Tom Moeller

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Nonfarm payrolls increased 175,000 (1.8% y/y) in April after rising 315,000 in March, revised from 303,000, and 236,000 in February, revised from 270,000. Expectations had been for a 250,000 rise in the Action Economics Forecast Survey. The three-month average change of 242,000 is the slowest since December of	 last year.

Average hourly earnings increased 0.2% in April after an unrevised 0.3% March gain and a 0.1% uptick in February, revised from 0.2%. The 3.9% y/y earnings increase remains below the 5.9% high in March 2022. It is the weakest rise since June 2021.

The unemployment rate, measured in the household survey, rose to 3.9% and reversed its decline to 3.8% in March. An unchanged 3.8% had been expected. Household employment rose 25,000 after increasing 498,000 in March. The labor force rose 87,000 after a 469,000 March gain. The overall unemployment rate, including workers who were marginally attached & working part-time for economic reasons edged up to 7.4%. It was the highest rate since November 2021.

In the **payroll survey**, private-sector employment increased 167,000 (1.7% y/y) in April after rising 243,000 in March. Construction sector employment increased 9,000 (3.3% y/y) last month following a 40,000 March gain. Factory sector jobs rose 8,000 (0.1% y/y) after falling 4,000. Mining & logging sector jobs fell 3,000 (+0.3% y/y) during April after rising 3,000 in March.

Private service-producing sector employment improved 153,000 in April (1.7% y/y) after a 204,000 March rise. Increases varied greatly amongst service sector categories. Education & health service jobs rose 95,000 (4.3% y/y) after rising 88,000 in March while leisure & hospitality employment rose 5,000 (2.3% y/y) after a 53,000 gain. Trade, transportation & utilities employment gained 52,000 (0.7% y/y) after rising 31,000 while financial activities jobs rose 6,000 (0.5% y/y) after rising 5,000 in March. Information sector employment fell 8,000 (-1.4% y/y) following a 4,000 gain and professional & business service jobs decreased 4,000 (0.5% y/y) after a 10,000 March rise. Within that category, the number of temporary jobs fell 16,400 (-6.0% y/y) and have fallen consistently since a March 2022 high.

Government sector payrolls improved a negligible 8,000 last month (2.8% y/y) after increasing 72,000 in March. Local government jobs held steady (2.4% y/y) after rising 51,000 in March and state government employment rose 6,000 (3.7% y/y) after an 11,000 gain. The number of federal government jobs increased 2,000 (2.9% y/y) following a 10,000 rise.

The 0.2% rise in private-sector average hourly earnings reflected a 0.2% gain (5.1% y/y) in the goods-producing sector which followed a 0.6% improvement in March. Earnings in construction strengthened 0.6% (5.2% y/y) while factory sector earnings eased 0.1% (+4.8% y/y). In the private services-sector, earnings rose 0.2% last month (3.7% y/y) after a 0.3% gain. Information sector earnings edged 0.1% higher (3.4% y/y) following a 0.4% improvement. Financial sector earnings increased 0.4% (6.0% y/y) for the third straight month. Private education & health services earnings rose slightly (2.8% y/y) after holding steady in March. Trade, transportation and utilities pay rose 0.1% (3.4% y/y) in April after a 0.2% rise.

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The length of the average workweek in the private sector eased to 34.3 hours in April after rising to 34.4 hours in March. The workweek in the goods-producing sector fell to 39.7 hours, down from a five-month high of 39.9 hours in March. The construction sector average workweek fell to 38.7 hours from 39.3. The factory sector workweek held steady at 40.0 hours for the third straight month while the average workweek in the private service sector was 33.3 hours, also for the third consecutive month. The aggregate weekly hours index in the private sector, a key indicator of production and income, eased 0.1% in April (1.7% y/y) after rising 0.4% in both of the prior two months.

In the **household survey**, the jobless rate climbed to 3.9% as the size of the labor force rose more quickly than employment. The labor force participation rate held steady at 62.7%. The rate for teenagers declined to 37.6%, while for individuals aged 20-24 it rose to 72.4%. For rate for workers aged 25-54, it edged higher to 83.5% but for workers 55 and over, it fell slightly to 38.4 hours.

