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Sandy Batten

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Job openings fell 194,000 to 7.568 million in February from an upwardly revised 7.762 million in January (previously 7.740 million), according to the Job Openings and Labor Turnover Survey. The level of openings has been little changed over the past eleven months after having declined rather steadily from a high of 12.134 million in March 2022. The number of openings continues to exceed the number unemployed, but only by 516,000, indicating a relatively balanced labor market. The job openings rate fell to 4.5% in February from 4.7% in January. It remains well below a high of 7.4% reached in March 2022. This rate is calculated as the ratio of job openings to total nonfarm employment plus openings.

Private sector openings fell 193,000 to 6.667 million in February from 6.860 million in January. The relatively small January decline was led by a 163,000 drop in trade, transportation and utilities openings. Finance openings slid 80,000 and leisure/hospitality openings declined 61,000. By contrast, professional and business services openings increased 134,000. The private sector job openings rate edged down to 4.7% in February from 4.8% in January. It has fluctuated between 4.4% and 5.0% over the past eleven months without a noticeable trend.

Total hiring edged up 25,000 in February to 5.396 million. This was the second increase in the past three months. Still, hiring has fallen 268,000 over the past year. Private hiring rose 46,000 to 5.046 million, its third consecutive monthly increase although it has fallen 231,000 over the past year. The February gain was due mostly to an 82,000 increase in professional and business services hiring. Hiring declined in most other sectors. Government hiring fell 21,000, led by a 15,000 decline in state and local government hiring. The total hiring rate was unchanged at 3.4%, where it has been for four of the past five months. The private hiring rate was also unchanged at 3.7% in February for the fifth consecutive month.

Total job separations edged down 11,000 to 5.261 million in February. They have been little changed over the past eleven months. Quits declined 61,000 to 3.195 million; layoffs rose 116,000 to 1.790 million; other separations fell 67,000 to 275,000. Quits are voluntary separations initiated by the employee and are often viewed as an indicator of workers’ willingness to leave jobs for other opportunities. Private quits (-80,000 in February to 2.998 million) have been relatively trendless recently, fluctuating between 2.8 and 3.1 million over the past seven months. By contrast, private layoffs (separations initiated by the employer) have been on a clear, though modest, uptrend since the middle of last year, pointing to a modest cooling in the labor market. They rose 96,000 to 1.692 million in February, led by a 47,000 increase in professional and business services layoffs.

The Job Openings and Labor Turnover Survey (JOLTS) data are available in Haver’s **USECON** database.

- Job openings fell to 7.568 million from 7.762 million in January.
- The job opening rate slid to 4.5% from 4.7%.
- Hiring was little changed in February.
- Layoffs rose to 1.790 million from 1.674 million.

U.S. JOLTS: Openings Fell Slightly and Layoffs Rose Slightly in February

Tom Moeller

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The ISM Purchasing Managers Index of activity in the manufacturing sector declined to 49.0 during March after easing to 50.3 in February. It remained up from a low of 46.9 in October of last year. A level of 50 is the break-even point between a rising and falling level of activity. The Action Economics Forecast Survey expected a reading of 49.8 for March. The series reached a monthly high of 63.8 in March 2021.

Four of the five component indexes weakened last month. The new orders index declined to 45.2 last month from 48.6 in February. It was the lowest level since May 2023. A greatly lessened 19.9% (NSA) of respondents reported higher orders while an increased 23.3% indicated declines. The March production index fell to 48.3 after declining to 50.7 in February. It was the lowest level in four months. A higher 21.0% (NSA) of respondents reported higher production while an increased 20.9% reported lower output. The employment index fell to 44.7 in March, its lowest point in six months, from 47.6 in February. A lessened 8.3% (NSA) of respondents reported more hiring while an increased 18.0% indicated fewer hires. The supplier delivery index declined to 53.5 from 54.5 in February. A lessened 13.4% (NSA) of respondents reported slower delivery speeds while an increased 6.4% reported a quickening.

Moving higher, the inventories reading surged to 53.4 last month from 49.9 in February. The reading stands well above its low of 43.2 in October of last year. A greatly increased 21.5% (NSA) of respondents reported higher inventories while a significantly lessened 12.8% reported lower.

