Tom Moeller

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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

Winnie Tapasanun

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The ISM U.S. manufacturing PMI fell to 49.2 in April after rising to 50.3 in March, according to the Institute for Supply Management. The April manufacturing PMI, below the 50 expansion-contraction dividing line, indicated that the U.S. manufacturing sector contracted for the 17th time in 18 months. While slightly higher than 47.0 in April 2023 and a low of 46.5 in March 2023, the April reading remained below a peak of 64.0 in March 2021. A reading of 50.0 had been expected in the Action Economics Forecast Survey for April.

The production index declined to 51.3 in April from 54.6 in March, suggesting production expanded for the third time in four months but at a slower pace compared to March; it was below a high of 66.8 in March 2021. A 22.1% (NSA) of respondents reported higher production in April while 15.3% reported lower. The employment index increased to 48.6 in April from 47.4 in March, indicating employment contracted for the seventh successive month but at a slightly less severe pace. The index remained down from a high of 57.7 in March 2021. An increased 16.3% (NSA) of respondents reported higher employment in April while 15.8% reported less hiring.

The new orders index dropped to 49.1 in April after increasing to 51.4 in March, indicating new orders contracted for the second time in three months to the lowest level since December. It was up from a low of 42.8 in January 2023 but below a high of 61.3 in February 2022. A 19.9% (NSA) of respondents reported higher new orders in April while 16.9% reported a decline. The inventories index was at 48.2 in April and March after 45.3 in February, showing inventories contracted for the 15th consecutive month. The index remained down from a high of 56.5 in July 2022. Meanwhile, the supplier deliveries index was at 48.9 in April, compared to 49.9 in March and 50.1 in February, indicating the delivery performance of suppliers to manufacturing organization was slightly faster for the second successive month. An 8.1% (NSA) of respondents reported slower delivery speeds in April while an increased 10.3% reported faster speeds.

Inflation has remained sticky. The prices paid index jumped to 60.9 (NSA) in April after rising to 55.8 in March, indicating raw materials prices rose for the fourth straight month to the highest reading since June 2022. The April index was well above a low of 39.4 in December 2022 but meaningfully below a high of 87.1 in March 2022 and a peak of 92.1 in June 2021. An increased 30.8% (NSA) of respondents reported higher prices in April while only 9.1% reported price declines.

In other ISM series not included in the composite index, the new export orders index dropped to 48.7 in April after registering at 51.6 in March and February, indicating new export orders contracted for the first time in three months. It was down from a high of 57.1 in February 2022. The imports index fell to 51.9 in April from 53.0 in March and February, remaining at an expansion level for the fourth consecutive month; it was down from a high of 61.0 in June 2021. The order backlog index decreased to 45.4 (NSA) in April from 46.3 in March and February, indicating falling backlog levels for the 19th straight month. It was up from a low of 37.5 in May 2023 but down from a high of 70.6 in May 2021.

The ISM figures are based on responses from over 400 purchasing executives from 20 industries, which correspond to their contribution to GDP in 50 states. These data are diffusion indexes where a reading above 50 indicates expansion. The figures from the Institute for Supply Management can be found in Haver's **USECON** database; further detail is found in the **SURVEYS** database. The expectations number is available in Haver's **AS1REPNA** database.

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- 49.2 in April vs. 50.3 in March, lower than expected.
- Production expands for the third month in four.
- Employment contracts for the seventh straight month.
- New orders contract to a four-month low after March’s expansion.
- Amid ongoing inflationary pressures, prices index rises to 60.9, the highest since June ’22.

U.S. ISM Manufacturing PMI Contracts in April, w/ Prices Highest Since June ’22

Carol Stone, CBE

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Job openings decreased 325,000 in March to 8.488 million after rising 65,000 in February, revised from 8,000 reported before, according to the Job Openings and Labor Turnover Survey conducted by the Bureau of Labor Statistics. The March amount is down -11.8% from 9.623 million a year ago, that is, March 2023, and down even more from 12.182 million in March 2022. The job openings rate, that is, the number of job openings as a percent of employment plus job openings on the last business day of the month, was 5.1% this March, down from 5.3% the prior month.

