Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060519a.jpg" width="353">
The May Index of General Business Conditions in the manufacturing sector from the Philadelphia Fed rose modestly, for the second month, to 14.4 from an unrevised 13.2 last month. The gain surpassed Consensus expectations for a decline to 12.5.
During the last ten years there has been a 65% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 49% correlation with q/q growth in real GDP.
The index reflected improvement in delivery times and inventories. However, declines in other sub indexes were broad based; new orders, shipments and employment each fell to the lowest levels since last Summer. During the last ten years there has been a 75% correlation between the employment index and the three month growth in factory payrolls.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060519b.jpg" width="353">
The business conditions index reflects a separate survey question, not the sub indexes.
The prices paid index surged to the highest level since last September. During the last ten years there has been a 76% correlation between the prices paid index and the three month growth in the intermediate goods PPI. There has been an 85% correlation with the change in core intermediate goods prices.
The separate index of expected business conditions in six months fell and reversed roughly half of the improvement in April. Expectations for employment fell sharply to the lowest level since August 2002..
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos0506.html">here</a>.
The rise in the Philly Fed index ran counter to the m/m improvement, reported Monday, in the May Empire State Manufacturing index of general business conditions. The Richmond Fed will report its May Mfg. Survey index next week. The reading will follow two months of sharp improvement, notably in orders, shipments and jobs and the figures will be available in the Haver SURVEYS database.
During the last ten years there has been a 57% correlation between the Richmond survey index level and the change in factory sector industrial production, nationally. The latest Richmond Fed Mfg. Survey is available <a href="http://www.richmondfed.org/research/regional_conditions/manufacturing_conditions/index.cfm"> here</a>.
The Richmond Fed also publishes indexes of conditions in the Service Sector and the latest release is available <a href="http://www.richmondfed.org/research/regional_conditions/service_sector/index.cfm"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">May &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>14.4</td>
<td>13.2</td>
<td>10.3</td>
<td>12.4</td>
<td>28.0</td>
<td>10.5</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>55.3</td>
<td>29.0</td>
<td>32.0</td>
<td>43.5</td>
<td>51.2</td>
<td>16.8</td>
</tr>
</tbody>
</table>
</body>
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The May Index of General Business Conditions in the manufacturing sector from the Philadelphia Fed rose modestly, for the second month, to 14.4 from an unrevised 13.2 last month. The gain surpassed Consensus expectations for a decline [...]

