Robert Brusca

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080714b.jpg" align="left" border="0" height="265" width="353">
You can like Mervyn King, Governor of the BOE, and BOE itself.
But that bank has lost its grip on inflation, at the PPI level and that
is chilling. PPI inflation has absolutely surged sending the CORE PPI
rate up by 6.3% Yr/Yr and the three month core rate to 11.8% in arise
reminiscent of the 1970s bell-bottoms and Carnaby Street &#8211; all that
along with its destructive episode of inflation. Of course the RPC/HICP
inflation measures are more important ones, but these sorts of
pressures at the factory gate level spell bad news for inflation
elsewhere in the economy. PPI headline inflation is bristling at a 10%
paces and over three-months UK headline inflation is over 17% for the
PPI. All that is very bad news indeed.
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080714c.jpg" align="right" border="0" height="265" width="353">
The second chart shows that the core HICP inflation rate has
remained much more stable in the face of rising oil prices and even the
rising PPI results. Still, there have been several step ups in the HICP
pace and right now there is the threat of an acceleration that may be
taking root.

As is the case in the US there is more pressure at the PPI
level than at the consumer prices level in the UK. UK the core PPI
inflation has a correlation with the core HICP of only 0.25, in
R-square terms that is only 0.06 &#8211; a very low association.

The BOE may be able to keep this wolf at bay. But what is
shocking for the moment at least is the degree of pressure that is
being mounted on the PPI. If only a fraction of it gets into the HICP
it will be too much. With this report in hand and with PPI data more
topical by a full two months (June for the PPI Vs April for the HICP)
inflation trends at the consumer level will be under the microscope in
the UK.


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="8" scope="col">UK PPI
</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">%m/m</td>
<td colspan="4">%-SAAR</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Jun-08</td>
<td>May-08</td>
<td>Apr-08</td>
<td>3-mo</td>
<td>6-mo</td>
<td>12-mo</td>
<td>12-moY-Ago</td>
</tr>
<tr>
<td class="firstcol">MFG</td>
<td>0.9%</td>
<td>1.8%</td>
<td>1.3%</td>
<td>17.2%</td>
<td>13.6%</td>
<td>10.0%</td>
<td>2.4%</td>
</tr>
<tr>
<td class="firstcol">Core</td>
<td>0.3%</td>
<td>1.4%</td>
<td>1.1%</td>
<td>11.8%</td>
<td>9.6%</td>
<td>6.3%</td>
<td>2.0%</td>
</tr>
<tr>
<td colspan="7" class="firstcol">Core: ex
food beverages, tobacco
&amp; Petroleum</td>
<td>&nbsp;</td>
</tr>
</tbody>
</table>
</body></html>

You can like Mervyn King, Governor of the BOE, and BOE itself. But that bank has lost its grip on inflation, at the PPI level and that is chilling. PPI inflation has absolutely surged sending the CORE PPI rate up by 6.3% Yr/Yr and the [...]

UK Losses Grip on PPI Inflation

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080714a.jpg" align="left" border="0" height="265" width="353">
Even capital goods output trends in Europe are begging to look
strained. Manufacturing IP is in its first decline since May of 2005 on
a Yr/Yr basis. The month-to-month 1.4% output drop is the largest since
Sept 2007. The drop is spread liberally across EMU members especially
large countries including German where output is off for three-months
in a row. France, Italy, Spain and the UK each have MFG output lower
yr/yr; in Germany it is still up but only by 0.9%.

In the current quarter MFG IP is dropping at a 3.3% annual
rate. Consumer goods output is off sharply. Intermediate goods output
in falling. Capital goods output is still rising in Q2 at a thin 0.6%
annual rate.

The euro currency seems to be doing some backtracking. Not
only has the &#8216;rescue package for Fannie Mae and Freddie Mac, two large
US &#8216;GSEs,&#8217; (Government sponsored enterprises) helped to buoy the dollar
but so has this news of encroaching weakness in Europe. Europe has been
in denial about its weakness (with a few exceptions) for some time.
Part of this has been due to a need to show a common front in backing
the ECB. Admitting that the wheels were coming of the economy would
have been no way to support the ECB in its plan to hike rates.

But with that done talk has turned quickly to how that hike
could be undone. Bill Gross of PIMCO, a long term dollar bear, has
changed his mind. Several high profile Wall Street strategists who had
recommended US companies with large foreign sales have thrown in the
towel as not only did that strategy not work it seems to have fewer
prospects to work with going forward. Europe is weakening and reality
is dawning slowing on a broad front with today&#8217;s report.


