months that pace is reduced to a 7.3% annual rate. German domestic orders fall by 8.6% over 12 months, then decline at an extremely rapid 26.1% annual rate over six months, and continue to decline at 11.1% annual rate over three months. For the time being, orders have been propped up by strength in the international market while domestic orders continue to languish and to contract.

**Real sales**
Sector sales, expressed in real terms, rose by 1% and those across all the components after seeing widespread contractions in May that had followed an uneven performance in April. Real sales for manufacturing fall by 1.5% over 12 months, fall at a 1.9% annual rate over six months, and fall at an annual rate of 9.2% over three months. Real sales trends are not reassuring.

**European Surveys on Industry**
Survey results for the largest economies in the European Monetary Union show slippages in June compared to May as three of the four large economies weaken (with Italy being the exception). Over three months France logged a weaker reading compared to six-months, Germany improved, Italy's performance is unchanged; Spain reports a result that's better by a single tick on the survey index comparing 3-months to 6-months. Comparing the 12-month to averages to 3-month averages for the four large European economies, shows deterioration that's across the board with the slight exception of Italy.

**Quarter-to-date (completed Q2)**
The quarter-to-date (QTD) performance in Germany for orders are strong, rising at a 13.1% annual rate. Sector sales show deteriorated real sector sales across most sectors on QTD basis; manufacturing sales fall at a 2.9% annual rate.

**Longer term evaluations** 
The two right hand columns evaluate the growth and level performance of these various metrics on real sector sales and on a level basis and well as on annual growth rates. Total orders and foreign orders ranked on levels are well above their 50% mark, which puts them above their median on data back to 1994. Domestic sales levels have only a 21.8 percentile standing, extremely weak. Rankings on growth rates show total orders at a 45.9 percentile ranking, below the median growth rate (which occurs at a ranking of 50%). However, foreign orders’ growth ranks in the 70th percentile, quite firm, while the domestic growth rate queue ranking resides in the lower 10.7 percentile of its range. Growth rates for real sector sales are mostly below their 50-percentile mark except for consumer nondurables and consumer goods sales overall (which, of course, are boosted by the sales of consumer nondurables). The industrial confidence indicators for European economies that are from diffusion surveys are evaluated relative to historic levels only. All of them score weak results. The best queue standing is Spain with a 37.5 percentile standing, followed by Italy at a 24.8 percentile standing. France has a 14.6 percentile standing, while Germany has a 7.4 percentile standing. These range from weak, and below median, to very weak.

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**Summing up**
On balance, German performance in June is poor. The trends are poor, and far from reassuring. Sector sales performance is poor. Performance across Europe continues to be poor as captured by survey results- that performance continues, for the most part, to deteriorate. However, German quarter-to-date growth rates for orders are strong in Q2 compared to Q1, but that is only on the back of strength in foreign orders. German domestic orders are still behaving badly. All-in-all, it's a disappointing report on the manufacturing sector for Germany and for what we survey of Europe.

Germany

German Orders Fall Again, Unexpectedly

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The U.S. ISM Services PMI declined to 50.1 during July, after rising to 50.8 in June from 49.9 in May, according to the Institute for Supply Management. The index hit a recent high of 55.8 in October of last year, and remains below the all-time high of 67.5 in November 2021. The Action Economics Forecast Survey expected a reading of 51.5 for July.

The composite index combines the services index and the manufacturing index released last Friday. This index fell to 49.8 in July from 50.6 in June. The latest figure is the lowest since June 2024, down from the November 2024 high of 54.7.

Amongst the services component series, the business activity index fell to 52.6 last month from 54.2 in June. Twenty-four percent (NSA) of respondents reported improved activity while 14.4% reported a decline. The new orders index fell to 50.3 in July from 51.3 in June. Twenty percent (NSA) of respondents reported improved orders while a higher 18.7% reported a decline. The employment series weakened to 46.4, its lowest level in four months, from 47.2 in June. An increased 12.3% (NSA) of respondents reported increased employment while a higher 18.1% reported a decline. Working higher, the supplier delivery series edged up to 51.0 in July after falling to 50.3 in June, but remained below a high of 56.4 in October of last year. A reduced 4.3% of respondents (NSA) reported faster delivery speeds while a higher 6.3% reported a slowing.

