Andrew Cates

**The global growth cycle**
The new orders-to-inventory spread in the global manufacturing PMI is often been viewed as one of the most reliable forward-looking indicators of the global economic cycle. When new orders are rising relative to inventories, it typically signals that demand is firming, production pipelines are beginning to refill, and industrial momentum is building. Conversely, when inventories accumulate faster than orders, it often foreshadows a slowdown. As the chart shows, this spread has been holding up relatively well in recent months, suggesting that despite ongoing headwinds—US tariff policies, uneven global demand, and geopolitical uncertainty—the underlying pulse of global manufacturing remains resilient.

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**US credit standards**
The latest Senior Loan Officer Opinion Survey (SLOOS) from the Federal Reserve suggests that credit conditions remain tight but are no longer worsening, marking a tentative stabilization after several quarters of tightening. Banks reported modest easing in standards for some categories of corporate and commercial real estate loans, though mortgage lending remains constrained. Demand for business credit continues to soften, reflecting both higher borrowing costs and a cautious corporate outlook. Historically, periods of widespread tightening—like those seen in 2008 and 2020—have coincided with sharp rises in the private sector savings balance (a proxy for deleveraging), as firms and households retrench simultaneously. The current configuration, shown in the chart, indicates lingering deleveraging pressures, but not a collapse in credit availability.

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**China**
Moving to China, the latest official and Caixin PMI releases for October painted a mixed picture of activity. Both manufacturing indices softened, suggesting that the industrial rebound which underpinned much of China’s recent growth may be losing some traction. The official non-manufacturing PMI, by contrast, edged higher, hinting at continued resilience in construction and public-sector-linked services, while the Caixin services measure—which tends to reflect smaller, private-sector firms—slipped modestly. The divergence underscores China’s two-speed recovery: industrial production and exports have carried the economy, while household spending and smaller enterprises remain subdued. If manufacturing momentum fades in the coming months, the economy could face a renewed loss of balance, with fewer reliable growth engines. Still, overall performance this year has surpassed expectations, and the government’s 5% growth target remains within reach, provided activity holds steady through year-end. Looking ahead, marginal policy support and improved external sentiment—helped by selective tariff relief from the US—could offer limited, though welcome, cushioning.

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**Australia** 
In Australia, the RBA left the cash rate unchanged at its November meeting, maintaining a cautious stance amid a still-complex inflation and growth backdrop. The case for further easing has become less compelling as core inflation (trimmed mean CPI) remains above target and labour market conditions—while gradually softening—continue to show resilience. The unemployment rate has edged higher but remains low by historical standards, consistent with lingering wage and services price pressures. Recent data also hint at a tentative pickup in activity, supported by strong population growth and stabilising commodity exports. Against that backdrop, the RBA has stressed that the path for policy remains finely balanced, with a strong focus on incoming inflation data and global financial conditions. While downside risks persist—particularly from China’s slowdown and weak global trade—the persistence of domestic price pressures means the bar for renewed rate cuts remains relatively high.

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**Argentina**
Turning to Argentina, markets continue to digest the implications of President Milei’s midterm election victory amid deepening economic and financial imbalances. The peso’s broad nominal effective exchange rate has remained under heavy pressure, extending its long-running slide as investors weigh the challenges of implementing fiscal consolidation and monetary reform in a fragile political and social environment. In stark contrast, the Buenos Aires stock index has surged to record highs, reflecting optimism that Milei’s reformist agenda—anchored in deregulation, privatisation, and fiscal restraint—may eventually stabilise the economy and attract renewed capital inflows. The divergence between a falling currency and soaring equity prices highlights the tension between near-term macro risks and longer-term reform hopes. Going forward, investor confidence will hinge on the government’s ability to deliver credible policy execution while managing the inflationary fallout from ongoing peso weakness.

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**Global CO2 emissions**
Shifting focus to more structural issues, the chart underscores how decarbonisation challenges remain deeply concentrated in a few heavy-emitting sectors. Energy production alone accounts for nearly 40% of global CO₂ emissions, with manufacturing, households, and transport together contributing another 50%. This composition highlights the complex trade-offs of the energy transition: the very sectors that underpin modern living standards—power generation, industrial output, mobility, and housing—are also those most difficult to decarbonise. Climate change is therefore not just an environmental issue but a structural economic one, shaping investment, infrastructure, and pricing systems for decades to come. The tension between sustaining growth and cutting emissions will remain a defining challenge for policymakers, particularly as clean technologies face constraints in scaling fast enough to offset rising global demand for energy-intensive goods and services.

