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[SASEHAVR](http://support.sas.com/documentation/cdl/en/etsug/67525/HTML/default/viewer.htm#etsug_sasehavr_gettingstarted01.htm) is a seamless interface between Haver and SAS data processing that enables SAS users to read economic and financial time series data that reside in a Haver Analytics DLX (Data Link Express) database. [SASEHAVR](http://support.sas.com/documentation/cdl/en/etsug/67525/HTML/default/viewer.htm#etsug_sasehavr_gettingstarted01.htm) requires both SAS/ETS and Base SAS Software.

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Teaches econometrics and forecasting at the University of Colorado Denver. He has over 15 years of econometric experience in both the private and public sector.

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Abdel M. Zellou, Ph.D.

Bootcamp and Econometric Tools 1 & 2

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Remote Training: Applied Time Series in Python

Investor sentiment worldwide is positive, especially in AI-led Asia

Winnie Tapasanun

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The NFIB Small Business Optimism Index slipped to 98.7 in August after a 2.4-point gain to 99.8 in July, according to the Small Business Economic Trends survey from the National Federation of Independent Business, indicating small business sentiment cooled slightly from July’s 11-month high. The decline was driven by weaker expected business conditions as well as decreases in earnings trends and plans to increase employment. The index was above its 52-year average of 98.0 for the second consecutive month and above a low of 88.5 in March 2024, albeit below 100.8 in August 2025 and a peak of 105.1 in December 2024. Six of the 10 index components fell, two rose, and two were unchanged. The NFIB Small Business Uncertainty Index declined to 89 in August following a two-point increase to 91 in July, remaining well above its historical average of 68. The index was up from its recent low of 84 in December 2025 and a low of 65 in November 2023, while below its record high of 110 in October 2024.

The outlook for business conditions in the next six months, while down in the August survey, remained positive for the 22nd straight month. The net balance of respondents expecting the economy to improve fell to 10% in August, the lowest level since May, following a two-point increase to 15% in July; these readings were far below a high of 52% in December 2024 but significantly above a record low of -61% in June 2022. Expected real sales dipped to a net 6% in August, a three-month low, from 7% in July; the latest result was below a high of 22% in December 2024 but above a low of -18% in August 2024. A net -9% of respondents reported higher nominal sales in the past three months, down from -4% in July and June and marking the lowest reading since November 2025; the measure remained above a low of -20% in October 2024 but below the recent positive reading of 1% in February and a peak of 9% in June 2021.

Plans to expand the business held at 12% in August and July, the highest level since February; the latest figure was below a high of 20% in December 2024 but above a low of 2% in March 2023. Plans to make capital outlays edged down to 24% in August from 25% in July (the highest reading since December 2024); these numbers were below a high of 28% in November 2024 and a peak of 31% in October 2021. Expected credit conditions improved to -2% in August from -4% in July; this result matched a high of -2% in December 2024 and remained above a low of -11% in November 2023. Meanwhile, a net -1% of respondents viewed current inventory stocks as “too low” in August, slightly up from -2% in July; the series had been negative since June 2025, with zero readings only for two months (June 2026 and August 2025); the positive reading of 1% was recorded in May 2025.

On the labor front, 47% of respondents reported that qualified workers to fill job openings were hard to find in August, down from 51% in July and June (the highest level since September 2024). These numbers were above a low of 43% in August 2025 but below a high of 56% in August 2024 and a peak of 62% in September 2021. A net 17% planned to increase employment in August, down from 20% in July (the highest level since October 2022); it remained above its most recent low of 9% in May but below a peak of 32% in August 2021. Notably, 35% reported positions not able to be filled in August, slightly down from 36% in July (the highest reading since June 2025); these figures remained below a high of 51% in May 2022.

Overall earnings trends had remained in negative territory since December 2019. The measure fell to -19% in August following a four-point increase to -16% in July. These readings were below the most recent high of -14% in February and a high of -5% in June 2021 but above a low of -37% in August 2024.

On the pricing front, actual and expected selling prices remained at an inflationary level, indicating continued inflationary pressures. The net percent of firms raising their average selling prices held at a still-elevated 31% in August and July, the lowest level since April, after a two-point increase to 38% in June. The latest reading was up from a low of 20% in August 2024 but well below a peak of 66% in March 2022. The percentage planning to raise prices registered at 28% in August and July, also the lowest since April, following a two-point decline to 32% in June; these readings remained above a low of 21% in April 2023.

Wage inflation remained relatively high in the August survey. A net 31% of respondents raised compensation during the last three months, unchanged from July and equaling May’s reading. It was above a low of 26% in November 2025 but below a high of 46% in February 2023 and a peak of 50% in January 2022. A net 18% of firms planned to raise worker compensation in the next three months, down from 19% in July (the highest level since February); this remained below highs of 28% in November 2024, 30% in November 2023, and 32% in October 2022.

