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Much lower US electricity costs gives it a competitive advantage

Tom Moeller

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The rate of decline in manufacturing activity in Texas accelerated in March, according to the Texas Manufacturing Outlook Survey conducted by the Federal Reserve Bank of Dallas. The General Business Activity index fell to -16.3 this month from -8.3 in February. It was the lowest level since July 2024 and is down from a high of +14.1 just three months ago. A lessened 12.7% of respondents reported improved business activity in March while an increased 29.0% of respondents reported a worsening. The company outlook index deteriorated to -10.7 this month from -5.2 in February, and compared to -13.3 twelve months ago.

The employment index fell sharply in March to -4.6, its lowest point since May of last year. A steady 11.8% of respondents reported higher employment this month while a higher 16.4% reported a decline. Also moving lower, the growth rate of orders index weakened to -8.1 from -7.5. It was down from its recent high of +4.8 last April. The wages & benefits reading slipped while unfilled orders remained sharply negative.

Showing improvement, the production index rose to 6.0 from -9.1. An increased 28.8% of respondents reported a rise in output while a lessened 22.8% reported a decline. The hours-worked index improved to -2.9 from -14.2. The shipments index rose marginally to 6.1, as 26.7% of respondents reported an increase, while 20.6% indicated a decline. The delivery times measure surged to 3.4 from -6.3.

Inflation indicators eased this month. The index for prices received for finished goods fell to 6.3 after increasing to 7.8 in February. It remained well below a high of 47.4 in March 2022. A lessened 13.4% of respondents reported raising prices this month while 7.1% reported lowering prices. The index of prices paid for raw materials rose to 37.7 this month from 35.0 in February. The index remained up from a low of 1.0 in June 2023 but below a high of 82.2 in June 2021.

Expectations of future manufacturing activity weakened greatly this month, and most categories were down. The future general business activity index plummeted to -6.6 this month from +7.7 in February. The future new orders growth and production growth measures fell along with future delivery times, and future wages & benefits plummeted. Moving slightly higher was the future employment reading.

Each index is calculated by subtracting the percentage reporting a decrease in activity from the percentage reporting an increase. When all firms report rising activity, an index will register 100. An index will register -100 when all firms report a decrease. An index will be zero when the number of firms reporting an increase equals the number reporting a decrease. Data for the Texas Manufacturing Outlook, conducted by the Federal Reserve Bank of Dallas, can be found in Haver's **SURVEYS** database.

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- General business activity index falls to 10-month low.
- New orders growth & labor market readings remain negative.
- Production & shipments improve.
- Future business index turns decisively negative.

Texas Manufacturing Activity & Expectations Readings Decline Further in March

Robert Brusca

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**The Circumstances-** The chart of the three largest EMU economies and their HICP inflation rates shows clearly that year-over-year trends and inflation in France have broken lower while Italy, that has long had the lowest inflation rate in the monetary union among the four largest economies, is on a mild uptrend. Germany has made a very small re-set as inflation has broken lower in the short-run, but German inflation year-on-year actually would still appear to be in a slight uptrend.

**There is good news-** Despite these broader views, there is some excitement over this month’s inflation statistics from Germany. German inflation has fallen by 0.2% in March after rising by only 0.1% in February and in January. The annual rate change for inflation in Germany over three months is -0.3% which compares to France at -2.1%. These are clearly good inflation developments for the two largest economies in the monetary union; however, Italian inflation over this period is at a 5.7% annual rate while Spain's inflation is at a 1.2% annual rate. Among the four largest monetary union economies, three of them have short-term inflation rates well inside of the ECB's targeted pace for the union as a whole; however, the picture is far from completely clear.

