Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070619b.jpg" width="353">
The ZEW indicator that measures the balance of opinion among German institutional investors and analysts on the outlook six months ahead fell to 20.3% in June from 24% in May. The consensus expectation was for a rise to 29%. At the same time the balance of opinion on current conditions rose to a record of 88.7%, as shown in the first chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070619c.jpg" width="353">
Some of the events that took place and some of the data that were released during the period, June 4th to June 18th, when the participants of the survey were asked for their opinions, may help explain the decline in the optimists over the pessimists.
The European Central Bank raised its official rate to 4% on June 6 and suggested further increases might be in the offing. The yield on the ten year government bond, which had been rising moderately since March, jumped by 8 basis points on June 8th. Although it has since recovered, the Frankfurt Xetra Dax Index declined 2.4% in the one day of June 6. The second chart shows the ten year government bond yield and the stock market index on a daily basis for the last year and a half.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070619d.jpg" width="353">
During the survey period it was revealed that the volume of manufacturing sales had declined 3.07% in April from March and that the volume of new orders for April was 1.17% below March. Moreover, April industrial production was down 2.27% from March. On the cost side, unit labor costs were up sharply, 4.25%, in April from March.

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<th scope="col" class="firstcol">ZEW INDICATOR&nbsp; (% BALANCE)&nbsp;</th>
<th scope="col">Jun &nbsp; 07</th>
<th scope="col">May&nbsp; 07&nbsp;</th>
<th scope="col">Jun &nbsp; 06</th>
<th scope="col">M/M Dif</th>
<th scope="col">Y/Y Dif</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Current Conditions</td>
<td>88.7</td>
<td>88.0</td>
<td>11.9</td>
<td>0.7</td>
<td>76.8</td>
<td>18.3</td>
<td>-61.8</td>
<td>-67.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Expectations 6 months ahead</td>
<td>20.3</td>
<td>24.0</td>
<td>37.8</td>
<td>-3.7</td>
<td>-17.5</td>
<td>22.3</td>
<td>34.8</td>
<td>44.6</td>
</tr>
<tr>
<td class="firstcol">ECONOMIC INDICATORS&nbsp; (2000=100)</td>
<td>Apr&nbsp;&nbsp; 07</td>
<td>Mar&nbsp; 07&nbsp;</td>
<td>Apr&nbsp;&nbsp; 06</td>
<td>M/M %</td>
<td>Y/Y %</td>
<td>2006</td>
<td>2005</td>
<td>2004</td>
</tr>
<tr class="odd">
<td class="firstcol"> Manufacturing Sales</td>
<td>116.9</td>
<td>120.6</td>
<td>111.6</td>
<td>-3.07</td>
<td>4.75</td>
<td>113.3</td>
<td>106.3</td>
<td>103.0</td>
</tr>
<tr class="odd">
<td class="firstcol"> Manufacturing New Orders </td>
<td>127.0</td>
<td>128.5</td>
<td>117.7</td>
<td>-1.17</td>
<td>7.90</td>
<td>119.0</td>
<td>108.7</td>
<td>103.2</td>
</tr>
<tr class="odd">
<td class="firstcol"> Industrial Production </td>
<td>112.1</td>
<td>114.7</td>
<td>108.1</td>
<td>-2.27</td>
<td>3.70</td>
<td>109.8</td>
<td>103.7</td>
<td>100.8</td>
</tr>
<tr class="odd">
<td class="firstcol"> Unit Labor Cost </td>
<td>93.2</td>
<td>89.4</td>
<td>93.0</td>
<td>4.25</td>
<td>0.22</td>
<td>91.8</td>
<td>95.9</td>
<td>99.3</td>
</tr>
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The ZEW indicator that measures the balance of opinion among German institutional investors and analysts on the outlook six months ahead fell to 20.3% in June from 24% in May. The consensus expectation was for a rise to 29%. At the [...]

German Financial Community Turns Less Optimistic

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Kathleen Stephansen, CBE

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Mortgage applications jumped 33.3% (6.6% y/y) in the week ended January 10, after a decline of 3.7% (-11.6% y/y) in the week ended January 3, and ending a streak of four consecutive weekly declines. Applications for loans to purchase a house jumped 26.9% (-0.1% y/y) in the week ended January 10, following a drop of 6.6% (-14.1% y/y) in the week ended January 3. Applications to refinance a loan surged 43.5% (22.2% y/y) in the latest week, after a rise of 1.5% (-5.7% y/y) in the prior week. These data are from the Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey and the amounts quoted are seasonally adjusted.

