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Disrupted global supply chains placing upward pressure on US goods prices

Sandy Batten

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The U.S. trade deficit in goods and services (BOP basis) narrowed to $55.9 billion in April from a downwardly revised $56.6 billion March (previously -$60.3 billion), according to the U.S. Census Bureau. The Action Economics Forecast Survey looked for a deficit of $55.5 billion. The goods deficit declined to $83.7 billion in April from a downwardly revised $86.1 billion in March (previously -$88.7 billion) while the services surplus narrowed to $27.8 billion from an upwardly revised $29.5 billion in March (previously +$28.4 billion).

The real (inflation-adjusted) trade deficit in goods narrowed to $84.3 billion (2017$) in April from a downwardly revised $85.9 billion in March (previously -$90.8 billion). The April figure is in line with the Q1 average, indicating that net exports could be a net neutral for Q2 GDP growth. Net exports subtracted 1.3%-points from GDP growth in Q1 and 0.2%-point in last year’s fourth quarter.

Exports of goods and services increased 2.6% m/m (12.6% y/y) in April versus an upwardly revised 2.2% monthly gain in March (previously 2.0% m/m). Over the four months of this year, exports have risen 14.7%. Goods exports (Census basis) increased 3.8% m/m (16.0% y/y) in April, once again led by a surge in petroleum exports. They jumped 33.3% m/m in April on top of a 34.7% monthly surge in March. The April-March jumps in petroleum exports were the largest since June 2008. The $9.2 billion increase in exports of petroleum and petroleum products more than accounted for the $8.1 billion increase in total goods exports in April. However, there was also strength in other exports. Capital goods exports excluding autos jumped 6.1% m/m, their fifth monthly gain in the past six months. Nonfood consumer goods exports excluding autos rebounded in April, rising 7.9% m/m, almost completely reversing the 8.4% monthly plunge in March. By contrast, auto exports fell 2.6% m/m, the first monthly decline in three months, and food and feed exports slipped 0.3% m/m, their second monthly decline in the past three months. Services exports fell 0.4% m/m (+5.1% y/y) in April. Maintenance and repair services fell 5.0% m/m; transport declined 2.2% m/m; travel fell 1.5% m/m.

Imports of goods and services rose 2.0% m/m (9.1% y/y) in April following an unrevised 2.3% monthly gain in March. The annual comparison is distorted by an outsized fall in imports last April (particularly of nonmonetary gold) that had followed a surge in imports in March that was an attempt to front-run tariff increases. Goods imports (Census basis) increased 2.0% m/m (10.1% y/y). The rise in imports had a distinct AI flavor. It was led by a marked gain in imports of capital goods (up 5.8% m/m), which included a 6.8% increase in computer imports and a 19.1% m/m jump in semiconductor imports. The $7.0 billion increase in capital goods imports more than accounted for the $5.9 billion rise in total goods imports. Industrial supplies exports fell 1.7% m/m; auto imports declined 1.4% m/m; and imports of nonfood consumer goods ex autos slipped 0.5% m/m. Service imports rebounded in April, rising 1.6% m/m following a 1.8% monthly decline in March. Travel increased 2.2% m/m; transport jumped 4.1% m/m; insurance services rose 2.2% m/m.

By country, the goods trade deficit with China narrowed to $12.0 billion in April from $14.6 billion in March. The trade deficit with the European Union narrowed to $7.2 billion from $9.0 billion in March. The trade deficit with Japan declined to $2.8 billion in April from $4.0 billion in March.

The international trade data 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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- The deficit in goods and services narrowed to $55.9 billion in April from a downwardly revised $56.6 billion in March.
- Exports rose 2.6% m/m, led by a 33% monthly jump in petroleum exports.
- Imports increased by 2.0% m/m, led by a 5.8% m/m rise in capital goods imports.
- The goods deficit narrowed to $83.7 billion, and the services surplus narrowed to $27.8 billion.