Private sector job openings fell 364,000 this March, following a 9,000 decline in February. The private sector rate was 5.3%, down from February’s 5.5%. The biggest change in private sector job openings was a 182,000 drop in construction; the rate in that industry fell from 5.3% in February to 3.2% in March. Another sizable decline was in finance and insurance, where opening fell 158,000 in March, and the rate dropped to 5.0% from 7.1% in February. Retail trade saw a 64,000 decrease in openings and a fall in the rate from 3.7% to 3.3%.  Industries with positive moves include the information sector, +43,000 openings in March and a rate change from 4.0% to 5.3%. The state and local education sector saw an increase in openings of 68,000 in March, with the associated rate moving to 2.9% from 2.3% the prior month.

Hiring showed widespread declines across industries with total hirings down 281,000 in March, making a rate of 3.5%, down from February’s 3.7%. The rates here are the amount of hiring during the entire month as a percent of total employment. Construction also saw a hiring decline, 59,000, with its rate moving down to 4.1% from 4.9% in February. Transportation, warehousing and utilities saw a 50,000 decrease in March’s hiring, and a decline in the rate to 3.4% from 4.1%. There were just a few increases, notably in private educational services, +10,000 in March and a move in the rate from 2.1% to 2.4%. Another notable increase took place in durable goods manufacturing, 6,000 in March, although this was not large enough to raise the rate in that industry, which stayed flat at 2.2%.

Layoffs actually fell in March by 155,000; the associated rate, that is, layoffs during the whole month as a percent of total employment, was 1.0%, down from 1.1% in February. These decreases in layoffs were spread across numerous industries; interestingly the most sizable decrease was in construction, 63,000, following an increase in that industry’s layoffs in February of 21,000. The March layoff rate in construction was 1.8% in March, down from 2.5% in February. The highest layoff rate among industries was 3.5% in arts, entertainment and recreation, and this was down from 5.0% in February.

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

- Job openings rise in just a few industries in March.
- Hiring declined among many industries in March.
- Construction job openings fell in March, but so did construction industry layoffs.

U.S. Job Openings Fell in March, but So Did Layoffs

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The ADP National Employment Report indicated that nonfarm private sector payrolls rose 192,000 during April following a 208,000 March increase, revised from 184,000, and a 176,000 February gain, revised from 155,000. The 1.8% y/y gain compares with 1.9% increase last year but remained below 3.1% growth in 2022. A 193,000 rise in April ADP employment had been expected in the Action Economics Forecast Survey.

Small business hiring (less than 50 employees) increased 38,000 (1.4% y/y) last month after rising 7,000 in March. Employment at medium-sized firms (50-499,000 employees) rose 62,000 (2.4% y/y) after a 118,000 March increase. Large business hiring (500+ employees) rose 98,000 (1.6% y/y) during April following a 78,000 March rise.

Goods-producing employment rose 47,000 last month (1.6% y/y) after a 45,000 March rise. The number of construction sector jobs rose 35,000 (4.2% y/y) following a 34,000 March increase. Hiring in the manufacturing sector edged 9,000 higher (-0.4% y/y) last month after a 3,000 March gain. Natural resource & mining hiring rose 3,000 (5.0% y/y) after an 8,000 increase.

Service-producing jobs rose 145,000 (1.9% y/y) in April following a 163,000 March gain. Leisure & hospitality employment rose 56,000 (4.3% y/y) and education jobs gained 26,000 (2.7% y/y). The number of trade, transportation & utilities jobs increased 26,000 (0.9% y/y). Professional & business services employment rose 22,000 (0.6% y/y) but information employment fell 4,000 (-1.2% y/y).