Philadelphia Fed Business Activity Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060519a.jpg" width="353">
The May Index of General Business Conditions in the manufacturing sector from the Philadelphia Fed rose modestly, for the second month, to 14.4 from an unrevised 13.2 last month. The gain surpassed Consensus expectations for a decline to 12.5.
During the last ten years there has been a 65% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 49% correlation with q/q growth in real GDP.
The index reflected improvement in delivery times and inventories. However, declines in other sub indexes were broad based; new orders, shipments and employment each fell to the lowest levels since last Summer. During the last ten years there has been a 75% correlation between the employment index and the three month growth in factory payrolls.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060519b.jpg" width="353">
The business conditions index reflects a separate survey question, not the sub indexes.
The prices paid index surged to the highest level since last September. During the last ten years there has been a 76% correlation between the prices paid index and the three month growth in the intermediate goods PPI. There has been an 85% correlation with the change in core intermediate goods prices.
The separate index of expected business conditions in six months fell and reversed roughly half of the improvement in April. Expectations for employment fell sharply to the lowest level since August 2002..
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos0506.html">here</a>.
The rise in the Philly Fed index ran counter to the m/m improvement, reported Monday, in the May Empire State Manufacturing index of general business conditions. The Richmond Fed will report its May Mfg. Survey index next week. The reading will follow two months of sharp improvement, notably in orders, shipments and jobs and the figures will be available in the Haver SURVEYS database.
During the last ten years there has been a 57% correlation between the Richmond survey index level and the change in factory sector industrial production, nationally. The latest Richmond Fed Mfg. Survey is available <a href="http://www.richmondfed.org/research/regional_conditions/manufacturing_conditions/index.cfm"> here</a>.
The Richmond Fed also publishes indexes of conditions in the Service Sector and the latest release is available <a href="http://www.richmondfed.org/research/regional_conditions/service_sector/index.cfm"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<thead>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">May &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>14.4</td>
<td>13.2</td>
<td>10.3</td>
<td>12.4</td>
<td>28.0</td>
<td>10.5</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>55.3</td>
<td>29.0</td>
<td>32.0</td>
<td>43.5</td>
<td>51.2</td>
<td>16.8</td>
</tr>
</tbody>
</table>
Chicago Fed Nat'l Activity Index Improved 
by <a href="/comment/Moeller.html">Tom Moeller</a> May 19, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060519c.jpg" width="353">
The National Activity Index (CFNAI) from the Federal Reserve Bank of Chicago improved during April on the prior month&#39;s recovery. It rose to 0.38 from 0.35 and a 1Q average of 0.24.
The three-month moving average of the CFNAI rose to 0.25 from 0.24 the prior month.
A zero value of the CFNAI indicates that the economy is expanding at its historical trend rate of growth and during the last twenty years there has been a 68% correlation between the level of the CFNAI and q/q growth in real GDP.
The CFNAI is a weighted average of 85 indicators of economic activity. The indicators reflect activity in the following categories: production and income, the labor market, personal consumption and housing, manufacturing and trade sales, and inventories &amp; orders.
The latest CFNAI report is available <a href="http://www.chicagofed.org/economic_research_and_data/files/cfnai_May2006.pdf">here</a>.
The Evolving Nature of the Financial System: Financial Crises and the Role of the Central Bank, yesterday&#39;s speech from the newly designated Vice Chairman of the Federal Reserve Board Donald L. Kohn, is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2006/200605182/default.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<thead>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S503/@S503.HTM">Chicago Fed</a></th>
<th scope="col">April</th>
<th scope="col">Mar</th>
<th scope="col">April &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">CFNAI</td>
<td>0.38</td>
<td>0.35</td>
<td>0.06</td>
<td>0.20</td>
<td>0.37</td>
<td>-0.11</td>
</tr>
</tbody>
</table>
Japan's Growth Gains Footing on Rise in Domestic Demand 
by <a href="/comment/Stone.html">Carol Stone</a> May 19, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060519d.jpg" width="353">
Japan&#39;s GDP surprised on the upside for Q1, in data reported today by the Japanese Cabinet Office. It expanded at a 1.9% annual rate. While this was less than Q4&#39;s 4.3%, it well exceeded forecasters&#39; views that anticipated about 1.2%. The yen gained briefly on the report.
Notably, the driving force in the growth was private domestic demand, led by business investment. This component had fallen in Q4 and rebounded sharply in Q1, at a 5.8% annual rate. That put it 4.6% ahead of a year ago. Household consumption moderated from Q4, increasing at a 1.6% annual pace relative to 2.6% in Q4. Together, private domestic demand grew 3.2% on the quarter (annualized) and was also up 3.2% from a year ago.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060519e.jpg" width="353">
Also of significance, growth of exports slowed from Q4&#39;s large 16.2% to &quot;just&quot; 11.3%. At the same time, imports switched from a modest decline in Q4 to a 12.6% rate of increase. Exports are substantially larger than imports, so these adverse moves did not keep the net export surplus from increasing, although the rise was very modest: only &yen;308 million on a base of &yen;18.1 billion.
Markets were encouraged that the domestic economy appears to be picking up steam. The price deflator is still falling, however, although this may be due in the most recent period by the surge in imported energy costs. The deflator for domestic demand is holding just about even with year-earlier levels. With these price signals still mixed, Bank of Japan officials remain skittish about whether the economy could stand higher borrowing costs; when they issued a statement to this effect later today, FX traders pushed the yen back down once again.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/JAPAN/@J2/@J2.HTM">Chain GDP % Chg,</a> &nbsp;Annual Rates*</th>
<th scope="col">Q1 2006</th>
<th scope="col">Q4 2005</th>
<th scope="col">Q3 2005</th>
<th scope="col">Year/ Year</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">GDP</td>
<td>1.9</td>
<td>4.3</td>
<td>0.6</td>
<td>3.1</td>
<td>2.6</td>
<td>2.3</td>
<td>1.8</td>
</tr>
<tr>
<td class="firstcol">Household Consumption</td>
<td>1.6</td>
<td>2.6</td>
<td>1.8</td>
<td>1.2</td>
<td>1.7</td>
<td>0.6</td>
<td>1.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Government Consumption</td>
<td>0.6</td>
<td>0.4</td>
<td>2.0</td>
<td>0.8</td>
<td>1.7</td>
<td>2.0</td>
<td>2.3</td>
</tr>
<tr>
<td class="firstcol">Private Plant &amp; Equipment</td>
<td>5.8</td>
<td>-0.9</td>
<td>5.2</td>
<td>4.6</td>
<td>7.7</td>
<td>4.9</td>
<td>5.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Exports</td>
<td>11.3</td>
<td>16.2</td>
<td>12.9</td>
<td>13.7</td>
<td>7.0</td>
<td>13.9</td>
<td>9.0</td>
</tr>
<tr>
<td class="firstcol">Imports</td>
<td>12.6</td>
<td>-2.5</td>
<td>13.3</td>
<td>8.0</td>
<td>6.3</td>
<td>8.5</td>
<td>3.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Private Domestic Demand</td>
<td>3.2</td>
<td>3.0</td>
<td>-0.0</td>
<td>3.2</td>
<td>3.2</td>
<td>2.2</td>
<td>1.9</td>
</tr>
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Carol Stone, CBE

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518d.jpg" width="353">
Yesterday, the report of US CPI for April set off a firestorm in financial markets as participants were hit with a bad case of inflation-itis. Today&#39;s Canadian CPI contained some of the same ingredients, but unlike the US&#39;s, Canada&#39;s &quot;core&quot; rate was actually weaker than expected. The total index was up just under 0.5% for the month, with the yearly rate ahead 2.4%, somewhat more than March&#39;s 2.2%. Dramatically, however, its &quot;core&quot; index was unchanged for the month and actually slowed on the year from 1.7% in March to 1.6%.
Canada&#39;s &quot;core&quot; inflation is defined by the Bank of Canada and is used directly as a monetary policy target. It excludes eight of the most volatile items, such as fresh fruits and vegetables, gasoline and mortgage interest rates. See the footnote beneath the table for the complete list.
Within the total index, energy prices played a major role in the monthly gain: all energy was up 6.9% (not seasonally adjusted), and separate data on actual retail gasoline prices show an increase of 13.7% to C$1.0675/liter, only the fourth month ever that the price has exceeded C$1.00/liter (the other three instances were just last year: August, September and October).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518e.jpg" width="353">
In discussing the surprising softness of the core measure, some press reports indicated a role for the Canadian dollar. It has strengthened noticeably against the US dollar, not just recently, but basically since the middle of 2002. It also moved up versus the euro from the middle of 2004 through the end of last year. So indeed, the strong currency could be helping Canadian inflation. We look at two components where imports have a significant influence, clothing and recreation. Clothing prices have been falling consistently and in April were 3% below a year earlier. By contrast in the US, the apparel category has declined much less over the last two years. Recreation is another Canadian sector with a trade component, as its residents travel south to Florida and other such destinations and residents of other areas come to Canada. The related prices in Canada are falling slowly, but their pattern changed distinctly soon after the the Canadian dollar turned upward. The chart shows &quot;traveler accommodation&quot; together with the US$ exchange rate; the two series have a remarkable 60% correlation since 1995.
All of Haver&#39;s Canadian monthly data are in CANSIM, an extensive collection of Statistics Canada&#39;s copyrighted series. Exchange rates can be found in USECON, DAILY, INTDAILY and the weekly counterparts of the latter two, as well as in CANSIM.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Canada CPI, % Changes*</th>
<th scope="col">Apr 2006</th>
<th scope="col">Mar 2006</th>
<th scope="col">Feb 2006</th>
<th scope="col">Year/ Year</th>
December/December
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">All Items</td>
<td>0.46</td>
<td>0.31</td>
<td>-0.23</td>
<td>2.44</td>
<td>2.15</td>
<td>2.12</td>
<td>1.99</td>
</tr>
<tr class="odd">
<td class="firstcol">All Items less 8 Volatiles**</td>
<td>0.00</td>
<td>0.23</td>
<td>0.16</td>
<td>1.58</td>
<td>1.59</td>
<td>1.70</td>
<td>2.15</td>
</tr>
<tr>
<td class="firstcol">Clothing</td>
<td>-0.50</td>
<td>-0.70</td>
<td>-0.69</td>
<td>-3.02</td>
<td>-0.93</td>
<td>-3.10</td>
<td>0.20</td>
</tr>
<tr class="odd">
<td class="firstcol">Recreation, etc.</td>
<td>0.00</td>
<td>0.00</td>
<td>-0.16</td>
<td>-0.16</td>
<td>-0.24</td>
<td>0.32</td>
<td>0.40</td>
</tr>
<tr>
<td class="firstcol">Memo: Can$/US$ Month Avg</td>
<td>1.1438</td>
<td>1.1574</td>
<td>1.1489</td>
<td>1.2397 (2/2005)</td>
<td colspan="3">December</td>
</tr>
<tr class="odd">
<td class="firstcol">1.1610</td>
<td>1.2191</td>
<td>1.3128</td>
</tr>
</tbody>
</table>
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Yesterday, the report of US CPI for April set off a firestorm in financial markets as participants were hit with a bad case of inflation-itis. Today's Canadian CPI contained some of the same ingredients, but unlike the US's, Canada's [...]