U.S. Trade Deficit Narrowed in April

Robert Brusca

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In the wake of a mixed in somewhat complex orders report from Germany yesterday, today Germany released its industrial production report. It shows output up by 0.4% in April after several months of declines. There was a strong gain of 1.9% month-to-month in consumer goods output and another strong gain of 1.4% in intermediate goods output. However, capital goods output continues to be weak, falling 1.5% month-to-month and continuing a string of five months in a row when manufacturing output for capital goods has declined.

Sequentially, overall output is showing strengthening growth rates from 12 months to six months to three months. The tendency to strengthen is driven by intermediate goods that have the exact same pattern in play. However, capital goods are showing increasing weakness from 12 months to six months to three months, culminating in a three-month annualized growth rate of -10.5%. The growth rate in consumer goods is weaker over three months and over 12 months but isn't intact progressively over all three periods. The chart is helpful here as it shows recent weakness and a more recent rebound that still leaves year-over-year growth rates declining.

Manufacturing output shows declines over each of these three periods without a clear trend tendency for speeding up or cooling down. Real manufacturing orders are close to accelerating over this same sequence of dates, while retail sector sales in manufacturing show increases in two of the periods, with a decline over three months at the end of the sequence and without a clear trend in place.

Other German industrial indicators are showing consistent weakness and deterioration from 12 months to six months to three months. That holds for the ZEW current index, the IFO manufacturing index, the IFO expectations index for manufacturing, and the European Commission’s index of industrial activity.

As for other early-reporting European economies, we have France, Spain, Portugal, and Norway to compare. France is showing acceleration from 12 months to three months. Spain comes close to showing consistent acceleration and finishes with a massive 60% annual rate of increase over three months. Portugal fails to show consistent signs but ends with strong output growth over three months as well. Norway also fails to show a consistent pattern and has a solid 2.3% growth rate over three months. The results from France and Spain are the most impressive among these—France because it shows consistent acceleration, and Spain because it is so very strong over the last three months.

In the quarter to date (QTD)—with one month of data in hand for the second quarter—all German sectors are showing expansion except for capital goods and manufacturing overall. The indicators for Germany show weakened conditions as we step into the new quarter, except for the EU Commission index. The four European countries we chronicled earlier, all show gains in the quarter to date, with France and Spain showing the most pickup.

The final column of the table ranks year-over-year growth rates on data back to 2006. On this basis, only the German intermediate goods sector has a year-over-year growth rate that ranks above its median for the period. Real manufacturing orders are close to their median with a 49.2 percentile standing, whereas the median occurs at a ranking of 50%. For the other industrial indicators, we compare them to historic index levels, and all four of the indicators are substantially below their historic marks since 2006. Meanwhile, for the four countries in Europe, three of the four are showing industrial output results that rank above their historic medians: Spain shows a 79th percentile ranking, France has a 77th percentile ranking, and Portugal has a 53rd percentile ranking. Only Norway has a subpar (below-median) 25th percentile ranking.

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**Summing up**
As we saw with orders, the monthly industrial production data for Germany are mixed; there are mixed trends, with overall industrial production trending higher, driven by intermediate goods, even as manufacturing is showing consistent declines across 12-month, six-month, and three-month horizons. If you put stock in indicators, the indicators are all weak and deteriorating. However, if you judge Germany from its neighborhood, its neighbors are generally doing better than Germany is showing. The quarter-to-date is showing relatively strong industrial production growth for Germany and other Europe compared to where they've been historically. The narrow results for Germany are weaker than those same results considered in a broader context.

Germany

German IP Rebounds in April

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German orders, now available for April, show both domestic and foreign orders are sketching a herky-jerky path higher. The volatility is such that we can't be sure the momentum will remain higher, but for the time being, the present orders are oscillating around an upward trend. There is a particularly striking downward movement in domestic orders, with three sizeable month-to-month drops in the last four months. The drop in foreign orders, at 4.2% month-to-month, is sharp, but that follows two months of very strong gains—although they follow one month of a substantial drop. German orders are simply sketching out a very dissonant path—very hard to discern a trend.

