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Despite resilient economy, US consumers are not very happy

Robert Brusca

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Consumer climate in the GfK readings from Germany in November edged slightly lower to -30.8 in November from -30.6 in October; the October level had dropped relatively sharply from -26.8 in September. The queue percentile standing also known as the count standing, was at a 2.7 percentile reading in November, which tells us it's been this weak or weaker only 2.7% of the time (based on data back to May 2002), an extremely weak reading.

The components of the GfK headline lag by one month; they showed an improvement in the economic expectations index to 2.1 in October from -3.4 in September, a deterioration in income expectations to -15.7 from -15.0, and for the propensity to buy there was a slippage to -11.9 in October from -10.8 in September.

The components show count rankings in their 43.9 percentile for economic expectations, in their 9.5 percentile for income expectations, an extremely low reading, and, for the propensity to buy, the standing is in its 26.5 percentile.

Readings for Italy, France, and the United Kingdom are in the far-right-hand portion of the table. France and the U.K. have October readings and are up to date on the same timeline as the components of the GfK index. The reading for Italy is a month older, in September. All of the readings, regardless of how topical they are, for Italy, France, and the U.K., dropped compared to their respective previous monthly values. In the case of Italy, the reading dropped to 91.2 in September from 94.5 in August. In the case of France, the reading for October dropped to 80.3 from 85.1 in September, and the U.K. situation showed the October reading dropped to -24.0 from -13.0.

The count percentile standings for these three countries are around the 51st percentile for Italy, the 25th percentile for the U.K., and the 0.3 percentile (yes, less than one percentile) for France, where the index is hundredths of a point away from being the lowest ever. The level of the reading is a function of how the index itself is formed, but the count percentile standings rank the current reading against the history of the index, giving us a better feel for where the current standing is compared to where it's been in the past. Clearly, France logs the weakest reading, which is not surprising given what's going on in Europe and particularly in France at the moment. Italy has also had some demonstrations, but the month-to-month drop in Italy is not as severe; Italy’s percentile standing is still above its median; however, the reading is for September so we're going to have to hold judgment until we start getting readings in October and later for Italy.

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**The bottom line**
The clear takeaway from these surveys is that conditions in Germany remain weak and they're not showing much tendency for improvement. The low standing for income expectations is particularly disturbing. Economic expectations are not that far from the historic median (the median occurs at a ranking at its 50th percentile); however, economic expectations are still some 6 percentile points below that. The ‘propensity to buy’ is looking at essentially a lower-quartile ranking, which dovetails nicely with the weak income expectations since weak income expectations should lead to a weak propensity to buy as soon as income expectations deteriorate. The big deterioration in income expectations occurred in September and the propensity to buy has been slow to deteriorate in comparison to that (the two series have a 0.8 correlation coefficient).

The other countries in the sample clearly show developing issues. France’s political circumstances and uncertainty are well reflected in the INSEE confidence index. The U.K., facing many of the same constraints as France, sees what might be a sympathetic decline in consumer confidence. While Italy shows some small deterioration in September, we have yet to get a fresh reading from the period when the demonstrations were breaking out in France and, to a lesser extent, in Italy. This survey and the accompanying data for France, Italy, and the U.K. are not a set of readings to reassure anyone. The problems that have broken out in France exist in the G5 countries even though there hasn't been any clear transmission to Japan or to the United States. Although in the U.S. bond yields have been rising relatively sharply and concerns about the U.S. fiscal position are swirling about, they haven't become pronounced market or political factors yet, even with the midterm elections on the doorstep in the U.S.

Europe

GfK Confidence Eases Slightly in Germany; Major Setback for Confidence in France

Winnie Tapasanun

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New single-family home sales slipped 0.6% m/m (-5.3% y/y) to a seasonally adjusted annual rate of 676,000 units in September, above expectations, following a downwardly revised 5.1% gain to 680,000 in August (initially +6.4%, 684,000) and a revised 4.9% drop to 647,000 in July (previously -4.3%, 643,000), data from the U.S. Census Bureau showed, indicating that demand for new homes remained relatively resilient amid high mortgage rates, with sales outperforming market forecasts despite remaining below year-earlier levels. The Action Economics Forecast Survey had expected September sales of 652,000. September marked the second m/m decrease in three months, leaving sales 10.7% below a high of 757,000 in November 2025 but 26.4% above a low of 535,000 in July 2022. The September decline coincided with a rise in the average 30-year fixed mortgage rate to 6.86%, the highest since January 2025, from 6.67% in August, according to Freddie Mac.