Canada CPI: Up with Energy, But Restrained by Strong Currency

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518b.jpg" width="353">
For April, the Conference Board&#39;s Composite Index of Leading Economic Indicators dipped 0.1% following a 0.4% March rise, initially reported as a 0.1% decline. Consensus expectations had been for a 0.1% April up tick.
Six month growth in the leaders fell to 2.9% from an upwardly revised 4.8% the prior month. During the last ten years there has been a 43% correlation between the six-month change in the leading indicators and quarterly growth in real GDP.
The breadth of one month gain amongst the 10 components of the leading index halved to 35% in April. Over a six month span 80% of the index components have risen. A large positive contribution from vendor performance was offset by lower building permits, lower consumer sentiment and a lower real money supply.Most of the remaining index components had little m/m impact on the change in the leaders.
The spread between yields on the 10 year Treasury Note and Fed funds made a minimal 0.02 percentage point positive contribution to the leaders. The method of calculating the contribution to the index from the interest rate yield spread has been revised. A negative contribution will now occur only when the spread inverts rather than when declining as in the past. More details can be found <a href="http://www.conference-board.org/pdf_free/economics/bci/lei0705.pdf">here</a>.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518c.jpg" width="353">
The leading index is based on eight previously reported economic data series. Two series, orders for consumer goods and orders for capital goods, are estimated.
The coincident indicators rose 0.2% for the third consecutive month. All of the four component series rose last month and during the last six months. During the last ten years there has been a 64% correlation between the change in the coincident indicators and real GDP growth.
The lagging indicators increased 0.3% following a revised 0.1% March increase. Last month, 78.6% of the series&#39; components rose while the ratio of coincident to lagging indicators, a measure of actual economic performance versus excess, fell slightly.
Visit the Conference Board&#39;s <a href="http://www.conference-board.org">site</a> for coverage of leading indicator series from around the world.
Today&#39;s speech titled Basel II: Its Promise and Its Challenges by Federal reserve Board Chairman Ben S. Bernanke is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2006/20060518/default.htm"> here</a>

<table border="0" cellspacing="0" width="100%">
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<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM">Business Cycle Indicators</a></th>
<th scope="col">April</th>
<th scope="col">Mar</th>
<th scope="col">6 Month Chg., AR</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Leading</td>
<td>-0.1%</td>
<td>0.4%</td>
<td>2.9%</td>
<td>2.3%</td>
<td>7.4%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.2%</td>
<td>0.2%</td>
<td>3.5%</td>
<td>2.2%</td>
<td>2.5%</td>
<td>0.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>0.3%</td>
<td>0.1%</td>
<td>1.6%</td>
<td>3.5%</td>
<td>0.0%</td>
<td>-0.0%</td>
</tr>
</tbody>
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For April, the Conference Board's Composite Index of Leading Economic Indicators dipped 0.1% following a 0.4% March rise, initially reported as a 0.1% decline. Consensus expectations had been for a 0.1% April up tick. Six month growth [...]

Leading Economic Indicators Dip, March Revised Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518a.jpg" width="353">
Initial unemployment insurance claims surged 42,000 last week to 367,000 due to a partial government shutdown in Puerto Rico. The shutdown added 46,000 claims and has been resolved. Consensus expectations had been for 316,000 claims.
The Labor Department indicated that excluding claims related to the government shutdown in Puerto Rico seasonally adjusted initial claims would have been closer to 312,000.
The latest figure is for the survey period for May nonfarm payrolls and claims rose 63,000 (20.7%) from the April period. The payroll survey counts persons who were paid during the week which contains the 12th of the month as employed. During the last ten years there has been a (negative) 77% correlation between the level of initial claims and the m/m change in nonfarm payrolls.
Excluding strikers, claims rose 8,000 (2.6%) from the April survey period for nonfarm payrolls.
The four week moving average of initial claims rose to 333,250 (-0.1% y/y).
Continuing claims for unemployment insurance rose 8,000 following a revised 60,000 decline during the prior week.
The insured rate of unemployment remained at 1.8%.
Job Matching: Evidence from the Beveridge Curve from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-08.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">05/13/06</th>
<th scope="col">05/06/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>367</td>
<td>325</td>
<td>11.6%</td>
<td>332</td>
<td>343</td>
<td>403</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,389</td>
<td>-8.7%</td>
<td>2,663</td>
<td>2,923</td>
<td>3,530</td>
</tr>
</tbody>
</table>
</body>
</html>

Initial unemployment insurance claims surged 42,000 last week to 367,000 due to a partial government shutdown in Puerto Rico. The shutdown added 46,000 claims and has been resolved. Consensus expectations had been for 316,000 claims. [...]