German orders show systemic sequential declines in domestic orders, an event that is offset by systematic sequential acceleration in foreign orders. The net result of total orders is an order slowdown over six months and four months that gives way to a sharp rise over three months.

Sector sales, expressed also in real trend, show consumer durable goods sales and intermediate good sales both engaged in alternating behavior.

Early in Q2, German orders show declines overall an in domestic orders that are only partly blunted by a sizeable rise in foreign orders. Sector sales show a real gain in manufacturing, pushed ahead by consumer durables and intermediate goods, against weakness in nondurables and in capital goods. The broad ranking of annual growth rates for sales and orders show abject ranking weakness for orders and all sales, with the sole exception of orders by foreigners—that series has a ranking above its median at the 60.7 percentile mark.

To compare German industry with other key European sectors, we use the EU industrial confidence gauges. This shows Spain as the only country among Spain, Italy, Germany, and France, with an industrial sector ranking above the 50th percentile mark (above its median reading). All of the manufacturing readings have negative values in April; however, only Germany shows an advance in progression from 12 months to six months to three months.

The industrial order report for April is weak, but there are undercurrents of uptrends embedded in the report. The month’s results and trends may be better than the current month’s topical readings suggest.

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German Orders Drop, But Trend Offers Hope

Tian Yong Woon

In this week’s Letter, we take stock of the latest Blue Chip Financial Forecast (BCFF) survey results and connect them with recent regional developments across Asia. Panellists have raised their policy rate forecasts relative to the pre–Middle East conflict baseline (chart 1), as inflation concerns intensify and several Asian central banks tighten policy (chart 2). Meanwhile, stronger US jobs data have strengthened the higher-for-longer rate narrative, tempering AI-driven equity gains in the US and Asia (chart 3).

Turning to country specifics, the sharp rise in South Korean equities masks a more nuanced picture, where sustained foreign investor outflows have eventually weighed on the market and contributed to weakness in the South Korean won (chart 4). India has experienced a similar pattern, with a range of rupee supportive measures already introduced, although their effectiveness remains too early to assess (chart 5). Indonesia has likewise seen persistent foreign capital outflows alongside a weakening rupiah, with foreign participation in its government bond market declining to a worrying trickle (chart 6).

**Blue Chip Financial Forecast (BCFF) survey**
Looking at the latest Blue Chip Financial Forecast (BCFF) survey results, chart 1 shows that panellists have significantly revised upward their policy rate forecasts since the March survey (conducted at the end of February), reflecting the inflationary implications of the ongoing conflict in the Middle East and the continued closure of the Strait of Hormuz. Such revisions are understandable, as the disruption to one of the world's most important oil shipping routes has constrained global oil supply. With supply reduced while demand remains broadly unchanged, oil prices have risen sharply, feeding through to higher inflation and increasing the likelihood of further monetary policy tightening, or at the very least, a slower pace of policy easing. Among the economies covered by the survey, panellists have revised up their policy rate expectations for Australia by the largest margin, followed by the United Kingdom and the euro area.

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Sure enough, these higher policy rate expectations have largely been borne out across Asia, where inflation has accelerated alongside rising oil prices, prompting many regional central banks to tighten monetary policy in an effort to contain price pressures (chart 2). Moreover, while reports of an imminent US-Iran peace agreement and the reopening of the Strait of Hormuz have surfaced repeatedly, the reality remains quite different. Shipping traffic through the Strait continues to be severely constrained, leaving global oil supplies under significant strain and keeping upward pressure on energy prices. Looking ahead, further inflation signals will emerge from this week's inflation releases in China and India. Should inflation continue to accelerate, regional central banks are likely to face increasing pressure to tighten monetary policy further rather than maintain a more growth supportive stance.