The prices index, which is not part of the composite series, surged to 69.4 (NSA) in March after increasing to 62.4 in February. It was the highest level since June 2022, up from a December 2022 low of 39.4. A greatly increased 46.0% of respondents reported higher prices last month, up from 12.2% in November, while a slightly higher 7.3% reported lower prices.

In other series, the export orders index fell to 49.6 in March from 51.4 during February. These readings remained above a low 45.2 in January of last year. The imports index weakened to 50.1 from 52.6 in February. It was the lowest reading in three months. The order backlog index dropped to 44.5 (NSA) last month from 46.8 in February. It was the lowest level in four months.

The ISM figures are based on responses from over 400 purchasing executives from 18 industries, which are weighted according to each industry’s contribution to GDP. These indexes are diffusion indexes where a reading above 50 indicates expansion and a reading below 50 points to contraction. The figures from the Institute for Supply Management can be found in Haver’s **USECON** database; further detail is found in the **SURVEYS** database. The expectations number is available in Haver’s **AS1REPNA** database.

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- Index indicates factory sector contraction.
- New orders, production & employment readings weaken.
- Prices index jumps to another three-year high.

U.S. ISM Manufacturing Index Declines in March; Prices Strengthen

Winnie Tapasanun

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The value of construction put in place rose a more-than-expected 0.7% m/m in February after a 0.5% decline in January (-0.2% initially) and a 0.3% increase in December (+0.5% previously), data from the U.S. Census Bureau showed. The February reading was the fourth m/m rise in five months. A 0.3% m/m February rise had been expected in the Action Economics Forecast Survey. The year-on-year rate rose to 2.9% in February after decelerating to 2.7% in January (the lowest since May 2019). The latest y/y figure was lower than 9.7% in February 2024, having remained below its recent high of 9.8% in January 2024 and a peak of 18.6% in April 2022.

Private construction recovered 0.9% (2.0% y/y) in February, up for the fourth month in five, after a 0.7% decrease in January (-0.2% initially) and a 0.4% rise in December (+0.7% previously). Residential private construction rebounded 1.3% (1.6% y/y) in February, the fourth m/m increase in five months, after a 1.2% decline in January (-0.4% initially). Home improvement building rose 2.0% (8.9% y/y), the first m/m rise since November, following a 3.8% January drop; it was 40.1% of the residential private construction. Single-family building grew 1.0% (-0.1% y/y), the sixth consecutive m/m gain, after a 1.0% January rise; it was 47.4% of the residential private construction. Meanwhile, multi-family building was virtually unchanged m/m (-11.6% y/y) in February following 14 straight m/m decreases; it was 12.5% of the residential private construction. 

Nonresidential private construction rose 0.4% (2.5% y/y) in February, the third m/m rise in four months, following a 0.2% decline in January (0.0% initially) and a 0.5% increase in December (+0.1% previously). The February rise reflected m/m increases in the following nonresidential private constructions. These included religious (4.2%; 14.9% y/y), amusement & recreation (2.6%; 7.3% y/y), commercial (0.9%; -5.0% y/y), educational (0.4%; -0.1% y/y), transportation (0.3%; 10.6% y/y), office (0.2%; 3.7% y/y), manufacturing (0.1%; 4.7% y/y), and utilities (0.1%; 5.0% y/y). In contrast, lodging private construction, the only category with a monthly decline in February, fell 0.4% (-0.2% y/y), the fourth m/m fall in five months, after a 0.1% January easing. Meanwhile, communication private construction (-0.03%; +3.6% y/y) and health care private construction (+0.03%; -0.9% y/y) were virtually unchanged m/m in February.