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="11" scope="col">Euro Area
Manufacturing IP </th>
</tr>
</thead>
<tbody>
<tr class="grey2">
<td class="firstcol">Saar except m/m</td>
<td colspan="3">Mo/Mo</td>
<td>May 
08</td>
<td>Apr 
08</td>
<td>May 
08</td>
<td>Apr 
08</td>
<td>May 
08</td>
<td>Apr 
08</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">Ezone Detail</td>
<td>May 
08</td>
<td>Apr 
08</td>
<td>Mar 
08</td>
<td>3Mo</td>
<td>3Mo</td>
<td>6mo</td>
<td>6mo</td>
<td>12mo</td>
<td>12mo</td>
<td>Q-2- 
Date</td>
</tr>
<tr>
<td class="firstcol">MFG</td>
<td>-1.4%</td>
<td>0.5%</td>
<td>-0.7%</td>
<td>-6.4%</td>
<td>-0.7%</td>
<td>-0.7%</td>
<td>1.0%</td>
<td>-0.2%</td>
<td>2.9%</td>
<td>-3.3%</td>
</tr>
<tr>
<td class="firstcol">Consumer</td>
<td>-1.8%</td>
<td>0.7%</td>
<td>-0.9%</td>
<td>-7.6%</td>
<td>-2.8%</td>
<td>-3.3%</td>
<td>-1.3%</td>
<td>-2.9%</td>
<td>0.4%</td>
<td>-4.4%</td>
</tr>
<tr>
<td class="firstcol">Consumer Durables</td>
<td>-3.3%</td>
<td>1.9%</td>
<td>-2.0%</td>
<td>-12.6%</td>
<td>-0.5%</td>
<td>-3.7%</td>
<td>-1.2%</td>
<td>-5.0%</td>
<td>1.0%</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">Consumer Non-Durables</td>
<td>-1.2%</td>
<td>0.0%</td>
<td>-0.6%</td>
<td>-6.9%</td>
<td>-3.8%</td>
<td>-3.2%</td>
<td>-1.4%</td>
<td>-2.5%</td>
<td>-0.1%</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">Intermediate</td>
<td>-1.4%</td>
<td>0.4%</td>
<td>-0.6%</td>
<td>-6.1%</td>
<td>0.1%</td>
<td>-0.1%</td>
<td>0.7%</td>
<td>-0.4%</td>
<td>2.5%</td>
<td>-2.9%</td>
</tr>
<tr>
<td class="firstcol">Capital</td>
<td>-2.4%</td>
<td>2.4%</td>
<td>-1.7%</td>
<td>-6.9%</td>
<td>4.2%</td>
<td>0.9%</td>
<td>5.4%</td>
<td>2.6%</td>
<td>7.6%</td>
<td>0.6%</td>
</tr>
<tr class="grey2">
<td colspan="11" class="firstcol">Main
Euro Area Countries
and UK IP in MFG</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Mo/Mo</td>
<td>May 
08</td>
<td>Apr 
08</td>
<td>May 
08</td>
<td>Apr 
08</td>
<td>May 
08</td>
<td>Apr 
08</td>
<td>&nbsp;</td>
</tr>
<tr class="grey2">
<td class="firstcol">MFG Only</td>
<td>May 
08</td>
<td>Apr 
08</td>
<td>Mar 
08</td>
<td>3Mo</td>
<td>3Mo</td>
<td>6mo</td>
<td>6mo</td>
<td>12mo</td>
<td>12mo</td>
<td>Q-2- 
Date</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>-2.6%</td>
<td>-0.3%</td>
<td>-0.3%</td>
<td>-12.2%</td>
<td>-2.2%</td>
<td>-1.9%</td>
<td>3.0%</td>
<td>0.9%</td>
<td>5.5%</td>
<td>-8.3%</td>
</tr>
<tr>
<td class="firstcol">France: IP excl Construction</td>
<td>-2.6%</td>
<td>1.5%</td>
<td>-1.1%</td>
<td>-8.8%</td>
<td>3.5%</td>
<td>-1.7%</td>
<td>0.4%</td>
<td>-1.2%</td>
<td>3.1%</td>
<td>-2.0%</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>-1.5%</td>
<td>0.3%</td>
<td>-0.2%</td>
<td>-5.3%</td>
<td>0.4%</td>
<td>0.9%</td>
<td>1.0%</td>
<td>-2.7%</td>
<td>-0.5%</td>
<td>-2.6%</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>-14.6%</td>
<td>27.5%</td>
<td>-16.9%</td>
<td>-32.9%</td>
<td>39.8%</td>
<td>-9.5%</td>
<td>11.8%</td>
<td>-7.4%</td>
<td>12.0%</td>
<td>26.7%</td>
</tr>
<tr>
<td class="firstcol">UK</td>
<td>-0.6%</td>
<td>0.1%</td>
<td>-0.5%</td>
<td>-3.8%</td>
<td>0.0%</td>
<td>-0.8%</td>
<td>0.2%</td>
<td>-0.8%</td>
<td>0.0%</td>
<td>-1.8%</td>
</tr>
</tbody>
</table>
</body></html>

Even capital goods output trends in Europe are begging to look strained. Manufacturing IP is in its first decline since May of 2005 on a Yr/Yr basis. The month-to-month 1.4% output drop is the largest since Sept 2007. The drop is [...]

Euro Area IP Trends Point Lower

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080714a.jpg" align="left" border="0" height="265" width="353">
Even capital goods output trends in Europe are begging to look
strained. Manufacturing IP is in its first decline since May of 2005 on
a Yr/Yr basis. The month-to-month 1.4% output drop is the largest since
Sept 2007. The drop is spread liberally across EMU members especially
large countries including German where output is off for three-months
in a row. France, Italy, Spain and the UK each have MFG output lower
yr/yr; in Germany it is still up but only by 0.9%.

In the current quarter MFG IP is dropping at a 3.3% annual
rate. Consumer goods output is off sharply. Intermediate goods output
in falling. Capital goods output is still rising in Q2 at a thin 0.6%
annual rate.

The euro currency seems to be doing some backtracking. Not
only has the &#8216;rescue package for Fannie Mae and Freddie Mac, two large
US &#8216;GSEs,&#8217; (Government sponsored enterprises) helped to buoy the dollar
but so has this news of encroaching weakness in Europe. Europe has been
in denial about its weakness (with a few exceptions) for some time.
Part of this has been due to a need to show a common front in backing
the ECB. Admitting that the wheels were coming of the economy would
have been no way to support the ECB in its plan to hike rates.

But with that done talk has turned quickly to how that hike
could be undone. Bill Gross of PIMCO, a long term dollar bear, has
changed his mind. Several high profile Wall Street strategists who had
recommended US companies with large foreign sales have thrown in the
towel as not only did that strategy not work it seems to have fewer
prospects to work with going forward. Europe is weakening and reality
is dawning slowing on a broad front with today&#8217;s report.


