Tom Moeller

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The Chicago Federal Reserve Bank reported that its National Activity Index (CFNAI) held steady at -0.19 during March. The three-month moving average of the index improved m/m to 0.01 from -0.09, and was higher than the low of -0.38 in December. During the last 20 years, there has been a 74% correlation between the index and the q/q change in real GDP.

The March index reflected mixed performance amongst the component series. The Production & Income component fell to -0.08 from 0.04 in February. It was the first negative figure in three months. The Personal Consumption & Housing component reading of -0.10 was the fourth negative reading in five months. The Sales, Orders and Inventories measure of -0.02 compared to -0.09 in both of the prior two months. On the plus side the Employment, Unemployment and Hours reading rose to 0.01 in March from -0.09 in February.

The diffusion index of the CFNAI, which measures the breadth of component change, rose to 0.14 from 0.10 in February.

The CFNAI is a weighted average of 85 monthly indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

These figures are available in Haver's **SURVEYS** database.

- Overall index is unchanged m/m below zero.
- Component series are mostly negative.

Chicago Fed National Activity Index Remains Negative

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The rate of decline in manufacturing activity in Texas lessened in November, according to the Texas Manufacturing Outlook Survey conducted by the Federal Reserve Bank of Dallas. The General Business Activity index edged up to -2.7 this month from -3.0 in October. It was the highest level since April 2022, up from the most recent low of -19.4 in May. The November reading compared to a low of -30.1 in May 2023. Nevertheless, the index has been negative since May 2022. A slightly increased 16.2% of respondents reported improved business activity in November while a fairly steady 18.9% of respondents reported a worsening. The company outlook index surged to 5.8 this month from -3.3 in October and was increased from a low of -18.4 in July. It’s been negative since March 2022. Data were collected from November 12th through 20th from 86 Texas manufacturers.

The production index fell sharply in November to -0.9, reversing virtually all of its October surge to 14.6 from -3.2 in September. A greatly lessened 26.3% of respondents reported higher production this month while a higher 26.2% reported a decline. Also moving lower, the growth rate of orders index eased to -12.5 from -11.7 and was the seventh straight month of decline. It was down from its recent high of 3.8 in April. The unfilled orders index improved to -14.1 from -17.5 in October, after falling to -18.0 in September. It was well below a high of 6.2 in July 2022. The shipments index fell to -5.9 this month from 1.5 in October. The capacity utilization index weakened to -4.8 from +4.3 in October. The delivery time index improved, however, to -5.2 this month from -11.5, which was the lowest level since July 2023.

Labor market indexes rebounded. The employment index rose to 4.9 after falling to -5.1 in October. The latest reading stands at the highest in four months, but remained well below a high of 18.2 in January 2023. An improved 19.3% of respondents reported an increase in net hiring in November while a lessened 14.4% reported net layoffs. The hours worked index was 0.3 this month after a decline to -5.5 in October. It remained well below a high of 13.6 in August 2022. Moving down, the wages & benefits index fell to 18.6 in November after rising to 23.5 in October.

Inflation indicators moved higher this month. The index for prices received for finished goods rose to 8.8 from 7.4 in October. It remained well below a high of 47.9 in March 2022. A greater 15.2% of respondents reported raising prices in November while a higher 6.4% reported lowering prices. The index of prices paid for raw materials increased to 28.5 this month from 16.3 in October. The index remained up from a low of 1.1 in June 2023 but below 73.2 in March 2021.

Expectations of future manufacturing activity improved this month. The future general business activity index rose to 31.2 in November from 29.6 in October. It was the highest reading in over three years. The future new orders and production measures led the gain along with future unfilled orders and future wages. The future shipments, employment and hours-worked indexes, however, declined.

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 has been rising since 2023 low.
- Production deteriorates, shipments decline, but hiring improves.
- Price reading is slightly higher but wages & benefits strength diminishes.
- Future business index moves up to highest point in three years. 


Texas Manufacturing Activity Remains Sluggish in November, but Expectations Improve 

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The Chicago Federal Reserve Bank reported that its National Activity Index (CFNAI) fell to -0.40 during October from -0.27 in September, revised from -0.28. It was the lowest figure in nine months and compared to a high of +0.39 reached in February. The three-month moving average of the index fell to -0.24 during October from -0.21 in September. The index has been consistently negative since late in 2022, suggesting below-trend economic growth. During the last 20 years, there has been a 91% correlation between the three-month index level and the q/q change in real GDP.

The report indicated deterioration in all categories used to construct the index in October.