Labor quality was cited as the single most important problem facing small businesses, as reported by 23% of NFIB members in August, down from 27% in July (the highest since October 2025). Taxes ranked second as the next most important problem (alongside inflation), as reported by 16% of respondents in August, unchanged from July and representing the lowest since November 2025. Inflation also remained a key challenge for small businesses, as reported by 16% of respondents in August, up from a four-month low of 14% in July; these readings were well below a peak of 37% in July 2022. Other concerns (in August vs. July) included poor sales (10% vs. 8%), government requirements (9% vs. 7%), insurance cost/availability (8% vs. 8%), labor costs (7% vs. 8%), and competition from large businesses (4% vs. 7%).

According to the Small Business Administration, there are 33 million small businesses in the United States, which employ 62 million workers. The NFIB surveys anywhere from 500 to 2000 respondents each month and the typical firm employs 10 people and reports gross sales of about $500,000 a year. The NFIB figures can be found in Haver’s **SURVEYS** database.

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- NFIB Small Business Optimism Idx down 1.1 pts. to 98.7 in Aug., still above its 52-year avg. of 98.0.
- Uncertainty Idx down 2 pts. to 89, remaining above the historical avg. of 68.
- Expectations for economy down 5 pts. to 10%, lowest since May.
- Hiring plans down 3 pts. to 17%; earnings trends down 3 pts. to -19%.
- Expected real sales down 1 pt. to 6%, a three-month low.
- Plans to expand business unchanged at 12%, highest since Feb.
- Firms raising avg. selling prices steady at 31%, lowest since April.
- Top three business concerns: labor quality (23%), taxes (16%), and inflation (16%).

U.S. NFIB Small Business Optimism Cools in August Amid Lower Business Expectations

Robert Brusca

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Japan's economy watchers are not in a state of bliss, but they have gradually been improving their outlook after suffering a severe setback when the attacks on Iran began.

The current index for economy watchers, which is a diffusion index, at 46.4, is below 50 and therefore indicates some deterioration in attitudes about the economy. However, the reading reflects an improvement, and there has been an ongoing improvement in the current situation.

The future reading, similarly, has been improving; in August, the future index is at 48.3, also indicating some deterioration, but less than a month ago, with an ongoing improvement visible there as well.

**Standings**
The percentile standings of the current index and the future index show slightly stronger readings for the future than for current assessments. The future index has a 49.4 percentile standing, placing it near its median for the evaluation period that goes back to August 2005. The current situation has a standing at its 43rd percentile, about 7 percentile points below its median for that period.

**Current Index**
The current index shows three readings above their 50th percentile standings: eating & drinking places, corporations, and corporate manufacturers. However, even so, all of the current readings in August have diffusion values below 50, indicating that all are showing deterioration, although less deterioration than in the previous month.

**Future Index**
The future reading itself is below its 50th percentile; however, six components are above their 50th percentiles. These include the overall assessment of households, the reading for eating & drinking establishments, services, corporations, including both manufacturers and nonmanufacturers as separate readings. The future reading for housing is extremely weak, with a 29.2 percentile standing, and employment has only a 36th percentile standing in the future index; that's similar to its weak 33rd percentile standing in the current index.

The lagging performance of employment in both indexes is certainly worrisome because that's the basis for jobs and spending. On the other hand, the future reading for households is above its 50th percentile. Households in the current index show a 44.7 percentile standing, below their median as well as below 50 overall, but not weak in a way that is especially worrisome.

The graph shows that there is an ongoing improvement in the assessments by the economy watchers. Their assessments dropped very sharply at the time of the Middle East conflict and the threat to oil supplies. Those assessments have since been recovering quite steadily and have moved to positions back closer to neutral, although still not to the point of registering growth. Among the current and future readings, only the reading for the service sector of the future shows a diffusion value in August above 50, indicating actual expansion; at least there's one, and that's a start.

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Japan

Japan’s Economy Watchers Regain Faith Steadily

Tian Yong Woon

In this week's Letter, we weigh Asia's building supply-side inflation risks against the AI export boom still powering regional growth. The US-Iran conflict has escalated once again, lifting crude prices and keeping geopolitical risk elevated (chart 1). Should oil hold at current levels without advancing further, base effects should eventually pull that impulse out of inflation. A second price risk is now building, and it is El Niño, an event already under way (chart 2). Drier conditions in parts of Southeast Asia and redistributed rainfall elsewhere stand to disrupt crops and lift food prices. Markets have started to price these risks in through higher yields. Japanese government bond yields have surged alongside global peers, also pushed by fiscal concerns as the budget is drawn up. Domestic buyers have reduced their net sales of JGBs, with the 10-year yield now flirting with 3% (chart 3). Set against these pressures, advanced Asia's AI buildout continues to run apace. Producers of critical AI chips in Japan, Taiwan and South Korea are posting double and triple-digit export growth (chart 4). The focus is also broadening from AI infrastructure towards physical applications such as humanoid robots. China has benefited too, with integrated circuits and computer equipment contributing about half of its export growth (chart 5). The remainder has come from other goods, including EVs, amid a still-robust overall export trend. By region, ASEAN-6 and India have driven that growth, offsetting the steep fall in shipments to the US (chart 6). That success, however, has again deferred China's longer-term rebalancing towards consumption.