The value of public construction grew 0.2% (6.0% y/y) in February, the seventh m/m gain in eight months, on top of a 0.2% rise in January (+0.1% initially), reflecting a 0.2% rebound (2.5% y/y) in residential public construction and a 0.2% increase (6.1% y/y) in nonresidential public construction. The February gain reflected m/m rises in the following nonresidential public constructions. These included commercial (4.1%; 53.1% y/y), conservation & development (2.4%; 8.2% y/y), water supply (1.4%; 15.6% y/y), health care (1.3%; 14.8% y/y), amusement & recreation (0.3%; 20.4% y/y), and educational (0.3%; 8.4% y/y). Notably, spending on highways & streets, which made up 28.9% of public construction spending, rose 1.2% (0.2% y/y) in February after a 0.8% increase in January, registering the fourth successive m/m rise and the sixth in seven months. To the downside, the following public constructions fell m/m in February: office (-2.8%; +1.3% y/y), utilities (-1.3%; -7.1% y/y), public safety (-1.2%; +4.3% y/y), transportation (-1.2%; +4.1% y/y), and sewage & waste disposal (-1.1%; +11.1% y/y).

The construction figures can be found in Haver's **USECON** database. The expectations figure is from the Action Economics Forecast Survey in **AS1REPNA**.

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- Construction spending +0.7% m/m (+2.9% y/y) in Feb. vs. -0.5% m/m (+2.7% y/y) in Jan.
- Residential private construction recovers 1.3% m/m, up for the fourth month in five, led by a 2.0% gain in home improvement building.
- Nonresidential private construction rebounds 0.4% m/m, up for the third month in four.
- Public sector construction increases 0.2% m/m, reflecting a 0.2% rise in both residential & nonresidential public buildings.

U.S. Construction Spending Rebounds in February, the Fourth M/M Gain in Five Months

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Retail gasoline prices for all grades rose last week to the highest level since the second week of October and averaged $3.29 per gallon (-9.6% y/y) after rising to $3.24 in the prior week. Prices have risen from a low of $3.13 in the week of December 9. The recent high was $3.79 in the week ending April 22, 2024. Its all-time high of $5.11 occurred in the week ending June 13, 2022. The retail price for on-highway diesel fuel increased to $3.59 per gallon (-10.1% y/y) in the week of March 31 after rising to $3.57 in the prior week. The latest diesel price remained well below a peak of $5.81 in the week ending June 20, 2022.

The price of West Texas Intermediate crude oil rose to $69.41 per barrel (-15.7% y/y) in the week ended March 28, after increasing to $67.64 per barrel in the prior week. Prices remain well below their peak of $120.46 in the week of June 10, 2022. Yesterday, the price was $71.48 per barrel. The price of European Brent crude oil increased to $74.35 per barrel (-13.3% y/y) in the week of March 28 compared to $72.21 in the prior week and a high of $82.79 in mid-January of this year. Prices remained well below a peak of $127.40 in the week of June 10, 2022. Yesterday, the price was $77.23 per barrel.

Natural gas prices slipped to an average $3.92 per mmbtu (+164.9% y/y) in the week ended March 29 after easing to $4.14/mmbtu in the prior week. Prices remained well above a low of $1.40/mmbtu in the week of March 15, 2024 but below their peak of $9.56 in the week of August 26, 2022. Yesterday, the price was $4.11 per mmbtu.

Gasoline demand slipped 0.2% y/y in the four weeks ending March 21 after holding steady y/y in the prior four weeks. Demand for all petroleum products rose 0.5% y/y in the four weeks ending March 21 after a 2.5% y/y rise in the previous four-week period. Crude oil input to refineries slipped 0.2% y/y in the four weeks ending March 21 after a 1.8% y/y increase in the prior four weeks.

Gasoline inventories rose 3.0% y/y in the week ending March 21 after a 4.2% y/y rise in the week ending March 14. Residual fuel oil inventories fell 19.5% y/y in the week of March 21, after a 21.3% y/y fall in the prior week. Crude oil inventories rose 2.3% y/y in the week of March 21 after a 3.2% y/y rise in the previous week.

Measured in days’ supply, gasoline inventories fell to 26.9 days in the week of March 21 from 27.2 days in the prior week. The recent low was 22.9 days in the week of November 8. The supply of crude oil was 27.7 days in the week of March 21, after three straight weeks at 28.0 days. It remained below a high of 31.9 days in the week of March 3, 2023.

