Andrew Cates

**Consensus GDP growth forecasts**
There has been a reversal of fortune in the world economy in recent weeks according to the latest Blue Chip survey of economic forecasters. The consensus forecasts for US GDP growth in 2024 was unchanged in May’s survey compared with April, at 2.4%. That’s the first time since July 2023 that US forecasters did not raise their growth expectations for this year. This stands in contrast moreover to the growth forecasts for the euro area and UK, which were lifted in May compared with April. The growth outlook for Japan in the meantime was left unchanged (see chart 1 below). 

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**Outcomes for GDP growth in Q1**
Those observations for Europe, unsurprisingly, chime with the early estimates for GDP growth in Q1. While the US economy still eked out a respectable growth rate of 0.4% q/q, that still marked its weakest pace of quarterly growth since 2022 Q2. The UK and euro area in the meantime chalked up respective growth rates of 0.6% and 0.3%, their fastest pace of growth since 2021 Q4 and 2022 Q3. That said, a bigger-than-expected contraction in Japan’s GDP of 0.5% in Q1, stands in contrast to the stabilization in growth expectations seen above. Weaker momentum in the US and stronger momentum in Europe, to be fair, partly reflect the underlying base from which the economy has shifted – i.e.  a relatively strong base in the US and a weak base in Europe. Even so, these reversals of fortune are clearly worth monitoring in the coming weeks.  

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**Germany’s under-performance**
Within Europe, nonetheless, the lingering under-performance of the German economy is another standout. One reason for this is the under-performance of activity in its industrial sector. In March 2024, for example, Germany’s industrial production was still around 9.5% lower than its pre-COVID level in January 2020. That compares with France, where production in March was some 4.2% lower than Pre-COVID levels, and Italy, where production was some 5.2% lower. Reasons for this under-performance are varied but they focus on the heavy reliance of Germany’s economy on manufacturing, amidst simmering global trade tensions and supply chain disruptions. Germany is also undergoing a major transition in its energy policy, which has led to increased dependence on imported energy, particularly natural gas from Russia. And that became extremely problematic especially after geopolitical tensions escalated.

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**The UK labour market**
Tuning back to the UK where this week’s labour market data have taken some of the shine away from its latest Q1 GDP report. These data showed another big fall in employment, albeit concentrated in the part-time sector, a further decline in job vacancies and another rise in the unemployment rate and accordingly speak to growing slack in the labour market. However, the data on wage growth were the proverbial fly in the ointment for the Bank of England. For instance, private sector regular pay rose by 0.6% month-over-month in March, following a 0.9% increase the previous month. These rates are arguably too strong for those on the BoE’s monetary policy committee who lean towards a more hawkish stance.

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**US immigration**
As for the US, while it might now be underperforming, this follows a period during which, as Chart 1 above suggests, its economy had been significantly outperforming expectations. Various factors have contributed to this, including fiscal activism, technological innovation, and robust corporate balance sheets. However, another factor gaining recognition is immigration. For instance, new data from the CBO suggest that 3.3 million net immigrants arrived in the US in 2023. Through its impact on labour force growth, consumer spending, and housing activity, immigration could have provided far more support to overall economic growth in the US last year than many observers had initially realized.

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**Global inflation**
Finally and taking a step back from the ebb and flow of the monthly inflation cycle, our last chart this week looks at the latest annual inflation data for 2023 from the World Bank. More specifically, we home in on the relatively rapid pace of global food price inflation last year when compared with levels of energy price inflation or broader levels of core (ex food and energy) CPI inflation (see chart 6). Some of the key reasons for these high inflation rates in food prices include supply chain disruption amidst intensifying geopolitical tensions, together with a likely lagged impact from high energy prices in the previous year. But another key source of food price inflation is likely to have been climate change and more extreme weather conditions: Indeed, extreme weather events, including droughts, floods, and heatwaves, affected key agricultural regions around the world last year which, in turn, reduced crop yields and tightened global supplies of food commodities.

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A Fed easing narrative has been re-energized over the past few days largely thanks to a slightly weaker than expected US CPI report this week but, more generally, because of a battery of weaker-than-expected US data over the past couple of weeks. In our charts this week we examine the latest Blue Chip survey of economic forecasters and the corresponding signals suggesting that the light is now shining a little less brightly on the US economy (see chart 1). The same survey suggests the outlook is shining a bit more brightly on Europe’s economies, albeit from a position of relative darkness, and as equally indicated by the GDP growth outcomes for Q1 2024 (Chart 2). Germany, however, continues to be a notable underperformer, which prompts us to examine the latest data on industrial production across several major euro area economies and the persistent evidence of underperformance (Chart 3). Next, we turn our attention to this week's UK labour market data, which increasingly suggest that this market is loosening (Chart 4). We then shift focus back to the US economy, highlighting one of the reasons for its relative strength in recent months —namely, higher levels of immigration (Chart 5). Finally, we address inflation issues, and specifically the relatively rapid pace of global food price inflation in recent years (Chart 6).

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Charts of the Week: Reversal of fortune

Tom Moeller

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The Consumer Price Index increased 0.3% during April following two consecutive 0.4% increases. A 0.4% rise had been expected in the Action Economics Forecast Survey. The 3.4% y/y rise compared to 3.5% in March, and was increased from a 3.1% January low. It remained below the peak 9.1% y/y increase in June of 2022. The three-month increase of 4.6% (AR) was steady with March and more than double the rise at the end of last year. As expected, prices excluding food & energy also rose 0.3% following three consecutive 0.4% monthly increases. It rose 3.6% y/y last month compared to 3.8% in March; however, during the last three months, core price inflation has accelerated to 4.1% (AR), off the 4.5% March high but higher than the 2.6% low during August of last year.

The CPI less food, energy and shelter, another measure of core pricing power, rose 0.2% after two consecutive 0.3% increases. The 2.1% y/y rise remained below the 7.6% y/y peak in February 2022.