**US-Iran tensions: No let up**
The US-Iran situation has escalated once again with a familiar headline, as both sides traded strikes over the weekend, with no clear resolution in sight. The latest strikes have brought the conflict well into its sixth month, pushing crude oil prices higher and keeping measures of geopolitical risk elevated (chart 1). All of this continues to give policymakers reasons to worry. With that said, while elevated oil prices have been pushing inflation upwards, that impulse should eventually fade. If prices stay at current high levels for at least another six months without advancing substantially further, base effects will pull them out of inflation calculations.

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**El Nino to the fore**
With Asia already grappling with still-high oil prices, even as much of it benefits from the ongoing AI boom. A further inflation risk is now building, and that risk is El Niño. This is not a forecast but an event already under way, which many authorities have touted as probably the biggest one yet. Indicators of the event, among them the Southern Oscillation Index (SOI), have been signalling it strongly for months (chart 2). The impacts are already showing through, including via rising sea surface temperatures and increased wildfire risks in parts of Southeast Asia. Rainfall is also being redistributed, greatly increased in some areas and greatly reduced in others. All of this stands to disrupt crop production, thereby bringing about an adverse food supply shock. That shock could send food price inflation surging soon, adding to policymaker woes. It is one to watch in the coming months, as more news of disrupted agricultural production starts to unfold.

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**Japanese government bonds**
The recent rise in global bond yields looks driven less by inflation than by real yields, as markets confront the prospect of heavier fiscal spending, capex-intensive investment paths and the issuance needed to fund them. Inflationary risks are compounding that repricing rather than leading it: oil prices have surged, and El Niño effects are ongoing and strengthening, building pressure from both energy and food. Japan is a case in point. JGB yields have surged alongside those of global peers, with the added impetus of the government's deliberations over next year's budget and what they imply for future fiscal outlay. The 10-year yield is now flirting with 3%, a level not seen since the 1990s, and high enough to have turned the tide for domestic buyers, who have cut their net sales of JGBs (chart 3) as the yields on offer become harder to pass up.

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**Advanced Asia**
Inflation risks and firmer yields aside; the AI buildout has continued to gather pace in advanced Asia. Producers of critical AI chips continue to benefit from massive export growth, which has in turn supported overall growth. These economies, including Japan and Taiwan, have kept posting dizzying double-digit growth in their exports of related goods, such as semiconductors and integrated circuits (chart 4). In South Korea's case, growth has run into triple digits, showing just how much the AI-related boom has already run. The picture is also shifting, and the focus is no longer only on infrastructure supporting newer, front-end AI models. It is increasingly taking shape in the physical realm, such as in humanoid robots, where recent weeks have unveiled growing capabilities.

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**China**
The advanced Asian economies above have not been the only ones in Asia to benefit from the ongoing AI boom. China too has continued to reap export benefits via its shipments of integrated circuits and computer-related equipment. Together, those two categories have contributed about half of overall exports growth in recent months (chart 5). The rest speaks to a broader story, as much of China's exports growth has also been driven by other goods. Those include motor vehicles, such as EVs, and come amid a still-robust upward trend in overall exports. These export revenues matter for growth at China's current juncture. The economy continues to undergo a two-speed dynamic, in which domestic growth drivers remain weak whilst external, export-oriented sectors supplement overall growth.

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By region, much of China's export growth continues to be driven by shipments to ASEAN-6 and India (chart 6). Shipments to the advanced Asian economies of Japan, South Korea and Taiwan have leaned close to the broader overall trend. On China's exports to the US, we saw a steep fall after President Trump began his second term in 2025, when trade tensions returned to the fore. Trade has since improved mildly in 2026, albeit remaining far from the end-2024 baseline. The overarching theme is that even with a stark pivot in exports away from the US, China has found alternative destinations. Those markets have not only made up for the US shortfall but also delivered robust growth alongside it. However, that continued pursuit of export-driven growth has once again deferred China's longer-term aim to rebalance towards a more consumption-driven economy.