These data are reported by the Energy Information Administration of the U.S. Department of Energy. The price and supply/demand data can be found in Haver’s **WEEKLY** & **USENERGY** database.

- Gasoline costs continue to move up from December low.
- Crude oil prices rise to four-week high.
- Natural gas costs ease.

U.S. Gasoline & Crude Oil Prices Rise Further Last Week

Robert Brusca

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The large industrial companies that form the most important vanguard readings for this report are the weakest in the first quarter with manufacturing backtracking to reading of +12 from +14 in the fourth quarter. That +12 reading is below its four-quarter average of +13.0. Large nonmanufacturing firms, however, stepped up with a reading of +35 in the first quarter up from +33 in the fourth quarter to the highest standing since the third quarter of 2006, which is the period over which we rank these data. The large manufacturing bellwether reading has a 66.7 percentile standing, while the total industry reading is static at +23 for the first quarter with the percentile standing and its 97th percentile.

The outlook for large manufacturing companies also stepped back to +12 in the second quarter from +13 in the first quarter. Its four-quarter average is +13.3 and that leaves it with the ranking at its 67th percentile quite similar to the current reading for the first quarter for manufacturing. Nonmanufacturing remained at a reading of +28 for the third quarter in a row; this is a second-quarter of 2025 reading; it's one-year average is +27.8 and at +28 this is also the highest outlook reading for nonmanufacturing on this timeline. The total industry reading has an outlook in the second quarter of +20.0, the same as the first quarter, down slightly from the fourth quarter; it compares to a four-quarter average of +20.3 and has a queue percentile standing in its 92nd percentile.

The outlook readings, for the most part, are firm-to-strong. Unfortunately, the manufacturing readings are the weakest; instead of being on their 90th percentile like the total industry and nonmanufacturing, manufacturing readings have 66th percentile standing which leaves them only at the lower border of the top third all readings since 2006.

Nonmanufacturing industries show the strongest readings with 90th percentile standings for transportation, restaurants & hotels, wholesaling, and services for businesses. Among the other reporting nonmanufacturing sectors, the standings are in their 80th percentiles or higher except for personal services that has a softer 70th percentile standing.

Compared to the period just before COVID, all sectors are higher except for services for businesses and personal services that are each one or two points lower than they were in the fourth quarter of 2019 before COVID struck. The strongest advances from the pre-COVID reading are from restaurants & hotels with the 35-point rise in their index, as well as retailing, and real estate each with 24-point increases in their respective indexes; wholesaling has a 22-point rise in its index. Large firm manufacturing overall has a 12-point rise in its index on that timeline while construction has an increase of only two points.

The responses for medium- and small-sized firms are not considered to be harbingers in this survey, but for manufacturing both medium- and small-sized firms have rankings in their low 80th percentile while the nonmanufacturing rankings have standing in their 97th and 98th percentile. However, the outlook for medium- and small-sized firms carry percentile standing in their 70th percentile for manufacturing. There still are readings with rankings in the high 90th percentiles for the nonmanufacturing sector that continues to be quite strong across Japan regardless of the size of the firm reporting

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Japan

Tankan Bellwether Edges Down

Tian Yong Woon

This week, we turn our focus to India in the context of US President Trump’s upcoming “Liberation Day” tariff announcements on April 2. Investors are likely on edge, uncertain about the specifics of Trump’s proposed “reciprocal” tariffs. However, early indications suggest that initial concerns may have been overstated, with significant impacts likely limited to only a handful of economies. As we noted in our previous letter, India could be among the most exposed in Asia to these tariffs, given its relatively high tariff rates (chart 1) and specifically those on imports from the US. Beyond tariffs, India also maintains comparatively high non-tariff trade barriers—both in contrast to the US and its more trade-liberal Asian peers (chart 2). Despite these concerns, India’s financial markets have demonstrated strong performance lately. The Indian rupee has staged a strong recovery from earlier selloffs, while equities have rallied (chart 3). The rupee’s resurgence may be partly driven by seasonal flows, whereas equities appear to have benefited from a sharp rebound in foreign portfolio inflows (chart 4). Looking at longer-term structural challenges, one area where India has yet to fully capitalize is its workforce. Despite a relatively young population, a significant portion remains unemployed (chart 5). A closer examination reveals several contributing factors, including insufficient job creation, a persistent skills mismatch, and, more fundamentally, the need for improved access to basic education (chart 6), among other challenges.