Growth in median annual pay for "job stayers" eased to 5.0% y/y in April from 5.1% in March, remaining well below a September 2022 high of 7.8% y/y. Pay increases in manufacturing averaged 4.6% y/y while leisure & hospitality rose 5.8% y/y. Pay increases for “job changers” strengthened 9.3% y/y last month, up from a 7.3% y/y low in January, but remained below the 16.4% y/y peak in June 2022.

The ADP National Employment Report and Pay Insights data can be found in Haver's **USECON** database. Historical figures date back to January 2010 for private employment. Pay data date back to October 2020. The expectation figure is available in Haver's **AS1REPNA** database.

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- Job increase is nearly the strongest since July 2023.
- Service-sector and construction sector employment are strong.
- Pace of wage growth steadies y/y.

ADP Employment & Pay Growth Remain Firm in April

Kathleen Stephansen, CBE

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Mortgage applications fell 2.3% (-10.4% y/y) in the week ended April 26 after a 2.7% (-9.3% y/y) decline in the week ended April 19. Home purchase loans declined 1.7% (-14.5% y/y) following a decline of 1.0% (-14.7% y/y) in the prior week. Applications to refinance a loan declined 3.3% (-0.9% y/y) after a decline of 5.6% (+3.3% y/y) the prior week. 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 rose 5bps to 7.48% in the week ended April 26, from 7.43% in the prior week. 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 down 1bps to 6.90% in the latest week from 6.91% in the week prior. The rate on 30-year Jumbo loans declined 9bps to 7.53% last week from 7.62% in the week prior, while the rate on the 5-year ARM eased 8bps to 6.88% in the latest week from 6.96%. 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 declined to 30.2% in the week ended April 26 from 30.8% in the prior week. That compared to a high of 39.7% in mid-December. The percentage of applications that were ARMs rose to 7.8% from 7.6%. The recent low of 5.4% was reached in early-January.

The average loan size fell 1.0% (-3.9% y/y) to $378,200 in the week ended April 26 from $381,900 in the prior week. The average size of a purchase loan declined 0.4% (-1.2% y/y) to $436,000 in the latest week from $437,900 in the prior week. The average loan size to refinance a mortgage fell 4.4% (-8.1% y/y) to $244,600 from $255,800 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 fell for the second consecutive week.
- Purchase applications & refinancing applications both fell.
- The effective interest rate on a 30-year fixed-rate loan rose, while other rates edged down.

U.S. Mortgage Applications Decreased for a Second Week

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The Conference Board's Index of Consumer Confidence declined 5.9% (-6.5% y/y) to 97.0 during April following a 1.6% March drop, revised from a 0.1% slip. A reading of 104.0 had been expected in the Action Economics Forecast Survey. These declines came after a 5.5% February fall and a 2.7% January rise. The latest level remains well below the high of 137.9 in October 2018.

The Present Situations Index fell 2.7% (-5.9% y/y) this month to 142.9 following a 0.5% March slip and February’s 4.7% decline. The Expectations Index fell 10.3% (-7.4% y/y) to 66.4, the lowest point since July 2022, after falling 3.0% in March and 6.4% in February.

An improved 20.6% of respondents characterized current business conditions as good in April, remaining below its high of 23.4% in June. Labor market readings deteriorated this month. The jobs gap, representing the difference between respondents indicating that jobs are plentiful and those saying jobs are hard to get, fell to 25.3% from 29.5% in March. The reading remained below the March 2022 high of 47.1%. Calculated by Haver Analytics, this series has a 64% correlation with the unemployment rate over the last ten years. The jobs plentiful measure fell to 40.2% from 41.7% and remained below the March 2022 high of 56.7%. The jobs hard-to-get measure of 14.9% compared to 12.2% in March and a recent high of 15.6% in October. The jobs not-so-plentiful reading fell to 44.9% from 46.1% in March and remained well above its 30.5% low in September 2021.