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**Rate hike prospects and market sentiment**
Just last week, stronger-than-expected US employment data prompted investors to raise the probability of further Federal Reserve tightening, taking some of the shine off the AI-driven rally in global equities. The increased prospect of further US policy tightening, reflected in higher US dollar overnight index swap rates (chart 3), has since weighed on market sentiment and dampened risk appetite in recent days. That said, equity rallies rarely proceed uninterrupted, and interim bouts of profit taking are a natural feature of financial markets, with major news events often serving as the catalyst. The softer market sentiment has also spilled over into Asian markets, as evidenced by the pullback in South Korean equities, although country specific factors have also played an important role.

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**South Korea**
There is, however, a disconnect between the meteoric rise in South Korean equities this year and the persistent depreciation of the South Korean won (chart 4). In many economies with significant foreign investor participation in equity markets, rising stock prices are often accompanied by some degree of domestic currency appreciation. A closer look at South Korea's equity flow data, however, reveals a different story: foreign investors have been net sellers of South Korean equities, partly explaining the won's continued weakness, while domestic individuals, together with financial investment firms, have accounted for the bulk of net purchases this year. The sustained outflow of foreign capital likely reflects several factors, including a broader risk-off environment following the outbreak of the Middle East conflict and the erosion of currency-adjusted equity returns caused by won depreciation. The latter, in turn, creates a feedback loop, as currency weakness further discourages foreign inflows and reinforces downward pressure on the won.

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**India**
India has been experiencing a similar dynamic, with persistent foreign equity outflows weighing heavily on the rupee (chart 5) and prompting authorities to intervene to stabilise or support the currency. The initial catalyst for these sustained outflows arguably came from the steep US trade tariffs imposed last year amid the absence of a concrete US–India trade agreement. More recently, the flare-up in the Middle East has added to investor concerns, given India's status as a major oil importer. Higher oil prices increase the country's import bill and, in turn, its demand for foreign currency, placing additional downward pressure on the rupee. While a weaker rupee can provide some support to exports and increase the local currency value of remittances, which are an important source of income given India's large overseas workforce, it also has its drawbacks. A persistent and rapid depreciation of the currency can create broader macroeconomic challenges, particularly for a net importer such as India. In response, the authorities have introduced a range of measures aimed at attracting foreign capital and supporting the rupee, although it will take time to assess their effectiveness. These measures include exempting interest and capital gains on foreign investments in government bonds from tax and expanding the pool of government bonds eligible for unrestricted foreign investment, among others.

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**Indonesia**
Indonesia has been facing a similar dynamic, with foreign investors having substantially unwound their holdings of tradable Indonesian rupiah-denominated government securities. As a result, the foreign ownership share has fallen to below 13%, from a peak of more than 40% before the pandemic (chart 6). This sharp decline reflects both a deterioration in foreign investor sentiment and the rapid expansion in government bond issuance, underscoring the significant funding needs of the current government as it pursues its ambitious policy agenda. In the meantime, a large share of this additional bond supply has been absorbed by Bank Indonesia itself, effectively invoking the concept of seigniorage—the use of central bank money creation to help finance government spending. These persistent foreign investor outflows have also been mirrored in the weakness of the rupiah.

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Asia

Economic Letter from Asia: Risk Reversal

Michael J. Moran

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Nonfarm payrolls rose 172k in May, noticeably stronger than the expectation of 92k shown in the Action Economics survey. Moreover, results for the prior two months combined were revised higher by 93k. The gain in May does not appear to be an isolated event, as payrolls have now posted firm showings for three consecutive months (average advance of 188k). This performance represents a marked improvement from late 2025, when payrolls were showing essentially no net gain.

A good portion of the job growth in May occurred in the local government sector (55k), but the health care and leisure & hospitality sectors also were strong. The construction and manufacturing industries (highly cyclical areas) were both in the plus column. Soft spots were limited, with only the financial services sector showing notable job cuts (-22k).