Regionally, September new home sales were mixed. Sales in the Midwest fell 7.3% (-8.2% y/y) to 89,000 in September, the third m/m fall in four months, after an 81.1% surge to 96,000 in August. Sales in the South slid 6.6% (-0.7% y/y) to 413,000, the lowest level since May, following a 5.5% August rebound to 442,000. In contrast, sales in the Northeast soared 28.0% (10.3% y/y) to 32,000, the third m/m gain in four months, after a 30.6% August plunge to 25,000. Sales in the West jumped 21.4% (-17.4% y/y) to 142,000, the strongest level since April, reversing a 15.8% August drop to 117,000. Notably, the South remained the dominant region, accounting for 61.1% of total U.S. new home sales.

The median sales price of a new home climbed 3.9% (-3.9% y/y) to $400,400 in September, the first m/m increase since April, after a 2.2% slide to $385,400 in August. The median sales price was 13.0% below its record high of $460,300 in October 2022 but 10.9% above a low of $361,100 in June 2021. The average sales price edged up 0.4% (-6.7% y/y) to $472,800 following a 10.2% August decrease to $470,800. The average price was 12.6% below a high of $541,200 in July 2022 but 2.1% above a low of $462,900 in September 2021. These sales price data are not seasonally adjusted.

The number of unsold new homes on the market fell 1.0% (-2.3% y/y) to 476,000 in September, the third m/m slide in four months and the lowest level since September 2024, after a 0.2% decline to 481,000 in August. The latest figure was 12.3% above a low of 424,000 in May 2023. The seasonally adjusted months' supply of new homes for sale ticked down to 8.4 months in September, the lowest level since December 2025, from 8.5 months in August and 8.9 months in July, still above a low of 6.9 months in May 2023 but below a high of 10.3 months in July 2022.

The median number of months a new home stayed on the market dipped to 3.0 months in September, matching the lowest level since January, from 3.1 months in August and July. The latest reading was above its record low of 1.5 months in September and October 2022 but well below a peak of 5.1 months in March 2021. These figures date back to January 1975.

New home sales are recorded when the sales contract is signed. New home sales activity and prices are available in Haver's **USECON** database. The consensus expectation figure from Action Economics is available in the **AS1REPNA** database.

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- Sales -0.6% m/m (-5.3% y/y) to 676,000 in Sept.; still 26.4% above a July ’22 low.
- Sales m/m down in the Midwest (-7.3%) and South (-6.6%); up in the Northeast (+28.0%) and West (+21.4%).
- Sales y/y down in all regions except the Northeast (+10.3%).
- Median sales price +3.9% m/m to $400,400, first rise in five mths.; avg. price +0.4% m/m to $472,800.
- Unsold inventory -1.0% m/m (-2.3% y/y) to 476,000, lowest since Sept. ’24; months' supply down to 8.4 mths., a Dec. ’25 low.

U.S. New Home Sales Ease in September Following August Rebound

Sandy Batten

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New orders for durable goods rose more than expected in September, helped significantly by a surge in aircraft orders. Total orders increased 1.8% m/m (+9.9% y/y) in September following an upwardly revised 0.1% m/m gain in August (previously -0.1% m/m). The Action Economics Forecast Survey expected a 1.4% monthly increase. Aircraft orders jumped 23.2% m/m, led by a 28.4% m/m rise in nondefense aircraft orders. This accounted for much of the September advance in total orders. Excluding aircraft, other orders increased by a more modest 0.1% m/m in September, the same monthly gain as in August. Overall, transportation orders increased 4.6% m/m (7.9% y/y) in September with orders ex transportation rising 0.5% m/m (11.1% y/y). For all of the third quarter, total orders increased 0.6% q/q while ex transportation orders rose 2.4% q/q.

Across major sectors, orders for computers and related products led the way, rising 3.9% m/m (+26.7% y/y) in September on top of a 2.3% monthly gain in August. Primary metals orders increased 0.5% m/m (+20.4% y/y); orders for fabricated metals rose 0.4% m/m (8.3% y/y); machinery orders were up 1.2% m/m (+16.1% y/y). By contrast, orders for communications equipment fell 1.3% m/m (+26.8% y/y), the second consecutive monthly decline, and orders for electrical equipment and appliances slipped 0.3% m/m (+4.8% y/y), the second monthly decline in the past three months.