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="11" scope="col">Euro Area
Manufacturing IP </th>
</tr>
</thead>
<tbody>
<tr class="grey2">
<td class="firstcol">Saar except m/m</td>
<td colspan="3">Mo/Mo</td>
<td>May 
08</td>
<td>Apr 
08</td>
<td>May 
08</td>
<td>Apr 
08</td>
<td>May 
08</td>
<td>Apr 
08</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">Ezone Detail</td>
<td>May 
08</td>
<td>Apr 
08</td>
<td>Mar 
08</td>
<td>3Mo</td>
<td>3Mo</td>
<td>6mo</td>
<td>6mo</td>
<td>12mo</td>
<td>12mo</td>
<td>Q-2- 
Date</td>
</tr>
<tr>
<td class="firstcol">MFG</td>
<td>-1.4%</td>
<td>0.5%</td>
<td>-0.7%</td>
<td>-6.4%</td>
<td>-0.7%</td>
<td>-0.7%</td>
<td>1.0%</td>
<td>-0.2%</td>
<td>2.9%</td>
<td>-3.3%</td>
</tr>
<tr>
<td class="firstcol">Consumer</td>
<td>-1.8%</td>
<td>0.7%</td>
<td>-0.9%</td>
<td>-7.6%</td>
<td>-2.8%</td>
<td>-3.3%</td>
<td>-1.3%</td>
<td>-2.9%</td>
<td>0.4%</td>
<td>-4.4%</td>
</tr>
<tr>
<td class="firstcol">Consumer Durables</td>
<td>-3.3%</td>
<td>1.9%</td>
<td>-2.0%</td>
<td>-12.6%</td>
<td>-0.5%</td>
<td>-3.7%</td>
<td>-1.2%</td>
<td>-5.0%</td>
<td>1.0%</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">Consumer Non-Durables</td>
<td>-1.2%</td>
<td>0.0%</td>
<td>-0.6%</td>
<td>-6.9%</td>
<td>-3.8%</td>
<td>-3.2%</td>
<td>-1.4%</td>
<td>-2.5%</td>
<td>-0.1%</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">Intermediate</td>
<td>-1.4%</td>
<td>0.4%</td>
<td>-0.6%</td>
<td>-6.1%</td>
<td>0.1%</td>
<td>-0.1%</td>
<td>0.7%</td>
<td>-0.4%</td>
<td>2.5%</td>
<td>-2.9%</td>
</tr>
<tr>
<td class="firstcol">Capital</td>
<td>-2.4%</td>
<td>2.4%</td>
<td>-1.7%</td>
<td>-6.9%</td>
<td>4.2%</td>
<td>0.9%</td>
<td>5.4%</td>
<td>2.6%</td>
<td>7.6%</td>
<td>0.6%</td>
</tr>
<tr class="grey2">
<td colspan="11" class="firstcol">Main
Euro Area Countries
and UK IP in MFG</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Mo/Mo</td>
<td>May 
08</td>
<td>Apr 
08</td>
<td>May 
08</td>
<td>Apr 
08</td>
<td>May 
08</td>
<td>Apr 
08</td>
<td>&nbsp;</td>
</tr>
<tr class="grey2">
<td class="firstcol">MFG Only</td>
<td>May 
08</td>
<td>Apr 
08</td>
<td>Mar 
08</td>
<td>3Mo</td>
<td>3Mo</td>
<td>6mo</td>
<td>6mo</td>
<td>12mo</td>
<td>12mo</td>
<td>Q-2- 
Date</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>-2.6%</td>
<td>-0.3%</td>
<td>-0.3%</td>
<td>-12.2%</td>
<td>-2.2%</td>
<td>-1.9%</td>
<td>3.0%</td>
<td>0.9%</td>
<td>5.5%</td>
<td>-8.3%</td>
</tr>
<tr>
<td class="firstcol">France: IP excl Construction</td>
<td>-2.6%</td>
<td>1.5%</td>
<td>-1.1%</td>
<td>-8.8%</td>
<td>3.5%</td>
<td>-1.7%</td>
<td>0.4%</td>
<td>-1.2%</td>
<td>3.1%</td>
<td>-2.0%</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>-1.5%</td>
<td>0.3%</td>
<td>-0.2%</td>
<td>-5.3%</td>
<td>0.4%</td>
<td>0.9%</td>
<td>1.0%</td>
<td>-2.7%</td>
<td>-0.5%</td>
<td>-2.6%</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>-14.6%</td>
<td>27.5%</td>
<td>-16.9%</td>
<td>-32.9%</td>
<td>39.8%</td>
<td>-9.5%</td>
<td>11.8%</td>
<td>-7.4%</td>
<td>12.0%</td>
<td>26.7%</td>
</tr>
<tr>
<td class="firstcol">UK</td>
<td>-0.6%</td>
<td>0.1%</td>
<td>-0.5%</td>
<td>-3.8%</td>
<td>0.0%</td>
<td>-0.8%</td>
<td>0.2%</td>
<td>-0.8%</td>
<td>0.0%</td>
<td>-1.8%</td>
</tr>
</tbody>
</table>
UK Losses Grip on PPI Inflation 
by <a href="/comment/Brusca.html">Robert
Brusca</a> July 14, 2008


<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080714b.jpg" align="left" border="0" height="265" width="353">
You can like Mervyn King, Governor of the BOE, and BOE itself.
But that bank has lost its grip on inflation, at the PPI level and that
is chilling. PPI inflation has absolutely surged sending the CORE PPI
rate up by 6.3% Yr/Yr and the three month core rate to 11.8% in arise
reminiscent of the 1970s bell-bottoms and Carnaby Street &#8211; all that
along with its destructive episode of inflation. Of course the RPC/HICP
inflation measures are more important ones, but these sorts of
pressures at the factory gate level spell bad news for inflation
elsewhere in the economy. PPI headline inflation is bristling at a 10%
paces and over three-months UK headline inflation is over 17% for the
PPI. All that is very bad news indeed.
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080714c.jpg" align="right" border="0" height="265" width="353">
The second chart shows that the core HICP inflation rate has
remained much more stable in the face of rising oil prices and even the
rising PPI results. Still, there have been several step ups in the HICP
pace and right now there is the threat of an acceleration that may be
taking root.

As is the case in the US there is more pressure at the PPI
level than at the consumer prices level in the UK. UK the core PPI
inflation has a correlation with the core HICP of only 0.25, in
R-square terms that is only 0.06 &#8211; a very low association.

The BOE may be able to keep this wolf at bay. But what is
shocking for the moment at least is the degree of pressure that is
being mounted on the PPI. If only a fraction of it gets into the HICP
it will be too much. With this report in hand and with PPI data more
topical by a full two months (June for the PPI Vs April for the HICP)
inflation trends at the consumer level will be under the microscope in
the UK.


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="8" scope="col">UK PPI
</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">%m/m</td>
<td colspan="4">%-SAAR</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Jun-08</td>
<td>May-08</td>
<td>Apr-08</td>
<td>3-mo</td>
<td>6-mo</td>
<td>12-mo</td>
<td>12-moY-Ago</td>
</tr>
<tr>
<td class="firstcol">MFG</td>
<td>0.9%</td>
<td>1.8%</td>
<td>1.3%</td>
<td>17.2%</td>
<td>13.6%</td>
<td>10.0%</td>
<td>2.4%</td>
</tr>
<tr>
<td class="firstcol">Core</td>
<td>0.3%</td>
<td>1.4%</td>
<td>1.1%</td>
<td>11.8%</td>
<td>9.6%</td>
<td>6.3%</td>
<td>2.0%</td>
</tr>
<tr>
<td colspan="7" class="firstcol">Core: ex
food beverages, tobacco
&amp; Petroleum</td>
<td>&nbsp;</td>
</tr>
</tbody>
</table>
</body></html>