Initial Jobless Insurance Claims Surge

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518a.jpg" width="353">
Initial unemployment insurance claims surged 42,000 last week to 367,000 due to a partial government shutdown in Puerto Rico. The shutdown added 46,000 claims and has been resolved. Consensus expectations had been for 316,000 claims.
The Labor Department indicated that excluding claims related to the government shutdown in Puerto Rico seasonally adjusted initial claims would have been closer to 312,000.
The latest figure is for the survey period for May nonfarm payrolls and claims rose 63,000 (20.7%) from the April period. The payroll survey counts persons who were paid during the week which contains the 12th of the month as employed. During the last ten years there has been a (negative) 77% correlation between the level of initial claims and the m/m change in nonfarm payrolls.
Excluding strikers, claims rose 8,000 (2.6%) from the April survey period for nonfarm payrolls.
The four week moving average of initial claims rose to 333,250 (-0.1% y/y).
Continuing claims for unemployment insurance rose 8,000 following a revised 60,000 decline during the prior week.
The insured rate of unemployment remained at 1.8%.
Job Matching: Evidence from the Beveridge Curve from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-08.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">05/13/06</th>
<th scope="col">05/06/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>367</td>
<td>325</td>
<td>11.6%</td>
<td>332</td>
<td>343</td>
<td>403</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,389</td>
<td>-8.7%</td>
<td>2,663</td>
<td>2,923</td>
<td>3,530</td>
</tr>
</tbody>
</table>
Leading Economic Indicators Dip, March Revised Up 
by <a href="/comment/Moeller.html">Tom Moeller</a> May 18, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518b.jpg" width="353">
For April, the Conference Board&#39;s Composite Index of Leading Economic Indicators dipped 0.1% following a 0.4% March rise, initially reported as a 0.1% decline. Consensus expectations had been for a 0.1% April up tick.
Six month growth in the leaders fell to 2.9% from an upwardly revised 4.8% the prior month. During the last ten years there has been a 43% correlation between the six-month change in the leading indicators and quarterly growth in real GDP.
The breadth of one month gain amongst the 10 components of the leading index halved to 35% in April. Over a six month span 80% of the index components have risen. A large positive contribution from vendor performance was offset by lower building permits, lower consumer sentiment and a lower real money supply.Most of the remaining index components had little m/m impact on the change in the leaders.
The spread between yields on the 10 year Treasury Note and Fed funds made a minimal 0.02 percentage point positive contribution to the leaders. The method of calculating the contribution to the index from the interest rate yield spread has been revised. A negative contribution will now occur only when the spread inverts rather than when declining as in the past. More details can be found <a href="http://www.conference-board.org/pdf_free/economics/bci/lei0705.pdf">here</a>.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518c.jpg" width="353">
The leading index is based on eight previously reported economic data series. Two series, orders for consumer goods and orders for capital goods, are estimated.
The coincident indicators rose 0.2% for the third consecutive month. All of the four component series rose last month and during the last six months. During the last ten years there has been a 64% correlation between the change in the coincident indicators and real GDP growth.
The lagging indicators increased 0.3% following a revised 0.1% March increase. Last month, 78.6% of the series&#39; components rose while the ratio of coincident to lagging indicators, a measure of actual economic performance versus excess, fell slightly.
Visit the Conference Board&#39;s <a href="http://www.conference-board.org">site</a> for coverage of leading indicator series from around the world.
Today&#39;s speech titled Basel II: Its Promise and Its Challenges by Federal reserve Board Chairman Ben S. Bernanke is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2006/20060518/default.htm"> here</a>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM">Business Cycle Indicators</a></th>
<th scope="col">April</th>
<th scope="col">Mar</th>
<th scope="col">6 Month Chg., AR</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Leading</td>
<td>-0.1%</td>
<td>0.4%</td>
<td>2.9%</td>
<td>2.3%</td>
<td>7.4%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.2%</td>
<td>0.2%</td>
<td>3.5%</td>
<td>2.2%</td>
<td>2.5%</td>
<td>0.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>0.3%</td>
<td>0.1%</td>
<td>1.6%</td>
<td>3.5%</td>
<td>0.0%</td>
<td>-0.0%</td>
</tr>
</tbody>
</table>
Canada CPI: Up with Energy, But Restrained by Strong Currency 
by <a href="/comment/Stone.html">Carol Stone</a> May 18, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518d.jpg" width="353">
Yesterday, the report of US CPI for April set off a firestorm in financial markets as participants were hit with a bad case of inflation-itis. Today&#39;s Canadian CPI contained some of the same ingredients, but unlike the US&#39;s, Canada&#39;s &quot;core&quot; rate was actually weaker than expected. The total index was up just under 0.5% for the month, with the yearly rate ahead 2.4%, somewhat more than March&#39;s 2.2%. Dramatically, however, its &quot;core&quot; index was unchanged for the month and actually slowed on the year from 1.7% in March to 1.6%.
Canada&#39;s &quot;core&quot; inflation is defined by the Bank of Canada and is used directly as a monetary policy target. It excludes eight of the most volatile items, such as fresh fruits and vegetables, gasoline and mortgage interest rates. See the footnote beneath the table for the complete list.
Within the total index, energy prices played a major role in the monthly gain: all energy was up 6.9% (not seasonally adjusted), and separate data on actual retail gasoline prices show an increase of 13.7% to C$1.0675/liter, only the fourth month ever that the price has exceeded C$1.00/liter (the other three instances were just last year: August, September and October).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518e.jpg" width="353">
In discussing the surprising softness of the core measure, some press reports indicated a role for the Canadian dollar. It has strengthened noticeably against the US dollar, not just recently, but basically since the middle of 2002. It also moved up versus the euro from the middle of 2004 through the end of last year. So indeed, the strong currency could be helping Canadian inflation. We look at two components where imports have a significant influence, clothing and recreation. Clothing prices have been falling consistently and in April were 3% below a year earlier. By contrast in the US, the apparel category has declined much less over the last two years. Recreation is another Canadian sector with a trade component, as its residents travel south to Florida and other such destinations and residents of other areas come to Canada. The related prices in Canada are falling slowly, but their pattern changed distinctly soon after the the Canadian dollar turned upward. The chart shows &quot;traveler accommodation&quot; together with the US$ exchange rate; the two series have a remarkable 60% correlation since 1995.
All of Haver&#39;s Canadian monthly data are in CANSIM, an extensive collection of Statistics Canada&#39;s copyrighted series. Exchange rates can be found in USECON, DAILY, INTDAILY and the weekly counterparts of the latter two, as well as in CANSIM.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Canada CPI, % Changes*</th>
<th scope="col">Apr 2006</th>
<th scope="col">Mar 2006</th>
<th scope="col">Feb 2006</th>
<th scope="col">Year/ Year</th>
December/December
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">All Items</td>
<td>0.46</td>
<td>0.31</td>
<td>-0.23</td>
<td>2.44</td>
<td>2.15</td>
<td>2.12</td>
<td>1.99</td>
</tr>
<tr class="odd">
<td class="firstcol">All Items less 8 Volatiles**</td>
<td>0.00</td>
<td>0.23</td>
<td>0.16</td>
<td>1.58</td>
<td>1.59</td>
<td>1.70</td>
<td>2.15</td>
</tr>
<tr>
<td class="firstcol">Clothing</td>
<td>-0.50</td>
<td>-0.70</td>
<td>-0.69</td>
<td>-3.02</td>
<td>-0.93</td>
<td>-3.10</td>
<td>0.20</td>
</tr>
<tr class="odd">
<td class="firstcol">Recreation, etc.</td>
<td>0.00</td>
<td>0.00</td>
<td>-0.16</td>
<td>-0.16</td>
<td>-0.24</td>
<td>0.32</td>
<td>0.40</td>
</tr>
<tr>
<td class="firstcol">Memo: Can$/US$ Month Avg</td>
<td>1.1438</td>
<td>1.1574</td>
<td>1.1489</td>
<td>1.2397 (2/2005)</td>
<td colspan="3">December</td>
</tr>
<tr class="odd">
<td class="firstcol">1.1610</td>
<td>1.2191</td>
<td>1.3128</td>
</tr>
</tbody>
</table>
</body>
</html>