The employment/population ratio for all workers slipped to 60.2% in April, standing slightly below where it was twelve months earlier. 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.

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- Job increase slows to weakest in just over one year.
- Earnings increase moderates.
- Jobless rate moves up as employment increase is negligible.

U.S. Payroll Employment & Wage Growth Moderate in April; Jobless Rate Edges Up

Andrew Cates

**Consensus interest rate forecasts**
Despite heightened concerns about the potential for lower US interest rates in the coming months, recent forecasts still show a broad consensus that an easing cycle will unfold in the period ahead across most major economies. The latest Blue Chip Financial Forecasts survey, for instance, indicates that policy rate reductions of approximately 100 basis points are anticipated from the Fed over the next 12 months. Additionally, the European Central Bank and the Bank of England are expected to implement cumulative cuts of 166 and 111 basis points, respectively, during the same timeframe. In contrast, Japan is expected to see further rate hikes, specifically an increase of 17 basis points over the year ahead.

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**US data surprises and 2 year bond yields**
The anxiety in financial markets about the Fed’s scope to lower interest rates can be largely traced to the US economy’s resilience – and its tight labour market in particular – together with sticky inflation. The former, however, namely economic resilience, has arguably being challenged in recent days by some, though by no means all, US data releases. These include, for example, a weaker-than expected consumer confidence report and ISM survey of manufacturing. Citigroup’s US growth surprise index has, against that backdrop, turned sharply lower.

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**US and euro area data surprises versus the euro**
A corresponding trend has also unfolded in the FX market. While US data have been a little more disappointing this contrasts with euro area data, which have been more resilient. Yet, thanks to still-firm US/Europe yield differentials, the US dollar has remained fairly resilient versus the euro (see chart 3).

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**Japan’s economy**
This week’s disappointing retail sales data from Japan could call into question the scope for further policy rate hikes from the Bank of Japan (BoJ) in the coming months. Retail sales specifically slowed to 1.2% y/y in March from 4.7% in February. That slowdown, moreover, was broadly-based, with reduced sales activity seen across various product categories.

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**Airport traffic in China**
The latest monthly dataflow from China have been a little more upbeat but that was not the message from this week’s official PMI surveys for April. Other less widely monitored data are also yielding sobering messages about the current economic environment. For instance, while aircraft movements at Beijing Airport have risen from their low points, they still remain well below pre-COVID pandemic levels (see chart 5). Similarly, specific data on cargo volumes and passenger traffic lead to the same conclusion.

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**Global warming and water levels**
Finally, on more structural matters, climate change continues to generate profound shifts in the economic landscape, influencing everything from agricultural productivity to energy markets and global supply chains. One manifestation of these shifts is low water levels in many areas and for example, in the Panama Canal. More specifically Gatun Lake has seen prolonged drought conditions, exacerbated by the El Niño phenomenon and broader climate change anomalies. The drought has resulted in lower-than-average rainfall and delayed rainy seasons, leading to reduced water availability not only for canal operations but also for over half of Panama's population relying on this water source. To that supply chain point above, the canal has also had to reduce the number of ships it can accommodate per day.

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Lingering concerns about the US Fed's inclination to lower interest rates in coming months have continued to unsettle financial markets over the past few days. That said, comments from Fed Chair Powell after this week’s FOMC meeting have calmed some of those nerves. In our charts this week we delve into the latest Blue Chip consensus on policy rates across the world’s major economies (chart 1). We also compare market expectations for US policy rates, inferred from 2-year Treasury yields, with a trend toward more negative US data surprises in recent days (chart 2). In addition we contrast that more negative US growth trend with the relative resilience of the euro area dataflow and some recent downward pressure on the EUR/USD exchange rate (chart 3). Turning to Asia, we assess Japan's economy with a focus on some recent disappointing retail sales data (chart 4), and provide insights into China's economic activity through aircraft movements at Beijing Airport (chart 5). Finally, and with a nod to climate change and its impact, we look at reduced water levels on the Panama Canal and how these contrast with above-average land and sea temperatures over the past few years (chart 6).