The improvement in the labor market also was evident in the payroll diffusion index. This measure shows the share of industries expanding payrolls plus one-half the share holding payrolls steady; a reading of 50 separates net expansion from contraction. This index was in sub-50 territory during much of 2024–25, but it moved into 50+ territory in March and climbed a bit higher in April and May (53.8 in May).

The unemployment rate was reported as steady at 4.3%, but a more precise calculation shows a slight improvement (4.296% versus 4.337% in April). Moreover, the dip was meaningful, as it was driven by employment growth as measured by the household survey (149k) that exceeded the increase in the size of the labor force (83k). The broad unemployment rate (the so-called U-6 measure) fell 0.1 percentage point to 8.1%. Both additional components of the broad unemployment rate contributed to the improvement (the number of individuals working part time involuntarily and the number of individuals who would like a job but are not actively searching).

Average hourly earnings rose 0.3% in May, a touch firmer than readings of 0.2% in the prior two months. Although earnings posted a solid advance in May, the increase was lighter than the 0.4% gain in May of last year, and thus the year-over-year change eased to 3.4% from 3.6% in April. Year-over-year changes in average hourly earnings had been larger than those in the consumer price index, indicating that many workers were registering gains in purchasing power. However, with the pickup in inflation, individuals fell behind in April, and the CPI for May (to be published on June 10) could show additional slippage in purchasing power.

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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- Nonfarm payrolls post their third consecutive firm advance.
- Unemployment showed marginal improvement.

May Employment Report: Revival in the Labor Market

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GDP growth in the European Monetary Union backtracked in the first quarter, falling by 0.9% at an annual rate after rising by 0.7% at an annual rate in the fourth quarter of 2025. The year-over-year growth rate from the monetary union also slowed sharply to 0.3%. The small positive gain in Q1 2026 comes after gains of over 1% in year-over-year calculations since the third quarter of 2024. The queue ranking of the year-on-year GDP growth rate, on data back to 1997, places the Q1 GDP result in its 21st percentile—roughly a lower one-fifth ranking.

Among the 14 EMU member reporters of GDP data in the table, five countries experienced quarter-to-quarter declines in GDP in Q1 2026: France, Ireland, Luxembourg, Malta, and Austria. Ireland has some peculiar accounting issues because a number of multinational companies are headquartered there for tax reasons; this produced a decline in GDP at a 40% annual rate to dominate these results. And the sharp Irish decline in GDP has an outsized impact on the European Monetary Union GDP report itself. In contrast, among the individual reporting members, the median change in GDP in the first quarter was a 0.2% increase at an annual rate; both Portugal and the Netherlands experienced GDP increases of that magnitude.

In addition to that, the fourth quarter of 2025 showed decelerations in GDP for six of these reporting monetary union members; however, GDP declined in only two of these members in the fourth quarter.

Year-over-year data show GDP growth rates in the first quarter declining broadly in 11 of the 14 reporting members in this table. That compares to a slowdown reported by six member countries in the fourth quarter of 2025.

The four largest monetary union members experienced a slowdown in GDP, with growth at 1% in the first quarter compared to 1.3% in the fourth quarter; that 1% growth rate is the same as in the third quarter of 2025. The rest of the monetary union saw a sharp decline as GDP contracted at a 5.7% annual rate, with the Irish data playing a big role in that for the rest of the monetary union. For the four largest EMU economies, GDP advanced by 0.9% in Q1 2026 on a year-over-year basis. Year-over-year changes show relatively steady growth in the four largest monetary union economies, with growth rates of 1% or 0.9% in each of the last four quarters, while the rest of the monetary union shows much stronger growth rates over the last four quarters, but for that group, growth rates have been generally decelerating. That process culminates in a decline of 1.2% for year-over-year GDP growth in Q1 2026 for the rest of the EMU.