**There are reasons to be cautions in digesting the ‘good news’ -** Italy shows a clear acceleration for inflation from 2.2% over 12 months to 2.8% over 6 months to a pace of 5.7% over 3 months; that acceleration is uncomfortable. For Germany, the year-over-year inflation is in excess of the EMU-wide target at 2.5%, and still excessive at 2.6%, and accelerating slightly over six months, but then it breaks sharply lower over 3 months to that -0.3% pace. France has relatively clean results with a one way read on inflation. Over all horizons, inflation’s pace is below the 2% mark and decelerating to boot running at a 0.9% annual rate over 12 months, followed with a 0.2% annual rate over 6 months, and then clocking -2.1% at an annual rate over 3 months. Spain is a good example of the mixed situation for European inflation as over 12 months it's 2.3% pace is slightly above the 2% that the ECB seeks for its EMU-wide target; over six months Spanish inflation steps up to a 3.4% annual rate, clearly excessive on everyone's radar, but not really worrisome, then, over 3 months, Spanish inflation settles down to only 1.2% at an annual rate- highly copacetic.

**The inflation overview: numbers and their trends-** Summing up what we have here are three countries with 12-month inflation above the 2% pace. France is below it at 0.9%. We also have three countries with inflation above the 2% pace over 6 months with France as the exception again at only 0.2% over 6 months. In addition to that, two of the three countries show acceleration over 12 months compared to 12-months ago, and over 6 months compared to the 12-month pace, inflation accelerates in three of these four countries. It's possible to look at these data and find good news; however, it's also possible to look at these data and find that the news does not appear to be quite so good.

**Beyond the headlines-** Turning to the core inflation rates for Italy and Spain, we see that both of the core rates for those two countries are at 2% over 12 months within the ECB's desired parameters and a green light for any pending rate cut decisions. Italian core inflation runs at 1.9% over 6 months with Spanish core inflation at 1.7% over 6 months also acceptable paces to the ECB. Over 3 months the Italian core picks up to 2.4% annual rate while the Spanish score remains at 1.4% and as part of a decelerating process for Spanish core inflation from 12-months to 6-months to 3-months.

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**Strong core support for rate cuts from two reporters...but -** Results for core inflation make a much stronger case for the ECB to consider rate cuts if it wants to do so. But the other thing to keep in mind is that there is also a step up in military spending going on in Europe that should help to underpin demand and in the process of accelerating growth there's a very strong chance that the decline in inflation is going to stop and that inflation pressures could develop.

**What if....** If the ECB were making policy in the spirit of the old Bundesbank, I don't think there's any way this set of conditions could possibly lead to consideration of rate cuts in this environment.  However, while the ECB carried over the Bundesbank charter, it made some modifications to it, and with the breadth of the European Community behind it, rather than just the Bundesbank and Germany's traditional fear of inflation, it's highly likely that the ECB is going to see the inflation-growth trade-offs to be much different than the Bundesbank would have in similar circumstances.

**The rate cut door is open-** That's likely leaves the door open for another rate cut from the ECB in the short term even though macroeconomic conditions soon to be affected by coming military spending do not argue for more stimulus. If military spending comes on stream sooner and has a bigger impact on growth, but if the ECB still cuts rates in advance of that happening, it would just make the case more likely for the ECB to stop rate cutting and then to commence a new cycle of raising rates a little bit earlier.

**What do conditions demand? What is the objective?** Let's remember that what's disappointing in Europe is mostly GDP growth and not underperformance of the labor markets. The labor markets in Europe are still very strong. If we judge them from unemployment rates, the unemployment rates for most of the European Monetary Union members are well below their historic medians and much closer to their historic lows. In fact, the EMU itself, on a weighted basis, has the community unemployment rate at its historic low. Should the ECB choose to cut interest rates, it will be cutting them purely for stimulating growth and possibly in anticipation of keeping any deterioration from the labor market, although with pending military spending that's a pretty weak argument to make at this point in the business cycle. I think we are going to learn from the ECB when we see if it decides to cut rates or not, is just how much of a hawk or a dove the ECB wants to be in this environment. Holding rates where they are makes the most sense since the ECB has this long period of overshooting on inflation behind it. It would be a strange time for the ECB to take a plunge to rate reductions on inflation that is still running too high relative to target while unemployment rates are still performing so well. In this case, I would say that the conduct of the ECB is going to tell us an awful lot about its intentions and its willingness and desire to fight inflation in the coming months, which is going to be more important as military spending ratchets up.