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Charts of the Week: Policy Surprises Versus Data Surprises

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The U.S. trade deficit in goods and services (BOP basis) of $69.4 billion in March compared to a $69.5 billion in February, revised from $68.9 billion, and an unrevised $67.6 billion in January, according to the U.S. Census Bureau. The deficit remained nearly the largest since April 2023 which was $72.2 billion. A $69.1 billion deficit had been expected in the Action Economics Forecast Survey. Exports fell 2.0% and were roughly unchanged y/y, reversing a 2.2% February rise. Imports declined 1.6% (+3.1% y/y) in March, following three straight months of moderate gain.

The deficit in goods trade (BOP basis) increased to $92.5 billion in March from $91.7 billion in February. Goods exports fell 2.9% (-2.8% y/y) after rising 2.8% in February. Imports of goods declined 1.6% (+2.5% y/y) following three straight monthly increases. The services trade surplus increased to $23.1 billion in March from $22.2 billion in February but remained down from a peak surplus of $25.2 billion last August. Services exports eased 0.2% (+6.0% y/y) following four consecutive monthly increases. Services imports declined 1.7% (+5.4% y/y) after rising 4.7% in February.

The real (inflation-adjusted) goods trade deficit (customs value; chained 2017 dollars), widened to $88.6 billion in March, the largest deficit since April of last year, from $87.4 billion in February. Real exports of goods declined 3.2% (-0.7% y/y) after rising 2.0% in February. Real imports of goods fell 1.5% (+2.5% y/y) after three straight monthly increases. In the first quarter of this year, a widening of the trade deficit (net exports) subtracted 0.86 percentage points from GDP growth after adding 0.25 percentage points to growth in Q4 2023.

The customs value goods trade deficit widened to $91.5 billion in March from $90.5 billion in February. The latest figure compared to a $91.8 billion deficit in the advance report released on April 25. Customs value exports fell 3.0% (-1.7% y/y) in March after a 2.8% February increase. Automotive vehicles, parts & engines rose 0.6% (-1.7% y/y) while nonfood consumer goods excluding autos declined 1.8% (-5.1% y/y). Capital goods exports excluding autos weakened 3.7% (+3.1% y/y) while exports of industrial supplies & materials fell 3.0% (-4.1% y/y). Foods, feeds & beverages exports were off 8.2% (-1.5% y/y).

Customs value imports of goods declined 1.6% (+2.6% y/y) in March after increasing for three straight months. Automotive vehicles, parts & engines imports fell 11.1% (+6.1% y/y) while capital goods imports excluding autos rose 0.1% (7.4% y/y). Foods, feeds & beverage imports declined 3.5% (+5.2% y/y). Imports of industrial supplies & materials fell 2.9% (-7.0% y/y) but nonfood consumer goods excluding autos rose 4.8% (4.1% y/y). Meanwhile, petroleum imports declined 2.5% and were unchanged y/y in March, following a 1.6% February rise. Nonpetroleum imports weakened 1.5% (+2.8% y/y) following three straight monthly increases.

The rise in services exports reflected a 0.7% increase (12.4% y/y) in personal, cultural & recreational services and a 1.3% decline (+24.9% y/y) in travel services exports. Exports of construction services declined 1.3% (+2.6% y/y) while government goods & services exports declined 0.9% (-23.0% y/y). The increase in services imports was due to construction services imports which rose 1.0% (35.1% y/y) but travel services imports fell 2.6% (+21.7% y/y). Imports of transport services declined 5.8% (-0.1% y/y) while charges for the use of intellectual property eased 0.1% (+3.2 y/y) in March.

The U.S. goods trade deficit with China widened to a seasonally adjusted $24.1 billion in March from $21.9 billion in February. Exports fell 3.6% (-10.3% y/y) while imports rose 4.8% (unchanged y/y). The goods trade deficit with the European Union deepened to $19.5 billion from $17.6 billion in February as exports fell 3.4% (-6.4% y/y), off for the third straight month, and imports rose 1.8% (4.2% y/y). The trade deficit with Japan narrowed to a seasonally adjusted $5.3 billion in March after narrowing to $6.2 billion in the previous month. Exports declined 1.9% (+3.0% y/y) while imports fell 8.7% (-2.2% y/y).

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** database. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- Exports and imports both fall.
- Adjusted for inflation, goods trade deficit increases to eleven-month high.
- Goods trade deficits with China & Europe deepen.