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Asia

Economic Letter from Asia: Shock and Boom

Sandy Batten

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After two consecutive months of disappointingly weak employment reports, the August report was much stronger than expected. Nonfarm payrolls increased 162,000 with meaningful upward revisions to both June and July, according to today’s report from the Bureau of Labor Statistics. The Action Economics Forecast Survey expected an increase of 52,000. The 23,000 decline previously reported for July was revised up to a 21,000 **increase** while the 20,000 increase previously reported for June was revised up to a 31,000 gain. The average gain over the past three months rebounded to 71,000 from 38,000 in July while the average increase over the past six months jumped to 106,000 from 54,000 in July. Both are on a modest uptrend and remain significantly stronger than in the second half of last year.

Private-sector payrolls also rose much more than expected in August after having disappointed in both June and July. They increased 127,000 against an expected increase of 46,000 with upward revisions to both June and July totaling 48,000. Government employment rebounded in August, increasing 35,000 after falling 50,000 in July. The swing from July to August was due to local government education jobs, which fell 58,000 in July but jumped 42,000 in August. It is usually difficult to seasonally adjust education jobs in the summer, but this seemed to be even more difficult this year. The July collapse in education jobs was the largest fall since September 2020 while the August rebound was the largest increase since July 2022.

The stronger-than-expected payroll report was echoed by a very strong report from the **household survey**. The civilian labor force jumped 683,000, the largest population-adjusted monthly increase since October 2020. The labor force had declined in four of the preceding five months. Employment increased 569,000 in August, again after having declined in four of the previous five months. The August rise was the largest population-adjusted monthly gain since November 2023. The number of unemployed increased 115,000 in August, its first increase in four months while the unemployment rate was unchanged at 4.1%, the lowest reading since June 2025. The labor force participation rate rebounded to 61.6 in August from 61.4 in July.

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In the **establishment survey**, private-sector goods-producing jobs increased a strong 41,000 in August, the largest monthly gain since January, on top of an upwardly revised 29,000 in July. Construction jobs rose 22,000 in August, the sixth consecutive monthly increase, while manufacturing jobs increased 16,000 in August, the third consecutive monthly gain and the largest since November 2023. Private-sector service-producing jobs rose 86,000 in August following an upwardly revised 42,000 gain in July (previously +5,000). The August increase in service-producing jobs was led by a surprising 62,000 increase in leisure and hospitality jobs following monthly declines in both June and July. The World Cup had been widely expected to generate jobs but leisure jobs fell in both June and July. So, the August rebound was surprising and accounted for nearly ¾ of the total increase in service-producing jobs. Healthcare and social assistance added 28,000 jobs in August while information jobs fell 23,000, the fourth monthly decline in the past five months, and financial activities jobs declined 11,000, the fifth monthly decline in the past six months. The declines in information and financial jobs may be related to AI.

The monthly change in private-sector average hourly earnings picked up a bit in August, rising 0.3% m/m versus an upwardly revised 0.2% monthly gain in July. The 0.3% monthly increase was in line with market expectations. However, the y/y rate continued to trend down with the y/y rate sliding to 3.1% in August, the lowest rate since May 2021, from 3.2% y/y in July. Wages in private service-producing firms rose 0.3% m/m in August versus 0.1% m/m in July but the y/y rate slowed to 2.9% from 3.0% in July. Goods-producing wages rose 0.2% m/m (4.0% y/y) in August, down slightly from a 0.3% monthly gain in July.

The breadth of private job growth widened markedly in August from July with the one-month diffusion index jumping to 55.6, its highest reading since December 2024, from 52.8 in July. This was well above the key 50 level and indicates that more industries were adding jobs than losing them. Moreover, the six-month diffusion index rose to 55.8 in August, its highest reading since January 2024.

The workweek lengthened to 34.4 hours in August, the longest week since March 2024, from 34.3 hours in July. The longer workweek and the jump in employment combined to pushed up aggregate weekly hours index by 0.3% m/m, the largest monthly gain since April.

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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- U.S. nonfarm payrolls surged 162,000 in August with upward revisions to both June and July.
- The market consensus looked for a 52,000 increase.
- The unemployment rate was unchanged at 4.1%, the lowest rate since June 2025.
- In the household survey, employment jumped 569,000, its largest population-adjusted increase since November 2023.
- Average hourly earnings rose 0.3% m/m, but the y/y rate continued to trend down, sliding to 3.1%, the lowest since May 2021.

U.S. Payroll Employment Surged in August

Andrew Cates

**The survey points towards higher rates**
The latest Blue Chip Financial Forecasts survey suggests that the shift towards tighter policy extends beyond the immediate market reaction. Over the next twelve months, panellists anticipate the largest rate increase in Japan, at slightly more than 40 basis points, followed by Canada at just over 20 basis points and the euro area at around 15. Much smaller increases are expected in the US and Australia, while the UK is the only economy in which rates are forecast to fall.