The Production & Income category contributed -0.25 to the total in October after subtracting -0.23 in September. It remained up from a January low of -0.48, suggesting a lessening of negative pressure. The Employment, Unemployment & Hours series weakened sharply and contributed -0.12 in October versus -0.01 in September. It has been mostly negative since early last year. The Personal Consumption & Housing figure contributed -0.01 last month after adding 0.02 in September. It remained higher than the January low of -0.09. The Sales, Orders & Inventories figure contributed -0.02 last month versus -0.04 in September. These readings compare to a high of 0.11 in November of last year.

The diffusion index of the CFNAI, which measures the breadth of component change, fell to -0.26 in October from -0.22 in September. It compared to a low of -0.27 in October of last year and stands below the recent high of +0.25 in September 2022.

The CFNAI is a weighted average of 85 monthly indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

These figures are available in Haver's **SURVEYS** database.

- Broad-based weakening occurs in all components.
- Production & Income measure leads decline.
- Trend is deteriorating.

Chicago Fed National Activity Index Declines Again in October

Robert Brusca

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Covid slammed the global economy and hit Germany hard. But the German economy recovered as the chart shows. Then the Russian invasion of Ukraine occurred and sent a second, more lasting, shock wave across the German economy. Government restrictions during Covid were put on and then taken off. But the Russian invasion occurred as a shock and continues to play out disrupting European energy markets, trade, and trade patterns, as well as leaving heightened international tensions in play.

This month’s report includes a table column that ranks the IFO diffusion gauges across industries and concepts since the Russian invasion of Ukraine. The climate gauges are all low ranking on a 1991-to-date basis as well as ranked just since the invasion. Wholesaling, retailing, and services do rank slightly higher over the post invasion period than overall, but the ranking changes are not really meaningful. What these rankings point out is how weak conditions got after the invasion compared to historic lows and how substantially that weakness has persisted.

The current conditions index shows deterioration month-to-month for the overall (all-sector) reading as well as for two individual sectors (construction and services). However, the current rankings over data since the invasion are universally and substantially lower than the rankings made on data since 1991. The all-sector current index is on a post invasion low. Manufacturing, construction and services in the past invasion period are still extremely low.

What has fared better are expectations. The November expectations standing on data back to 1991, the overall ranking is at its 14.2 percentile. But ranking expectations since the February 2022 invasion shows that expectations have lifted substantially from the post-invasion lows with readings largely in the 60th to 70th percentiles. However, even with these rebounds, the overall ranking shows how extremely low the current reading stands in November.

Apart from the rankings, the all-sector diffusion readings are weaker in each of the three ranking environments of climate, current conditions, and expectations. Month-to-month expectations worsen for manufacturing, construction, and services even though those sectors show much higher rankings since the invasion compared to their overall rankings back to 1991.

These comparisons simply point out that there is little in the way of lasting improvement underway. Conditions are better relative to their median values since the invasion for expectations, but not for climate or current conditions. And despite this improved relative standing for expectations, the expectations readings are especially adverse and without an improving trend.

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Germany

German IFO Survey Remains Extremely Weak

Tian Yong Woon

In this week’s letter, we focus on Southeast Asia (ASEAN). While exports have become increasingly important to ASEAN economies as drivers of real GDP growth, secondary growth drivers offer a buffer in the event of dampened external demand. A deeper look at the composition of ASEAN’s export value added reveals that intermediate goods account for the largest share, compared to finished goods. This highlights the region’s key role as a hub in the global supply chain. We also explore the differences among ASEAN economies. On the one hand, resource-rich countries like Indonesia and Malaysia benefit from their role as exporters of raw or partially processed commodities. On the other, resource-scarce economies like Singapore have carved out a niche in higher-end manufacturing, often relying on inputs from other regions.

Overall, ASEAN remains a bright spot for growth, with IMF forecasts suggesting that the region is poised to outpace other Asian economies, including China, over the next decade. However, the region’s prospects are not without risks. The US trade deficit with many ASEAN economies, particularly Vietnam, could provoke trade-related actions from US President-elect Trump. Ironically, Vietnam’s rise—largely driven by its strategic positioning amid US-China tensions during Trump’s first term—may also lead to increased scrutiny in his second term. Finally, we examine the industrial policies of certain ASEAN economies, particularly Indonesia. While the success of its nickel ore export ban is notable, similar export bans on commodities like bauxite have had more mixed success.