In April, a greatly lessened 12.8% of consumers believed that business conditions in six months would improve and a higher percentage of 19.9% believed they would worsen. A lessened 11.7% of respondents felt there would be more jobs in six months, down from a high of 41.2% in April 2020. This remains below a recent high of 20.0% in December of 2022. A lessened 15.4% expected income to increase in six months, down from 18.3% in December and below a high of 19.6% in October of 2022.

The expected inflation rate in twelve months of 5.3% compared to 5.3% in March. It remained below the 7.9% high in June 2022, but above the 4.4% low in January 2020.

A steady 53.8% of respondents felt that interest rates would be higher in twelve months, up from a low of 42.1% in January. A diminished 20.5% thought they would be lower. A lessened 46.3% of respondents believed that stock prices would be higher in twelve months. Roughly 27% thought stock prices would be lower in twelve months versus a high of 44.7% in July of 2022. The share of respondents planning to buy a home within six months declined to 4.9% from 5.2% and remained below the October 2022 high of 7.4%. The percentage of respondents planning to buy a major appliance fell sharply m/m to 41.2% and remained below a high of 52.4% in October 2022.

The Consumer Confidence data are available in Haver's **CBDB** database. The total indexes, which are indexed to 1985=100, appear in **USECON**, and market expectations are in **AS1REPNA**.

**How Do Households Respond to Income Shocks?** from the Federal Reserve Bank of Minneapolis is available [here](https://www.minneapolisfed.org/article/2024/wealth-moves-dramatically-with-income-shocks-with-implications-for-policy-and-theory).

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- Decline moves to roughly two-year low.
- Present situations and expected conditions decline.
- Inflation expectations remain steady.

U.S. Consumer Confidence Diminishes Greatly in April

Sandy Batten

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The MNI Chicago Business Barometer fell for the fifth consecutive month, to 37.9 in April, its second lowest reading since the pandemic and well below the critical 50 level that separates expansion from contraction. The Action Economics Forecast Survey had looked for the index to increase to 45.0 in April.

Haver Analytics calculates an ISM-adjusted version of this index that gives equal weights to each of the five key component subindexes. The headline index includes the same subindexes but with varying weights. This ISM-adjusted index fell to 41.0 in April, equaling the lowest reading in 15 years, from 44.0 in March. This index has been pointing to weak activity for quite a while, having been above the critical 50 level in only one month since August 2022.

All the subindexes remained below the critical 50 level in April with four of the five declining from March. Only the inventories subindex increased, rising to 45.8 from 39.5 in March. The production subindex declined 6.9 points to 35.5, its lowest reading since November 2022, with 14% of respondents reporting an increase and 35% reporting a decrease. The new orders subindex fell 5.1 points to 37.9, its lowest reading since November 2022, with 40% of respondents reporting a decline in orders. After having risen in March, the employment index fell 8.5 points to 38.6 in April, its lowest reading since February 2023. Twenty-eight percent of respondents reported a decline in employment while only 9% reported an increase. And the supplier deliveries subindex slipped 0.8 point to 47.3 in April, its third consecutive month below 50, indicating that delivery times are shortening.

Input prices continued to rise in April with the increase picking up pace. The index increased 6.7 points to 69.3, its highest reading since August 2023. Forty-seven percent of respondents reported paying higher prices in April vs. 35% in March while only 3% reported paying lower prices in April.

The Chicago Business Barometer is considered to be a leading indicator of the U.S. economy. A reading above 50 indicates expansion while one below 50 suggests contraction. Summary data are contained in Haver’s **USECON** database with detail including the ISM-style index in the **SURVEYS** database. The expectations figure from the Action Economics Forecast Survey is in the **AS1REPNA** database.

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- Index falls to the second lowest level since the pandemic and moved deeper into contraction territory.
- All component indexes remained below 50.
- The prices paid index rose to highest level since August 2023.

Chicago Business Barometer Unexpectedly Falls Again 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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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

Andrew Cates

**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.