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**Shipping stress returns**
The next chart helps explain why the expected policy path has lately become less benign. The Baltic Exchange Dry Index, a market measure of the cost of moving bulk commodities, has climbed sharply in recent months. At the same time, the Federal Reserve Bank of New York's Global Supply Chain Pressure Index has moved decisively above zero after spending much of the previous two years at or below its historical norm. Neither measure maps mechanically into producer prices, but together they signal renewed pressure on freight, capacity and traded inputs. Such pressure tends to reach PPI inflation with a lag, suggesting that part of the disinflation delivered by normalising supply chains is now being unwound.

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**More is still in the pipeline**
The latest manufacturing PMI surveys for August tell a similar story. Global manufacturing output prices rose sharply in late 2025 and, although they have eased from their recent peak, remain comfortably above the neutral level of 50. Suppliers' delivery times, meanwhile, have dropped below 50, indicating that deliveries are slowing again. The combination of longer delivery times and elevated output prices is a familiar warning that supply friction is feeding into factory-gate inflation. With oil back above $90/bbl and a new round of tariffs raising the cost of traded goods, the pressures entering the pipeline are, for the moment, being renewed about as quickly as they drain.

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**A newer squeeze, where workers are needed**
The aggregate US labour-market picture conceals a sharp sectoral rotation. Over the past three months, job-opening rates have risen most clearly in manufacturing and construction, with smaller increases in trade and government, while they have fallen in education, leisure and, most dramatically, professional services. That divergence is awkward for policy. Demand is softening in parts of the white-collar and service economy even as industries that depend heavily on foreign-born labour continue to search for workers. Tighter immigration enforcement can therefore lift wage and operating costs in bottleneck sectors while aggregate hiring and growth weaken at the same time.

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**The demand side has already yielded**
In contrast to these supply-side pressures, demand-driven inflation has been more contained. Core inflation in many G10 economies is now clustered relatively close to target, ranging from just over 0.5% in Switzerland to 2.6% in the United Kingdom. Rates in the United States and euro area remain above target but have lately been easing, while those in Canada, Japan, Sweden and Switzerland are below 2%, despite some recent firming. Wage growth has also moderated as labour markets have cooled.

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**And the cost of capital has turned**
A final theme this week lengthens the horizon. The real yield on advanced-economy government debt - the cost of capital once inflation is stripped out - fell for four decades, from the peaks of the Volcker era to the lows of the 2010s and the negative rates of the 2022 inflation, and has since turned back up to its highest since before the financial crisis. Part of the rise is cyclical; part reflects a more lasting increase in the demand for capital, as artificial intelligence, the energy transition, rearmament and widening deficits draw on a pool of saving that is no longer expanding to meet them. Whether rates settle back towards their former lows, as much of the financial system still assumes, is on this account increasingly open to question.

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Central banks dominated the financial-market narrative last week. In his first Jackson Hole address as Federal Reserve chairman, Kevin Warsh indicated that the next move in US interest rates was more likely to be an increase than a cut. The ECB, having raised rates in June, is also expected to tighten further. Government bond yields consequently remained under upward pressure across the advanced economies, with long-term yields close to their highest levels in two decades. Rising real yields weighed on equities and gold, while oil climbed back above $90 following US strikes on Iranian launchers near the Strait of Hormuz. The latest Blue Chip Financial Forecasts survey places this shift in a broader context. Panellists expect policy rates to rise over the next twelve months in Japan, Canada and the euro area, with more modest increases anticipated in the United States and Australia; the United Kingdom is the only economy in which rates are expected to fall (chart 1). At the same time, shipping costs and global supply-chain pressures are rising again (chart 2), with renewed inflationary pressure emerging at the factory gate (chart 3). US labour demand is also shifting towards sectors where supply constraints appear most pronounced (chart 4). Yet core inflation across the G10 is now relatively close to target (chart 5). The final chart places these developments within a longer-term shift: after declining for four decades, the real cost of capital has moved decisively higher (chart 6).

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Charts of the Week: The Turn Towards Tightening

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The U.S. trade deficit in goods and services (BOP basis) widened to $88.58 billion in July from $71.18 billion in June ($73.26 billion originally) and $75.75 billion in May ($77.65 billion previously), according to the U.S. Census Bureau. This was the second time in three months the gap had widened. The July deficit was the biggest since March 2025 and larger than the $75.06 billion in July 2025. A deficit of $89.5 billion had been expected in the Action Economics Forecast Survey. Exports fell 2.1% m/m (+9.3% y/y) in July, the third consecutive monthly fall, after a 0.8% decline in June (-0.9% initially). Imports rose 2.8% (11.2% y/y), the fifth m/m increase in six months, following a 1.8% June decrease (unrevised).