Service costs less energy increased 0.4% in April (5.3% y/y) following two straight 0.5% increases. Transportation services costs strengthened 0.9% (11.2% y/y) following a 1.5% March jump. The cost of shelter rose 0.4% (5.5% y/y) for the fifth month in the last six as owners’ equivalent rent of primary residences increased 0.4% (5.7% y/y) for the third consecutive month. Rents of primary residences increased 0.4% (5.4% y/y) after a 0.4% gain. The cost of lodging away from home fell 0.2% (-0.3% y/y) after two months of 0.1% increase. Education & communication prices rose 0.2% (1.6% y/y) for a second straight month. Recreation services prices rose 0.3% (4.1% y/y) following a 0.1% uptick and medical care service costs rose 0.4% (2.7% y/y) after a 0.6% strengthening.

During April, the CPI for goods less food & energy dipped 0.1% (-1.3% y/y) after falling 0.2% in March. Education & communication goods costs rose 0.1% (-6.0% y/y) following a 1.2% drop in March. Prices for recreation products held steady (-2.2% y/y) after falling 0.5%. Home furnishings prices weakened 0.4% (-2.8% y/y) after a 0.1% slip, while appliance costs fell 0.9% (-5.6% y/y) after two straight months of decline. Apparel prices rose 1.2% (1.3% y/y) after rising 0.7% in March. New vehicle prices eased 0.4% both m/m and y/y after slipping 0.2% in March while used car & truck prices declined 1.4% (-6.9% y/y) after falling 1.1% in March.

Energy prices increased 1.1% (2.6% y/y) in April for a second consecutive month. These gains followed four months of decline. Gasoline prices rose 2.8% (1.2% y/y) after a 1.7% rise. Amongst other energy products, fuel oil prices rose 0.9% (-0.8% y/y) after declining 1.3% in March. Electricity prices slipped 0.1% (+5.1% y/y) after rising 0.9%, while natural gas prices declined 2.9% (-1.9% y/y) after holding steady in March.

Food prices held steady (+2.2% y/y) last month after rising 0.1% in March. Egg prices weakened 7.3% (-9.0% y/y) after five straight months of strong increase. Meat, poultry & fish prices eased 0.1% (+1.9% y/y) after rising 0.6% while cereal & bakery product prices rose 0.6% both m/m and y/y after declining 0.9% in March. Fruit & vegetable prices weakened 0.8% (+1.7% y/y) after edging 0.1% higher, while dairy prices edged up 0.1% (-1.3% y/y) and reversed the March fall. Nonalcoholic beverage prices fell 0.2% (+2.3% y/y) after a 0.3% gain.

The Consumer Price figures can be found in Haver's **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

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- Transportation costs surge, while shelter prices increase steadily.
- Goods price pressure weakens further.
- Energy prices move higher but food prices hold steady.

U.S. CPI Strength Diminishes in April; Core Pricing Pressures Ease

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The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo fell 11.8% during May (-10.0% y/y) to 45 from 51 in April. The reading fell short of expectations for 51 in the Informa Global Markets Survey. The NAHB figures are seasonally adjusted. During the last ten years, there has been a 65% correlation between the y/y change in the home builders index and the y/y change in housing starts.

The May index of present sales conditions in the housing market weakened 10.5% (-8.9% y/y) to 51 after rising 1.8% in April. The index for conditions in the next six months fell 15.0% (-8.9% y/y) in May to 51 after declining 3.2% in April. Home builders reported that the traffic of prospective buyers’ index weakened 11.8% (-9.1% y/y) to 30, down from the recent high of 40 in July 2023.

Amongst the regional indexes for May, the index for the Midwest fell 2.0% from April (+16.7% y/y) while the index for the South declined 10.0% (-19.6% y/y). The index for the Northeast declined 10.8% this month (+28.9% y/y) and the reading for the West dropped 25.0% both m/m and y/y.

The NAHB has compiled the Housing Market Index since 1985. It reflects survey questions asking builders to rate market conditions as "good," "fair," "poor" or "very high" to "very low." The figure is thus a diffusion index with numerical results six over 50 indicating a predominance of "good" readings. The weights assigned to the individual index components are .5920 for single-family detached sales, present time, .1358 for single-family detached sales, next months and .2722 for traffic of prospective buyers. The results are included in Haver's **SURVEYS** database. The expectations figure is available in Haver's **MMSAMER** database.

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- Current & future readings fall meaningfully.
- Prospective home buyer traffic is depressed.
- Regional declines are broad-based.

U.S. Home Builder Index Declines Sharply in May

Winnie Tapasanun

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Total retail sales were virtually unchanged m/m (3.0% y/y) in April after downwardly revised increases of 0.6% in March (+0.7% reported on Apr. 23 & 15) and 0.7% in February (+1.0% reported on Apr. 23 & +0.9% reported on Apr. 15), according to the Census Bureau. The April no change was the worst m/m reading since January’s 1.1% drop (+0.3% y/y). A 0.4% m/m April rise had been expected in the Action Economics Forecast Survey.

Excluding motor vehicles & parts, retail sales rose 0.2% (3.6% y/y) in April, the fourth m/m rise in five months, on top of a 0.9% gain in March. A 0.3% m/m April increase had been expected. Sales of motor vehicles & parts fell 0.8% (+0.8% y/y), the third m/m fall in four months, following a 0.3% March decline.

Sales in the retail control group, which excludes autos, building materials, gasoline stations, and food services, fell 0.3% (+3.5% y/y) in April following a 1.0% rise in March and no change in February. These sales are used in the construction of personal consumption expenditures in NIPA accounts. Nonauto sales excluding gasoline & building materials declined 0.2% (+3.9% y/y) after a 0.8% March increase and no change in February.

Sales by category were mixed in April. Gasoline station sales jumped 3.1% (4.0% y/y) in April, the biggest of three consecutive m/m gains, after a 2.1% rise in March. Clothing & accessory store sales rebounded 1.6% (2.7% y/y) vs. a 2.0% March decline. Electronics & appliance store sales rose 1.5% (0.8% y/y), the third m/m rise in four months, after a 3.1% March drop. Building materials & garden equipment store sales grew 0.5% (-1.0% y/y), the fourth m/m gain in five months, on top of a 0.4% March increase.