Over these last four quarters when the rest of the monetary union growth rates—apart from the four largest economies—showed steady slippage, Switzerland also showed a steady deceleration in GDP growth; so has the United Kingdom. Japan also has weakening growth over these last four quarters. However, the U.S. does not fall into that pattern, having maintained steady growth and then experienced a pickup in growth to 2.6% year-over-year in Q1 2026.

**Few show above-median growth**
Among the countries in the table, very few have GDP growth rates year-over-year that are above their medians on performance back to 1997. However, countries with queue standing above their 50th percentile for growth rates reflect that phenomenon; those countries are the U.S., Spain, Portugal, Italy, Luxembourg, Greece, and Denmark. Belgium, Ireland, Cyprus, and Switzerland have growth rates ranked below the 20th percentile in the queue ranking system. The median and year-over-year growth rate in the monetary union has a 30.4 percentile ranking, similar to Japan with a 36.4 percentile ranking for its year-over-year GDP. Growth metrics are showing some struggle, and the combined weight of the ongoing Ukraine war and the new effect of the Middles East conflict take their tolls.

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Europe

EMU GDP Contracts; Year-on-Year Growth Slows Sharply

Andrew Cates

**More Hawkish Central Banks**
One of the most important developments in recent months has been the steady shift in expectations surrounding monetary policy. Earlier this year, investors were largely focused on the prospect of widespread rate cuts as growth slowed and inflation appeared to be moving back towards target. Today, the narrative has changed materially. According to the latest Blue Chip Financial Forecasts survey, economists now expect policy rates to rise modestly over the next twelve months in Japan, Canada, the euro area and Australia. Only the UK and US are still expected to see rate reductions and even these are relatively modest compared with expectations earlier in the year. Perhaps more interesting is the growing divergence between economists and financial markets. While the Blue Chip panel continues to anticipate small reductions in policy rates in both the UK and US, market pricing has increasingly shifted towards the possibility of modest tightening instead. Stronger economic activity, firmer labour markets (in the US) and renewed inflation concerns have all contributed to this reassessment. The result is a global interest rate environment that increasingly looks "higher for longer" rather than one characterised by an aggressive easing cycle.

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**US Labour Demand Remains Surprisingly Resilient**
As noted, part of the reason markets have become less convinced about future rate cuts is that the US labour market continues to show surprising resilience. Job opening rates have actually risen over recent months, suggesting that labour demand may be reaccelerating despite growing discussion about AI-related job displacement. On that last note, the sectoral detail is particularly revealing. Professional and business services recorded the largest increase in job openings over the past three months, significantly outperforming most other sectors. This is noteworthy because professional services are frequently cited as one of the areas most vulnerable to disruption from generative AI. Rather than reducing hiring demand, however, AI investment may currently be creating additional demand for highly skilled workers involved in software development, consulting, implementation and digital transformation.

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**Middle East Tensions Continue to Generate Inflation Risks**
A second factor contributing to higher bond yields and reduced expectations of monetary easing is the persistence of supply-side inflation pressures. The latest global PMI surveys show that manufacturing output prices are climbing more sharply while supplier delivery times have lengthened compared with earlier in the year. Much of this appears linked to ongoing instability in the Middle East and the associated disruption to global shipping routes. Longer transit times, higher insurance costs and logistical bottlenecks have all contributed to upward pressure on manufacturing costs. There is, however, a modestly encouraging signal in the latest data. While delivery times remain relatively stretched, the most recent PMI survey does not indicate any significant further deterioration at the global level. This suggests that supply chain conditions may be stabilising rather than entering another period of sustained disruption.