The real (inflation-adjusted) goods trade deficit (customs value; chained 2017 dollars) expanded to $106.39 billion in July, the largest since March 2025, after narrowing to $94.36 billion in June; it was larger than the $99.22 billion in July 2025. The $92.87 billion average monthly real trade deficit in Q2'26 was the biggest since Q1'25’s record $140.54 billion shortfall. The trade balance (net exports) subtracted 1.14%-points from Q2'26 real GDP growth after subtracting 0.37%-points in Q1'26 and 0.22%-points in Q4'25.

The deficit in goods trade (BOP basis) ballooned to $119.59 billion in July, the highest level since March 2025, from $101.97 billion in June; it was larger than the $102.65 billion in July 2025. Goods exports fell 3.0% (+12.1% y/y) in July, the third successive m/m decline, after a 1.8% drop in June. Goods imports recovered 3.7% (13.7% y/y), the fifth m/m rise in six months, following a 2.6% June decrease.

The customs value goods trade deficit widened to $118.94 billion in July, the widest since March 2025, after narrowing to $101.05 billion in June; it was much larger than the $101.28 billion in July 2025. The latest figure was in line with a $118.81 billion deficit in the advance report released on August 27. Customs value exports fell 2.9% (+11.9% y/y) in July, down for the third straight month, after a 1.7% drop in June. This reflected m/m decreases in several end-use categories, including declines of 10.8% (+18.9% y/y) in industrial supplies & materials, 6.8% (+4.7% y/y) in other goods, 1.0% (+10.1% y/y) in foods, feeds & beverages, and 0.7% (+1.0% y/y) in automotive vehicles, parts & engines, while exports of nonfood consumer goods excluding autos (+8.1%; +0.2% y/y) and capital goods excluding autos (+2.8%; +13.1% y/y) rose m/m in July. Significantly, exports of nonmonetary gold plunged 42.0% (+7.6% y/y) in July, the fourth m/m fall in five months, following a 59.5% surge in June. Meanwhile, petroleum exports dropped 14.7% (+31.5% y/y) in July following a 19.9% slump in June and three consecutive m/m increases; nonpetroleum exports slid 0.8% (+9.4% y/y), the fourth m/m slide in five months, after a 2.4% June gain.

Customs value imports rose 3.9% (13.9% y/y) in July, up for the fifth time in six months, following a 2.5% decline in June. This reflected m/m rises of 11.4% (47.0% y/y) in capital goods excluding autos and 0.5% (-1.3% y/y) in nonfood consumer goods excluding autos, while imports of industrial supplies & materials (-3.2%; -11.2% y/y), other goods (-2.0%; +8.0% y/y), automotive vehicles, parts & engines (-1.4%; +3.9% y/y), and foods, feeds & beverages (-0.7%; -4.2% y/y) fell m/m in July. Notably, imports of nonmonetary gold advanced 17.1% (-84.9% y/y) in July following a 2.7% increase in June and two successive m/m declines. Meanwhile, petroleum imports dropped 12.2% (+7.3% y/y) in July after an 8.8% decrease in June and four straight m/m increases, while nonpetroleum imports rose 5.0% (14.3% y/y), the fifth m/m rise in six months, reversing a 2.0% June decline.

The services trade surplus rose to $31.02 billion in July, the highest since March, after increasing to $30.79 billion in June; it was bigger than $27.58 billion in July 2025. Services exports slid 0.4% (+4.6% y/y) in July, the first m/m decline since April, following a 1.1% gain in June. This reflected m/m decreases of 3.1% (-0.6% y/y) in travel services, 2.0% (+2.4% y/y) in transport services, and 1.5% (+12.5% y/y) in financial services, while exports of charges for the use of intellectual property (+2.0%; +9.7% y/y), telecommunications, computer, & information services (+1.2%; -0.6% y/y), and insurance services (+1.1%; +2.9% y/y) increased m/m in July. Services imports fell 0.8% (+1.8% y/y), the first m/m fall since March, after a 1.1% June rise. This reflected m/m drops of 7.9% (+16.1% y/y) in charges for the use of intellectual property, 2.8% (+4.4% y/y) in transport services, and 1.4% (-8.9% y/y) in insurance services, while imports of construction services (+3.7%; +13.1% y/y), maintenance & repair services (+3.2%; -28.0% y/y), and travel services (+1.4%; +1.1% y/y) rebounded m/m in July.

The U.S. goods trade deficit with China narrowed slightly to $15.24 billion in July from $15.35 billion in June. Exports climbed 3.0% (4.8% y/y) after a 2.3% June rebound; imports grew 0.8% (4.3% y/y), the weakest of three consecutive m/m increases, following a 4.5% June rise. The goods trade deficit with the European Union fell to $8.94 billion in July, the smallest since April, after widening to $10.90 billion in June, with exports down 0.2% (+3.3% y/y) and imports down 4.2% (+1.7% y/y). The trade shortfall with Japan rose to $4.18 billion in July, a five-month high, from $3.28 billion in the previous month, reflecting declines of 13.3% (+19.4% y/y) in exports and 2.9% (+4.1% y/y) in imports.