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Recent financial market developments have been shaped by a renewed bout of volatility, with heightened concerns about stretched AI valuations triggering a big correction across parts of the tech sector. This comes against a backdrop of lingering uncertainty in Washington, where the US government shutdown has continued to delay the release of several key economic reports, clouding visibility on near-term momentum. Still, the broader macro signals offer a mixed but nuanced picture. Global manufacturing PMIs have continued to hold up, hinting that underlying industrial momentum remains resilient (chart 1). The latest US Senior Loan Officer Survey points to a stabilisation in credit conditions—banks remain cautious, but the most intense phase of tightening may have now passed (chart 2). In China, the October PMIs reflected renewed softness in manufacturing alongside a still-steady services sector, tentatively suggesting that growth may be rebalancing, albeit at a weaker aggregate pace of growth (chart 3). Australia’s inflation and labour market data, meanwhile, have complicated the case for near-term policy easing, with the RBA opting to stay on hold this week as core inflation remain sticky. In Argentina, currency weakness persists even as equity markets rally, highlighting the policy and market tension surrounding President Milei’s reform agenda (chart 5). And finally, at a more structural level, latest global emissions data serve as a reminder that energy, manufacturing, transport, and households remain the principal sources of CO₂—illustrating how the climate and energy transition will continue to shape the macro landscape well beyond the current economic cycle (chart 6).

Charts of the Week: Uneven But Unbroken

Tom Moeller

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Initial claims for unemployment insurance fell 12,643 during the week ended October 25 to 219,520 (+0.6% y/y) and mostly reversed the prior week’s increase to 232,163. The four-week moving average of initial claims eased to 226,766 from 227,953. They have trended higher this year, after weakening late in 2024. The four-week average hit a low of 200,323 in January 2024.

Federal government employees initially filed 9,435 jobless insurance claims last week after 10,062 in the prior week. These figures are increased from 588 at the end of September.

Continuing claims for unemployment insurance rose to 1.957 million (5.5% y/y) in the week ended October 18 from 1.947 million in the prior week. The four-week moving average rose to 1.940 million from 1.931 million. It was the highest level since the last week of August.	

Federal government employees continuing benefits rose to 23,188 in the week ended October 18 from 14,472 in the prior week. These figures are increased from 8,680 at the end of September.

The insured unemployment rate varied greatly across individual states and territories. In the week ended October 18, the highest unemployment rates were in New Jersey (2.14%), Washington (2.03%), California (1.93%), Massachusetts (1.84%), the District of Columbia (1.86%) and Connecticut (1.70%). The lowest were in South Dakota (0.25%), Florida (0.36%), North Carolina & Louisiana (0.41%), Nebraska (0.44%) and Virginia (0.49%). Rates in other notable states include New York (1.51%), Illinois (1.50%), Pennsylvania (1.39%), and Texas (1.11%). 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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- Decline in initial claims reverses earlier gain.
- Continuing claims move higher.
- State unemployment rates vary.

U.S. Initial Unemployment Insurance Claims Decline in Latest Week

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Business in the service sector recovered last month. The Services PMI rose to 52.4 during October after falling to 50.0 in September, following a rise to 52.0 in August, according to the Institute for Supply Management. The index hit a recent high of 55.8 in October of last year and remains below the all-time high of 67.5 in November 2021. The Action Economics Forecast Survey expected a reading of 50.9 in October.

The ISM Composite Index, developed by Haver Analytics, combines the services index and the ISM manufacturing index released on Monday. This index rose to 52.0 in October, the highest level since February, after declining to 49.9 in September.

Most components of the services index increased last month. The business activity index rose to 54.3 last month after falling to 49.9 in September. It remained below its high of 70.9 in both October & November of 2021. Twenty-three percent (NSA) of respondents reported improved activity while 15.3% reported decline. The new orders index surged to a twelve month high of 56.2 after falling to 50.4 in September. Twenty-eight percent (NSA) of respondents reported improved orders while a 16.3% reported decline. Also working higher, the employment series rose to 48.2, its highest level in five months, after rising to 47.2 in September. A higher 14.3% (NSA) of respondents reported increased employment while 17.9% reported declines. Working lower, the supplier delivery series fell to 50.8 in October after rising to 52.6 in September. A lessened 3.5% of respondents (NSA) reported faster delivery speeds while a much lower 5.1% reported slower speeds.

On the inflation front, the prices index rose to a three-year high of 70.0 in October after rising to 69.4 in September. The index has increased from its March 2024 low of 53.5. An increased 43.2% (NSA) of respondents reported higher prices while 5.4% reported lower prices.