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080711i.jpg" width="353">
The U.S. government ran a budget surplus in June, as it usually does, of $50.7B. In fact, the surplus was double the size it was during the past several years. Based on expectations formed by Public Debt Transactions from the Daily Treasury Statement, the budget surplus beat the Consensus forecast for a $30.0B surplus. These transactions data are available in Haver&#39;s DAILY database.
That, however, is where the good news on the Federal budget front ends. For the first nine months of FY08 the government ran a budget deficit of $268.7B which was more than double the deficit during the first nine months of FY07.
For the fiscal year to date federal receipts fell 0.6% from a year earlier, the first negative comparison since 2003 and it compared to 7.5% y/y growth during the first nine months of FY07. Higher unemployment pulled the growth in individual income tax receipts (44% of total receipts) to a negative 0.8% this year versus 11.5% growth in FY07. Growth in withheld income taxes of 4.8% was roughly half that of a year earlier and non-withheld taxes grew 5.2%, or nearly one third as during the first nine months of FY07.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080711j.jpg" width="353">
Lower corporate profitability provided a further crimp to government revenues. Corporate income taxes (13% of total receipts) declined 7.5% decline from receipts during the first nine months of FY07. During FY07 they rose 10.0% during the first nine months.
Unemployment insurance contributions fell 2.5% FYTD due to negative employment growth but Federal excise taxes rose 5.8%. Estate and gift taxes rose 13.6%.
U.S. net outlays grew 6.6% during the first nine months of FY08. That growth was more than double the outlay growth of FY07&#39;s first nine months. Growth in defense spending (19% of total outlays) led the doubling with a 10.1% gain while growth in transportation spending surged to 7.5% from 1.8% in FY07&#39;s first nine months.
Medicare expenditures (12% of outlays) actually fell 1.8% but health spending (10% of total outlays) held constant at a 5.4% growth rate. Growth in Social Security spending (21% of outlays) also held steady at 5.3% while growth in interest expense also held steady at 4.3%. Growth in outlays for income security (15% of outlays) surged to 17.5% from 4.4%.
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">June</th>
<th scope="col">May</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>$50.73B</td>
<td>-$165.9B</td>
<td>$27.5B (6/07)</td>
<td>-$162.0B</td>
<td>-$248.2B</td>
<td>-$318.7B</td>
</tr>
<tr>
<td class="firstcol">Net Revenues</td>
<td>$259.9</td>
<td>$124.3B</td>
<td>-6.0%</td>
<td>6.7%</td>
<td>11.8%</td>
<td>14.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Net Outlays</td>
<td>$209.2</td>
<td>$290.2B</td>
<td>-16.0%</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 surplus in June, as it usually does, of $50.7B. In fact, the surplus was double the size it was during the past several years. Based on expectations formed by Public Debt Transactions from the Daily [...]

U.S. June Budget Surplus Up, FYTD Deficit More Than Doubled

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080711g.jpg" width="353">
The University of Michigan&#39;s index of consumer sentiment in early July ticked up 0.4% versus the June average to a level of 56.6. The rise beat Consensus expectations for a slight decline. Nevertheless the level of sentiment remained near the lowest level since 1980.
During the last ten years there has been a 47% correlation between the level of sentiment and the three month change in real consumer spending.
The current conditions index improved 2.8% (-33.5% y/y) but that made up just a sliver of the recent monthly declines. The rise was due to a sharp increase in the index of whether now is a good time to buy large household goods to the highest level since March (-26.9% y/y). The view of current personal finances fell yet again (-44.3% y/y).
The expectations component of overall sentiment fell another 1.8% as the index fell to its lowest level since 1980. Expectations for personal finances dropped 2.1% (-24.8% y/y) like it did during the prior two months. It was at its lowest level since 1980 while expectations for business conditions during the next five years improved just slightly but remained near the lowest level since 1990.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080711h.jpg" width="353">
The opinion of government policy, which apparently influences economic expectations, gave back its June improvement. It was it&#39;s lowest since 1992 as only 4% of respondents had a favorable opinion of government policy and 52% thought a poor job was being done. An only fair opinion of policy was held by 42% of respondents.
The mean expected rate of inflation during the next twelve months rose back to 6.9%, about equal to its 1981 high. During the next five years the expected inflation rate slipped to 3.8%.
The University of Michigan survey is not seasonally adjusted.The reading is based on telephone interviews with about 500 households at month-end; the mid-month results are based on about 300 interviews. The summary indexes are in Haver&#39;s USECON database, with details in the proprietary UMSCA database.
Has the Behavior of Inflation and Long-Term Inflation Expectations Changed? from the Federal Reserve Bank of Kansas city is available <a href="http://www.kansascityfed.org/PUBLICAT/ECONREV/PDF/1q08Clark.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM">University of Michigan</a></th>
<th scope="col">July (Prelim.)</th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">July 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">Consumer Sentiment</td>
<td>56.6</td>
<td>56.4</td>
<td>59.8</td>
<td>-37.4% </td>
<td>85.6</td>
<td>87.3</td>
<td>88.5</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Current Conditions</td>
<td>69.5</td>
<td>67.6</td>
<td>73.3</td>
<td>-33.5%</td>
<td>101.2</td>
<td>105.1</td>
<td>105.9</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Expectations</td>
<td>48.3</td>
<td>49.2</td>
<td>51.1</td>
<td>-40.7%</td>
<td>75.6</td>
<td>75.9</td>
<td>77.4</td>
</tr>
</tbody>
</table>
</body>
</html>

The University of Michigan's index of consumer sentiment in early July ticked up 0.4% versus the June average to a level of 56.6. The rise beat Consensus expectations for a slight decline. Nevertheless the level of sentiment remained [...]