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060517a.jpg" width="353">
Singapore&#39;s economy turned in a much better than expected performance in Q1, with its GDP up 6.8% annualized from Q4 and 10.6% from a year ago. Forecasts had called for a greater slowdown after the strong close to 2005 in Q4, when GDP was up 12.5% from Q3. The good gain prompted the Singapore government to raise its official forecast for the entire year from 4%-6% projected in February to 5%-7%.
On a year-over-year basis, both goods- and service-producing sectors participated in the good growth. Goods were led by manufacturing, which expanded by 20%. Press reports cited strength in electronic products, a sizable portion of manufacturing in Singapore. Also, among the industry &quot;cluster&quot; data compiled by the Singapore Economic Development Board, biomedical production and transport engineering were also very strong.
Value added in service industries gained 8.1% year-on-year, its best showing since Q2 2004. Wholesale and retail trade was a leader here, reflecting, according to the Department of Statistics, the movement of re-exports, which expanded 39.5% from a year ago in current prices.
Net exports were a leading source of demand, accounting for nearly 80% of the yearly GDP growth. Among domestic sectors, demand for machinery and equipment increased 19% from a year ago.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060517g.jpg" width="353"><img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060517h.jpg" width="353">

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/EMERGEPR/@P4/@P42/@P42.HTM">Singapore</a></th>
<th scope="col">Q1 2006</th>
<th scope="col">Q4 2005</th>
<th scope="col">Q3 2005</th>
<th scope="col">Q2 2005</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">GDP Qtr/Qtr</td>
<td>6.8</td>
<td>12.5</td>
<td>9.6</td>
<td>14.6</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Year/Year</td>
<td>10.6</td>
<td>8.6</td>
<td>7.6</td>
<td>5.7</td>
<td>6.4</td>
<td>9.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Goods Producing (Yr/Yr)</td>
<td>16.3</td>
<td>12.0</td>
<td>10.7</td>
<td>4.9</td>
<td>7.7</td>
<td>8.6</td>
</tr>
<tr>
<td class="firstcol">Service Producing (Yr/Yr)</td>
<td>8.1</td>
<td>7.2</td>
<td>6.8</td>
<td>5.8</td>
<td>6.0</td>
<td>7.1</td>
</tr>
</tbody>
</table>
</body>
</html>

Singapore's economy turned in a much better than expected performance in Q1, with its GDP up 6.8% annualized from Q4 and 10.6% from a year ago. Forecasts had called for a greater slowdown after the strong close to 2005 in Q4, when GDP [...]