Additionally, the new export orders index rose to 47.8 (NSA) in October following a decline to 46.5 in September. A higher 14.1% of survey respondents reported higher exports while a steady 18.6% reported decline. The imports index fell to 43.7 last month after falling to 49.2 in September. A lessened 6.9% of respondents reported higher imports while an increased 19.6% reported decline. The inventory change index rose to 49.5 after falling to 47.8 and the order backlog index declined sharply to 40.8 and reversed its September rise. These series are not seasonally adjusted and not included in the ISM Services PMI total.

The ISM Services PMI is a composite index consisting of four equally weighted diffusion indexes: Business Activity, New Orders, Employment, and Supplier Deliveries. A reading above 50 indicates expansion in the services sector, while below 50 suggests contraction. Supplier Deliveries is the only ISM index that is inversed; a reading above 50 indicates slower deliveries.

The ISM figures are available in Haver's **USECON** database, with additional detail in the **SURVEYS** database. The expectations figure from Action Economics is in the **AS1REPNA** database.

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- Total services index is highest since February.
- Business activity, new orders and employment increase.
- Prices index continues upward trend from 2024 low.

U.S. ISM Services PMI Rebounds in October; Price Index Advances

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The ADP National Employment Report indicated that nonfarm private sector payrolls during October increased 42,000 (0.7% y/y) after declining 29,000 in September, revised from -32,000, and dipping an unrevised 3,000 in August. The three-month average change of 3,000 compares to 24,000 in Q3’25, 22,000 in Q2 and 139,000 in Q1. The Action Economics Forecast Survey expected a 25,000 increase in October.

Small business hiring (less than 50 employees) fell 10,000 (+0.1% y/y) after declining 34,000 in September, revised from -40,000. Employment at medium-sized firms (50-499 employees) weakened 22,000 (+0.7% y/y) after declining 30,000 in September, revised from a 20,000 fall. Large business hiring (500+ employees) offset these declines and rose 74,000 (2.2% y/y) after increasing 31,000 in September, revised from 33,000. It was the largest gain in twelve months.

Service-producing jobs increased 32,000 (0.7% y/y) in October after falling 21,000 in September, revised from -28,000. Changes amongst industry sectors were mixed. Trade, transportation & utilities employment rose 47,000 (0.3% y/y) after falling 6,000. Financial activities employment improved 11,000 (1.9% y/y) following a 9,000 decline in September. Education & health services rose 25,000 (0.2% y/y) after increasing 32,000 in September. Working lower, leisure & hospitality employment declined 5,000 (+2.4% y/y) after falling 16,000 in September. Professional & business jobs fell 15,000 (+0.1% y/y) following a 6,000 decline. Information sector employment weakened 17,000 (-0.0% y/y) after rising 1,000 in September.

Goods-producing employment moved up by 9,000 (1.0% y/y) in October, following a 7,000 decrease, revised from a 3,000 decline. Construction jobs rose 5,000 (1.8% y/y) after falling 4,000. Manufacturing jobs fell 3,000 (+0.2% y/y) following a 2,000 increase. Natural resources and mining jobs increased 7,000 (2.7% y/y) after declining 5,000 in September.

By region, in the Midwest employment rose 9,000 (0.8% y/y) last month after falling 55,000 in September. In the West, the number of jobs improved 39,000 (0.6% y/y) following a 16,000 increase. In the South, employment rose 5,000 (0.7% y/y) following a 17,000 September increase. Working lower, the number of jobs fell 12,000 (+0.9% y/y) in the Northeast in October after falling 5,000 in September.

Wage growth for job-changers in October held steady at 6.7% y/y, well below a high of 16.1% in April 2022. Wage growth for job-stayers advanced 4.5% y/y, unchanged from September and the slowest increase since June 2021. Across major industries, wage growth for job-stayers was reduced.

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

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- Gain in private payrolls is first in three months.
- Service-sector & construction hirings move up, but factory jobs decline.
- Wage growth steadies.

U.S. ADP Employment Recovers in October

Winnie Tapasanun

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Mortgage applications fell 1.9% w/w (+73.6% y/y) in the week ending October 31 following a 7.1% gain in the week ending October 24, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. The latest reading was the fifth w/w fall in six weeks to the index level of 332.3. Applications for loans to purchase a house declined 0.6% (+24.8% y/y) in the October 31 week, down for the fifth week in six, after a 4.5% increase in the previous week. Applications for loan refinancing dropped 2.8% (+151.4% y/y) in the October 31 week, down for the first week in three, following a 9.3% advance in the October 24 week.