Strong business spending on equipment has been a key factor supporting the economy over the past several quarters. Shipments of core capital goods (nondefense capital goods shipments excluding aircraft) are a reliable coincident indicator of business spending on equipment in the national accounts. They rose 1.2% m/m (+11.5% y/y) in September to post another solid quarter. For all of Q3, core capital goods shipments were up 3.9% q/q after a 2.8% quarterly gain in Q2. Real business spending on equipment jumped 13.4% q/q saar in Q2. The Q3 gain in core capital goods shipments points to another strong quarterly increase in Q3 (scheduled for release with GDP on Thursday, October 29). Core capital goods orders increased 0.5% m/m (+13.5% y/y) in September on top of a 1.6% monthly jump in August. For all of Q3 they were up 3.6% q/q versus 4.3% q/q in Q2.

Total manufacturing shipments rose a solid 1.3% m/m (+10.1% y/y) in September following a 0.1% monthly rise in August. For all of Q3, shipments increased 1.9% q/q versus 4.0% q/q in Q2. Shipments of durable goods rose 0.9% m/m (+9.4% y/y) in September while shipments of nondurable goods jumped 1.7% m/m (+10.9% y/y). Durable goods shipments excluding transportation increased 0.7% m/m (+9.3% y/y), led by a 3.4% monthly rise in computer shipments and a 1.7% monthly gain in machinery shipments. By contrast, shipments of communications equipment fell 0.6% m/m in September, the first monthly decline in 11 months.

Unfilled durable goods orders rose 0.8% m/m (+9.0% y/y) in September, the largest monthly gain since April. Total factor inventories increased 0.3% m/m (+3.0% y/y) following a 0.5% monthly gain in August. Durable goods inventories rose 0.3% m/m (+3.4% y/y), and nondurable goods inventories increased 0.4% m/m (+2.4% y/y).

Manufacturers’ orders and shipments of durable and nondurable goods, along with unfilled orders and inventories, are compiled by the U.S. Census Bureau. They are available in Haver’s **USECON** database. The Action Economics forecast data are in the **AS1REPNA** database.

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- New orders for durable goods jumped a larger-than-expected 1.8% m/m in September, led by a surge in nondefense aircraft orders.
- Orders excluding aircraft rose a more modest 0.1% m/m.
- Core capital goods shipments rose 3.9% q/q in Q3, pointing to another strong increase in business spending on equipment.

U.S. Durable Goods Orders Jump in September on Surge in Aircraft Orders

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**EMU Money Growth**
Money supply in the European Monetary Union had slowed in September as the near-term growth rates peaked at a 12-month pace of 4.4% annualized. Over six months, growth is 2.7%, annualized; over three months, M2 money supply growth is at an annualized rate of 1.8%. The EMU shows a clear slowing in nominal money growth. This has led to a decline and a contraction in real money balances in the monetary union. Real money supply growth over three years, two years, and one year is locked into a very narrow range of 0.5% to 0.6% at an annual rate. However, over six months, the annualized rate of growth is -1.9%; over three months, the annual rate of growth is -4.4%. Nominal money supply growth and the pace of real money balances are clearly pulling back in the monetary union.

**Credit Growth in EMU**
Nominal credit growth is also slowing in the Monetary Union as nominal credit growth peaked over 12 months at 4.5% and has decelerated to a three-month growth rate annualized at 3.1%. Private sector credit peaked over 12 months at 4.5%, decelerated to a 3.8% annualized rate over six months, and then decelerated again to a 3.2% annualized rate over three months. In real terms, private credit is also slowing and contracting, with both total and private credit growth rates in the neighborhood of -3% growth, expressed at an annual rate over three months.

**The U.S. - An Uneven Picture**
The U.S. shows only a hint of monetary slowing as nominal money growth is 4.1% over the last three years, climbing to 5.7% over 12 months and rising further to a 7.2% pace over six months. It does slow over three months but only to a pace of 6.0%, leaving it below its six-month pace and yet above all the other growth rate calculations, making the assessment of a ‘slowdown’ premature.

The U.S. monetary real balance growth rate shows a hint of slowing, but the signal is not clear. Real M2 growth is 1.1% over three years; it rises to 1.9% over 12 months, rises to 3.4% over six months, and then drifts lower to 1.3% over three months. This pace shows period-to-period deceleration but is still above its three-year pace, and the three-month decline may be too steep to take at face value.

**U.K. Money Growth - Lagged Readings**
The U.K. is a month behind the other countries in reporting money growth for September. U.K. nominal M4 growth is in a nominal slowing mode, with the annualized growth pace down to 3.3% over three months. U.K. real money balances show monetary contraction over six months and three months, with the three-month pace at a chilling -1.8%, still not quite as steep as the money or credit slowing in the EMU.