Europe

Some Hopeful Signs in European Inflation Trends; But Are the Signals Good Enough Given the Circumstances?

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**The PCE chain price index** rose 0.3% during February for the third straight month. The y/y rise held steady at 2.5%. The price index excluding food & energy strengthened 0.4% last month after increases of 0.3% in January, 0.2% in December and 0.1% in November. The y/y change rose to 2.8% last month from 2.7% in January, where it has fluctuated since last April.

**Durable goods prices** rose 0.4% (-0.9% y/y) in February, after a 0.3% January rise. Motor vehicle & prices edged 0.1% higher (-0.1% y/y) following a 0.9% surge. Recreational product prices improved 0.5% (-2.4% y/y) last month, after increasing 0.7% in January, while home furnishings & appliance costs rose 0.3% (-2.0% y/y) after a 0.1% uptick in January.

**Prices of nondurable goods** ticked 0.1% higher (1.0% y/y) last month after rising 0.6% in January. Gasoline & oil prices held back the overall increase and declined 0.8% (-3.7% y/y) after a 2.0% rise in January. Clothing prices rose 0.4% (0.5% y/y) after falling 1.2%. The cost of food & beverages eased slightly (+1.5% y/y) after rising 0.3%.

**Services prices** increased 0.4% (3.5% y/y) in February, after rising 0.3% in January. Housing & utility prices rose 0.4% (4.2% y/y) after two straight 0.3% gains, and services prices excluding energy & healthcare increased 0.4% (4.1% y/y) for the third straight month. Recreation services costs strengthened 1.0% (3.9% y/y) after a 1.1% January increase. Healthcare prices rose 0.3% (1.9% y/y) after a 0.2% decline. Transportation prices fell 0.2% (+3.7% y/y) after declining 0.3% in January while hotel & restaurant prices rose 0.4% (3.3% y/y), the same as in January.

**Personal consumption expenditures** (PCE) increased 0.4% (5.3% y/y) in February after a 0.3% decline in January, revised from down 0.2%. A 0.6% increase had been expected in the Action Economics Forecast Survey. When adjusted for price changes, PCE rose 0.1% (2.7% y/y) after falling 0.6% in January, revised from down 0.5%.

**Real spending on durable goods** increased 1.0% (4.5% y/y) in February, after a 4.6% January drop. Real spending on motor vehicles rose 1.6% (3.7% y/y), after an 8.8% pull-back. Real outlays on furnishings & appliances rose 0.7% (5.8% y/y) last month and cut into January’s 2.0% gain. Real spending on recreational goods & vehicles rose 1.0% (6.5% y/y) last month, after falling 3.2% in January. Spending on “other” durable goods slipped 0.1% (unchanged y/y) after declining 0.9% in January.

**Nondurable goods** spending in real terms rose 0.5% (3.1% y/y) in February following a 0.8% decline. Real clothing and footwear purchases eased 0.1% (+1.8% y/y) last month, following a 0.2% gain in January. Real food & beverage purchases improved 0.7% (2.4% y/y) and reversed January’s decline. Real outlays on gasoline & other energy products fell 0.6% (+5.1% y/y), after strengthening 0.7%. Real spending on “other” nondurable goods rose 0.8% (3.7% y/y) last month, following a 1.7% January decline.

**Real spending on services** eased 0.1% (+2.3% y/y) in last month, following a 0.1% January increase. Real spending on housing & utilities fell 0.2% (+1.8% y/y) in January, after increasing 0.6%, while real health care spending rose 0.1% (4.2% y/y) for the second straight month. Real spending on food services & accommodations weakened 1.4% (-0.9% y/y), after rising 0.1% during January. Real spending on financial services & insurance rose 0.5% (2.1% y/y) after holding steady. Real spending on transportation services rose 0.6% (4.7% y/y) in February, after easing slightly in January. Recreation spending improved 0.1% (2.9% y/y) after rising 0.2% in January. A 0.3% rise (2.6% y/y) in spending on “other” services followed a 0.3% improvement in January.