U.S. Trade Deficit Deepens in March

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The Commerce Department reported that inventories in the factory sector remained unchanged (0.6% y/y) during March after a 0.2% February rise. Transportation equipment inventories held steady (6.9% y/y). Furniture inventories increased 0.3% (-4.4% y/y) while electrical equipment inventories dropped 0.4% (-0.5% y/y). Amongst nondurable goods industries, petroleum inventories were 0.5% higher (2.6% y/y) and plastics & rubber inventories rose 0.2% (-4.8% y/y). These changes were accompanied by a 0.5% rise (-1.7% y/y) in apparel. Basic chemical inventories were unchanged (-0.6% y/y) for a second consecutive month while paper product inventories gained 0.2% (-2.6% y/y).

Orders to all manufacturers improved 1.6% (1.7% y/y) in March following a 1.2% February rise. The gain was led by a 2.6% rise (1.2% y/y) in durable goods orders, as commercial aircraft surged 30.6% (-50.9% y/y) in. New orders excluding transportation gained 0.5% (1.6% y/y). Orders for nondurable goods (which equal shipments) rose 0.6% (2.1% y/y). The rise reflected a 1.5% increase (4.9% y/y) in shipments from oil refineries and a 0.7% gain (2.1% y/y) in basic chemicals. Orders for textile products declined 1.4% (-1.7% y/y) and apparel orders fell 0.2% (-1.9% y/y). Orders for food products rose 0.2% (-0.3% y/y). Paper product shipments held steady (-2.0% y/y).

Unfilled orders improved 0.4% in March (9.1% y/y) and, excluding the transportation sector, they eased 0.1% (-0.9% y/y). Backlogs of electrical equipment slipped 0.1% (+0.7% y/y). Unfilled orders in the machinery sector eased 0.3% (-3.9% y/y) and unfilled orders for transportation equipment rose 0.7% (15.5% y/y). Unfilled orders of furniture rose 0.6% (-5.6% y/) and fabricated metals backlogs were off 0.1%, unchanged y/y.

The factory sector figures are available in Haver's **USECON** database.

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- Inventories levels are flat.
- Order improvement led by aircraft.
- Unfilled orders rise.

U.S. Factory Inventories Hold Steady While Orders Rise in March

Kathleen Stephansen, CBE

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Nonfarm business sector productivity increased 0.3% (SAAR) during Q1’24, following upwardly revised gains of 3.5% in Q4’23 and 4.6% in Q3’23. The rises in productivity were originally reported as being 3.4% in Q4 and 4.4% in Q3. Expectations had been for a 0.8% rise in the Action Economics Forecast Survey. On a year-on-year comparison, Q1 productivity rose 2.9%, up from 2.7% in Q4 and 2.4% in Q3. The y/y gain was the quickest since 2020. Real value-added output rose 1.3% (SAAR) (3.2% y/y) in Q1 from a 3.8% (3.3% y/y) gain in Q4.

Hours-worked in the nonfarm business sector rose 1.0% (0.3% y/y) in Q1 from a 0.2% (0.6% y/y) rise in Q4. Nonfarm hourly compensation increased 5.0% (4.7% y/y) in Q1 from a 3.5% gain (5.2% y/y) in Q4. Adjusted for price inflation, real compensation per hour rose 1.1% (1.5% y/y) in Q1, following a 0.8% (1.9% y/y) rise in Q4.

Weaker productivity brought an acceleration in unit labor costs to 4.7% (1.8% y/y) in Q1 after a 0.0% (2.4%) rise in Q4. The Action Economics Forecast Survey called for a 2.3% quarterly rise in unit labor costs.

In the manufacturing sector, real output per hour slowed to a rise of 0.2% (1.2% y/y) last quarter after a gain of 2.4% (0.9% y/y) in Q4. Manufacturing output was unchanged over the quarter (-0.1% y/y) after declining 1.0% (-0.2% y/y) in Q4. Hours-worked declined 0.2% (-1.3% y/y) in Q1 after a drop of 3.3% (-1.1% y/y) in Q4.