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**Manufacturing Is Benefiting from a More Benign Trade Environment**
While supply chain concerns remain important, there are also signs that some of the pressures facing global manufacturers may be easing. Effective tariff rates facing many major US trading partners have declined significantly over the past six months. The largest reductions have occurred across several key Asian economies including India, China, Japan, South Korea, Taiwan and members of ASEAN. Europe and the UK have also experienced some easing, although to a lesser extent, while Australia stands out as one of the few countries facing an increase in effective tariff rates. This chart may help explain some of the resilience visible in recent manufacturing surveys around the world. While trade policy uncertainty remains elevated, the actual tariff burden facing many exporters has become less restrictive.

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**South Korea Highlights the Scale of the AI Boom**
If there is one chart that captures the extraordinary scale of the AI investment cycle, it is South Korea's semiconductor export data. Semiconductor exports surged by an astonishing 169% year-on-year in May, one of the strongest readings on record and a powerful illustration of the strong demand currently flowing through the global technology supply chain. South Korea occupies a pivotal position within the global semiconductor ecosystem, making its export data one of the most useful real-time indicators of AI-related capital expenditure. The rapid buildout of data centres, cloud infrastructure and advanced computing capacity is generating unprecedented demand for memory chips, processors and other semiconductor components. While concerns about eventual overcapacity remain valid, the near-term momentum remains remarkable. The strength of South Korean exports suggests that AI-related investment spending is continuing to accelerate rather than slow, providing an increasingly important support to global growth and trade at a time when many other sectors are facing cyclical headwinds.

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**Investors Are Following the AI Money**
Our final chart this week highlights how investors are positioning for these trends. Equity fund flows since the beginning of 2025 show a striking divergence across Asian markets. Taiwan and South Korea have attracted substantial inflows, while broader Asia ex-Japan regional funds and India have experienced net outflows. The explanation is relatively straightforward. Taiwan and South Korea sit at the centre of the global AI supply chain and are among the largest beneficiaries of surging semiconductor demand. At the same time, both economies have also benefited from the recent easing in tariff pressures highlighted in the previous chart. Investors have therefore become increasingly selective, directing capital towards those markets with the greatest exposure to AI-driven growth. The concentration of flows into a relatively narrow group of markets inevitably raises questions about valuations and positioning. Nevertheless, the broader message remains clear. The AI investment boom continues to dominate both trade flows and capital flows across Asia and remains one of the most powerful forces shaping the global economy today.

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The global macro backdrop continues to evolve in ways that would have surprised many investors at the start of the year. Expectations of widespread monetary easing have steadily receded as inflation has proven more persistent and economic activity more resilient than anticipated. The latest Blue Chip Financial Forecasts point to a growing bias towards policy tightening rather than loosening in several major economies (chart 1), while rising US job opening rates suggest labour demand remains firmer than expected (chart 2). At the same time, ongoing instability in the Middle East continues to generate supply-side inflation risks and lengthier delivery times (chart 3). There are, however, also reasons for optimism. Manufacturing activity appears to be finding some support from a reduction in effective tariff rates facing many major US trading partners (chart 4). More importantly, the AI investment boom continues to gather momentum. South Korea's semiconductor exports surged by an extraordinary 169% year-on-year in May, highlighting the strength of global demand for AI-related hardware (chart 5). Unsurprisingly, investors continue to direct capital towards those markets most exposed to these trends, with Taiwan and South Korea attracting substantial equity inflows (chart 6). The bottom line is that inflation concerns and higher-for-longer interest rates remain important risks, but they are increasingly being offset, for now, by a combination of improving economic conditions and one of the strongest technology-driven investment cycles in modern history.

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Charts of the Week: Inflation Fears, AI Cheers

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Growth of nonfarm business productivity (output per hour) was revised down more than expected in Q1 to 0.3% q/q saar from 0.8% previously and 1.6% in Q4. The Action Economics Forecast Survey expected a 0.7% quarterly increase in productivity. Compared to a year ago, productivity rose 2.8% y/y in Q1 (revised down from 2.9% previously), up from 2.5% in Q4. Since productivity growth began to accelerate at the beginning of 2023, it has grown at a well above trend 2.6% annual rate, likely a reflection of AI and other technology advances. Strong productivity is a key factor for boosting real incomes and restraining inflation pressures.