Michigan Consumer Sentiment Up Slightly

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080711e.jpg" width="353">
U.S. import price overall jumped another 2.6% last month. That was little changed from the gains in each of the prior three months and it exceeded the expected 2.0% increase. During the last three months import prices have risen at a 37.6% annual rate which was near the quickest since late-1990.
The rise was led by the strength in petroleum prices which jumped another 7.4% and the three-month rate of increase amounted to 154%. Imported crude petroleum prices in July are about even with June .
Less petroleum, import prices rose 0.9% after a 0.7% gain during May, again pushed higher by the lower foreign exchange value of the dollar. The 12.4% rate of price increase during the last three months is near the fastest on record. 
 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.
Prices for industrial supplies &amp; materials excluding oil surged another 3.4% in June and the three-month rate of increase ballooned to 41.0% (AR).. There has been great strength in finished metal, chemicals and agricultural prices. The detailed import price series can be found in the Haver USINT database. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080711f.jpg" width="353">
Capital goods import prices rose 0.3% and the three month rate of gain of 2.8% is double last year&#39;s rate of increase. Less the lower prices of computers, capital goods prices have been rising at an 8.0% rate during the last three months. They rose 2.7% last year. Prices of computers, peripherals and accessories have fallen at a 4.9% rate this year after the 5.1% 2007 decline.
Finally, prices for nonauto consumer goods imports rose 0.2% in June but they have risen at a 5.1% in 2008 after the 1.6% increase last year. This year&#39;s gain in prices is the quickest since 1992 and has been notable for durables (5.7%).
Total export prices surged 1.0% as agricultural prices jumped 2.2% (33.0% y/y). Nonagricultural export prices also have been strong and they rose in June by 0.9% (6.4% y/y). 
What Is the Optimal Inflation Rate? from the Federal Reserve Bank of Kansas City can be found <a href="http://www.kansascityfed.org/PUBLICAT/ECONREV/PDF/2q08billi_kahn.pdf"> 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">June</th>
<th scope="col">May</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>2.6%</td>
<td>2.6%</td>
<td>20.5%</td>
<td>4.2%</td>
<td>4.9%</td>
<td>7.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Petroleum</td>
<td>7.4%</td>
<td>8.9%</td>
<td>78.6%</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>0.9%</td>
<td>0.7%</td>
<td>7.3%</td>
<td>2.7%</td>
<td>1.7%</td>
<td>2.7%</td>
</tr>
<tr>
<td class="firstcol">Export- All Commodities</td>
<td>1.0%</td>
<td>0.4%</td>
<td>8.6%</td>
<td>4.9%</td>
<td>3.6%</td>
<td>3.2%</td>
</tr>
</tbody>
</table>


</html>

U.S. import price overall jumped another 2.6% last month. That was little changed from the gains in each of the prior three months and it exceeded the expected 2.0% increase. During the last three months import prices have risen at a [...]

U.S. Total Import Prices Surged Again

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080711d.jpg" align="left" border="0" height="265" width="353">
The OECD cyclically adjusted leading indicators are pointing
severely lower. Japan continues to point to recovery in the LEI scheme
of the OPED, yet many Japanese domestic indicators continue to unravel
such as its consumer confidence report, freshly released today, a
report that is up-to-date for consumer feelings through June and shows
continued deterioration.

German data have been getting weaker and so have French and
Italian reports. The slide in the EMU region is documented here as well
as in the EMU&#8217;s own statistics.

The US signal is flattening out in the OECD framework and is
not showing as deep a decline as it did in the last US recession - but
it is a significant drop and slowdown. The OECD metrics are pointing to
a broad-based slowdown and only show good news in train for Japan where
Japan&#8217;s own domestic series do not seem to reflect the OECD&#8217;s optimism. 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="5" scope="col">OECD
Trend-restored leading Indicators </th>
</tr>
</thead>
<tbody>
<tr class="grey4">
<td colspan="5">Growth progression-SAAR</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>3-Mos</td>
<td>6-Mos</td>
<td>12-Mos</td>
<td>Yr-Ago</td>
</tr>
<tr class="grey1">
<td class="firstcol">OECD</td>
<td>-3.9%</td>
<td>-2.7%</td>
<td>-2.6%</td>
<td>1.8%</td>
</tr>
<tr class="grey1">
<td class="firstcol">OECD7</td>
<td>-3.0%</td>
<td>-3.2%</td>
<td>-3.3%</td>
<td>1.1%</td>
</tr>
<tr class="grey1">
<td class="firstcol">OECD Europe</td>
<td>-4.5%</td>
<td>-3.8%</td>
<td>-2.8%</td>
<td>1.2%</td>
</tr>
<tr class="grey1">
<td class="firstcol">OECD Japan</td>
<td>1.1%</td>
<td>0.9%</td>
<td>-2.4%</td>
<td>0.0%</td>
</tr>
<tr class="grey1">
<td class="firstcol">OECD US</td>
<td>-3.6%</td>
<td>-4.1%</td>
<td>-3.7%</td>
<td>1.8%</td>
</tr>
<tr class="grey4">
<td colspan="5" class="firstcol">Six
month readings at 6-Mo
Intervals:</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>Recent six</td>
<td>6-Mo Ago</td>
<td>12-Mo Ago</td>
<td>18-Mo Ago</td>
</tr>
<tr class="grey1">
<td class="firstcol">OECD</td>
<td>-2.7%</td>
<td>-2.6%</td>
<td>2.6%</td>
<td>1.1%</td>
</tr>
<tr class="grey1">
<td class="firstcol">OECD7</td>
<td>-3.2%</td>
<td>-3.5%</td>
<td>1.8%</td>
<td>0.4%</td>
</tr>
<tr class="grey1">
<td class="firstcol">OECD Europe</td>
<td>-3.8%</td>
<td>-1.8%</td>
<td>1.1%</td>
<td>1.3%</td>
</tr>
<tr class="grey1">
<td class="firstcol">OECD Japan</td>
<td>0.9%</td>
<td>-5.7%</td>
<td>0.1%</td>
<td>0.0%</td>
</tr>
<tr class="grey1">
<td class="firstcol">OECD US</td>
<td>-4.1%</td>
<td>-3.2%</td>
<td>2.8%</td>
<td>0.8%</td>
</tr>
<tr>
<td colspan="5" class="firstcol">Slowdowns
indicated by BOLD RED</td>
</tr>
</tbody>
</table>
</body></html>

The OECD cyclically adjusted leading indicators are pointing severely lower. Japan continues to point to recovery in the LEI scheme of the OPED, yet many Japanese domestic indicators continue to unravel such as its consumer confidence [...]