To the downside, nonstore retail sales fell 1.2% (+7.5% y/y) in April, the third m/m fall in four months, after a 2.5% rebound in March. Sporting goods, hobby shop, book & music store sales decreased 0.9% (-4.7% y/y) following a 1.3% March drop and a 0.7% February rise. Furniture & home furnishing store sales slid 0.5% (-8.4% y/y), the fourth m/m slide in five months, after a 2.3% March decline. Miscellaneous store sales dropped 0.4% (+6.8% y/y) vs. three successive m/m rises. General merchandise store sales fell 0.3% (+3.7% y/y), the first m/m fall since November, following a 1.3% March gain (however, within this grouping, department store sales grew 0.5% (-1.2% y/y), the first m/m gain since January).

In the nondiscretionary sales categories, food & beverage store sales rose 0.8% (2.2% y/y) in April, the largest of three straight m/m rises, after a 0.5% increase in March. Health & personal care store sales, however, fell 0.6% (-0.3% y/y), the fifth m/m fall in six months, following a 0.2% March rebound.

Consumers continued to eat out despite still-high inflation (April CPI +0.3% m/m, +3.4% y/y). Restaurant & drinking place sales rose 0.2% (5.5% y/y) in April following a 0.1% March downtick and a string of meaningful increases during the March 2023 to November 2023 period.

Retail Sales data can be found in Haver's **USECON** database. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- +0.02% (+3.0% y/y) in Apr.; downward revisions for Mar. and Feb.
- Ex-auto sales up for the fourth month in five.
- Auto sales down for the third month in four.
- Gasoline sales post the largest of three straight m/m increases.
- Nonstore retail sales fall for the third time in four months.

U.S. Retail Sales Disappoint in April, Unexpectedly Holding Steady

Kathleen Stephansen, CBE

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Mortgage applications edged up 0.5% (-7.8% y/y) in the week ended May 10, following a rise of 2.6% (-13.5% y/y) in the week ended May 3. Home purchase loans declined 1.7% (-14.3% y/y) following a rise of 1.8% (-17.0% y/y) in the prior week. Applications to refinance a loan rose 4.7% (6.8% y/y) in the latest week after rising 4.5% (-5.8% y/y) in the week before. These data are from the Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey.

The effective interest rate on a 30-year fixed-rate loan eased 11 bps to 7.26% in the week ended May 10, from 7.37% in the week ended May 3. It compared to a high of 8.12% in mid-October of last year and a low of 6.87% in the fourth week of December. The rate on 15-year fixed-rate mortgages edged up 2bps to 6.77% in the latest week from 6.75% in the week prior. The rate on 30-year Jumbo loans fell 5bps to 7.39% in the week ended May 10 from 7.44% in the week prior, and the rate on the 5-year ARM fell 4bps to 6.80% in the latest week from 6.84% the week before. These latter rates remain below the 7.31% high in the last week of October but above the recent low of 5.93% in the last week of December.

The share of applications for refinancing an existing loan rose to 32.0% in the week ended May 10 from 30.6% in the week ended May 3. That compared to a high of 39.7% in mid-December. The percentage of applications that were ARMs eased to 7.0% from 7.7%. The recent low of 5.4% was reached in early January.

The average loan size eased 1.6% (-3.0% y/y) to $379,400 in the week ended May 10, from a rise of 2.0% (-2.4% y/y) to $385,600 in the week ended May 3. The average size of a purchase loan declined 1.2% (-0.6% y/y) to $437,700 in the latest week from $443,200 in the prior week. The average loan size to refinance a mortgage was largely unchanged (-2.3% y/y) at $255,200 from $255,100 in the prior week.

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.

- Mortgage applications edged up in the latest week.
- Purchase applications fell while refinancing applications rose.
- The effective interest rate on 30-year fixed-rate loans eased.

U.S. Mortgage Applications Edged Up as Interest Rates Eased Last Week

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The Producer Price Index for final demand increased 0.5% (2.2% y/y) during April after easing 0.1% in March, revised from a 0.2% increase, according to the Bureau of Labor Statistics. A 0.3% gain had been expected in the Action Economics Forecast Survey. The PPI excluding food and energy strengthened 0.5% (2.4% y/y) after easing 0.1% in March. It was the largest increase in three months. A 0.2% rise had been expected. Producer prices excluding food, energy & trade services rose 0.4% (3.1% y/y) in April following increases of 0.2% and 0.4% in the prior two months.

Final demand energy prices rose 2.0% last month (1.0% y/y) after a 1.3% decline. Gasoline prices rose 5.4% (-1.9% y/y) after falling 3.0% in March. Electric power prices rose 0.3% (4.5% y/y) following a 0.7% increase. Food prices were off 0.7% (+0.5% y/y) after increasing 0.4% in March. The gain reflected a 7.3% increase (-7.5% y/y) in fruit & melon prices as well as an 11.2% increase (21.7% y/y) in fresh egg prices. Offsetting these increases, beef & veal costs fell 5.9% (+10.8% y/y) and fresh & dried vegetable prices eased 18.7% (NSA, -23.9% y/y). Grain prices weakened 4.5% (-35.6% y/y).

Prices for goods less food & energy rose 0.3% (1.6% y/y) in April after holding steady in March. Finished consumer goods prices increased 0.1% (1.9% y/y) for a second straight month. Core nondurable goods prices rose 0.1% (2.4% y/y) after holding steady in March. Durable consumer goods prices also edged 0.1% higher (1.1% y/y) after rising 0.3% in March. Capital equipment prices rose 0.2% (2.8% y/y), the weakest increase in four months, while government purchased goods prices rose 0.3% (2.1% y/y).