Compensation per hour in manufacturing slowed to a gain of 3.4% (6.3% y/y) last quarter following a rise of 6.8% (6.7% y/y) in Q4. Real compensation declined 0.4% (3.0% y/y) in Q1, after a rise of 4.0% (3.4% y/y) in Q4. Unit labor costs in manufacturing slowed to a rise of 3.2% (5.0% y/y) in Q1 following a gain of 4.2% (5.8% y/y) the prior quarter.

The productivity and labor cost data are available in Haver’s **USECON** database. The Action Economics expectations figures are in the **AS1REPNA** database.

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- Productivity slows in Q1.
- Unit labor costs rise sharply.
- Slowdown in factory productivity and unit labor cost growth.

U.S. Productivity Growth Slows and Unit Labor Cost Growth Accelerates in Q1

Carol Stone, CBE

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Initial claims for unemployment insurance were steady last week, ended April 27, at 208,000 seasonally adjusted; the April 20 week’s number was revised marginally from 207,000.  The latest week was close to the Action Economics Forecast Survey estimate of 210,000. The four-week moving average of initial claims was 210,000 in the April 27 week, down from 213,500 the week before. The latest week’s data extends the tight range of initial claims, which has hovered from 194,000 to 228,000 since September 3, 2023.

The number of continued claims for unemployment insurance, also called “insured unemployment,” was 1.774 million in the April 20 week, unchanged from the prior week; that earlier amount was revised from 1.781 million reported last week. As with initial claims, the number of continuing claims has maintained a tight range for several months, running from 1.728 million to 1.829 million since June 3, 2023.

The insured unemployment rate, that is, the number of unemployment benefits recipients as a percent of covered employment, was again 1.2% in the April 20 week. This rate has been steady at 1.2% since March 11, 2023.

Insured unemployment rates vary widely among individual states. In the April 13 week, the highest rates were in New Jersey (2.50%), California (2.31%), Rhode Island (1.91%), Minnesota and Illinois (both 1.85%), and Massachusetts (1.84%). The lowest rates were in Kansas (0.33%), Florida (0.37%), South Dakota (0.39%), North Carolina and Virginia (both 0.41%) and Alabama (0.42%). Rates in other prominent states include Arizona (0.74%), Texas (1.07%), Pennsylvania and Connecticut (both 1.54%) and New York (1.74%).  These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986. The expectations figure is from the Action Economics Forecast Survey in the **AS1REPNA** database.

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- Initial claims flat at 208,000 in April 27 week.
- Continued claims also unchanged in April 20 week.
- Insured unemployment rate maintains 1.2% level since March 2023.


U.S. Initial Unemployment Insurance Claims Maintain Tight Range

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At today’s meeting of the Federal Open Market Committee, the target range for the Federal funds rate was left unchanged at 5.25% - 5.50%. Each member of the FOMC voted in favor of today’s action. The Fed’s focus continues to be reducing price inflation, as mentioned several times in the meeting summary.

Text accompanying today’s meeting indicated, “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

“The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.”

“In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”

In addition, “Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities. The Committee is strongly committed to returning inflation to its 2 percent objective.”

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- Fed maintains focus on inflation reduction.
- Federal funds rate range remains at 5.25% - 5.50%, where it’s been since early-August 2023.
- Rate stays at highest level since March 2001.

FOMC Holds Funds Rate Steady

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The Autodata Corporation reported that U.S. light vehicle sales rose 2.8% (1.5% y/y) to 16.00 million units (SAAR) in April after falling 1.9% to 15.56 million in March. Sales averaged 15.43 million in Q1.

Sales of light trucks rose 2.9% (3.4% y/y) during April to 12.9 million units (SAAR) after falling 1.3% in March. Purchases of domestically-made light trucks edged 0.5% higher to 9.68 million units (unchanged y/y), after falling 2.5% in March. Sales of imported light trucks strengthened 10.7% (15.0% y/y) to 3.22 million units, the highest level in three years,  after a 3.6% March increase.

Trucks' share of the light vehicle market held steady at a record 80.6% last month compared to 79.1% in April of last year.

Auto sales rose 1.3% (-5.8% y/y) to 3.10 million units (SAAR) in April following a 2.9% March decline. Purchases of domestically-produced cars improved 2.8% (-7.2% y/y) last month to 2.19 million units after falling 3.6% in March. Sales of imported autos weakened 2.2% both m/m and y/y to 0.91 million units after easing 1.1% in March.