**US “reciprocal” tariffs**
As discussed in last week’s economic letter, India is among the most exposed countries in Asia to US President Trump’s upcoming “reciprocal” tariffs, set to be unveiled later this week (April 2). This exposure stems from the fact that not only does the US run a significant trade deficit with India, but India also imposes comparatively high tariff rates on imports in general, and not just from the US, as shown in chart 1. While there are concerns about the potential impact of these tariffs, India has already begun trade deal talks with the US to mitigate the effects if they are implemented. It seems that Trump’s underlying strategy may be working: US-India trade talks are reportedly progressing well, with India considering tariff reductions or even eliminations on more than half of its imports from the US.

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To provide historical context for India, the country has consistently maintained relatively high import tariff rates due to its desire to protect domestic industries. While it is understandable that tariffs are often used to protect domestic industries, the approach can have drawbacks. For example, sustaining high tariff rates can also lead to scrutiny from trading partners. This, in turn, may provoke retaliatory actions, as seen in the case between the US and India. Furthermore, while the intention behind high tariffs is to protect domestic industries, they may inadvertently stifle competitiveness and productivity. By maintaining high tariffs, India risks trapping its industries in a cycle of inefficiency, while also keeping domestic consumers dependent on local producers, even when better alternatives are available elsewhere. This ultimately prevents local producers from effectively competing with foreign counterparts. All of the above discussion also applies to India’s non-tariff trade barriers. These barriers are comparatively higher than those of the US. They are even more restrictive compared to trade-liberal Asian economies like Singapore, as shown in chart 2.

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**Financial market developments**
Despite the looming threat of the US’s “reciprocal” tariffs, recent developments in India’s financial markets have been encouraging. The rupee has appreciated significantly, and Indian equities have rallied, as shown in chart 3. This rally marks a dramatic turnaround from earlier this year when the rupee was heavily sold, making it the worst-performing Asian currency for a time. However, the rupee’s recent strengthening may be driven by seasonal factors, such as corporate repatriation of earnings ahead of the fiscal year-end in March, rather than a fundamental shift in its outlook. As for equities, prior steep sell-offs may have attracted bargain hunters, including foreign investors, propping up prices. This trend will be discussed further below.

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Looking at recent trends in portfolio flows for India, foreign institutional and portfolio investors heavily sold off Indian equities during the first two months of the year, while moderately increasing their holdings in Indian debt, as shown in chart 4. However, more recent data suggests a remarkable turnaround in portfolio flows, with India’s rolling 30-day total indicating a shift from the steep outflows earlier this year. This change is likely due to Indian equities becoming more attractive as valuations dropped during the selloffs. Additionally, the growth-friendly stance adopted by India’s central bank (RBI) under its new governor has likely contributed to the shift in investor sentiment towards Indian equities, with investors now anticipating the next RBI rate cut in April.

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**Longer-term structural issues**
Shifting focus from trade to longer-term structural issues, while India continues to benefit from a relatively young and growing workforce, it is far from utilizing this potential to the fullest. As shown in chart 5, India suffers from extremely low employment rates, of under 40%, with rural unemployment being even worse than urban rates. This suggests that while the economy has a large pool of ready workers, a significant portion of them remain untapped for economic growth—at least officially. There are several reasons for India’s chronically low employment rate. One key factor is that the growth rate of India’s working-age population significantly outpaces the rate of domestic job creation. This issue is further exacerbated by the fact that most job creation in India is concentrated in the services sector, which is not labour-intensive. Another contributing factor is the severe skills mismatch within the workforce. Many educated working-age Indians find themselves in jobs unrelated to their training, reflecting deeper issues within India’s education system. Lastly, the informal sector poses another challenge. Working-age Indians employed there may not always be fully captured in labour statistics due to challenges with measurement and data collection.