The effective interest rate on a 30-year fixed rate loan was 7.28% in the week ended January 10, up 10bps from 7.18% in the week ended January 3. The effective rate on a 15-year fixed rate mortgage inched down 1bp to 6.61% in the week ended January 10 from 6.62% in the week ended January 3. The rate on a 30-year jumbo loan rose 2bps to 7.22% in the latest week from 7.20% in the January 3 week. The rate on a 5-year ARM rose 31bps to 6.38% from 6.07% in the week ended January 3.

The share of applications to refinance an existing mortgage was 42.7% in the week ended January 10, up from 40.8% in the week ended January 3. The share of applications for ARMs was 5.0% in the latest week, up from 4.7% in the January 3 week.

The average loan size in the January 10 week was $367,100, up 2.1% (1.7% y/y) from $359,500 in the January 3 week. The average size of an application for a loan to purchase a house was up 1.3% (1.1% y/y) to $419,600 in the week ended January 10 from $414,400 in the week ended January 3. The average size of an application to refinance an existing loan rose by 6.0% (9.6% y/y) to $296,800 in the week ended January 10 from $279,900 in the week ended January 3. 

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

- Applications to purchase and to refinance loans jumped.
- Rates on 30-year fixed-rate loans rose moderately.
- Average loan size rose modestly in latest week.


U.S. Mortgage Applications Surged in the January 10 Week

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The Producer Price Index for final demand rose 0.2% (3.3% y/y) in December, following an increase of 0.4% (3.0% y/y) during November, according to the Bureau of Labor Statistics (BLS). The December monthly reading compared to a 0.4% rise expected in the Action Economics Forecast Survey. Producer prices excluding food, energy & trade services edged 0.1% higher (3.3% y/y) following a similar monthly rise (3.5% y/y) in November. The PPI excluding food & energy was unchanged (3.5% y/y) in December after rising 0.2% (3.5% y/y) in November. The BLS reported that on an unadjusted basis, prices for final demand increased 3.3% in 2024 after moving up 1.1% in 2023, while prices for final demand excluding food, energy & trade services rose 3.3% in 2024 following a 2.7% advance in 2023.

Final demand food prices eased 0.1% (4.7% y/y) in December, following a rise of 2.9% (4.9% y/y) in November, revised from a rise of 3.1% (4.9% y/y). Prices for fresh and dry vegetables declined by 14.7% (+21.3% y/y), while egg prices rose 0.5% (127.9% y/y) after a surge of 55.6% over the month in November.

Energy prices increased 3.5% (-2.0% y/y) during December, after holding steady (-6.1% y/y) in November, revised from a rise of 0.2% (-6.2% y/y). Gasoline costs rose 9.7% (-2.5% y/y) while home heating oil prices rose 4.0% (-12.6% y/y). Electric power prices rose 1.0% (1.8% y/y) and natural gas costs gained 0.7% (2.2% y/y). Diesel fuel dropped 1.3% (-13.9% y/y).

Final demand goods prices excluding food & energy were unchanged over the month (2.1% y/y) during December, following a rise of 0.2% (2.2% y/y) in November. Core finished consumer goods prices increased 0.1% (2.4% y/y) after a rise of 0.3% (2.3% y/y) in November. The increase in core nondurable goods prices rose 0.1% (2.9% y/y) last month after a rise of 0.4% (2.9% y/y) in November. Durable consumer goods prices rose 0.2% (1.6% y/y) in December following a rise of 0.1% (1.3% y/y) in November. Capital equipment prices rose 0.2% (2.8% y/y) last month following a similar monthly rise (2.7% y/y) in November. Core government-purchased goods prices edged 0.1% higher (2.1% y/y) in December, after similar monthly and year-on-year rises in November.

Final demand services prices were unchanged (4.0% y/y) in December after rising 0.3% (3.9% y/y) in November. Trade services prices eased 0.1% (+4.4% y/y) last month following a rise of 0.7% (3.2% y/y). Trade of finished goods prices were unchanged (3.8% y/y) in December, after rising 0.6% (2.8% y/y) in November. Prices for final demand transportation and warehousing services rose 2.2% (2.1% y/y) last month, after falling 0.6% (-0.3% y/y) in November. Services prices less these costs fell 0.2% (+4.1% y/y) last month, after a rise of 0.2% (4.7% y/y) in November.

Construction costs rose 0.2% (1.7% y/y) in December, after holding steady (+1.6% y/y) during November.