**Japanese Money Trends**
The last country on the table is Japan, where M2 plus CD nominal growth rates appear fairly flat. The three-year growth rate in Japan has averaged 1.6% at an annual rate; the 12-month pace stepped up to a 1.9% growth rate, which has since ticked down to a 1.8% annualized rate over both three and six months. Money growth in Japan is relatively flat in nominal terms while persistently shrinking in real terms. The growth hit to real balances in Japan shows them contracting over all periods in the table. Over 12 months, real balance growth is -0.3%; then the annual rate of decline becomes more intense over three months and six months at -1.3% for both of those tenors. The real balance slowdown is clear; however, for nominal money, the growth profile is simply flat.

**Implications**
Having more resilient money growth in the U.S. could be a problem for the rest of the world if the U.S. takes this as a sign that it has more of an entrenched or even growing inflation problem because it will be then raising rates while other countries are experiencing weakening money growth and are going to be less able to absorb the increases in interest rates that rate hikes in the U.S. could start to impose on the global economy. All of the central banks in this table are engaged in some process of an interest-rate tightening. The Bank of Japan has been engaged in a very slow and steady process of ‘normalization.’ The ECB process has been a little bit more aggressive and preemptive, while in the U.K. the inflation numbers are starting to look a little bit worse and could motivate the Bank of England to go back on the rate hiking path after it had sought some moderation.

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**Summing Up**
The situation with money supply growth globally is uncomfortable, and it's equally as uncomfortable as the fiscal situations that all the countries in this table find themselves in. Of course, France right now is experiencing the worst blowback. It is really between a rock and a hard place, with an inability to raise taxes and demands for further spending. But the U.K. and the U.S. are also in relatively unenviable positions. In Japan, Prime Minister Sano Kaichi has been able to engineer some measured investment-led government spending despite the large deficits there and the heavy debt-to-GDP burden.

**The Outlook**
The outlook for growth, inflation, and interest rates across these countries remains uncertain, with the price of oil high and lingering at high levels and the war in the Middle East still unresolved. It's hard to make any kind of statement about the future in which we can have confidence. Policymakers in all these countries are going to be watching global events while dealing with market pressures, political realities, economic trends, and pursuing the clear need to get inflation back down inside their monetary targets without doing economic damage. It's a tall order for the period ahead.

Money Supplies Slow Except in the U.S.

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The Chicago Fed National Activity Index (CFNAI) was at +0.07 in September, up from a downwardly revised -0.08 in August (-0.04 initially) and down from an upwardly revised +0.12 in July (+0.08 previously), today’s report from the Federal Reserve Bank of Chicago showed, indicating that economic activity was slightly above its historical trend for the third time in four months in September after slightly below the historical trend in August. The latest CFNAI was above a low of -0.49 in October 2025 and a reading of -0.31 in September 2025 but below a high of +0.39 in February 2025.

The index's three-month moving average (CFNAI-MA3), which smooths out the m/m volatility in the index, edged up to +0.03 in September from +0.01 in August (unrevised), registering the fourth successive positive reading and the seventh in eight months. It was above a low of -0.39 in October 2025 and -0.23 in September 2025 but below its recent high of +0.07 in April. The CFNAI-MA3 is expressed in standard deviation units from zero (with a value of zero defined as trend real GDP growth). Research at the Chicago Fed indicates that an average reading of -0.70 or below is consistent with the economy being in a recession. Therefore, the September CFNAI-MA3 suggested that the U.S. economy is not currently in a recession.

The September reading reflected m/m increases in three of the four CFNAI key components and two positive contributions. The contribution of the Production & Income index to the CFNAI rose to +0.13 in September, the highest reading since April, from -0.06 in August; it was below a high of +0.37 in February 2025 but above -0.10 in September 2025 and a low of -0.61 in January 2024. The contribution of the Sales, Orders & Inventories index rebounded to +0.02 in September, the fourth positive reading in five months, from -0.03 in August; it was above -0.17 in September 2025 and a low of -0.19 in April 2025 but below a high of +0.16 in March 2025. The Employment, Unemployment & Hours index improved to a neutral value (0.00) in September from -0.02 in August; it was above its recent low of -0.13 in February and -0.01 in September 2025 but below its recent high of +0.05 in January. The contribution of the Personal Consumption & Housing index fell to -0.08 in September, the second negative reading in three months and the lowest level since May 2025, from +0.02 in August; it was below -0.03 in September 2025 and a high of +0.09 in March 2025 but above a low of -0.14 in January 2025.