Imports' share of the U.S. light vehicle market rose to 25.8% in April from 24.7% in March, up versus a May 2023 low of 22.3%. Imports' share of the passenger car market declined to 29.4% from 30.4% in March. It reached a high of 37.9% in September 2021. Imports' share of the light truck market improved to 25.0%, a five-month high, from 23.2% in March.

U.S. vehicle sales figures can be found in Haver's **USECON** database. Additional detail by manufacturer is in the **INDUSTRY** database.

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- Light truck sales improve considerably while passenger car sales edge higher.
- Imports' market share gains ground.

U.S. Light Vehicle Sales Move Up in April

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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**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 4.3% 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.

Revised Productivity in Q4: Slightly Better Than Previously Believed

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Initial claims for unemployment insurance were 221,000 seasonally adjusted in the week ended March 1, down 21,000, almost exactly reversing their 22,000 increase in the week ended February 22. The Action Economics Forecast Survey had expected a somewhat smaller decline to 232,000. The four-week moving average was 224,250 in the week ended March 1, down slightly from 224,000 in the February 22nd week.

The total number of unemployment insurance recipients – also known as “insured unemployment” or “continued claims” – was 1.897 million in the week ended February 22, up noticeably from 1.855 million the week before. The four-week moving average was 1.866 million, up from 1,863,250 the prior week.

The insured unemployment rate, that is, the number of beneficiaries as a percentage of covered employment was still 1.2%, where it has been almost continuously since March 2023.

Economic conditions vary widely across states and territories. In the week ended February 15, the highest unemployment rates were in Rhode Island (2.93%, New Jersey (2.92%), Minnesota (2.58%, Montana (2.44%) and Massachusetts (2.39%). The lowest rates were in Florida (0.36%), Alabama (0.45%), Virginia (0.47%), North Carolina (0.57%) and Arkansas (0.58%). Rates in other notable states include Pennsylvania (2.02%(, New York (1.90%) and Texas (1.06%). These state rates are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986. The expectations figure is from the Action Economics Forecast Survey in the **AS1REPNA** database.

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- Initial claims reverse previous week’s increase.
- Insured unemployment rate still 1.2%.
- Continued claims up 42,000 in Feb. 22 week.

U.S. Jobless Insurance Claims Ease in March 1 Week

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The U.S. ISM Services PMI rose to 53.5 during February after falling to 52.8 in January, according to today’s report by the Institute for Supply Management. The reading indicated service sector expansion for the eighth consecutive month. The Action Economics Forecast Survey expected 53.0 for February.

Haver Analytics constructs a composite index combining the services index and the manufacturing index released on Monday. This index rose to 53.1 in February from 52.6 in January. The latest figure remains above its June low of 49.1.

Amongst the services component series, the employment index led last month’s improvement in the overall index. It rose to 53.9 from 52.3, up from 48.0 twelve months earlier. Higher employment was reported by 19.3% of respondents while 15.0% reported a decline. The new orders index rose to 52.2 after falling to 51.3 in January. The supplier delivery series rose to 53.4 last month after rising to 53.0. The business activity series eased to 54.4 from 54.5 in January.

On the inflation front, the prices index rose to 62.6 in February after declining to 60.4 in January. An increased 32.4% (NSA) of respondents reported higher prices while a higher 4.6% reported lower prices.

Additionally, the new export orders index increased to 52.1 (NSA) in February following a rise to 52.0 in January. The imports index eased to 49.6 last month from 49.8 in December. The inventory change index rose to 50.6 after falling to 47.5 in January. These series are not seasonally adjusted and not included in the ISM Services PMI total.

The ISM Services PMI is a composite index consisting of four equally weighted diffusion indexes: Business Activity, New Orders, Employment, and Supplier Deliveries. A reading above 50 indicates expansion in the services sector, while below 50 suggests contraction. Supplier Deliveries is the only ISM index that is inversed; a reading above 50 indicates slower deliveries. The ISM figures are available in Haver's **USECON** database, with additional detail in the **SURVEYS** database. The expectations figure from Action Economics is in the **AS1REPNA** database.

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- Total index has trended higher since 2024 low.
- Employment leads upturn; new orders & supplier deliveries edge up.
- Prices Index moves higher.