Prices for final demand services increased 0.6% last month (2.7% y/y) after easing 0.1% in March. Trade services prices strengthened 0.8% (-0.3% y/y) after a 1.0% decline. Prices for final demand transportation and warehousing services fell 0.6% (+0.3% y/y) after a 0.2% increase. Services prices less these costs increased 0.6% (4.4% y/y) following two straight 0.3% increases. Prices of travel accommodation services strengthened 2.4% (-1.2% y/y).

Construction costs rose 0.1% in April (-0.8 y/y) for the second consecutive month.

Prices for intermediate demand processed goods increased 0.6% (-0.5% y/y) in April after falling 0.5% in March. Processed energy goods prices rose 1.6%, while food prices were off 0.2%. The index for intermediate demand unprocessed goods jumped 3.2% (-4.6% y/y).

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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- Core goods prices rise moderately.
- Services prices surge after a slight decline.
- Energy prices jump, but food prices decline.

U.S. Producer Price Strength in April is Pronounced; March Revised Lower

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The NFIB Small Business Optimism Index rebounded to 89.7 in April, the first monthly increase since December, from 88.5 in March, according to the April 2024 Small Business Economic Trends survey conducted by the National Federation of Independent Business. The index, while slightly up from a low of 89.0 in April 2023, had been below the 50-year average of 98 for the 28th straight month; it was also down from a high of 102.5 in June 2021. Seven of the 10 index components rose, two fell, and one was unchanged. The NFIB Small Business Uncertainty Index increased to 78 in April, the highest level since September, from 77 in March; it was up from 72 in April 2023 and a low of 55 in June 2022.

The outlook for business conditions in the next six months remained deeply negative in the latest survey. The net balance of respondents expecting the economy to improve fell to -37% in April, the third monthly fall in four months, after increasing slightly to -36% in March, but it was up from a record-low -61% in June 2022. Expected real sales improved to a net -12% in April after falling 8 pts. to -18% in March, indicating continued pessimism at a less severe pace. 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, down from -10% reported in March; these numbers were up from a low of -17% in November.

Plans to make capital outlays rose to 22% in April, the first m/m rise in four months, from 20% in March. These readings were up slightly from a low of 19% in April 2023 but down from a high of 27% in July 2023 and a high of 31% in October 2021. Plans to expand the business registered at 4% in April and March, the lowest reading since May 2023. The latest figure, while slightly up from a low of 2% in March 2023, was below a high of 11% in December 2021 and a high of 15% in June 2021. Meanwhile, expected credit conditions declined to -9% in April, the lowest reading since November, after falling 2 pts. to -8% in March; the latest number was also down from a high of -4% in May 2022 and a high of -3% in November 2021.

Labor markets remained tight but seemed to ease slightly. Fifty-one percent of respondents reported that qualified workers to fill job openings were hard to find in April, following 48% in March and 51% in February. These figures, however, 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 12% planned to increase employment in April, slightly up from 11% in March, but it was down from a high of 26% in May 2022 and well below a high of 32% in August 2021. Notably, 40% reported positions not able to be filled in April, the highest reading since December, following 37% in March and February (37% was the lowest reading since January 2021). These figures were historically high; however, having remained below a high of 51% in May 2022. Overall earnings trends increased slightly to -27% in April, still a poor reading, from -29% in March; these numbers were below a high of -18% in March 2023.

On the pricing front, inflation pressures, while trending down, remained at an inflationary level. The net percent raising their average selling prices eased to 25% in April after rising 7 pts. to 28% in March; it was meaningfully down from 33% in April 2023 and a high of 66% in March 2022. The percentage planning to raise prices fell to 26% in April after a three-point increase to 33% in March, registering the lowest reading since April 2023’s 21%; these figures were well below a high of 52% in March 2022.

Wage inflation remained high as a net 38% of respondents raised compensation during the last three months, unchanged from 38% reported in the previous survey. Nevertheless, it was down from a high of 46% in February 2023 and a peak of 50% in January 2022. A net 21% of firms planned to raise worker compensation in the next three months, unchanged from 21% in the previous survey. However, it was down from a high of 30% in November and a high of 32% in October 2022.

Inflation continued to be an issue facing small businesses, as reported by 22% of NFIB members in April as the single most important problem. It was down from 25% in March and well below a peak of 37% in July 2022. The quality of labor was the second important concern with 19% in April, up from 18% in March. Other concerns (in April vs. March) included taxes (15% vs. 14%), the cost of labor (11% vs. 10%), and government requirements (8% vs. 6%).

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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- Apr. NFIB Small Business Optimism Index inches up 1.2 pts. to 89.7, the first m/m gain since December.
- Expected real sales increase to -12% after falling to -18%, still indicating pessimism.
- Business conditions in the next six months decline to -37%, down for the third month in four.
- Inflation (22%) is top business problem, followed by Quality of Labor (19%).

U.S. NFIB Small Business Optimism Index Edges Up in April While Inflation Remains the Number One Problem

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Retail gasoline prices for all grades declined to $3.73 per gallon (+2.3 y/y) in the week ended May 13 from $3.77 in the prior week. It was the lowest price in five weeks and compare to a low of $3.18 in the middle of January. The recent high stands at $4.00 per gallon in the third week of September, and the all-time high was $5.11 in the week ended June 13, 2022. Retail prices for on-highway diesel fuel slipped to an average $3.85 per gallon (-1.3% y/y) last week from $3.89 in the prior week. A recent low of $3.77 per gallon occurred in the week ended July 3, 2023.

The average price of West Texas Intermediate crude oil declined to $79.32 per barrel (+10.1% y/y) in the week ended May 7 from an average $81.07 in the prior week. It remained well above its low of $69.37 per barrel in the week of June 30, 2023. The price remained below a high of $91.45 in the week of September 29, 2023. The all-time high was seen in the week of July 4, 2008 at $142.46 per barrel. Yesterday, the price of West Texas Intermediate crude oil was $79.12 per barrel. The price of European Brent crude oil declined to $83.36 per barrel (+9.9% y/y) in the week ended May 10 compared to $84.82 in the prior week. The price of Brent has recently ranged from a low of $73.55 in the week ended June 30, 2023 to a high of $127.40 in the week ended June 10, 2022. Yesterday, the price was $83.06 per barrel.