The CFNAI Diffusion Index—which measures the breadth of change in the component series and is also a three-month moving average—ticked up to +0.06 in September, the seventh straight positive reading, from an upwardly revised +0.05 in August (+0.02 initially). A string of negative readings was posted during the March 2023 to February 2026 period. A reading of zero indicates that all of the indicators are growing at their long-term average. The September reading was above a low of -0.58 in October 2025 and -0.34 in September 2025 but below its recent high of +0.13 in July (matching September 2022).

The CFNAI is a weighted average of 85 indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

These figures are available in Haver's **SURVEYS** database.

- CFNAI up to +0.07 in Sept., positive for the third time in four mths.
- Three of four CFNAI components up m/m; two make positive contributions.
- CFNAI-MA3 up to +0.03, fourth consecutive positive reading; above -0.70 (recession signal).
- CFNAI Diffusion Index up to +0.06, remaining positive for the seventh straight mth.

Chicago Fed National Activity Index Turns Positive in September

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The Confederation of British Industry (CBI) survey responses in October, for October itself or looking to the month ahead, show sharp improvements in the current results and significant improvement in expected retail sales and less broad improvement for expected wholesale orders and sales.

The rank standings of the survey categories all are below their 50% marks, their respective medians, for all the survey items except for the retail survey on sales for the time of year and for inventory ratios.

**Overview**
This means that despite some relatively pronounced recovery between September and October, conditions are still subpar for most of the categories. October levels are generally above levels posted a year ago as well and here, we're comparing the actual readings in October to October of one year ago, and the expectations for November to November of one year ago. For the most part, we're seeing significant improvements on that basis. We're also seeing significant improvements in the October-November values for current and expected activities compared to the 12-month averages. So, the U.K. economy has been through a real sort of baptism of fire over the last 12 months, with extremely weak readings having been posted and then, in October, or looking ahead to November, there is quite a remarkable improvement. But the economy was in such a deep hole that even with this sharp month-to-month jump, conditions continue to score out as weak compared to historic benchmarks.

**Retailing in real time**
The retail survey, for example, is showing sales in October for the concept ‘sales compared to a year ago’ at a -10 diffusion reading, compared to -55 in September and a 12-month average of -41. Orders, compared to a year ago, at -36 in October sharply improve; they also are up from -62 in September, but they're only back to their 12-month average, which is -36. Sales ‘for the time of year’ improve sharply to -3 in October from -40 in September; that compares to a 12-month average of -25. Without referencing the ranking statistics, it's clear that there's a sharp improvement underway, but when we reference the queue rankings, we see that it's still an improvement that has a long way to go just to get back to ‘average.’

**Retailing expectations**
Similarly, the expectations for retailing for ‘sales compared to a year ago’ in November are at -10 compared to -37 in October; that compares to a 12-month average of -34. Orders, compared to a year ago, come in at -29 for November’s expectations, up from -63 in October; that compares to a 12-month average of -35. So that marks a sharp improvement month-to-month, but a modest improvement compared to the 12-month average. Sales ‘for the time of year’ also improve to -24 for what's expected in November, from -39 in October; the -24 reading is only marginally better than the -26 average over the last 12 months.

**Current wholesaling evaluations**
The volume assessments for the current situation in wholesaling show similar improvements in October compared to September and also for the October standings relative to the 12-month averages. Sales compared to a year ago, for example, are at a -4 reading in October compared to -24 in September, which compares to a 12-month average of -26. But here again the queue standing for that October reading is only in its 34th percentile, barely above the lower third of all readings chronicled back to August 2002. Orders compared to a year ago come in at -10 compared to -22 in September, which compares to a -34 average over 12 months. Sales ‘for the time of year,’ a sort of seasonally adjusted view, actually deteriorate in wholesaling to -26 in October from -21 in September, but there is an improvement when compared to the 12-month average of -31.

**Wholesaling expectations**
Wholesaling expectations improve to -10 in November on the metric ‘sales compared to a year ago,’ a significant improvement from October’s -23 reading and an improvement from the 12-month average of -29. Orders ‘compared to a year ago’ improve to a reading of -21 in November from -28 in October; that's a nice improvement from the -37 average over 12 months. Sales ‘for the time of year,’ however, deteriorate slightly in November to -26 from -24 in October, although there is an improvement from the 12-month average of -32. Expected ‘sales for the time of year’ have an extremely low ranking, with a lower 12th percentile standing. But that was also the low ranking in retailing this month, for expected sales for the time of year in November, even though in retailing there was a sharp monthly improvement.