OECD LEIs Getting Ever Weaker…

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080711a.jpg" width="353">
The U.S. foreign trade deficit unexpectedly narrowed in May to $59.8B from a little-revised $60.5B in April. A May deficit of $62.4B had been generally expected. So far this year the monthly deficit has averaged $59.0B versus $59.8B during the first five months of 2007.
In constant dollars the picture is even more encouraging as the deficit narrowed to $43.6B from $46.6B in April. So far this year the real deficit has narrowed by $10B to an average $47.8B. For the second quarter so far it appears the narrower deficit will add up to two percentage points to real GDP growth after additions between 0.8 and 1.4 percentage points during the last three quarters.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080711b.jpg" width="353">
U.S. exports rose 0.9% following the 3.7% pop in April that was revised up slightly. Annualized, exports have risen at an 11.4% rate during the last three months versus 13.0% growth during 2006 and 2007.
Goods exports rose 0.5% May after an upwardly revised 5.0% pop in April. In chained dollars they rose 0.7% (10.3% y/y). Real exports of nonauto consumer goods dipped 0.1% (+10.4% y/y) after their 6.2% pop during April. Exports of capital goods also gave back some of their strong April gain and fell 1.7% (+6.8% y/y). Exports of industrial supplies &amp; materials jumped 4.8% during May (16.0% y/y).
Exports of services rose 1.3% (16.0% y/y), about the same as they did during April. Travel exports surged 2.3% (20.0% y/y) and passenger fares rose 0.8% (25.9% y/y).
Reduced demand for oil dropped May petroleum imports by 1.7%. Adjusted for the higher prices, petroleum imports slouched by 10.5% (-13.5% y/y). The average cost for a barrel of crude oil was $106.28 in May.
Month-to-month, imports of nonpetroleum products rose 1.3% but measured in chained 2000 dollars these imports rose just 0.8% (0.8% y/y) following a 2.5% surge in April. In chained dollars imports of capital goods surged again by 1.6% (6.3% y/y). Chained imports of nonauto consumer goods also were quite firm and jumped 3.6% (2.2% y/y). That strength was countered by a 3.9% (-3.1% y/y) drop in real imports of automotive vehicles &amp; parts.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080711c.jpg" width="353">
Services imports jumped 1.1% (8.9% y/y). Travel imports increased reversed an April decline and rose 1.4% (8.2% y/y) while passenger fares increased 1.3% (16.5% y/y).
With China, the U.S. trade deficit in goods added to the sharp April deterioration and fell to $21.0B. That was the deepest deficit since last November. The deficit with China during the first five months of this year is about the same as during last year&#39;s first five months. Exports to China rose 26.3% y/y and imports rose a moderate 9.4%.
Globalization and Inflation Dynamics: The Impact of Increased Competition from the Federal Reserve Bank of New York is available <a href="http://www.newyorkfed.org/research/staff_reports/sr324.html"> here</a>
Building a Better World: Infrastructure&#39;s Role in Economic Growth from the Federal Reserve Bank of Atlanta can be found <a href="http://www.frbatlanta.org/invoke.cfm?objectid=C049ABCE-5056-9F12-1297C2B04451632F&amp;method=display_body"> 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/@EE/@EE01/@EE01.HTM">Foreign Trade&nbsp;</a></th>
<th scope="col">May</th>
<th scope="col">April</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">U.S. Trade Deficit</td>
<td>$59.8B</td>
<td>$60.5B</td>
<td>$59.4B (5/07)</td>
<td>$700.3</td>
<td>$753.3</td>
<td>$711.6B</td>
</tr>
<tr>
<td class="firstcol">Exports - Goods &amp; Services</td>
<td>0.9%</td>
<td>3.7%</td>
<td>17.8%</td>
<td>13.0%</td>
<td>13.5%</td>
<td>10.6%</td>
</tr>
<tr>
<td class="firstcol">Imports - Goods &amp; Services</td>
<td>0.3%</td>
<td>4.6%</td>
<td>12.5%</td>
<td>6.1%</td>
<td>10.8%</td>
<td>12.8%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Petroleum</td>
<td>-1.7%</td>
<td>12.9%</td>
<td>47.4%</td>
<td>9.4%</td>
<td>20.1%</td>
<td>39.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Nonpetroleum Goods</td>
<td>1.3%</td>
<td>3.7%</td>
<td>6.9%</td>
<td>4.8%</td>
<td>9.1%</td>
<td>10.3%</td>
</tr>
</tbody>
</table>
</body>
</html>

The U.S. foreign trade deficit unexpectedly narrowed in May to $59.8B from a little-revised $60.5B in April. A May deficit of $62.4B had been generally expected. So far this year the monthly deficit has averaged $59.0B versus $59.8B [...]

U.S. May Trade Deficit Narrowed Unexpectedly

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

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

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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 much 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 fell 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 March, 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 3-month low.

U.S. Trade Deficit Narrows in June; the Smallest Since Sept. ’23

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The S&P Global PMI indexes once again showed mixed performance in July. Most large economies continue to do better, and the total PMI services sectors continue to make up for shortcomings in manufacturing.

**Stability on a low growth path**
In July, 24% of the reporting countries showed activity was slowing; that's down from 48% in both June and May and indicates some progress. Only five of the reporting jurisdictions have PMI values below 50 indicating economic contraction in July; that July figure compares to five in June and seven in May. Declining activity continues to be an unusual event. Medians and average readings for the group of 25 countries or regions show extreme stability in the recent months as well as across sequential averages.

**Growth moderately improves**
Comparing period averages from 12-months to six-months to three-months, unweighted readings of the U.S., the U.K., and European monetary union show extremely flat PMI values oscillating between values of 51.2 to 51.7 on those period averages; over three months, six months, and 12 months. The jurisdictions in the table show PMI readings below 50 are rare; once again declining activity is an unusual event. The proportion of reporters slowing over three months is 34.8% compared to 52.2% over six months and 30.4% over 12 months. Once again, we see these statistics tilted toward improving growth rather than towards slowing

**Summing up**
The queue percentile standings for the group in July have an average value at 65.9% which is above the 50% mark that coincides with the median for the period. This tells us the growth is largely better than what its median has been over the past 4 1/2 years. On a queue ranking basis, the largest economies consistently perform better with readings above the 50% mark for the U.S. and for the European Monetary System including each of its largest EMU economies: Germany, France, Italy, and Spain. Japan has a queue standing in its 57th percentile. However, China’s percentile standing is in its 26th percentile and the U.K. is at its 40.5 percentile. Not all large economies are in the catbird seat, but most are faring well despite the moderate growth track globally.

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Service Sectors Prop-up Global Economy

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Total factory orders declined 4.8% (+5.6% y/y) in June after surging 8.3% in May, revised from 8.2%, as reported by the U.S. Census Bureau. A 4.9% decline had been expected in the Action Economics Forecast Survey. A halving in orders for nondefense aircraft accounted for much of the June decline. Factory orders excluding transportation altogether rose 0.4% after increasing 0.3% in May, revised from 0.2%.

Durable goods orders fell 9.4% (+10.9% y/y) in June after 16.5% rise in May. The advance report indicated a 9.3% decline. Transportation orders fell 22.4% (+30.5% y/y). Automobile orders declined 3.1% (-2.7% y/y). Computer & electronic product orders increased 0.6% (5.2% y/y) while electrical equipment, appliances & components rose 0.1% (4.5% y/y). Machinery orders improved 0.3% (3.0% y/y). Furniture & related products increased 0.1% (1.1% y/y). Primary metals orders increased 0.6% (-0.5% y/y) while fabricated metals orders edged 0.1% (3.1% y/y) higher.