**Personal income** rose 0.8% (4.6% y/y) after gaining 0.7% in January, revised from 0.9%. A 0.4% gain was expected. Wages & salaries rose 0.4% (3.5% y/y) last month, after a 0.2% rise. Rental income improved 0.9% (4.4% y/y), after rising 0.7% in January. Proprietors’ income moved 0.1% higher (3.9% y/y), following a 0.1% January slip. Income from assets rose 0.4% (2.7% y/y), after rising 1.2%, and current transfer receipts strengthened 2.2% (8.5% y/y) in February, after rising 1.8% in January. Government social benefits also rose 1.8% (7.9% y/y) in February, the same as in January.

**Disposable personal income** increased 0.9% (4.4% y/y) following a 0.7% January rise, revised from 0.9%. After adjusting for price changes, disposable income rose 0.5% in February following a 0.3% increase. The y/y increase recovered to 1.8% from 1.3% in January.

**The personal saving rate** rose to 4.6% in February, after rising to 4.3% in January. It began 2024 at 5.5%. Personal saving rose 7.7% (-11.0% y/y) in February, after surging 30.7% in January.

The personal income and consumption figures are available in Haver’s **USECON** database with detail in the **USNA** database. The Action Economics forecasts are in **AS1REPNA**.

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- Monthly core price gain is strongest since January 2024; annual rise edges up.
- Real spending rose last month after sharp decline.
- Disposable income surges and savings rate strengthens.

U.S. Core PCE Price Inflation Picks Up in February; Real Spending Gain Eases

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The EU commission's overall reading for the European Monetary Area unexpectedly eroded, dropping to 95.2 in March from 96.3 in February, leaving it also below its January 2025 level but above its December 2024 level. It may simply be too soon for this survey to reflect any of the changes going on in Europe. But very clearly a ramp up in military spending is planned and economic conditions in the monetary union and beyond are about to receive a significant boost. While that development might be simply too new to have gotten into the indexes as of March, it is still in train so curb your disappointment.

**EMU in March by Sector**
March readings for the monetary union show the industrial sector unchanged at -11 from February but showing improvement compared to both the December and January readings. Consumer confidence slipped in March to -14.5 from -13.6 in February and it's below its January and December levels as well. Retailing slipped to -7 in March from -5 in February and it also is below its string of readings since December of last year. Construction spending at -3 posted the same reading it logged in February and in January and those were slight improvements from December. The services reading in March slipped to +2 from +5 in February and it is also below its reading of +6 in January.

**Country Readings**
Country level data show readings for 18 of the monetary union members; of these 18, only 6 have percentile standings for overall indexes that are above their median (a ranking of 50%) calculated on data back to 1990. Only one of the four largest countries has a reading above its median and that's Spain at a standing at 51.4% Other large countries show much weaker readings with Germany at a 16-percentile standing, Italy at a 37-percentile standing, and France at a 37.5 percentile standing. Month-to-month changes show deterioration in nine of the 18 reporting countries. This compares to a deterioration in eight in February and compares to January when six weakened relative to December. It is a worsening trend but based on developments in military spending to shore up NATO. Europe supported defense systems must carry more of the load. This will imply stimulus across the board coming for the monetary union.

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**The Four Largest EMU Economies – Sector Standing**
Standings by sector are fleshed out in the table above for the four largest economies with their standings compared to the overall results for the monetary union. Construction has consistently been the highest standing at a 71.1 percentile reading; this is for these four countries in terms of their unweighted average. Consumer confidence at a 53.8 percentile standing, ranks next, followed by retailing at 51.2%. Those readings are followed by a 31.7 percentile standing for industry and a 29.9 percentile standing for services. The average reading for the four largest economies is 35.5 percentile; and if we reweight those to reflect GDP size, the average weighting drops to is 31.3%. This compares to an overall reading for the European Monetary Union 30.4%. The large economies post higher percentile rankings than the European Monetary Union as a whole for consumer confidence and for the industrial gauge; otherwise they have slightly weaker readings than the overall readings for the monetary union by sector.