Prices for intermediate demand of processed goods rose 0.3% (0.2% y/y) in December after holding steady (-0.6% y/y) in November. Processed energy goods prices rose 1.6% last month after easing 1.2% in November, while food prices rose 0.4% following a 0.8% advance in November.

The PPI data are published by the Bureau of Labor Statistics and can be found in Haver’s **USECON** database. Further detail is contained in **PPI** and **PPIR**. The expectations figures are available in the **AS1REPNA** database.

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- Overall index rise softer than expected.
- Advance in core goods prices is steady.
- Advance in services price is steady.

U.S. PPI and Core PPI Gains Ease in December

Winnie Tapasanun

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The NFIB Small Business Optimism Index rose to 105.1 in December, the eighth m/m rise in nine months and the highest level since October 2018, after an 8.0-point rise to 101.7 in November, according to the Small Business Economic Trends survey conducted by the National Federation of Independent Business. This was the second straight month that the index was above the 51-year average of 98. The index, up from its recent low of 88.5 in March 2024 and 91.9 in December 2023, was also above a high of 102.5 in June 2021 and a high of 104.0 in October 2020. Seven of the 10 index components rose, two fell, and one was unchanged. The NFIB Small Business Uncertainty Index declined to 86 in December, the lowest level since June 2024, from 98 in November; however, it was well above its recent low of 65 in November 2023 and a low of 55 in June 2022.

The outlook for business conditions in the next six months remained positive for the second consecutive month in the latest survey. The net balance of respondents expecting the economy to improve jumped to 52% in December, the seventh m/m rise in eight months and the highest level since March 2002, on top of a 41-point surge to 36% in November; it was significantly above a record low of -61% in June 2022. Expected real sales rose to a net 22% in December after an 18-point gain to 14% in November, posting the second successive positive reading and the highest level since January 2020. The latest reading was up from a low of -21% in May 2023 and a low of -29% in July 2022. A net -13% of respondents reported higher nominal sales in the past three months, unchanged from November and registering the highest reading since June 2024. The latest result, however, was below the most recent positive reading of 1% in May 2022 and a peak of 9% in June 2021.

Plans to make capital outlays dipped to 27% in December following a six-point increase to 28% in November. These numbers were up from a low of 19% in September 2024 and a low of 19% in April 2023 but down from a high of 31% in October 2021. Plans to expand the business rose to 20% in December after an eight-point rise to 14% in November; the latest figure, up from a low of 2% in March 2023, registered the best reading since February 2020. Meanwhile, expected credit conditions increased to -2% in December, the highest reading since February 2020, from -5% in November; these readings were above a low of -11% in November 2023.

On the labor front, labor markets remained relatively tight. Forty-nine percent of respondents reported that qualified workers to fill job openings were hard to find in December, slightly up from 48% in November. These numbers were below a high of 57% in September 2023, a high of 61% in May 2022, and a peak of 62% in September 2021. A net 19% planned to increase employment in December, slightly up from 18% in November, but it was down from a high of 26% in May 2022 and a peak of 32% in August 2021. Notably, 35% reported positions not able to be filled in December, slightly down from 36% in November; these figures remained below a high of 51% in May 2022.

Overall earnings trends had remained in negative territory since December 2019. The figure was held at -26% in December and November, still a poor reading, following a one-point increase to -33% in October; these readings were below a high of -18% in March 2023 and a high of -5% in June 2021.

On the pricing front, inflation pressures, while trending down, remained at an inflationary level. The net percent raising their average selling prices held at 24% in December and November after a one-point easing to 21% in October; these numbers were slightly down from 25% in December 2023 and well below a high of 66% in March 2022. The percentage planning to raise prices registered at 28% in December and November following a one-point increase to 26% in October; these figures were below 32% in December 2023 and a high of 52% in March 2022.

Wage inflation, while relatively high, eased somewhat in the December survey. A net 29% of respondents raised compensation during the last three months, down from 32% reported in the November survey and registering the lowest reading since March 2021. It was down from a high of 46% in February 2023 and a peak of 50% in January 2022. A net 24% of firms planned to raise worker compensation in the next three months, down from an 11-month-high 28% reported in November; these numbers remained below a high of 30% in November 2023 and a high of 32% in October 2022.

Inflation continued to be an issue facing small businesses, as reported by 20% of NFIB members in December as the single most important problem. The December figure was unchanged from November and down from and a peak of 37% in July 2022. The quality of labor was the second important concern with 19% in December, unchanged from November. Other concerns (in December vs. November) included taxes (15% vs. 14%), the cost of labor (11% vs 11%), and government requirements (8% vs. 8%).