Firm Q1 Growth in Singapore Prompts Hike in "Official" 2006 Forecast; Net Exports, Business Equipment Investment Lead

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060517c.jpg" width="353">
Chain store sales were unchanged last week, according to the International Council of Shopping Centers (ICSC)-UBS survey, after a modest 0.4% decline to open the month. So far, sales in May are 0.3% ahead of the April average which rose 1.6% from March.
During the last ten years there has been a 47% correlation between the y/y change in chain store sales and the change in nonauto retail sales less gasoline.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060517b.jpg" width="353">
Retail gasoline prices rose four cents last week to $2.95 per gallon, however, yesterday spot market gasoline prices dropped again and the NY price is off nearly a dime from last week.
The latest Short-Term Energy Outlook from the US Energy Information Administration is available <a href="http://www.eia.doe.gov/emeu/steo/pub/contents.html"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">05/13/06</th>
<th scope="col">05/06/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>475.7</td>
<td>475.9</td>
<td>3.1%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>


</html>

Chain store sales were unchanged last week, according to the International Council of Shopping Centers (ICSC)-UBS survey, after a modest 0.4% decline to open the month. So far, sales in May are 0.3% ahead of the April average which [...]

Chain Store Sales Unchanged. Gasoline Prices Jumped

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Much lower US electricity costs gives it a competitive advantage

Wage growth slowing in the US and Euro area; elevated and sticky in the UK

Stagflation-lite: Blue Chip forecasts below-trend growth and elevated inflation

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

US and Japan ended 2024 on solid ground in contrast to Europe

US economy expected to outperform other major economies in 2025

Only modest evidence of AI-related surge in US productivity growth

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

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

Underperforming German economy generating increased policy uncertainty relative to Europe and the US

Resilient US economy is pushing up longer-term inflation expectations and interest rates

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Job openings fell 288,000 to 7.192 million in March from a downwardly revised 7.480 million in February (previously 7.568 million), according to the Job Openings and Labor Turnover Survey. This is the lowest level of openings since last September although openings have been relatively trendless for the past year. The number of openings continues to exceed the number unemployed, but by only 109,000, the smallest amount since the pandemic, and indicates a relatively balanced labor market. The job openings rate fell to 4.3% in March from 4.5% in February. The March figure was in line with those immediately prior to the pandemic and is 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 229,000 to 6.359 million in March from 6.588 million in February. The March decline was widely spread with manufacturing (+4,000) and “other” (+20,000) the only major sectors experiencing an increase. Trade, transportation and utilities openings fell 62,000 on top of 198,000 plunge in February. Construction openings fell 38,000, their first monthly decline in three months. Private education and health services openings fell 61,000, their third monthly decline in the past four months. The private sector job openings rate edged down to 4.5% in March from 4.6% in February (revised down from 4.7%). It has fluctuated between 4.4% and 5.0% over the past 13 months without a noticeable trend.

Total hiring edged up 41,000 to 5.411 million in March. This was the second monthly gain in the past six months. Over the past year, hiring has fallen 61,000. Private hiring rose 30,000 to 5.050 million, its fourth consecutive monthly gain although it has fallen 41,000 over the past year. Hiring in leisure and hospitality increased 48,000, the first increase in three months. Private educational and health services hiring rose 36,000, also its first increase in three months. Finance hiring increased 28,000. In contrast, construction hiring fell 45,000, the first monthly decline in three months. And professional and business services hiring fell 43,000. Total government hiring rose 11,000 which included a 1,000 decline in federal government hiring. The total hiring rate was unchanged at 3.4%, where it has been for five of the past six months. The private hiring rate was also unchanged at 3.7% in March for the sixth consecutive month.

Total job separations fell 179,000 to 5.137 million in March. They have been little changed over the past year. Quits increased 82,000 to 3.332 million; layoffs fell 222,000, the largest monthly decline since February 2023; other separations fell 39,000 to 247,000. 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 (+91,000 in March to 3.145 million) have been on a modest uptrend since late last year, possibly pointing to a slight firming of the labor market. Private layoffs (separations initiated by the employer) appear to be reversing their uptrend from last year. They fell 229,000 to 1.451 million in March, also their largest monthly decline since Febuary2023, led by a 79,000 monthly decline in leisure and hospitality layoffs and a 56,000 drop in trade, transportation and utilities layoffs.

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

- Job openings fell to 7.192 million from downwardly revised 7.480 million in February.
- The job opening rate slid to 4.3% from 4.5%.
- Hiring was little changed in March.
- Layoffs fell to lowest level since last June.

JOLTS: Openings and Layoffs Fall in March; Hiring Little Changed

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The advance estimate of the U.S. international trade deficit in goods deepened to $162.0 billion in March after narrowing to $147.8 billion in February, as reported by the U.S. Census Bureau showed. A deficit of $143.0 billion for March had been expected by the Action Economics Forecast Survey. In Q1'25, the goods trade deficit widened to $463.2 billion after rising to $324.0 billion in Q4'24 from $305.1 billion in Q3'24. In real terms, the Q1’25 trade deficit is likely to have subtracted from real GDP growth, after having added 0.26 percentage point to growth in Q4'24.

Total goods imports jumped 5.0% (31.3% y/y) to $342.7 billion in March after a 0.3% February gain. Consumer goods imports surged 27.7% (54.1% y/y) following a 2.9% increase. Auto imports strengthened 6.6% (9.5% y/y) after a 1.2% rise while capital goods imports increased 4.0% in March (23.2% y/y) following a 1.7% February gain. Offsetting these increases, imports of industrial supplies & materials declined 13.3% (+39.9% y/y) after falling 3.7% in February. Foods, feeds & beverage imports eased 0.4% (+10.9% y/y) following a 2.1% decline and imports of “other” goods were off 5.6% (+13.7% y/y) after a 4.7% February increase.

Total goods exports rose 1.2% (6.9% y/y) to $180.8 billion in March, the fourth rise in five months, after increasing 3.7% in February. The rise reflected a 6.9% surge (-0.5% y/y) in foods, feeds & beverages after a decline of 2.5% In February. Industrial supplies & materials exports gained 3.2% (4.5% y/y) after increasing 4.6% in February. Exports of autos surged 7.9% (10.8% y/y) following a 2.7% increase. Exports of other goods edged 0.3% higher (2.4% y/y) after four straight months of decline. Offsetting these gains, consumer goods exports declined 1.6% (+1.9% y/y) following a 0.6% rise. Capital goods exports were off 2.6% (+13.3% y/y) after rising 4.8% in February.  