**ASEAN’s place in trade and the world**
Trade has long been crucial to the economies of Southeast Asia (ASEAN), with export revenues serving as a significant driver of growth for several countries in the region. In recent quarters, this role has become even more pronounced, as evidenced in Chart 1, which shows rising export contributions to growth for Malaysia, Thailand, and Indonesia. In contrast, the Philippines continues to struggle to generate growth from its exports. However, unlike advanced Asian economies such as South Korea and Taiwan, many ASEAN countries have benefited from strong secondary growth drivers, particularly private consumption. A robust domestic consumer base has supported business activity across the region. This dynamic provides a buffer in times of reduced global demand, which may dampen export performance. Even if external conditions weaken, these economies may still rely on internal demand to sustain growth, provided their domestic situations remain stable.

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Diving deeper into the details, we find that while they share certain similarities in their export profiles, they also exhibit significant differences. Starting with the similarities, as Chart 2 shows, most of the value added in the exports of ASEAN-6 economies comes from intermediate goods, highlighting the region's critical role as both a hub and source of inputs for finished goods within the global value chain. Additionally, in many of these economies, the share of value added from agricultural and mining goods is notably high, with some nearing 100%. This suggests that these countries benefit from their natural endowments and play a key role in supplying raw commodities—such as metals from mining and food products like rice and palm oil.

We turn next to examine a few points of distinction between the ASEAN-6 economies. Take Singapore, for example, where the proportional domestic value added in exports is relatively low compared to its regional peers. This points to a significant share of value being contributed by foreign economies before the goods are exported. Singapore's lack of natural resources, unlike its neighbours, explains its reliance on external inputs to add value within the global value chain. A similar pattern can be seen across the manufacturing sectors of several ASEAN-6 economies, such as Vietnam, Malaysia, and Thailand. These countries typically receive parts from abroad, add value through processing, and then export either finished goods or intermediate goods for further production elsewhere in the global supply chain.

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Turning to growth opportunities in the ASEAN-6, Chart 3 shows that the region is expected to deliver robust economic growth in the coming years, according to IMF forecasts. This makes ASEAN-6 an attractive investment destination. This is especially true given the anticipated slowdown in growth across other major Asian economies, such as China. In fact, the region's average growth is forecasted to surpass China’s over the next decade. However, digging deeper, much of the growth within ASEAN-6 will be driven by a few key economies, such as Vietnam and Indonesia. On the other hand, Singapore is expected to experience comparatively lower growth, primarily due to its more advanced stage of development. Meanwhile, Thailand continues to strive to unlock its full growth potential while addressing structural challenges.

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**Potential impacts of President-elect Trump’s policies**

The growth opportunities in the ASEAN-6 region, however, are not without risks—particularly in light of President-elect Trump’s impending return to office and the potential trade-related policies he may implement. As Chart 4 illustrates, the US runs trade deficits with most ASEAN-6 economies, with Vietnam standing out due to its substantial deficit of nearly $119 bln, based on rolling 12-month totals. For context, the US goods trade deficit with Vietnam is so large that it ranks just behind the deficits with China and Mexico, two countries with which Trump has frequently expressed dissatisfaction over trade. This risk is compounded by Vietnam’s heavy reliance on China for many of its imports. Should Trump prioritize bilateral trade balances and take actions, both directly and indirectly, against China, Vietnam may find itself in the crosshairs of US trade actions. Consequently, Vietnam’s economic growth now faces additional risks under the Trump administration, with potential trade measures threatening to drag down its growth if these actions materialize.

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Delving deeper into Vietnam, the economy has experienced remarkable growth in recent years, with real GDP accelerating to 7.4% y/y in Q3 2024, a standout figure in the Asian region. This success can be attributed to several key drivers. First, Vietnam has capitalized on the “China Plus One” strategy, where businesses globally seek to diversify their supply chains away from China, attracting significant investment inflows. On the other hand, Vietnam has also benefitted from China’s trade-related challenges, as China has increasingly used Vietnam as a hub to reroute exports. However, Vietnam’s rise amid US-China tensions during Trump’s first term may ironically become a source of greater scrutiny this time around. The US trade deficit with Vietnam has nearly quadrupled over the past eight years, largely driven by surging imports of computers and electronics (Chart 5).

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**Industrial policy**
Finally, we turn to the industrial policies implemented by certain ASEAN economies and their outcomes. In Indonesia's case, the ban on raw nickel exports, enacted in 2020, has proven highly successful. The policy has not only attracted substantial foreign direct investment (Chart 6), with foreign firms setting up refineries in Indonesia to process the nickel for export, but it has also significantly increased Indonesia's share of global nickel production. With no viable substitutes for nickel, global demand—particularly from industries like stainless steel and electric vehicle batteries—seems likely to remain strong in the near term, securing Indonesia's position in the global supply chain. However, Indonesia's attempts to replicate this success with other commodities, such as its bauxite export ban in June 2023, have yielded mixed results.

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Asia

Economic Letter From Asia: Talking ASEAN