Growth in nonfarm business output (not quite the same as real GDP) was revised down to 1.0% q/q saar in Q1 from 1.5% in the previous estimate. This was in line with the previously announced downward revision in Q1 real GDP growth to 1.6% from 2.0% in the first estimate. Growth in hours worked was not revised at 0.7%. However, compensation growth was revised down markedly in both Q1 and last year’s Q4. For Q1, compensation growth was revised down to 2.1% from 3.1% in the first estimate. The revision for Q4 was even larger with compensation growth revised to 3.7% from 6.3% previously. These revisions in compensation led to similarly large downward revisions to growth of unit labor costs. Unit labor costs rose 1.8% in Q1 versus 2.3% in the first estimate and 2.1% in Q4 versus 4.6% in the previous estimate. Accordingly, the annual rate of growth of unit labor costs slowed to 0.5% y/y in Q1, the slowest annual pace since Q3 2019 and generally supports what former Fed Chair Powell has noted several times: that the labor market is not a source of the recent rise in US inflation.

Manufacturing productivity growth in Q1 was also revised down, to 3.2% q/q saar from 3.6% in the first estimate. However, in contrast to the revision to nonfarm productivity, the downward revision to manufacturing productivity was due to an upward revision in hours worked with no revision to manufacturing output (up 3.3% in both estimates). Hours worked were revised to unchanged from a 0.4% decline in the first estimate. Growth in manufacturing compensation was also revised down to 5.5% from 6.1%. The larger downward revision to compensation than to productivity resulted in the growth in manufacturing unit labor cost being revised down to 2.2% from 2.4% previously. This was down sharply from 8.8% unit labor cost growth reported for Q4, revised down 9.8%.

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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- Q1 output per hour growth was revised down to 0.3% q/q saar in the second estimate from 0.8% in the first, reflecting a downward revision to output.
- However, longer-term productivity growth remained solidly well above trend.
- Compensation growth was revised down meaningfully, resulting in a downward revision to unit labor cost growth to 1.8% from 2.3% previously.

U.S. Q1 Productivity and Unit Labor Cost Growth Revised Down

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance rose 4,000 to 229,000 in the week ending June 6, from an unrevised level of 225,000 in the week ending May 30. This is the highest level since the February 7 week. The four-week average rose to 219,000 in the June 6 week from 214,750 in the week ending May 30, also unrevised. The Action Economics/Haver Analytics Survey looked for 220,000 claims to have been filed. 

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—rose by 24,000 to 1.795 million in the week ending May 30, from 1.771 million in the week ending May 23, revised from 1.777 million. The four-week moving average rose to 1.780 million in the May 30 week from 1.776 million, revised from 1.777 million in the May 23 week. The insured unemployment rate was unchanged at 1.2% in the week of May 30. Except for a one-week dip to 1.1% in the week of April 25, the insured unemployment rate has been at 1.2% since the week of November 29, 2025.

The insured unemployment rate varied greatly across individual states and territories. In the week ending May 23, the highest unemployment rates were in New Jersey (2.07%) and Washington (2.03%). The lowest rates were in South Dakota (0.27%), Florida (0.32%), Louisiana (0.34%), Alabama (0.39%), North Carolina (0.40%), Arkansas (0.42%), Tennessee (0.47%), Kentucky and Virginia (both 0.49%). Rates in other notable states include California (1.84%), New York (1.56%), Illinois (1.41%), Pennsylvania (1.28%), and Texas (1.05%). These state data 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.

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- New claims rose by 4,000 to 229,000 in the week ending June 6.
- Continuing claims rose by 24,000 to 1.795 million.
- The insured unemployment rate was unchanged at 1.2% in the week of May 30.

U.S. Initial Unemployment Claims Rose in the Week of June 6

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