On the inflation front, the prices index surged to 69.9 in July after easing to 67.5 in June. It was the highest level since October 2022. An increased 42.1% (NSA) of respondents reported higher prices while an increased 4.0% reported lower prices. The index was increased from its March 2024 low 53.5 and stood at its highest level since October 2022.

Additionally, the new export orders index fell sharply to 47.9 (NSA) in October following a rise to 51.1 in June. Just 10.4% of survey respondents reported higher exports while an increased 14.7% reported a decline. The imports index fell sharply to 45.9 last month from 51.7 in June. A greatly lessened 4.1% of respondents reported higher imports while a higher 12.4% reported a decline. The inventory change index weakened to 51.8. The order backlog index rose to 44.3 in July after falling to 42.4 in June. A higher 8.3% of respondents reported higher backlogs while a fewer 19.7% reported a decline. These series are not seasonally adjusted and not included in the ISM Services PMI total.

The ISM Services PMI is a composite index consisting of four equally weighted diffusion indexes: Business Activity, New Orders, Employment, and Supplier Deliveries. A reading above 50 indicates expansion in the services sector, while below 50 suggests contraction. Supplier Deliveries is the only ISM index that is inversed; a reading above 50 indicates slower deliveries.

The ISM figures are available in Haver's **USECON** database, with additional detail in the **SURVEYS** database. The expectations figure from Action Economics is in the **AS1REPNA** database.

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- Total index trending lower for nine months.
- Business activity, new orders & employment weaken.
- Prices Index strengthens to highest level since 2022.

U.S. ISM Services PMI Declines in July; Price Index Increases

Winnie Tapasanun

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The U.S. trade deficit in goods and services (BOP basis) narrowed to $60.18 billion in June after widening to $71.66 billion in May ($71.52 billion originally), according to the U.S. Census Bureau. This was the second month in three in which the deficit had narrowed. The June deficit was the smallest since September 2023 and much smaller than the $73.89 billion in June 2024. A deficit of $61.6 billion had been expected in the Action Economics Forecast Survey. Exports declined 0.5% m/m (+3.3% y/y) in June following a 4.1% drop in May (-4.0% previously) and four successive m/m increases. Imports fell 3.7% (-1.4% y/y) after an unrevised 0.1% downtick in May, registering the third consecutive m/m fall and the fourth in five months.

The real (inflation-adjusted) goods trade deficit (customs value; chained 2017 dollars) narrowed to $84.61 billion in June after widening to $93.32 billion in May; it was smaller than the $92.82 billion in June 2024. The $87.43 billion average monthly real trade deficit in Q2'25 was the smallest since Q4'23 and significantly smaller than the record $143.28 billion in Q1'25. A trade balance (net exports) added 4.99%-points to Q2'25 real GDP growth after subtracting 4.61%-points in Q1'25.

The deficit in goods trade (BOP basis) narrowed to $85.88 billion in June, the smallest since September 2023, after widening to $97.30 billion in May; it was much smaller than the $99.56 billion in June 2024. Goods exports fell 0.7% (+3.3% y/y) in June following a 5.9% drop in May and four straight m/m rises. Imports of goods decreased 4.5% (-2.9% y/y), down for the fourth month in five, after a 0.1% May easing.

The customs value goods trade deficit fell to $84.85 billion in June, the smallest since September 2023, after widening to $96.21 billion in May; it was much smaller than the $98.81 billion in June 2024. The latest figure was slightly smaller than an $85.99 billion deficit in the advance report released on July 29. Custom value exports fell 0.7% (+3.5% y/y) in June following a 5.6% drop in May and four consecutive m/m gains. This reflected m/m falls of 7.4% (+0.7% y/y) in industrial supplies & materials and 2.6% (+22.8% y/y) in other goods. To the upside, exports for the following end-use categories rose m/m in June: nonfood consumer goods excluding autos (4.6%; 4.3% y/y), foods, feeds & beverages (4.4%; 1.2% y/y), capital goods excluding autos (3.4%; 9.7% y/y), and automotive vehicles, parts & engines (1.6%; -15.8% y/y).