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**The bottom line**
So, the message from distributive trades in October is mixed. But it’s a mixed message that's still relatively positive. The various aspects of the distributive trades survey largely show improvements and some significant improvements from where they had been, especially one month ago. But one month ago, these readings really had their back against the wall; so even though there are improvements, conditions are still scored out as weak, when compared to history. However, they had been abysmally weak and so this is still a significant improvement for many measures. It's far from signaling that the economy is out of the woods, but it does suggest that the economy faces challenges that are perhaps more normal rather than the extraordinary circumstances it had seemed to face over the past year and especially one month ago.

United Kingdom

U.K. CBI Survey Remains Weak but Sharply Rebounds

Tian Yong Woon

In this week’s Letter, we take stock of a busy run of central bank decisions across Asia, as most of the region tightens in the face of an oil-driven inflation shock. So far this year, most central banks in the region have raised rates (chart 1). The US-Iran conflict, a renewed Fed hiking cycle and domestic pressures have driven this, with Thailand the clear exception. In Indonesia, BI held its benchmark rate at 5.75% but raised its deposit facility rate and cut reserve requirements (chart 2). Indonesian assets remain under heavy pressure, with equities hit further by MSCI’s potential downgrade to standalone status. In South Korea, the BoK paused at 3.00% after hikes in July and August, with markets eyeing November for another move. Yet much of its inflation is imported and its growth export-led, so the headline data may overstate its room to tighten (chart 3). The Philippines faces a harder trade-off. The BSP hiked for a fourth straight meeting as energy prices, El Niño risks and a record-weak peso push inflation up. Growth, meanwhile, remains a laggard (chart 4). Looking ahead, the Fed, ECB and BoJ all decide this week. The BoJ is expected to hold at 1.25% and hike in December, with solid wages and business sentiment offsetting weak household spending (chart 5). Thailand also decides this week. Having cut to 1.00% in February, the Bank of Thailand faces a soft economy weighed down by household debt and weak tourism. Relative to its pre-pandemic level, its real GDP has recovered the least in emerging Asia, a sign of deep pandemic scarring (chart 6).

**The year so far**
The past week brought a cluster of monetary policy decisions in Asia. Bank Indonesia (BI) and the Bank of Korea (BoK) held their policy rates, while the Philippines’ central bank (BSP) raised its policy rate by 25 bps. Zooming out, most central banks in the region have tightened policy so far this year (chart 1). Several forces lie behind this. The oil price shock from the US-Iran conflict has pushed inflation higher across the region. In the US, the Fed resumed hiking in September with a 25 bp move to 3.75% to 4%, its first increase in three years. Domestic factors have added to the pressure in several economies. There are exceptions, however. Malaysia has broadly stood pat, while Thailand has gone the other way. The Bank of Thailand cut its policy rate to 1.00% in February, in part to support soft domestic growth.

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**Indonesia**
In its latest decision, Bank Indonesia held its benchmark rate at 5.75% last week (chart 2), with economists split between a hold and a hike. It did, however, act on two other fronts. It raised the deposit facility rate by 25 bps to 5.00% to try to attract inflows. It also cut banks’ rupiah reserve requirement by 2 ppts, from 9% to 7% in two steps, to release liquidity. BI has raised its benchmark rate by 1 ppt this year, all of it in May and June. Even so, Indonesian assets remain under pressure. Policy concerns, among other factors, have weighed on the rupiah, equities and bonds. Equities took a further hit after MSCI proposed in mid-October a two-step downgrade from emerging market to standalone status. That would exclude Indonesian stocks from MSCI’s major benchmarks and the tracker funds that follow them, raising the risk of large outflows. Separately, Indonesia continues to step up efforts against persistent peatland fires, whose haze has degraded air quality in several neighbouring countries. 

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**South Korea**
The BoK kept its policy rate at 3.00% last week, a widely expected outcome after back-to-back hikes in July and August. The pause gives the board time to assess external developments and the effects of its earlier tightening. CPI inflation, at 2.9% y/y in September, remains above the 2% target. Growth is robust, supported by AI-driven demand for exports, with export volumes up more than 20% y/y on a three-month average basis (chart 3). Further tightening this year is therefore plausible, and many investors are eyeing November. However, much of the recent rise in inflation looks externally driven, through import prices, with energy import prices up sharply (chart 3). Demand-driven inflation appears limited so far, with retail sales volumes barely growing. Growth, too, has been led by exports rather than domestic demand. Looking at headline inflation and growth alone may therefore overstate how much room the BoK has for further tightening.