**Summing up**
The weakness in March was unexpected, probably because there's anticipation that this change in military spending is going to ripple through the European economy and spread strength across sectors. That is certainly due to happen. It might just be a little too soon for it to show up in these figures. For the time being, that is my working hypothesis. I am not going to get too excited about the unexpected weakness in this report from March because military spending is coming.

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EU Indexes Show Slight Erosion 

Andrew Cates

**Manufacturers’ input prices** 
This week’s flash PMI surveys from the US, Europe and Japan contained mixed evidence about the current plight of the world economy. The US economy maintained some decent momentum in March at the same time as Europe’s growth rate has picked up pace. Japan in contrast saw some marked weakening in its headline composite PMI, suggesting a big loss of momentum. Away from the headline messages, however, it was the underlying details that were of more interest. As chart 1 below suggests US factories reported the steepest rise in input costs for 31 months, causing the rate of inflation to far outpace equivalent rates reported in the other G4 economies. Producers commonly blamed these higher prices on tariffs.

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**Supply chain pressures and UK inflation**
A broader concern that stems from US tariff policies is the disruption they might invoke for global supply chains. Still, the evidence for this so far is patchy. The New York Fed’s global supply chain pressure index, for example, remained close to “normal” levels in February. This week’s inflation data from the UK additionally showed no evidence yet to suggest that pipeline price pressures in the goods sector are beginning to stoke inflation (chart 2).

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**US growth and the dollar** 
A broader, longer-term concern among investors is the willingness of overseas capital to remain in US asset markets amid rising trade tensions and reduced global cooperation. A sustained deterioration in international economic ties could trigger an outflow of foreign capital from US markets, undermining elevated valuations and putting significant downward pressure on the US dollar. However, the extent of any capital flight will depend not only on investors’ willingness to exit US markets but also on the attractiveness of alternative destinations. As chart 3 highlights, the steady appreciation of the real value of the US dollar in recent years—driven in large part by robust foreign demand for US financial assets—has coincided with a period of US economic outperformance. With US growth concerns mounting and policy uncertainty increasing, the narrative of American economic superiority is being increasingly questioned. But if confidence in US markets erodes while viable alternatives in Europe or China fail to materialize, capital reallocations may be more gradual.

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**Electricity prices in selected advanced economies** 
Indeed, as we have emphasized in this publication before, the outperformance of the US economy relative to other advanced economies is underpinned by several structural advantages that are unlikely to fade anytime soon. One of the most significant is the US’s energy advantage. As highlighted in Chart 4, domestic electricity prices in the US remain substantially lower than in other major economies, with the UK, France, and Germany facing significantly higher costs. This energy cost disparity continues to provide US industries with a competitive edge, supporting manufacturing, investment, and overall economic resilience at a time when Europe’s growth prospects remain constrained by elevated energy expenses.

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**Living standards (and energy)**
As chart 5 below suggests, it can be no coincidence that European economies with relatively high electricity prices over the past 5 years have seen very little overall growth – and in Germany’s case, negative growth - in their living standards. In contrast those economies with relatively low electricity prices, including the US, but also the Scandinavian bloc and Australia, have seen a bigger improvement in their overall living standards.

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**China’s real exchange rate**
Amid ongoing US-China trade tensions and shifting global capital flows, China’s currency dynamics remain a key focus. While the yuan has depreciated in real terms since early 2022—partly due to external exchange rate and inflation trends—its role in trade competitiveness is evolving. Historically, a weaker yuan supported China’s export-led growth model, benefiting global firms sourcing inputs from China. However, as China has moved up the value chain in high-end manufacturing, currency-driven trade advantages are becoming more contentious. With China now competing more directly with advanced economies in finished goods, further depreciation could invite greater scrutiny—particularly from the US, where protectionist sentiment is already high.