Customs value imports slid 4.6% (-2.9% y/y) in June, the third straight m/m slide and the fourth in five months, after a 0.1% downtick in May. This reflected m/m drops of 12.7% (-13.3% y/y) in nonfood consumer goods excluding autos, 5.2% (-12.4% y/y) in industrial supplies & materials, 4.9% (+7.8% y/y) in other goods, 3.6% (-12.2% y/y) in automotive vehicles, parts & engines, and 1.5% (+3.8% y/y) in foods, feeds & beverages. In contrast, imports of capital goods excluding autos, the only end-use category with a monthly increase in June, rose 0.7% (14.0% y/y), the seventh m/m rise in eight months, on top of a 0.3% May rebound. Meanwhile, petroleum imports fell 3.8% (-24.7% y/y) in June, the fourth m/m fall in five months, reversing a 1.5% rise in May. Nonpetroleum imports slid 4.6% (-1.1% y/y), the third straight m/m slide, after a 0.2% May decline.

The services trade surplus rose to $25.70 billion in June after narrowing to $25.64 billion in May; it was in line with $25.67 billion in June 2024. Services exports fell 0.2% (+3.3% y/y) in June, the fifth m/m fall in six months, on top of a 0.6% decline in May. This reflected m/m drops of 4.8% (-11.3% y/y) in government goods & services, 2.1% (+30.8% y/y) in maintenance & repair services, and 1.1% (-0.02% y/y) in travel services, while exports for construction services (0.9%; -5.7% y/y), insurance services (0.7%; 18.9% y/y) and charges for the use of intellectual property (0.5%; 7.0% y/y) increased m/m in June. Services imports fell 0.3% (+4.5% y/y) after a 0.3% May fall and two successive m/m increases. This reflected m/m drops of 1.9% (+48.0% y/y) in maintenance & repair services, 1.5% (+2.9% y/y) in travel services, and 1.3% (-1.3% y/y) in transport services, while imports for construction services (2.0%; 82.3% y/y), charges for the use of intellectual property (0.8%; 1.3% y/y) and financial services (0.5%; 4.9% y/y) rose m/m in June.

The U.S. goods trade deficit with China narrowed to a seasonally adjusted $9.38 billion in June, the smallest on record, after falling to $13.97 billion in May. Exports surged 45.4% (-16.6% y/y) following a 19.9% May slump, while imports fell 6.9% (-45.6% y/y) on top of a 26.3% May plunge. The goods trade deficit with the European Union narrowed markedly to $9.52 billion in June, the smallest since June 2013, after widening to $22.54 billion in May, with exports up 6.8% (16.6% y/y) and imports down 19.2% (-8.2% y/y). The trade shortfall with Japan narrowed marginally to $5.72 billion in June, the smallest since February, from $5.77 billion in the previous month, reflecting declines of 3.4% (-7.5% y/y) in exports and 2.3% (-0.4% y/y) in imports.

The international trade data, including relevant data on oil prices, can be found in Haver’s **USECON** database. Detailed figures on international trade are available in the **USINT** and **USTRADE** databases. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- $60.2 bil. trade deficit, reflecting $85.9 bil. goods deficit & $25.7 bil. services surplus.
- Exports -0.5% m/m, down for the second consecutive month.
- Imports -3.7% m/m, down for the third straight month.
- Real goods trade deficit narrows to $84.6 bil. after May’s widening.
- Goods trade deficits w/ China at a record low, w/ EU at a June ’13 low, and w/ Japan at a 4-month low.

Economy in Brief: March 2008

Jump to:

U.S. CPI Total & Core Unchanged

Japan's Industrial Sector Slows Down, Does the Economy?

Japan Retail Sales: A Jump Then a Slowing

U.S. Budget Deficit Deeper Due to Revenue Shortfall & Spending Surge

U.S. Total Import Prices Eased, Nonoil Strongest Since 1995

U.S. Weekly Initial Claims for Unemployment Insurance Unchanged

U.S. Retail Sales Fell Unexpectedly, Discretionary Sales Mixed

U.S. Retail Sales Fell Unexpectedly, Discretionary Sales Mixed