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Delving deeper into the structural issue, a two-fold solution seems viable, although achieving it will likely be difficult and take time. First, on the labour demand side, India should focus on increasing job creation, particularly in formal roles and labour-intensive sectors, to absorb the ready pool of working-age Indians. Part of this effort would involve attracting more foreign firms to establish operations and create jobs domestically. Second, India needs to reform its education system to better align with industry needs by emphasizing skills in demand. This would also require improving the overall access and quality of basic education (chart 6), which is essential for working-age Indians to acquire the technical skills and higher education needed in the market. While India has already begun implementing some of these solutions, much deeper reform is still needed to realize their full potential.

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Asia

Economic Letter from Asia: Liberation Day

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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

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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 ADP National Employment Report indicated that nonfarm private sector payrolls rose 155,000 (1.4% y/y) during March after increasing 84,000 in February, revised from 77,000, and 186,000 in January. The increase remained below the 221,000 high in October of last year. A 116,000 March rise in ADP employment had been expected in the Action Economics Forecast Survey.

Growth in median annual pay for "job stayers" eased to 4.6% y/y from 4.7% y/y in the prior two months and compared to 5.0% y/y one year earlier. It remained below a September 2022 high of 7.8% y/y. Manufacturing sector pay grew 4.8% y/y while construction sector pay improved 4.7% y/y. Natural resource & mining sector pay grew 4.3% y/y. Financial sector pay rose 5.3% y/y while education & health services pay rose 4.7% y/y. Leisure & hospitality pay also increased 4.7% y/y. Professional & business service sector pay increased 4.4% y/y and trade, transportation & utilities pay rose 4.3% y/y. Information pay rose 4.0% y/y. Median annual pay for “job changers” rose 6.5% y/y after 6.8% y/y growth in February and stood below a 16.1% y/y high in April 2022.

Small business hiring (less than 50 employees) rose 52,000 (0.7% y/y) in March, following no change in February. Employment at medium-sized firms (50-499,000 employees) rose 43,000 (1.1% y/y) after increasing 53,000 in February. Large business hiring (500+ employees) rose 59,000 (3.6% y/y) last month following a 33,000 February rise.

Goods-producing employment rose 24,000 (1.3% y/y), after rising 40,000 in February. Factory sector employment rose 21,000 (-0.2% y/y) following a 15,000 rise. The number of construction sector jobs rose 6,000 (3.6% y/y), following a 26,000 February increase. Natural resource & mining jobs fell 3,000 (+1.9% y/y), after a 1,000 decline.

The number of service-producing jobs rose 132,000 (1.4% y/y) last month, following a 43,000 February gain. Professional & business services employment grew 57,000 (0.7% y/y) last month following a 22,000 February increase. Employment in the financial industry rose 38,000 (2.0% y/y) after a 24,000 rise. Leisure and hospitality employment increased 17,000 (2.9% y/y), following a 47,000 February increase. Employment in “other” services rose 11,000 (3.5% y/y) in March, following an 18,000 gain in February. The number of education & health care jobs improved 12,000 (1.8% y/y), after a 25,000 decline during February. Information sector employment rose 3,000 (0.2% y/y) last month after a 12,000 decline. The number of jobs in trade, transportation & utilities fell 6,000 (+0.4% y/y) in January after a 31,000 decline during February.

By region, employment in the Northeast increased 89,000 (2.0% y/y) last month, after rising 40,000 in February. Employment in the Midwest rose 81,000 (1.4% y/y) following a 62,000 gain in February. In the South, employment increased 27,000 (1.4% y/y) following a 17,000 gain, but in the West, employment fell 41,000 (+0.6% y/y) in March, after a 32,000 February decline.

The ADP National Employment Report and Pay Insights data can be found in Haver's **USECON** database. Historical figures date back to January 2010 for private employment. Pay data date back to October 2020. The expectation figure is available in Haver's **AS1REPNA** database.

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- Employment increase is strong in both services & factory sectors.
- Wage growth for “job stayers” and “job changers” moderates.
- Small business employment recovers; hiring at medium-sized firms slows.

U.S. ADP Payroll Gain Rebounds in March; Pay Growth Eases

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