Nondurable goods orders, which equal nondurable goods shipments, rose 0.5% (0.6% y/y) in June after edging 0.1% higher in May. Shipments of petroleum & coal products rose 1.4% (-4.5% y/y) and beverage & tobacco products rose 1.5% (4.2% y/y). Food product shipments improved 0.4% (0.9% y/y) and textile product shipments rose a minimal 0.1% (1.9% y/y). To the downside, apparel shipments declined 0.9% (-4.7% y/y) and chemical product shipments eased 0.1% (+3.6% y/y). Paper products declined 0.3% (+0.7% y/y).

Total shipments increased 0.5% (1.8% y/y) in June following a 0.2% May increase. Excluding transportation, shipments rose 0.4% (1.3% y/y) in June after a 0.1% uptick in May. Shipments of durable goods industries rose 0.5% (3.0% y/y) in April, the seventh consecutive m/m rise.  Transportation equipment shipments rose 0.8% (4.3% y/y) as nondefense aircraft shipments fell 6.2% (+13.8% y/y). Machinery shipments rose 1.0% (1.5% y/y), and electrical equipment, appliances & components shipments increased 0.6 (4.6% y/y). Primary metals shipments rose 0.6% (2.4% y/y), fabricated metals shipment rose 0.2% (1.9% y/y), but furniture & related products eased 0.2% (+1.4% y/y).

Unfilled orders rose 1.0% (7.1% y/y) in June after a 3.4% jump in May. Excluding transportation, unfilled orders held steady (+0.8 y/y) after a 0.1% rise in May. Backlogs of durable goods increased 1.0% (7.1% y/y), reflecting a 2.1% rise (14.7% y/y) in nondefense aircraft and a 0.1% decline (-1.8% y/y) in machinery. Electrical equipment, appliances & components backlogs also rose 0.1% (1.0% y/y) while computer & electronic equipment backlogs eased 0.1% both m/m and y/y.
 
Inventories increased 0.2% (1.1% y/y) in June after edging 0.1% higher in May. Excluding transportation, inventories rose 0.2% (1.0% y/y) in June after a 0.1% uptick in May. Durable goods inventories rose 0.2% (1.5% y/y) in June, the same as in May, and rose 0.1% in both of the prior two months. Nondurable goods inventories increased 0.2% 0.5% y/y) after declines in both of the prior two months.

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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- Total orders less transportation rise moderately.
- Shipments pick up.  
- Unfilled orders surge as inventories rise modestly.

U.S. Factory Orders Retreat in June, Largely Centered in Aircraft

Tian Yong Woon

This week, we examine the latest wave of trade developments across Asia as the US unveiled a full list of its modified reciprocal tariff rates, set to take effect on August 7. As anticipated, many of the updated rates are now lower than the original tariffs, with Cambodia and Vietnam seeing the sharpest reductions (chart 1). However, from peak tariff levels, China stands out—continuing to benefit from a 10% pause rate, down from triple-digit highs.

South Korea secured a deal just before the deadline, lowering its tariff from 25% to 15%. The new rate also applies to auto exports, offering relief to Korean automakers (chart 2). Thailand and Cambodia followed with US trade agreements after agreeing to an unconditional ceasefire following earlier military clashes. Their US-imposed tariffs dropped from 36% to 19%, highlighting how US trade policy can intersect with geopolitical interests and, in this case, may help reduce trade uncertainty (chart 3).

Malaysia, a key mediator in the ceasefire, also finalized a trade deal, reducing its tariff rate to 19% and gaining exemptions on key exports such as semiconductors (chart 4). Turning to Japan, while its US trade deal helped avert immediate tensions, the vague terms and a headline $550 billion investment—mostly in the form of loans—leave room for future friction (chart 5). China, however, remains a wildcard. Talks to extend its tariff pause are ongoing, but failure could see a return to extreme tariff levels (chart 6). Meanwhile, tech tensions linger, despite eased restrictions on Nvidia AI chip exports.

**Latest US tariff developments**
We gained further clarity on the new reciprocal tariff rates announced by the US administration last week, as the White House released a full list of the modified rates on Thursday. It also announced that the new rates will take effect on August 7, giving partner countries a bit more time to negotiate new terms. Overall, as earlier indications suggested, Trump’s post-pause tariff rates—regardless of whether trade deals were secured—have often ended up lower than the original rates, as shown in chart 1. The largest reductions from original tariff levels have so far come from Cambodia and Vietnam. However, when looking at the steepest reductions from peak tariff rates, China stands out. It continues to benefit from a 10% tariff pause—down sharply from the triple-digit rates imposed at the height of US-China trade tensions earlier this year. On the flipside, a handful of economies—including New Zealand, the Philippines, and Brunei—are now facing modified tariff rates that are actually higher than their original Liberation Day levels. Notably, the Philippines ended up in this group despite having secured a trade deal with the US.

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**South Korea**
As for South Korea, the US reduced its tariff rate to 15% just ahead of the August 1 deadline, a significant drop from the original Liberation Day rate of 25%. In return, South Korea committed to, among other terms, $350 billion in investments into the US. Of that total, $150 billion will go specifically toward shipbuilding cooperation—supporting the entry of Korean firms into the US shipbuilding industry—while the remaining $200 billion will be directed toward semiconductors and other sectors. Similar to Japan’s arrangement, the new 15% tariff rate will also apply to South Korean auto exports, likely providing relief to the country’s automakers. As shown in chart 2, South Korea’s vehicle exports—and, by extension, its export-driven growth—have come under pressure, with more recent headwinds stemming from the broad 25% auto tariffs imposed by the US. Notably, South Korea’s dealmaking pace with the US has been considered exceptionally swift, especially given that the country had only recently undergone an administrative transition following its presidential elections, leaving limited time to initiate formal trade negotiations.

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**Thailand and Cambodia**
Moving to other parts of Asia, one of the more notable developments last week was the signing of two additional US trade deals—specifically with Thailand and Cambodia. The two countries had recently been engaged in escalating border clashes but agreed to an unconditional ceasefire after mediation by Malaysia and the US. In reality, tensions between Thailand and Cambodia had been simmering for some time, likely driving in part the heightened uncertainty shown in chart 3, though other factors may have played a role. Notably, US President Trump stated that he had made it clear to both governments that no trade deal would be considered while they remained in conflict—an ultimatum that may have incentivized both sides to pursue de-escalation. Ultimately, US trade deals with both countries were announced, reducing their tariff rates from the original Liberation Day level of 36% to 19%. This illustrates how the US approach to dealmaking goes beyond trade, sometimes factoring in broader geopolitical considerations as well.