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Financial markets remain gripped by heightened uncertainty surrounding US trade policy, slowing US growth, and broader fears of global economic instability. Latest data suggest that the recent introduction of US tariffs has driven up manufacturing input prices and risks exacerbating supply chain frictions (charts 1 and 2). Looking ahead, investors are also increasingly assessing the implications of reduced global cooperation for US capital markets and the value of the dollar (chart 3). Still, notwithstanding recent concerns, there remain big question marks about the degree to which other major economies, including Europe and China, will act as a magnet for global capital in the period ahead. Energy costs, for example, remain a critical ingredient for economic competitiveness, and while the US continues to benefit from low electricity prices, Europe’s high energy costs are still acting as a drag on its growth prospects (charts 4 and 5). As for China, tentative signs of stabilization have emerged following recent fiscal loosening and targeted stimulus measures, which have helped buoy industrial output and credit growth. The government’s latest initiatives—centred on infrastructure investment, tax incentives, and efforts to support the property sector—have raised hopes of a turnaround, though structural headwinds, including weak consumer confidence and ongoing financial strains in the real estate sector, remain formidable. Whether China can sustain a more durable recovery will be a key factor shaping global capital flows, particularly as investors weigh the relative attractiveness of US and Chinese assets in an increasingly fragmented global economy (chart 6).

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Charts of the Week: Tariffs, Tensions, and Trade-Offs

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The Pending Home Sales Index, a forward-looking measure of home sales based on contract signings, rose 2.0% (-3.6% y/y) during February after falling an unrevised 4.6% during January, and declining an unrevised 4.1% in December, according to the National Association of Realtors.

The sales decline occurred as the average rate on a 30-year mortgage fell to 6.84% in February, after rising to 6.96% in January. The rate averaged 6.78% in February of last year. It hit a low of 6.18% averaged in September of 2024.

Regional sales patterns varied greatly during February. In the South, sales rose 6.2% (-3.4% y/y) after weakening 9.2% in January. Pending home sales in the Midwest improved 0.7% (-4.7% y/y) after falling 2.0% in January. Moving lower were pending home sales in the West which declined 3.0% (-3.5% y/y) after falling 1.2% in January. Pending home sales in the Northeast edged 0.9% lower (-2.5% y/y) after rising 0.3% in January.

The index of pending home sales measures sales at the time the contract for the purchase of an existing home is signed, similar to the Census Bureau's new home sales data. In contrast, the National Association of Realtors' existing home sales data are recorded when the sale is closed, which is usually a couple of months after the sales contract has been signed. In developing the pending home sales index, the NAR found that the level of monthly sales contract activity leads the level of closed existing home sales by about two months.

The series dates back to January 2001 and are available in Haver's **PREALTOR** database. Weekly mortgage interest rates from the Mortgage Bankers Association can be found in the **WEEKLY** database.

- Sales edge up from record low.
- Pattern of home sales is mixed across country.

U.S. Pending Home Sales Increase in February

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Real GDP growth was revised to 2.4% last quarter (SAAR) from 2.3% reported last month. It followed a 3.1% gain in the third quarter and 3.0% growth in Q2. A 2.3% gain had been expected in the Action Economics Forecast Survey. Growth Q4/Q4 in 2024 fell to 2.5% from 3.2% in 2023.

Reported for the first time, after-tax corporate profits rose 6.7% (12.1% y/y) in Q4 following a 0.3% decline in Q3. Before-tax earnings with IVA & CCA rose 5.4% (6.9% y/y) after a 0.4% decline in Q3. Overseas earnings rose 18.8% (4.6% y/y) following an 8.9% decline. Domestic financial sector earnings improved 10.7% (31.5% y/y) after rising 0.5% while nonfinancial sector earnings rose 2.0% (2.3% y/y) following a 0.9% improvement.

Business inventories shaved 0.84 percentage point from growth, revised from a 0.81 percentage point subtraction, after trimming 0.22 point from Q3 growth. It was the largest drag on GDP growth since Q1’23. Net exports added 0.26 percentage point to growth last quarter, revised from 0.12 point, after subtracting 0.43 point in Q3. Exports eased a lessened 0.2% last quarter (+3.0% y/y). Imports fell 1.9% (+5.5% y/y) last quarter, revised from a 1.2% fall, after rising 10.7% in Q3.