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**The Philippines**
Moving to the Philippines, the BSP raised its policy rate for a fourth consecutive meeting last week with a larger-than-expected 50 bp move, taking it to 5.50%. Its inflation problem is more acute than that of most peers. As a heavy energy importer, the Philippines saw an outsized surge in CPI inflation on higher oil prices. Inflation reached 7.2% y/y in September, well above the 2 to 4% target (chart 4). Developing El Niño conditions threaten adverse food supply shocks, adding a second source of upward pressure. A persistently weak peso, which hit a record low beyond 63 per US dollar this month, opens a third channel through import prices. The peso’s nominal effective exchange rate now sits at its weakest level since at least 2017. All this tightening is happening against a weak growth backdrop. GDP grew just 2.3% y/y in Q2 2026, the slowest pace since 2009 outside the pandemic. That makes the Philippines’ economic catch-up a harder task than usual.

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**Japan**
Looking ahead, markets face a pivotal week, with the Fed deciding on 28 October, the ECB on 29 October and the BoJ on 30 October. Markets expect the BoJ to hold at 1.25% for now, with the next hike seen in December instead. This fits the bank’s step-by-step approach to normalisation since it ended negative rates in March 2024. Domestic indicators broadly support continued gradual tightening (chart 5). CPI inflation, at 1.9% y/y, is close to the 2% target, with lingering upside risks from oil prices and a weak yen. Wage growth remains firmly positive, with nominal cash earnings up 3.8% y/y and real earnings up 1.5% y/y. Tankan business sentiment is strong, at 19 for manufacturers and 20 for non-manufacturers. Other indicators paint a softer picture. Real household spending is still falling, down 3.1% y/y, and consumer confidence remains subdued.

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**Thailand**
The week also brings Thailand’s rate decision on 28 October. As noted earlier, the Bank of Thailand is just about the only central bank in the region to have cut this year. That stands in stark contrast with peers, which have mostly tightened or stood pat. The soft domestic backdrop behind February’s cut has persisted. Real GDP contracted 0.2% q/q sa in Q2 2026, with private consumption weighed down by household debt of 85.2% of GDP. Foreign tourist arrivals are also running about 4% below last year’s pace. More broadly, Thailand remains a laggard among its regional peers (chart 6). Real GDP only climbed back above its pre-pandemic level around the end of 2023 and now sits about 7% higher, the smallest gain in the group. This points to deep scarring from the pandemic, especially in the tourism and household sectors. Foreign arrivals reached nearly 33mn in 2025, still well short of the almost 40mn recorded in 2019.

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Asia

Economic Letter from Asia: Decisions, Decisions

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Among the early reporting countries, I present flash readings for the S&P PMIs in October. Only two of these reporters, the United Kingdom and India, show stronger headline PMI readings in October than they had in September. For reporters Germany, the U.K., Australia, and the United States, stronger PMI readings for the manufacturing sector emerge in October compared to September. However, only the U.K. and Japan report stronger services readings in October than they reported in September.

The weakness in services is very broad-based, while the weakness in manufacturing is mixed. The impact on the headline causes readings to be weaker in most cases in October than they were in September. This rounds out the picture of an uneven economy as central banks are on the path to fight what has been an excess of inflation, as energy prices continue at uncomfortably high levels.

However, these results are only for the month of October. If we look at the three-month averages, which are based on historical final data and so do not include the October ‘flash’ readings, we have stronger readings across the board for the headline PMI. We have stronger readings across the board except for India in services. Also, over three months, the performance of the manufacturing sector is mixed, with four stronger and four weaker reporters.

For six months the picture is more uneven, as slightly more readings are weakening compared to the 12-month readings that are strengthening. However, over six months the U.S. shows strengthening on all three sector readings, as does India. Three-sector weakness over six months comes from Australia, while Japan, the U.K., France, Germany, and the European Monetary Union all show the headline weaker over six months, driven by a weaker services sector.

Over 12 months all the readings are stronger for all three sectors for all country comparisons except the U.S. For the U.S., weaker readings are in the services sector and the composite index compared to a year ago.

The queue percentile standings paint an upbeat picture, with the average composite reading at a 52nd percentile standing, above its historic median; manufacturing at a 58th percentile standing is looking quite strong, while services at a 46.8 percentile standing shows that the services sector has performed below its median performance on data back to 2021. Australia and India are the weakest on these timelines in terms of their ranking for their composites as well as because they have below-median results for their manufacturing and services sectors. The U.S. shows the strongest statistics on this comparison, with an 86.8 percentile standing for its composite, a 77.9 percentile standing for manufacturing, and an 85.3 percentile standing for services. Among the remaining countries, only France has a composite reading below its median, meaning it is below a ranking of 50%, while Japan manages a headline ranking of 72.1% despite having a services ranking below its 50% mark, and it does that on the strength of a manufacturing ranking in its 80.9 percentile.