According to the Small Business Administration, there are 33 million small businesses in the United States, which employ 62 million workers. The NFIB surveys anywhere from 500 to 2000 respondents each month and the typical firm employs 10 people and reports gross sales of about $500,000 a year. The NFIB figures can be found in Haver’s **SURVEYS** database.

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- December NFIB Small Business Optimism Index up 3.4 pts. to 105.1.
- Uncertainty Index down 12 pts. to a six-month-low 86.
- Expectations for economy up 16 pts. to 52%, the highest since March 2002.
- Expected real sales up 8 pts. to 22%, the highest since January 2020.
- Inflation (20%) remains top business problem, followed by Quality of Labor (19%); both unchanged from November.

U.S. NFIB Small Business Optimism Rises Again in December; Highest Level Since October 2018

Robert Brusca

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The plot of the economy watchers readings since mid-2024 paints a pretty clear picture of the performance of the economy according to this metric. The chart shows the summary. The future conditions index, the current conditions index, and the reading for current conditions employment, have all been below diffusion values of 50 on a fairly steady basis. In addition, there has been little tendency for trend to take hold; there appears to be some modest up trending going on from early-2024 to later in the year. However, more recently we see some backfilling in terms of that progress. All told it's hard to make too much out of these readings other than to note that diffusion values have been slightly below 50, indicating slight deterioration in current conditions, in the employment market, and for expected future conditions. The results are not draconian. It's really just been a period of slight underperformance by the economy and for expectations for the future and in terms of the job market.

**December Current Index**
In December, among the nine component readings for the current index, four of them produced diffusion values above 50, indicating some net expansion. Corporate nonmanufacturers registered 50.5, the household sector generated a rating of 50.2, retailing came in at 50.4, while the services sector produced the highest reading at 51.1. All of these are readings very close to 50 and are not showing much in the way of growth. But being above 50, they are signaling some small net expansion. The contracting side of the ledger in December shows eating and drinking places with the diffusion value of 46.9, housing at 46.5, corporate manufacturers at 47.2, the overall corporate reading at 49.1, and the employment reading at 49.7. The current reading is an echo of the performance of the headlines plotted in the chart at the top, indicating a close clustering around the value of 50. There are a few sector readings with diffusion values slightly above 50 and a few with readings below 50. However, over 12 months we have net declines for all of the readings except for housing and for retailing.

Diffusion ratings pertain to month-to-month activity comparisons while the queue standings describe the December diffusion index ranked among its historic data on a longer timeline back to 2002. The ranking data put a slightly different spin on events because the current index, which is at 49.9, showing the barest decline in terms of the diffusion index, also has a queue standing at 69.6% which tells us that over this span the index has been stronger only about 30% of the time. A modest contraction is actually significantly stronger reading than Japan has been used to seeing over this 20-plus year period. Looking at the rankings across the components, we find only two have a percentile standing below their 50%-mark, employment at 29.2% along with corporate manufacturers at 47.8%.

**December Future Index**
The future index has a diffusion reading of 48.8; that shows a weakening compared to November's reading at 49.4. In December only two components have readings above the 50th percentile, services at 52.8 and nonmanufacturing corporations at 50.1; the latter is as bare bones a reading above 50 as possible. The remaining readings are below 50 indicating net contractions. The lowest being housing at 44.5, with three readings in the 47-diffusion range for corporate manufacturers, for eating and drinking establishments, and for retailing. As we saw with the current index, the 12-month change in the future index also shows a drop in the headline of 1.6 points with drops logged across most components with an increase only in nonmanufacturing corporations and an unchanged reading for retailing.

Queue percentile standings are weaker for the future index than for the current index. Its standing is only at 51.4% for the headline with four components having readings below the 50% mark, but for the most part, significantly below the 50% mark corporate manufacturers have a percentile standing at 45.1%, eating and drinking places have a ranking at 41.5%, housing has a ranking at 40.7%, and on the outlook for employment there is a reading at 30%.

On balance, the economy watchers index does not indicate much change in Japan's economy in December. The outlook deteriorates slightly from November, but it's still roughly unchanged in its diffusion value showing only slight deterioration; that continues to be the overall picture just as for the current index where deterioration continues to be the picture despite some reduction in the pace of slowing this month. The queue standings, however, show that the current index is posting numbers that are relatively firmer compared to what they've been over the last 20 years or so. The future index is much more modestly positioned compared to its historic readings.

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Japan

Economy Watchers Index Improves But Shows Shrinkage in December