The advance international trade data can be found in Haver's **USECON** database. The expectation figure is from the Action Economics Forecast Survey, which is in **AS1REPNA**.

- Advance reading reflects higher consumer goods & auto imports.
- Other imports also are strong, while exports rise modestly.
- Exports growth held back by fall in nonauto consumer & capital goods.

U.S. Goods Trade Deficit Deepens to Another Record in March as Imports Surge

Winnie Tapasanun

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U.S. house prices edged up 0.1% m/m in February after rises of 0.3% in January (+0.2% initially) and 0.4% in December (+0.5% previously), according to the Federal Housing Finance Agency (FHFA) House Price Index. The February HPI at 437.32 was 13.3% above a low of 386.15 in August 2022. The February m/m reading was the 11th straight monthly gain but the smallest since May 2024. The year-on-year rate of increase decelerated to 3.9% in February, the lowest since June 2023, from 5.0% in January; thus, having remained lower than 7.3% in February 2024 and well below a high of 18.7% in February 2022.

House prices rose m/m in February (vs. January) in six of the nine census divisions. These included New England (1.3% vs. 0.1%), East North Central (0.8% vs. 0.5%), Middle Atlantic (0.6% vs. 1.0%), South Atlantic (0.3% vs. -0.6%), West North Central (0.2% vs. 0.8%), and East South Central (0.1% vs. -0.03%). To the downside, house prices fell m/m in three census divisions in February (vs. January): Pacific (-0.8% vs. 0.6%), Mountain (-0.7% vs. -0.02%), and West South Central (-0.1% vs. 0.9%).

Year-on-year house prices continued to gain in February. However, the pace of increase decelerated y/y in February (vs. January) in all of the nine census divisions. These were Pacific (0.9% vs. 3.6%), West South Central (2.1% vs. 2.8%), South Atlantic (3.2% vs. 4.1%), Mountain (3.5% vs. 4.3%), East South Central (3.7% vs. 4.4%), West North Central (4.2% vs. 5.0%), New England (6.1% vs. 7.5%), East North Central (6.5% vs. 7.0%), and Middle Atlantic (7.0% vs. 8.5%).

The FHFA house price index is a weighted purchase-only index that measures average price changes in repeat sales of the same property. An associated quarterly index includes refinancing the same kind of properties. The indexes are based on transactions involving conforming conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac. Only mortgage transactions on single-family properties are included.

The FHFA data are available in Haver’s **USECON** database.

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- Feb. FHFA HPI +0.1% m/m (+3.9% y/y, lowest since June ’23); +0.3% m/m (+5.0% y/y) in Jan.
- House prices up m/m in six of nine census divisions but down in Pacific, Mountain, and West South Central.
- House prices up y/y in all of the nine regions, w/ the highest rate in Middle Atlantic (7.0%) and the lowest rate in Pacific (0.9%).


U.S. FHFA House Price Growth Continues to Decelerate in February

Tian Yong Woon

This week, we focus on the immediate impacts of the recent US-China trade escalation. As we discuss below these are already being exhibited in the data. While still within historical ranges, high-frequency estimates of US and China cargo trade volumes have begun to deteriorate (chart 1). In tandem with these volume declines, freight rates on certain Shanghai-to-US routes have fallen (chart 2), suggesting reduced shipping demand. This has been further corroborated by widespread reports of large-scale shipment cancellations from China to the US. A potentially clearer signal comes from South Korea’s trade data for the first 20 days of the month, often viewed as a bellwether for global trade. The figures point to a notable slump compared with a year ago (chart 3). More complete April data are expected later this week.

Turning to broader developments in China, we observe that the dominant shifts in the country's financial balances over the past decade have occurred between the general government and the private sector. In contrast, China’s foreign sector balance—essentially its current account—has remained relatively stable (chart 4). As we further discuss financial balances and the underlying causes of the US’ persistent current account deficit (chart 5) have been a recurring topic in recent conversations with clients in Asia. It is argued that the US dollar’s role as a global reserve currency effectively necessitates the US running a current account deficit. Consequently, attempts to narrow the deficit through tariffs may address symptoms rather than root causes. Finally, we revisit the China Plus One strategy adopted by firms since the initial US-China trade fallout in 2018. This approach has contributed to ballooning trade deficits between the US and some of its other major trading partners (chart 6), prompting renewed scrutiny under President Trump’s early “Liberation Day” trade actions.

**US and China cargo trade**
Financial markets have recently found some reason for relief, as both the US and China appear to be lowering the temperature on further trade tariff actions. Recent messaging has leaned more toward a de-escalation of trade tensions, though concrete details remain sparse, and it is unclear how or when formal negotiations might begin. That said, the substantial and mutually imposed tariffs between the US and China remain firmly in place, and a significant rollback does not seem likely in the near term. In the meantime the economic impact of these tariffs is beginning to surface in the data, as shown in charts 1 to 3. Chart 1, based on IMF estimates, shows a sharp decline in daily activity at several key ports involved in US-China trade. However, while the drop is notable, port activity still remains within historical ranges, so a more fundamental shift is not yet evident.

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**US-China freight rates**
Another indication of the impact of escalating US-China tensions is seen in global freight rates, as shown in chart 2. Freight costs on routes from Shanghai to New York and Los Angeles have dropped sharply—even before the most recent round of trade escalations—likely due to growing caution among shippers about what trade actions might come next for China. This decline contrasts with the year-end spike in shipping rates in 2024, which likely reflected front-loading of shipments in anticipation of potential US tariffs. Looking ahead, the outlook remains uncertain and potentially discouraging, especially following recent reports of widespread shipment cancellations from China to the US. These developments suggest that China-to-US shipping volumes may remain subdued or decline further over the near-term.