Natural gas prices strengthened to an average of $2.00/mmbtu (-4.8% y/y) in the week ended May 10 from $1.64/mmbtu in the prior week. These compare to a high of $3.20 averaged in the week of October 13, 2023. Yesterday, the natural gas price was $2.11/mmbtu.

Gasoline demand fell 4.0% y/y in the four weeks ended May 3 after declining 3.6% y/y in the four weeks ended April 26. Demand for all petroleum products was little changed y/y for the second consecutive four-week period. Crude oil input to refineries rose 0.3% y/y in the four weeks ended May 3, the same as during the previous four week period.

Gasoline inventories rose 3.8% y/y in the week of May 3 after rising 1.9% y/y in the prior week. Inventories of residual fuel oil fell 14.8% y/y in the week of May 3 after declining 9.8% y/y in the previous week. Crude oil inventories, including the Strategic Petroleum Reserve, improved 0.3% y/y in the week of May 3, the same as in the prior week.

Measured in days’ supply, gasoline inventories eased w/w to 26.4 days in the week of May 3. The recent low was 23.4 days in the week of June 30, 2023. Crude oil inventories fell to 29.0 days of supply in the week of May 3 from 29.2 days in the prior week. These compare to a recent high of 31.9 days in the week of March 3, 2023 and a low of 25.0 days in the week of September 1, 2023.

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

- Gasoline prices fall for third straight week.
- Crude oil costs decline sharply.
- Natural gas prices strengthen.

U.S. Gasoline & Crude Oil Prices Decline in Latest Week

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

Positive US economic data surprises leading to upward adjustment of interest rate expectations

Recent aggressive policy easing in China has given a massive boost to equity prices

FOMC expects much more easing now than in June

US is clear world leader in business capital spending on artificial intelligence

Blue Chip forecasters expect US to lead aggressive policy rate cuts over coming year—apart from Japan

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Nonfarm payrolls increased 151,000 (1.3% y/y) during February after rising 125,000 in January, revised from 143,000, and 323,000 in December, revised from 307,000. Expectations had been for a 160,000 rise in the Action Economics Forecast Survey. The latest figure left the three-month average change at 199,700 in February, down from 236,300 in January.

Average hourly earnings rose 0.3% during February after increasing 0.4% in January, revised from 0.5%. These increases came after a 0.2% December rise, revised from 0.3%. Earnings growth of 4.0% y/y remained up from 3.6% in July, but below the 5.9% high in March 2022. A 0.3% February increase had been expected.

The unemployment rate, measured in the household survey, edged up to 4.1% last month and reversed the January dip to 4.0%. The Action Economics Forecast Survey expected 4.0%. It reached a low of 3.5% in July of 2023. The unemployment rate, including employees working part-time for economic reasons plus all marginally-attached workers, rose to 8.0% from 7.5%.

In the **payroll survey**, private-sector employment rose 140,000 (1.2% y/y) in February following an 81,000 January gain. Construction sector employment increased 19,000 (2.0% y/y) last month after rising 2,000 in January. Factory sector payrolls gained 10,000 (-0.7% y/y) after falling 5,000 in January.

Private service-producing employment increased 106,000 (1.4% y/y) last month after increasing 88,000 in January. Increases varied greatly amongst service sector categories. Private education & health service jobs rose 73,000 (3.5% y/y) while trade, transportation & utilities employment rose 21,000 (1.0% y/y). Financial activities jobs rose 21,000 (1.0% y/y) and information sector employment rose 5,000 last month (-0.3% y/y). Leisure & hospitality employment fell 16,000 (+1.5% y/y) while professional & business service jobs declined 2,000 (-0.4% y/y). Temporary help services jobs weakened 12,300 (-5.6% y/y).

Government sector payrolls increased 11,000 (1.5% y/y) in February after rising 44,000 in January. Local government jobs improved 20,000 (1.5% y/y) last month while state government employment rose 1,000 (2.2% y/y). The number of federal government jobs declined 10,000 (+0.5% y/y).

The 0.3% February rise in private-sector average hourly earnings reflected a 0.3% gain (4.2% y/y) in the goods-producing sector. Earnings in construction improved 0.2% (4.2% y/y) last month and factory sector earnings rose 0.4% (4.2% y/y). In the private services sector, earnings rose 0.3% (4.0% y/y) after rising 0.4% in January. Information sector earnings held steady (4.6% y/y) and professional & business service-sector earnings rose 0.3% (5.1% y/y). Trade, transportation and utilities pay improved 0.3% (2.7% y/y). Leisure & hospitality earnings rose 0.3% (3.7% y/y). Financial sector earnings increased 0.5% (4.2% y/y) while private education & health services earnings edged 0.1% higher (4.1% y/y).

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The length of the average workweek in the private sector held at 34.1 hours last month. The workweek in the goods-producing sector was steady at 39.7 hours for the fifth straight month. The construction sector average workweek eased to 38.6 hours from 38.8 hours. The factory sector workweek was 40.1 hours for the fourth consecutive month while average weekly overtime hours edged up to 2.9	 hours. The average workweek in the private service sector held at 33.1 hours. The aggregate weekly hours index in the private sector, a key indicator of production and income, rose 0.1% last month (0.6% y/y) after a 0.2% decline in January.

In the **household survey**, the rise in the jobless rate to 4.1% in February from 4.0% in January reflected a 588,000 decline in employment which followed a 2.234 million January rise. The labor force fell 385,000 last month following a 2.197 million January increase. The unemployment rate for teenagers rose to 12.9%, while for individuals aged 20-24, the rate increased to 8.3%. The jobless rate for workers aged 25-54 edged up to 3.5% but for workers 55 and over, it eased to 2.9% in February.

The labor force participation rate fell to 62.4% during February, the lowest level since January 2023. The employment/population ratio for all workers fell to 59.9% in February. It remained below its high of 61.1% in February 2020, just prior to the pandemic.