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**Malaysia**
Touching further on Malaysia, which played a key role in mediating the Thailand-Cambodia conflict mentioned earlier, a last-minute US-Malaysia trade deal also materialized shortly after the agreements with Thailand and Cambodia were hinted at. Under the new terms, Malaysia’s tariff rate was reduced to 19%, down from the original 24%. Malaysian Trade Minister Zafrul described the deal as a “win-win,” noting that Malaysia has either reduced or eliminated tariffs on nearly all American products. Notably—and perhaps offering some interim relief—Malaysia also secured tariff exemptions for its exports of semiconductors and pharmaceuticals. This is especially significant, as semiconductor exports account for a substantial share of Malaysia’s shipments to the US, as shown in chart 4.

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**Japan**
Turning to Japan, the recent US-Japan trade deal appears to have averted the worst for now. However, many key details remain unclear, particularly regarding Japan’s reported $550 billion investment into the US. While the headline figure is striking, Japan’s chief trade negotiator, Akazawa, later clarified that only 1–2% of the amount would constitute actual investment, with the remainder largely consisting of loans. More critically, the deal—like several other recent US-Asia trade agreements—was not accompanied by formal documentation, leaving its terms vague and, perhaps more concerning, open to future revision. These loose ends present ongoing risks to US-Japan economic relations and could potentially unwind recent market gains driven by trade optimism, as uncertainty remains and may yet resurface (see chart 5). This lingering uncertainty likely contributed to the Bank of Japan’s decision to hold its policy rate steady last week. The central bank adopted a wait-and-see approach before considering further rate hikes, while notably revising its inflation forecasts upward and presenting a slightly improved growth outlook for the fiscal year.

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**China**
Amid the recent flurry of US trade deals, one critical issue that may have slipped from the spotlight—but remains central to the global outlook —is China. Ongoing discussions between the two countries aim to extend China’s current tariff pause. If talks break down, US Treasury Secretary Scott Bessent has warned that the existing 10% tariff on Chinese exports could “boomerang” back to its previously exorbitant levels. This could potentially drive the US effective import tariff rate on China well above its already-elevated levels, as shown in chart 6. Meanwhile, the recent reversal of export restrictions by the US on Nvidia’s H20 AI chips may have brought temporary relief to China’s AI sector. However, Chinese authorities have raised national security concerns over the chips’ built-in tracking features and potential remote shutdown capabilities—adding yet another layer of complexity to the already tense US-China trade relationship and broader economic rivalry.

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Asia

Economic Letter from Asia: New Duty Roster

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Nonfarm payrolls increased 73,000 during July after rising 14,000 in June, revised from 147,000, and 19,000 in May, revised from 144,000. Expectations had been for a 102,000 rise in the Action Economics Forecast Survey. The three-month average change in payrolls of 35,000 compared to 64,000 in June. The Bureau of Labor Statistics indicates that monthly revisions result from additional reports received from businesses and government agencies since the last published estimates.

Average hourly earnings rose an expected 0.3% during July after unrevised gains of 0.2% and 0.4% in June & May. Earnings growth of 3.9% y/y is little changed over twelve months, but has been trending lower from its 5.9% high in March 2022.

The unemployment rate, measured in the household survey, edged up m/m to an expected 4.2% from 4.1% and compared to 4.2% in the previous three months. 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, rose to 7.9% last month from 7.7% In June. It was 6.6% in April 2023.

In the **establishment survey**, private-sector employment in July rose 83,000, factory sector jobs declined 11,000, off for the third straight month. Construction sector employment increased 2,000, after rising 3,000 in June. The number of mining & logging industry jobs declined 4,000 after falling in both of the prior two months. 

Private service sector employment increased 96,000 July after improving 16,000 in June. Increases varied greatly amongst service sector categories. Private education & health sector employment rose 79,000 last month, following a 52,000 increase in June. The number of trade, transportation & utilities jobs gained 11,000, following a 22,000 decline and financial activities employment improved 15,000 after a 2,000 drop, while leisure & hospitality employment rose just 5,000 after a 4,000 gain. The number of professional & business services jobs fell 14,000, down for the third straight month.  Information sector employment fell 2,000, after holding steady in June.

Government sector payrolls declined 10,000 last month and revered June’s 11,000 rise. Federal government employment weakened 12,000 and has fallen for six straight months. Local government employment eased 3,000 after rising 10,000 in June while state government payrolls rose 5,000 after increasing 10,000.

Private-sector average hourly earnings rose 0.3% (3.9% y/y) in July. Earnings in the goods-producing sector edged up 0.1% (3.6% y/y). In construction, earnings rose 0.2% (3.7% y/y) following a 0.4% rise, but factory sector earnings eased 0.1% (+3.6% y/y). In the service sector, earnings rose 0.4% (4.0% y/y) in July after increasing 0.2% in June.

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The length of the average workweek rose to 34.3 hours in July from 34.2 hours in June. The workweek in the goods-producing sector lengthened to 39.9 hours from 39.7 hours. The construction sector average workweek rose to 39.1 hours from 38.9 while the factory sector workweek held steady at 40.1 hours. The average workweek in the private service sector edged up to 33.2 hours from 33.1 hours.

In the **household survey**, the unemployment rate increased to 4.2% in July after falling to 4.1% as employment fell 260,000 after rising 93,000 in June and the size of the labor force declined 38,000, off for the third straight month. The labor force participation rate eased to 62.2% last month from 62.3% and remained below the high of 63.3% early in 2020. The rate for teenagers declined to 35.0%, after plunging to 35.1%. For workers aged 20-24, the rate declined to 70.9%. For workers aged 25-54, the participation rate eased to 83.4%. For individuals 55 and over, the rate improved slightly to 38.1% but remained near a 20-year low of 38.0% in June.

The employment/population ratio for all workers slipped to 59.6% last month. It remained below the peak reading of 61.1% in February, 2020 just prior to the pandemic. For men, the rate fell to 64.7% in July from 64.9% and for women, the rate eased to 54.7% from 54.8% in June.

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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- Recent job growth reduced by fewer factory & government jobs.
- Earnings gain remains steady y/y.
- Jobless rate reverses June decline.

Economy in Brief: July 2008

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