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**Trade indications from South Korea**
A perhaps firmer indication comes from South Korea’s trade figures for the first 20 days of April, widely regarded as an early signal of global trade trends. The data showed a notable slump compared to the same period last year, driven largely by a sharp drop in shipments to the United States. This move has made US-China trade increasingly difficult, aside from a few exemptions on key goods such as electronics and semiconductors. Even so, South Korea’s semiconductor export growth continued to slow in April, highlighting the broader fallout from ongoing trade tensions. More definitive trade data from South Korea are expected later this week.

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**Broader topics on China**
Next, we turn to broader structural trends in China’s economy, starting with chart 4, which depicts China’s financial balances based on its flow of funds accounts. Over the past decade, the general government has accumulated an increasingly large net deficit, as its sources of funds (liabilities) have consistently outpaced the uses of funds (assets). This has fuelled growing investor concerns over government indebtedness. In contrast, the private sector—particularly households—has seen a sharp rise in its net surplus, almost mirroring the government’s deterioration. Meanwhile, the foreign sector has continued to run net deficits with China, consistent with China maintaining a current account surplus with the rest of the world. That said, unlike in the 2000s and early 2010s—when private and foreign sector balances often moved closely together—recent shifts in the general government and private sector balances appear to have had a more limited effect on the foreign sector's position.

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**The US’ current account deficit**
Expanding on these themes, chart 5 highlights the persistent current account deficits of the US alongside the cumulative current account surpluses of its major trading partners. Some may advocate for reducing US imports—such as through tariffs, as President Trump is currently pursuing—as a way to close the current account deficit. However, such measures tend to address only the symptoms rather than the root causes. This topic featured prominently in client meetings in Singapore. Fundamentally, the persistent current account deficit in the US can be seen as a structural outcome of the dollar’s role as the world’s primary reserve currency. The global demand for dollar-denominated assets drives sustained financial inflows into the US, which, by balance of payments accounting, necessitates a corresponding current account deficit.

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**What China Plus One?**
Lastly, we turn to the China Plus One strategy, a diversification approach adopted by firms and governments since US-China tensions began during Trump’s first term in 2018. However, even this approach may no longer offer a full hedge against additional US trade actions. As chart 6 shows, the shift away from China has contributed to a sharp rise in the US trade deficit with several alternative partners, particularly Asian economies such as Vietnam. In light of the broader scope of US trade actions—exemplified by Trump’s recent “Liberation Day” tariffs—businesses are being forced to rethink their global strategies. Some may find themselves needing to reshore production to the US, despite the fact that labour cost advantages, technical know-how, and manufacturing infrastructure for many goods remain more competitive abroad.

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Asia

Economic Letter from Asia: How Freightening?

Robert Brusca

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**Retailing and Wholesaling continue to show wear and tear**
The United Kingdom’s distributive trades survey has four parts. There's a survey of retailing and a separate survey of wholesaling. Then for each one of these surveys, there's a module that addresses current conditions and another one that addresses expected conditions.

**Current Conditions vs. Expectations for the distributive trades**
In this month's report, the current conditions assessments improved in retailing but were mixed for wholesaling. Expectations in retailing and wholesaling were also mixed as to month-to-month changes, but the levels of the responses remained quite weak.

**The Specifics**
Current Retailing- Retail sales compared to a year ago improved sharply to a -8 reading in April compared to a draconian -41 in March. Orders compared to a year ago improved at a reading of -24 in April from -38 in March. Sales for the time of year improved to -31 from -36. Sales compared to a year ago have a below median 29.2 percentile standing, while orders compared to a year ago have a 16.9 percentile standing and sales evaluated for the time of year have a 12.3 percentile standing. In each case, the reading from April is below its median reading of the last 24 years. These readings as a collection are weak readings.

Expected Retailing- The expected results for retailing in the survey show mixed results. The reading for sales compared to a year ago at -33 in May is slightly weaker than -30 in April. Orders compared to a year ago improved to -29 in May from -41 in April. But the survey shows a deterioration in sales for the time of year at -38 in May compared to -35 in April. The rankings for these readings range between the 10.5 percentile and 4.2 percentile, range marking them as all extremely weak readings in their historic queue of standings.

Current Wholesaling- Wholesaling also generally shows slippage in April. Sales compared to a year ago fell to -33 in April from in -29 in March, while orders compared to a year ago improved to -32 from March’s -38. Sales for the time of year, which post a reading of -31 in April compared to a reading of -20 in March, demonstrated slippage again. The rankings for these readings range from 4.2 to 9.2 in percentile standing terms.

Expected Wholesaling- Turning to expectations, sales compared to a year ago nudged lower to -26 in May from -25 in April. Orders compared to a year ago improved nicely to a reading of -28 in May compared to -38 in April; expected sales for the time of year slipped to -28 from April’s -27. Several of these are small stumbles month-to-month. But these readings range from a low percentile standing of 7.7 percentile to a high standing at a 12.6 percentile – all weak metrics.

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**Summing up**
What is quite clear in all of these readings is that the standings are exceptionally low. There’s widespread, even if somewhat mixed, slippage in these readings. Current sales are somewhat of an exception with some monthly traction amid still very low readings. Yet, the United Kingdom has been an economy that has continued to fight against an inflation overshoot so that the Bank of England does not really have a great deal of flexibility in the conduct of policy. Still, the U.K. is geographically close to the European Monetary Union where rate reductions are still in train.

The U.K. continues to be at risk to the U.S. tariff plan even though the U.S. does not run a deficit with the U.K. in trade. Despite ‘The Formula’ that allegedly has been used to set reciprocal tariffs, the Trump administration has found some different wrinkle to generate a tariff on goods from the U.K. Given this evolving situation, it's not surprising that the expectations are continuing to erode in the U.K. distributive trades survey.

Economy in Brief

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