The employment and earnings data are collected from surveys taken each month during the week containing the 12th day of the month. The labor market data are contained in Haver's **USECON** database. Detailed figures are in the **EMPL** and **LABOR** databases. The expectations figures are in the **AS1REPNA** database.

**Economic Outlook** is the title of today’s speech by Fed Chair Jerome H. Powell and it can be found [here](https://www.federalreserve.gov/newsevents/speech/powell20250307a.htm).

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- Job gains remain up from last summer.
- Recent trend in earnings growth remains slightly improved.
- Jobless rate is close to mid-point of past year’s range.

U.S. Payroll Employment Growth Picks Up in February, but Earnings Gain Eases & Unemployment Rate Edges Higher

Robert Brusca

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German real orders, those are orders adjusted for the effects of inflation, fell by 70% in January, with foreign orders falling 2.3% and domestic orders falling 13.2%. These results follow increases for all the categories December reported a rise in total real orders of 5.9%, foreign orders of 0.5% and domestic orders of 14%. In November total orders and foreign orders fell while domestic orders rose by 3.5%.

**Weakness overall**
German orders remain in a period of weakness as overall orders are dominated by foreign orders which continued to decline. Foreign orders are falling at an accelerating pace that's strong enough to drive the total order series to a decelerating pace despite the fact that the domestic order series falls over 12 months and gets even weaker over six months but then shows a strong gain over three months. That strong 3-month gain is buried in the total by the extreme weakness in foreign orders; it declined at a 40.2% annual rate over three months.

The statistics behind these trends show total orders down by 2.5% over 12 months, falling at a 12.2% annual rate over six months and falling at a 24.3% annual rate over three months. Foreign orders fall by 3.8% over 12 months, at an 8.4% annual rate over six months and at a 40.2% annual rate over three months. Domestic orders only fall by 0.5% over 12 months but then accelerate that drop falling at a 17.1% annual rate over six months and then rebounded to rise at a 10.5% annual rate over three months.

On a quarter-to-date basis, total orders, foreign orders, and domestic orders are falling at deep double-digit paces of about 25% or more at an annual rate, but this is early in the first quarter with only January data in hand. Things could change.

**Real sector sales**
Real sector sales show greater firmness; real sales fall only in consumer durable goods and in intermediate goods in January. They fell for capital goods and intermediate goods in December. A 3-month growth rate for real sector sales shows an 8.2% annual drop for consumer durable goods, and a 4% annual rate drop for intermediate goods, with increases elsewhere for all the manufacturing. Sales are not just improving but they're accelerating from -0.8% growth over 12 months, to a +5.4% annual rate growth pace over six months to +9.7% annualized growth over three months. Even though orders are weakening at a rapid pace, sales continue to plow ahead, and they've actually been plowing ahead at an improving pace.

On quarter-to-date basis, real sector sales are growing for all categories except for consumer durables and intermediate goods. For all manufacturing, the growth rate is 7.6% at an annual rate.

**Industrial indicators for Europe**
Industrial indicators for Germany, France, Italy, and Spain, the four largest economies in the European Monetary Union, show negative readings in January. But there is some improvement afoot. In Germany, the reading improved slightly to -25.2 in January from -28.2 in December. France’s rating improved slightly to -11 from -11.4. Italy's reading improved to -8.2 from -9.4. Spain's reading improved to -4.4 from -4.6. Industrial confidence in these four economies improved in January across the board, but these are small improvements and improvements are from very weak readings. Looking at a broader changes, the change in these readings from a year ago finds Germany worse off by 20 points with the decline of 20.4 points and with more modest but still negative results for France, Italy, and Spain, all of which are weaker in January 2025 than they were in January 2024.

**Industrial queue standings -** The table provides queue standings for the industrial confidence indicators since 1990 and here we see how weak conditions are: the German numbers on industrial confidence have been weaker only about 4% of the time. France and Italy have been weaker only about 21% of the time; however, Spain shows the reading above its median! The Spanish reading for January has actually been weaker 51.6% of the time and stronger less than 50% of the time. Spain is above its median.

**Queue standings reveal weakness**
On the upper part of the table, I present two different kinds of queue standing data, one set of percentile standings is applied to the levels of orders expressed in real terms. There we see that overall orders are above their 50th percentile, at 50.5 percentile. Foreign orders have a 64.1 percentile standing. Domestic orders are only at a 27.4 percentile standing, substantially below their historic median. Quite apart from the growth rates, the level of orders Germany is getting from abroad are still above what it has been historically, above the historic median. Domestic orders generate only a 27-percentile standing. The queue standings for real sector sales show manufacturing sales above their historic median at a 51.3 percentile mark, led by a 70.5 percentile standing in capital goods. Intermediate goods are below their median at a 43.9% standing and consumer nondurables are at a 44.4 percentile standing; both of those are marginally below the 50th percentile mark which would designate the median reading since 1990. The levels that are extremely weak are levels of real orders for consumer goods particularly weighed down by consumer durables that have been weaker only 3.2% of the time.

**Growth rate standings**
The second set of standings is applied to year-over-year growth rates and here we see total orders foreign and domestic orders all are below their median growth rate with rankings in the 24th to the 44th percentiles. Real sector sales post only a 32-percentile standing for all manufacturing although year-over-year sales or consumer nondurable goods have a 74-percentile standing and that helps to elevate overall consumer goods to a 63-percentile standing.

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**Summing up**
On balance, the reading that German orders remains poor the January reading, so it shows a loss of further momentum across the board. Real sales are holding up a lot better than orders and that may mean that there'll be a termination of this weakness in orders. It's hard to believe that the orders are this weak and have been weak this long they're going to continue to weaken and drag real sales down further but that remains a possibility. It's always a question when you have this kind of divergence whether the firm sales will get translated back into orders or whether the weakness in orders is going to further degrade the strength in sales and we're waiting to see which way that goes. Right now, the step up in German military seems to set the stage for a strengthening ahead. As for Europe we see weakness across the board and weak standings across the board with only Spain that has been showing better statistics in a number of ways showing some firming and improving trends. The rest of Europe will see increased military spending as well. For now, Germany continues to be struggling along with France and Italy in those conditions are largely borne out by other indicators as well. But there is an air of change in the wind.