Changes over 12 months show declines in all three PMI sector readings only in India and in Australia. The U.K. and France show improvements in all three sectors over 12 months, while the monetary union and Germany show headline declines over 12 months caused by a weakening services sector in the face of solid increases in manufacturing.

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**On Balance**
The bottom line on these PMI readings is that October was a difficult month; it was backtracking as the inflation numbers have flared. Central banks have generally been raising interest rates, and it remains to be seen how weak the conventionally reported economic data will be. It also remains to be seen how aggressively central banks are going to pursue the excess inflation problem or if they're going to view it as excessive for now but largely contained and whether they are going to start to get a little bit more concerned about growth prospects. This is the balancing act we need to look at for the period ahead. Are the central banks confident enough to go more aggressively after inflation, or are they too worried about whether growth could do anything more than raise rates modestly to defend their own credibility? That is the question.

S&P PMIs Show Mixed but Broad Weakening in October

Jonathan Basile

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The U.S. Employment Cost Index (ECI) expanded at a slower 0.8% rate in the three months ended September, the softest quarterly pace since the fourth quarter of 2025 (0.7%). On a year-over-year (YoY) basis, compensation costs have been running at the same 3.4% figure for four consecutive quarters. The four-quarter stability in the annual trend is highly unusual for a cyclical indicator that oscillates with long-term wage cycles over time; it has occurred just 2% of the time since the 1982 inception of the series. A deeper dive beneath the headline ECI figure reveals persistently opposing paths for wages and benefits.

There is a trend divergence between ECI: Wages and Salaries and ECI: Benefits for all civilian workers. The former continued to grind down to 3.1% YoY in 2026’s third quarter, a fresh five-year low. The latter picked up to a 3.9% YoY rate, the highest in three years. Moreover, the Bureau of Labor Statistics’ (BLS) unpublished Health Benefits for Private Industry, a subset of ECI benefits, expanded at a 6.4% YoY pace, matching the 2025 fourth quarter’s 20-year high. The combination of higher benefit inflation and slower wage inflation shows an environment where employers’ management of compensation costs is falling directly on employees.

The details for the private sector are similar to that for all civilian workers. Private ECI: Compensation costs edged up to a 3.4% YoY figure in the third quarter. This marked the first uptick in the YoY compensation trend in five quarters. It was not due to higher wage pressures, though. Private ECI: Wages and Salaries was steady at a 3.1% YoY rate, the lowest since 2021’s first quarter. Private ECI: Benefits advanced to 3.9% YoY, the highest since 2023’s third quarter.

The spread between Private ECI: Wages and Private ECI: Benefits illustrates private sector profit pressure. In the second quarter, the -0.8-percentage point spread was the lowest in 14 years. Benefit costs are determined by market forces and are an expense beyond any private companies’ control. Wages and salaries, on the other hand, are an important line item completely under the purview of C-suite executives. The easing in private wage pressures suggests that firms are opting to trim one cost at the expense of another. From private workers’ perspective, the higher benefit/lower wage growth results in faster growth for paychecks, but slower growth for take-home pay.

The BLS report also has an alternative way to observe vacillating pressures on consumer purchasing power with “real” inflation-adjusted measures. To that end, consumers’ purchasing power loss in 2026’s third quarter, measured by the Real ECI: Wages and Salaries, amounted to a -0.6% YoY decline. This was the weakest since 2012’s first quarter (-0.9% YoY). The 14-year low also echoed other periods of economic stress during the Great Recession and the 2000s Housing Bust.

Lack of forward momentum from the Real ECI: Wages and Salaries fundamentally does not support an accelerating profile for Real Consumer Spending over the near term. To that end, this week’s Income and Spending report indicated a September stall in Real Consumer Spending at the same time that Real Income metrics – personal income less transfer and disposable personal income – posted the first monthly declines in five months.

The employment cost index measures the change in the cost of labor, free from the influence of employment shifts across occupations and industries. It is provided by the Bureau of Labor Statistics and is available in Haver’s **USECON** database. Consensus estimates from the Action Economics Forecast Survey are in Haver’s **AS1REPNA** database.

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- Compensation costs ease in Q3.
- Wage pressures at a five-year low.
- Benefit costs at a three-year high.

Employment Cost Index: Unusually Steady Compensation Trend Reveals Slower Wage and Faster Benefit Cost Growth

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