Private domestic final demand increased 2.9% (3.0% y/y), revised from 3.0%, in Q4 after rising 3.4% in Q3. It reflected a 4.0% gain (3.1% y/y) in personal consumption expenditures, revised from a 4.2% surge, which followed a 3.7% advance in Q3. Durable goods buying surged 12.4% (5.8% y/y), after a 7.6% gain. That surge was driven by a 19.7% gain (6.5% y/y) in motor vehicle spending, a 13.9% rise (6.0% y/y) in recreational goods buying and a 5.4% rise (5.7% y/y) in home furnishings & appliance purchases. Nondurable goods spending rose 3.1% (2.1% y/y), revised from 3.0% as clothing purchases rose 5.0% (1.6% y/y), food purchases gained 1.8% (1.6% y/y) gasoline & fuel oil spending fell 2.0% (-0.1% y/y) and “other” nondurables purchases jumped 5.0% (3.3% y/y). Services spending growth improved 3.0% (3.0% y/y) revised from 3.3%, reflecting a 4.7% gain (5.5% y/y) in healthcare, a 3.1% rise (3.1% y/y) in financial services and a 2.8% gain (0.4% y/y) in spending at restaurants & hotels. 

Residential investment grew a minimally changed 5.5% (2.8% y/y) after declining 4.3% in Q3. The 3.0% decline (+2.3% y/y) in business fixed investment was revised from down 3.2% y/y. Structures investment rose 2.9% (1.0% y/y) while investment in equipment fell 8.7% (+2.8% y) and reversed most of the prior quarter’s increase. Information processing equipment fell 7.3% (+5.1% y/y) but investment in intellectual property eased 0.5% (+2.6% y/y) from unchanged after rising 3.1% in Q3.

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Government spending rose 3.1% last quarter (3.2% y/y), revised from 2.9% after increasing 5.1% in Q3, as federal government outlay growth remained firm at an unrevised 4.0% (4.2% y/y) with higher defense spending, up 4.8% (5.5% y/y). Nondefense outlays increased 2.9% (2.4% y/y). State & local government spending growth was revised up to 2.5% (2.7% y/y) from 2.2%.

The GDP price index rose 2.3% (2.5% y/y), revised from a 2.4%, last quarter after a 1.9% Q3 gain. A 2.4% rise had been expected. The PCE price index moved up an unrevised 2.4% (2.5% y/y), after a 1.5% Q3 rise. The price index less food & energy increased 2.6% (2.8% y/y), revised from 2.7%, after a 2.2% Q3 gain. The business fixed investment price index rose 1.5% (2.1% y/y), revised from 1.7%, and the residential price index improved a minimally changed 1.9% (2.1% y/y). The government price index increased 2.1% (2.6% y/y), down from 2.4% in Q3.

The GDP data can be found in Haver’s **USECON** and **USNA** databases. **USNA** contains virtually all of the Bureau of Economic Analysis detail in the national accounts. The Action Economics consensus estimates can be found in **AS1REPNA**.

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- Inventory drag on economic growth remains largest in almost two years; net exports add negligibly to growth.
- Sharp gain in consumer spending growth is revised down slightly, while the decline in business investment is lessened.
- Price index gain is revised down slightly.

U.S. GDP Slowdown in Q4 Is Minimally Revised; Corporate Profits Rebound

Sandy Batten

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Manufacturing activity in the Kansas City Federal Reserve district continued to decline in March with the composite index of manufacturing conditions edging up to -2 from -5 in February. This is an index centered on zero with positive readings indicating growth while negative readings indicate contraction. The headline index has not been positive since September 2022. The March survey was open for a six-day period from March 19-24, 2025 and included 97 responses from plants in Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico, and western Missouri.