Germany

German Orders Drop

**US recession risks**
Recession risks in the US have climbed sharply, albeit from low levels, over the past few days. That at least is the message from the US Treasury market – and the spread between 10 year bond yields and 3 month interest rates in particular (chart 1). The re-imposition of tariffs on Chinese imports, alongside new levies targeting Canadian and Mexican goods, has, following retaliatory measures, heightened fears of a global trade war. Coupled with efforts to cut costs and trim headcount in the government sector, latest US data have revealed a big drop in growth momentum. Against this backdrop the Russell 2000 stock price index, which is highly sensitive to domestic growth prospects, has also declined sharply.

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**FDI and Goodwill**
Between 2016 and 2020, US net foreign direct investment (FDI) flows exhibited volatility, reflecting the impact of the Trump administration’s trade policies in that period. The imposition of tariffs on key trading partners, withdrawal from multilateral agreements, and the push for a reshoring of US manufacturing created uncertainty for multinational firms, leading to fluctuating investment patterns. But while corporate tax cuts in 2017 initially encouraged some capital inflows, broader uncertainty around trade relationships arguably discouraged long-term commitments (chart 2). That could have been because these policies eroded the United States' economic goodwill—an intangible asset reflecting trust in stable business conditions and regulatory predictability.

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**China growth target**
China has not been spared from the latest round of trade actions by US President Trump, who doubled tariffs on Chinese imports from an initial 10% to 20%. This move prompted retaliation from China, which imposed tariffs ranging from 10% to 15% on US agricultural goods, among other measures. However, it may be important to note that China’s response to US tariffs has been relatively restrained. Despite the potential growth-dampening effects of US policies and other risks, China has once again set its annual growth target at “around 5%”. This target was revealed during China’s annual National People’s Congress, which began this week. Investors are now closely watching for specific policy details on government measures to support growth and navigate China’s ongoing challenges. An early indicator of China’s approach is the budget deficit target of 4% of GDP this year, up from last year’s 3%, marking the largest deficit in more than 30 years. This suggests the government is willing to increase spending significantly to support the economy. For context, China achieved exactly 5% growth last year, largely thanks to a strong Q4 performance as authorities’ stimulus measures took effect and, somewhat ironically, due to a front-loading of imports from China in anticipation of possible US trade initiatives.

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**South Korea’s economy**
South Korea's industrial production has shown a noticeable slowdown in recent months (chart 4). This trend reflects broader economic challenges, including weakening global demand for semiconductors and possibly thanks to supply chain disruptions stemming from geopolitical tensions. The US administration’s renewed protectionist trade stance may have added further strain. Additionally, diplomatic tensions with China—South Korea’s largest trading partner—have complicated the trade environment, leading to weaker business investment and industrial activity.

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**Inflation and the ECB**
Wage growth in the euro area, as tracked by the ECB, has shown significant moderation after peaking in 2023, aligning with a broader decline in services inflation. That suggests the central bank's restrictive monetary policy is having its intended effect, easing inflationary pressures across the economy. And this was, in turn, a key reason behind the ECB’s decision to lower its key policy rates by 25bps this week. That said, as the accompanying commentary suggested, policymakers remain cautious, emphasizing the need for sustained disinflation before committing to a further shift in the monetary policy stance.

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**Energy and growth**
Finally, chart 6 below illustrates the relationship between per capita GDP and primary energy consumption per capita in the world’s major developed and developing economies, It highlights how higher energy use tends to correlate with higher economic output and living standards. Energy is a fundamental driver of economic activity, supporting key factors of production such as capital, labour, and technology. Industrial productivity, transportation, digital infrastructure, and household consumption all rely on stable and affordable energy supplies. Economies with higher energy consumption, such as the United States, tend to have more advanced manufacturing, service sectors, and technological innovation, translating into higher GDP per capita. Meanwhile, lower energy consumption often reflects constraints on industrial capacity, infrastructure, and economic development, as seen in China and other emerging economies. However, the ongoing energy transition—shifting towards renewable energy sources—introduces challenges and opportunities. While reducing reliance on fossil fuels is necessary for sustainability, ensuring that clean energy remains abundant and cost-effective is crucial for maintaining productivity and economic growth. The ability of countries to transition efficiently to renewable energy while sustaining high levels of economic output could define a country’s competitiveness in the years ahead.

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Financial markets have experienced heightened volatility in recent days, with investor sentiment rattled by rising US recession risks, escalating global trade tensions, and mounting geopolitical uncertainties. Sharp decline in US stocks, lower yields coupled with weaker confidence data reflect growing concerns that recent trade and economic policies from the US administration are sapping economic growth and increasing financial instability (chart 1). Beyond immediate market fluctuations, the long-term impact of these policies is also sparking a broader debate about the erosion of economic goodwill—the trust and stability that businesses and consumers historically associated with the United States (chart 2). Meanwhile, China and South Korea, two of the world’s most trade-dependent economies, are also feeling the strain with latest data from the latter suggesting sharply slower industrial production and weakening external demand (charts 3 and 4). The impact is also evident in Europe, where, having cut its key policy rates by 25bps this week, the ECB faces increasing challenges in calibrating monetary policy amid an uncertain economic landscape (chart 5). Finally, and looking at even broader issues, energy remains a critical variable in the global outlook. While the long-term energy transition continues, short-term concerns over trade-driven supply disruptions and geopolitical instability in energy markets add another layer of economic risk, reinforcing fears that persistent economic fragmentation could weigh on long-term growth across major economies (chart 6).

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Charts of the Week: Goodwill Hunting 

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The U.S. trade deficit in goods and services (BOP basis) widened to $131.4 billion in January from $98.1 billion in December, revised from $98.4 billion, and $78.2 billion in November, revised from $78.9 billion, according to the U.S. Census Bureau. A $123.0 billion deficit was expected by the Action Economics Forecast Survey. Exports rose 1.2% (4.1% y/y) in January after falling 2.6% in December. This was accompanied by a 10.0% (23.1% y/y) jump in imports which came after a 3.6% December gain.