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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- Deficit: $88.6 bil. in July, up from $71.2 bil. in June, reflecting $119.6 bil. goods deficit & $31.0 bil. services surplus.
- Exports -2.1%, third straight m/m decline, driven by a plunge in nonmonetary gold exports.
- Imports +2.8%, fifth m/m increase in six months, boosted by a rise in capital goods imports.
- Real goods trade deficit widens to $106.4 bil., largest since Mar. ’25.
- Goods trade deficits w/ China down to a still-high $15.2 bil., w/ EU down to a 3-month low, and w/ Japan up to a 5-month high.

U.S. Trade Deficit Widens in July to Highest Level Since March ’25

Michael J. Moran

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The Bureau of Labor Statistics reported no change in the initial estimate of 1.4% growth in labor productivity in the second quarter. Output in the nonfarm business sector rose 1.7%, while labor hours rose 0.3%. Both figures were essentially unrevised in the new report, showing only fractional changes that were lost in rounding. (Productivity growth is approximately equal to output growth less growth in labor hours.)

Productivity growth in Q2 was a touch firmer than the average of 1.2% in the prior two quarters, but all three trailed the quarterly averages of 2.3% in 2024 and 2.5% in 2025. In all of the past three quarters, the easing in productivity growth reflected slow advances in output: 1.7% in Q2 and an average of 1.4% in the prior two quarters. Output growth averaged 2.4% in 2024 and 2.8% in 2025. Growth of labor input in recent quarters has not deviated meaningfully from other recent averages.

The slowdown in productivity growth in the past three quarters might raise concern about the underlying pace of growth. However, the recent easing is not especially alarming, as productivity often moves erratically; soft patches have occurred in the past only to revive in subsequent quarters. Still, the past three quarters have generated a downward drift in the eight-quarter moving average of growth, which is intended to smooth the variability in productivity growth. Despite this drift, it is too early to conclude that productivity growth is fading. The eight-quarter average is still noticeably firmer than the pre-pandemic performance. The softening in recent quarters should be viewed as disappointing only to those expecting a burst in efficiency gains from artificial intelligence.

Unit labor costs—hourly labor compensation relative to productivity—rose 1.2% in Q2, a tick slower than in the prior quarter and noticeably slower than results in 2024 and 2025 (2.6% and 1.9%, respectively). Labor compensation grew moderately in Q2 at 2.6%, and the offset from 1.4% productivity growth left a restrained advance in unit labor costs.

Fed officials have argued in recent months that the labor market is not a factor pushing inflation above the target of 2.0%. The results on unit labor costs support this view. If unit labor costs were the only factor driving price changes, average growth of 1.9% last year and 1.2% so far this year would suggest an inflation rate below 2.0%.

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

- Productivity gains, while still respectable, have lost a bit of vigor in recent quarters.
- The growth of unit labor costs eased slightly from an already moderate pace.

Revised Productivity in Q2: No Adjustment to Moderate Growth

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance rose by 2,000 to 206,000 in the week ending August 29, from 204,000 in the week ending August 22, revised marginally from 203,000. The four-week average was 207,250 in the August 29 week, up from 205,750 in the August 22 week. Claims remain largely range-bound at historically low levels between 200,000 and 230,000. The Action Economics/Haver Analytics Survey looked for 205,000 claims to have been filed.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”— rose by 8,000 to 1.779 million in the week of August 22, from 1.771 million in the August 15 week, revised down from 1.778 million. The four-week moving average edged down to 1.782 million in the August 22 week from 1.787 million in the prior week. The insured unemployment rate remained unchanged at 1.2% in the week of August 22. 

The insured unemployment rate varies greatly across individual states and territories. In the week ending August 15, the highest unemployment rates were in Minnesota (2.03%), Massachusetts (2.12%), Rhode Island (2.22%), Puerto Rico (2.57%), and New Jersey (2.64%). The lowest rates were in South Dakota (0.24%), Florida (0.35%), Louisiana (0.37%), Alabama (0.38%), North Carolina (0.39%), Arkansas (0.42%), North Dakota (0.46%), Kansas and Tennessee (both 0.48%), and Nebraska (0.49%). Rates in other notable states include California (1.84%), New York (1.70%), Pennsylvania (1.68%), Illinois (1.54%), and Texas (1.06%). 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 2,000 to 206,000 in the week of August 29.
- Continuing claims rose by 8,000 to 1.779 million in the week ending August 22.
- The insured unemployment rate was unchanged at 1.2% in the week of August 22.