Haver Analytics calculates an index based on the Kansas City results which is comparable to the ISM PMI series. Surprisingly, this index rose to 51.4 (NSA) in March, its first rise above the critical 50 level which separates expansion from contraction since May 2024. However, this index is not seasonally adjusted. When Haver’s seasonal adjustment program is applied, the seasonally adjusted index fell to 47.0 in March from 47.5 in February.

The nondurable manufacturing sector continued to drive the declines in March, particularly food, paper, and printing manufacturing. Most month-over-month indexes were negative, but many improved from last month’s readings. New orders fell more rapidly in March, posting a reading of -12 versus -7 in February. Shipments also continued to fall in March but more slowly than in February, posting a reading of -4 versus -11 in February. Production rebounded to +1 in March, its first positive reading since August 2024. The employment index fell again, to -4 in March from -14 in February, indicating that employment continued to fall but at a slower pace than in February.

The impact of higher tariffs was apparently demonstrated in another increase in the prices paid for inputs index to 42, its highest reading since September 2022, from 38 in February and 18 in January. Firms appear to be having some difficulty passing higher input prices on to finished goods prices. The prices received index slipped to 15 in March from 17 in February.

All year-over-year indexes were negative, except the price indexes and capital expenditures index. However, the pace of declines eased. The composite index increased from -18 to -7 in March. Production, shipments, new orders, and employment all fell moderately from this time last year. Capital expenditures edged up modestly from last year.

The composite index of expectations in six months decreased for the third consecutive month to 10 in March from 14 in February. Expected production fell to 24 from 30. Expected shipments declined to 20 from 28. Expected new orders slipped to 20 from 27. And expected employment fell to zero from 12. By contrast, expected capital expenditures increased to 13 from 9 in February.

The series dates back to July 2001. The diffusion indexes are calculated as the percentage of total respondents reporting increases minus the percentage reporting declines. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. Data for the Kansas City Fed Survey can be found in Haver’s **SURVEYS** database.

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- The headline index increased to -2 in March from -5 in February.
- The index has not been positive, depicting growth, since September 2022.
- New orders fell more rapidly while shipments fell less rapidly.
- Employment continued to decline though at a slower rate than in February.
- Prices paid for inputs surged to highest reading since September 2022.

Manufacturing Activity Continues to Decline in Kansas City Fed District in March

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The light vehicle market continued to improve last month, with sales rising to the highest level in four years. U.S. light vehicle sales rose 10.4% (11.8% y/y) to 17.76 million units (SAAR) in March after rising 3.8% to 16.09 million in February. The rise in March vehicle sales accompanied a 1.8% y/y rise in real disposable income through February, which compared to 2.0% growth in 2024.

Sales improvement was broad-based last month. Light truck sales rose 12.1% (13.2% y/y) during March to 14.46 million units (SAAR), after increasing 3.3% in February. Purchases of domestically-made light trucks surged 12.4% (13.1% y/y) to 11.05 million units, after rising 3.3% in February. Sales of imported light trucks jumped 10.7% (13.0% y/y) to 3.40 million units, following February’s 3.4% rise.

Trucks’ 81.4% share of the light vehicle market last month compared to 80.2% in February and set a new record. The share was 80.3% during all of 2024 and 53.3% ten years earlier.

Auto sales also rose last month, by 3.8% (8.2% y/y) to 3.31 million units (SAAR) following a 6.0% February increase. Sales of cars moved to the highest level since July 2021. Purchases of domestically-produced cars rose 3.4% (12.3% y/y) last month to 2.46 million units, after rising 9.2% in February. Sales of imported autos gained 4.9% (-7.6% y/y) to 0.85 million units, following a 2.4% February decrease.

Imports' share of the U.S. light vehicle market eased to 23.9% in March from 24.1% in February. It compared to a May 2023 low of 22.9% before it reached a high of 26.3% in November of 2023. Imports' share of the passenger car market rose to 25.7% last month from 25.4% in February. It reached a high of 38.7% in September 2021. Imports' share of the light truck market eased to 23.5% in March after holding at 23.8% in February.

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

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U.S. Light Vehicle Sales Surge in March

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