The deficit in goods trade (BOP basis) swelled to $156.8 billion from $123.3 billion in December, revised from $123.0 billion. Goods exports (customs value) rose 1.6% (1.3% y/y) in January, after falling 3.8% in December. The January increase reflected an 8.1% (10.1% y/y) rise in capital goods exports which came after a 2.6% decline, and an 8.5% jump (0.4% y/y) in nonauto consumer goods exports which recouped an 8.4% December decline. Foods, feeds & beverage exports weakened 7.2% (-1.7% y/y) following a 1.1% December decline. Auto exports dropped 3.1% (-15.5% y/y) after a 6.6% weakening. Industrial supplies exports eased 0.7% (-2.0% y/y) following a 3.0% December drop.

Imports of goods surged 12.5%  (26.1% y/y) in January after two monthly increases of roughly 4.2%. The strength was led by a 34.3% jump (65.3% y/y) in imports of industrial supplies and materials which came after a 19.1% jump in December. Nonauto consumer goods imports climbed 8.3% (26.0% y/y) following a 3.1% December increase. Capital goods imports rose 5.5% (18.2% y/y) following a 1.5% rise. Foods, feeds & beverage imports rose 4.3% (19.2% y/y) following a 1.6% decline while auto imports increased 2.3% (-6.1 y/y) after a 5.5% December drop. Petroleum imports by end-use fell 1.1% (-2.3% y/y) after a 4.6% rise. Nonpetroleum imports shot up 13.4% (28.4% y/y) following a 4.0% December rise.

The inflation-adjusted goods trade deficit (customs value) soared to $142.9 billion in January from $112.1 billion in December. Real exports rose 0.4% (-0.9% y/y) after a 3.9% decline in December while real imports rose 12.4% (24.4% y/y) in January following a 3.9% December rise.

The services trade surplus of $25.4 billion in January compared to $25.2 billion in December. Service exports edged up 0.6% (9.5% y/y) after the same increase in December. Monthly gains in service exports were led by a 3.7% rise (37.6% y/y) rise in exported construction services. Travel services exports gained 0.4% (10.8% y/y) and financial exports increased 1.4% (9.6% y/y). Service imports rose 0.6% (12.1% y/y) in January following a 1.6% gain in December. Monthly gains in service imports were widespread. Maintenance & repair services rose 2.4% (33.1% y/y) while imported transport services gained 0.2 (14.2% y/y). Imported travel services eased 0.7% (+12.4% y/y) while charges for use of intellectual property rose 3.1% (23.4% y/y).

The U.S. goods trade deficit with China deepened to a seasonally adjusted $29.7 billion in January from $25.3 billion in December. Exports to China fell 9.8% (-18.5% y/y) while imports increased 8.8% (11.5% y/y). The deficit with the European Union deepened to $25.5 billion in January from $20.4 billion in December, while the deficit with Japan expanded to $7.4 billion from $5.5 billion.

The international trade data, including relevant data on oil prices, can be found in Haver’s **USECON** database. Detailed figures on international trade are available in the **USINT** and **USTRADE** databases. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- Deficit is surprisingly large as petroleum imports surge.
- Goods deficit widens to record, while services surplus was little changed.
- Exports recover half of December’s decline and imports jump.

U.S. Trade Deficit Deepens in January to Another Record

Michael J. Moran

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The revised reading on labor productivity for the fourth quarter of last year was slightly firmer than previously estimated, now showing growth of 1.5% rather than 1.2% (annual rates). The adjustment reflected a slight revision to output growth (2.4% rather than 2.3%, an outcome consistent with the modest adjustment to GDP growth). Businesses achieved these output gains with fewer labor hours, which grew 0.8%, down from the previous estimate of 1.0%.

The positive revision to productivity bodes well for the inflation outlook, as it provides more cushion for businesses to absorb costs. The favorable inflation-related news was reinforced by a downward adjustment to labor compensation per hour, which grew 3.8% versus the initial estimate of 4.2 percent. The combination of firmer productivity growth and slower growth in compensation per hour left the growth of unit labor costs at 2.2%, noticeably slower than the initial estimate of 3.0%.

Today’s report also contained benchmark revisions to results in the prior two years, and the new figures were generally positive. Over the four quarters of 2024, productivity growth was 0.4 percentage point firmer than previously believed (2.0% versus 1.6%), while 2023 showed similar improvement (3.1% versus 2.7%). Declines in hours worked were the driving force behind the improvements in productivity. The upward revision to productivity in 2024 was joined by slower growth in compensation per hour (4.1% rather than 4.4%), which provided more inflation protection. Unit labor costs (compensation adjusted for productivity) grew 2.0% over the four quarters of 2024, slower than the previous estimate of 2.7%.

Many observers are hopeful that the spread of Artificial Intelligence, will lead to a burst in productivity, but there is scant evidence of a meaningful effect thus far. Productivity has been firm in the past two years, but no better than the norm during an economic expansion. (Productivity tends to be firm in the early stages of a business expansion, as firms move from suboptimal levels of production to more efficient levels. Also, recessions can trigger changes to business models and staffing that generate productivity gains.)

While AI does not seem to have had much effect thus far, this result is not surprising. Individuals and businesses have just started to experiment with the new technology, and it will most likely take several years to bear fruit. The February Blue Chip survey of economic forecasters asked about the prospects for productivity gains from AI, and only 17% of respondents expected noticeable gains in the next three years. However, 57% expected notable results over a three-to-five-year span, and 26% felt that gains would take more than five years.
 
The productivity and labor cost data are available in Haver’s **USECON** database. The Action Economics expectations figures are in the **AS1REPNA** database.

- Benchmark revisions showed upward adjustments to productivity for both 2023 and 2024.
- Little apparent influence from AI thus far.