U.S. Initial Unemployment Claims Inched Up in the Week of August 29

**Growth surprises support the equity rally**
The balance of economic news has become more favourable for equities in recent weeks. Across the G10, growth data have increasingly beaten expectations, Incoming inflation data in the meantime have been surprising to the downside. And that differential (growth surprise compared with inflation surprise) has moved closely with global share prices. The relationship is intuitive: investors welcome stronger activity when it is not matched by a comparable rise in price pressure. And that helps explain why equities have remained resilient despite rising bond yields. But it is also a fragile configuration. This week's US producer- and consumer-price releases will show whether the improvement in US growth can continue without prompting a less benign reassessment of inflation and monetary policy.

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**Uncertainty recedes, but remains high**
Some of that underlying resilience in the world economy arguably reflects a modest clearing of the policy fog. Global and US measures of economic policy uncertainty have fallen sharply from the peaks reached earlier this year. But both indices remain far above their long-run norms. The retreat has coincided with stronger equity markets, though the level still matters. Firms making investment decisions face continuing uncertainty over trade rules, costs and financing conditions. The economic outlook may have improved, but it rests on a policy environment that remains unusually unsettled.

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**A world tilting towards reflation**
An AI-generated global growth-inflation map (see chart 3 below) points to an increasingly reflationary world economy. Built from OECD and national statistics, it positions each major economy by two gauges of momentum over the past six months — the change in its OECD composite leading indicator, a guide to the direction of growth, on one axis, and the change in consumer-price inflation on the other — with each bubble scaled to the size of the economy. The four quadrants that result correspond to reflation, where both are rising; stagflation, where growth fades while inflation climbs; a benign mix of firmer growth and easing prices; and a broad slowdown. The United States, India and South Korea sit in the first of these, where both growth and inflation momentum are strengthening. Japan and Mexico occupy the more benign position of improving activity and easing price pressure, while the United Kingdom, Australia and Indonesia remain in the slowdown quadrant. China is different again: growth momentum has weakened while inflation momentum has risen from an exceptionally subdued starting point. These positions describe changes over the past six months, not the level of growth or inflation. Even so, the dispersion might make a synchronised global monetary cycle less likely. Central banks are confronting quite different domestic conditions.

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**Supply pressure stirs again**
The reflationary turn also has a supply-side dimension. Global supply-chain pressure has risen again after the long normalisation that followed the disruption of 2021 and 2022. The index has historically led producer-price inflation in advanced economies by about six months, so its latest increase points to firmer price pressure in the production pipeline. This is a signal rather than a forecast: companies can absorb some higher costs in their margins, and the pass-through to consumers depends on demand. But it suggests that the goods disinflation which helped pull headline inflation lower may be losing force.

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**The Phillips curve steepens**
Renewed supply pressure matters more when domestic economies have little spare capacity. The Phillips curve, which describes the relationship between labour-market tightness and inflation, appears to have steepened since 2020 across the United States, the United Kingdom, Japan and Canada. Chart 5 below is built by regressing consumer-price inflation on the ratio of job vacancies to unemployment — a cleaner gauge of tightness than unemployment alone — while controlling for global supply-chain pressure and energy prices, and then comparing the estimated sensitivity before and since 2020. On that basis the result remains after allowing for supply-chain and energy shocks. In other words, a given increase in the ratio of job vacancies to unemployment is now associated with a larger rise in inflation than it was before the pandemic. Supply shocks still matter, but they may pass into wages and prices more readily when labour markets are tight. The final stage of disinflation could therefore prove more costly than the first.

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**The rise in yields is a real-rate story**
This backdrop helps explain the move in the bond market. The recent rise in the US 10-year Treasury yield towards 5 per cent has not been driven mainly by inflation expectations, which remain broadly stable. The Federal Reserve's DKW model instead attributes much of the increase to higher expected real short-term rates and a larger real term premium, the extra return investors demand for holding long-dated debt. Markets are repricing the real cost of capital rather than signalling a collapse in the inflation anchor. Heavy government borrowing and strong investment in defence and artificial intelligence fit that account. But the distinction offers limited comfort if renewed supply pressure and stronger demand eventually begin to lift inflation expectations as well.

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Financial markets have entered September in an awkward mood. Global equities have advanced, but long-term bond yields have risen towards multi-decade highs as the European Central Bank meets this week and the Federal Reserve and Bank of Japan prepare to follow. The common thread is a turn towards reflation: growth is firming while inflation remains stubborn. Growth surprises have improved relative to inflation surprises, supporting equities (chart 1), while policy uncertainty has retreated from its peak but remains unusually high (chart 2). Most major economies are now on the expansionary side of the growth-inflation cycle (chart 3). Yet supply-chain pressure is returning (chart 4), inflation has become more responsive to tight labour markets since 2020 (chart 5), and the rise in bond yields has been driven largely by higher real rates rather than inflation expectations (chart 6).

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Charts of the Week: The Reflationary Turn

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