The effective interest rate on a 30-year fixed-rate loan edged up to 6.48% in the week ending October 31 after declining to 6.47% in the week ending October 24; it was up from a low of 6.29% in the week of September 20, 2024 but down from a peak of 8.12% in the week of October 20, 2023. The rate on 15-year fixed-rate mortgages slipped to 5.81% in the October 31 week, the lowest since the September 12 week, after decreasing to 5.82% in the previous week; it was up from a low of 5.60% in the week of September 20, 2024 but down from a high of 7.44% in the week of October 27, 2023. The rate on 30-year jumbo loans rose 4bps to a three-week-high 6.52% in the October 31 week after declining to 6.48% in the prior week; however, it was slightly down from a low of 6.57% in the week of September 13, 2024 and below a high of 7.99% in the week of October 27, 2023. The rate on a 5-year ARM rose 4bps to 5.88% in the October 31 week, the highest since the September 26 week, after rising to 5.84% in the previous week; it was above a low of 5.84% in the week of September 13, 2024 but below a high of 7.31% in the week of October 27, 2023.

The share of applications for refinancing an existing loan edged down to 57.0% of total applications in the week ending October 31 after rising to a five-week-high 57.1% in the week ending October 24; those numbers remained below a peak of 60.2% in the week of September 19. The adjustable-rate mortgage (ARM) share of activity fell to 8.7% in the October 31 week, the lowest reading since the September 26 week, after falling to 8.9% in the prior week; it was below its recent peak of 12.9% in the September 12 week and a high of 9.6% in the April 11 week but up from a low of 4.7% in the January 3 week.

The average size of a mortgage loan, up for the third week in four, increased 0.6% w/w (7.3% y/y) to $414,900 in the October 31 week, the highest level since the September 19 week, reversing a 0.6% drop to $412,300 in the October 24 week. The average size of a purchase loan fell 0.4% (-2.3% y/y) to $435,100 in the October 31 week on top of a 0.5% decline to $436,800 in the prior week, marking the fourth weekly fall in five weeks and the lowest level since the October 10 week. The average size of a loan to refinance a mortgage rose 1.5% (34.0% y/y) to $399,700 in the October 31 week after a 0.4% decline to $393,900 in the previous week, registering the third weekly rise in four weeks and the highest level since the September 19 week.

The Mortgage Bankers Association Survey covers 75% of all U.S. retail residential mortgage applications and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. The base period and value for all indexes is March 16, 1990=100. The figures for weekly mortgage applications and interest rates are available in Haver’s **SURVEYS** database.

- Purchase applications -0.6% w/w; refinancing loan applications -2.8% w/w.
- Effective interest rate on 30-year fixed loans ticks up to 6.48% despite ongoing downward trend.
- Average loan size rebounds to the highest level since the September 19 week.

U.S. Mortgage Applications Drop 1.9% in the October 31 Week After Previous Gain

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Retail gasoline prices for all grades slipped to $3.15 per gallon (-1.3% y/y), on average, in the week ended November 3 after rising to $3.16 in the previous week. The recent high was $3.79 in the week ending April 22, 2024. Their all-time high of $5.11 occurred in the week ending June 13, 2022. Haver Analytics seasonally adjusts the retail prices of regular grade gasoline. That price held at $3.05 last week versus $3.05 in the previous week.

The price of West Texas Intermediate crude oil rose to $60.70 per barrel (-11.2% y/y) in the week ended October 31 after improving to $59.43 per barrel in the prior week. It was the highest price in three weeks but prices remained below a recent high of $74.17 during the third week of June. The cost of crude oil peaked at $120.46 in the week of June 10, 2022. Yesterday, the price was $61.05 per barrel. The price of European Brent crude increased to $65.02 per barrel (-10.5% y/y) in the week of October 31 after rising to $63.22 in the prior week. Prices remained below a recent high of $95.61 in the week of September 29, 2023 and below a peak of $127.40 in June 2022. Yesterday, the price was $65.79 per barrel.

Natural gas prices rose to an average $3.43/mmbtu (88.5% y/y) in the week ended October 31 after rising to $3.25/mmbtu in the prior week. The rise left prices at the highest level since the second week of April and well above the low of $1.40/mmbtu in the week of March 15, 2024. Yesterday, the price was $3.37 per mmbtu.

Gasoline demand declined 4.2% y/y in the four weeks ending October 24, following a 3.6% y/y decline in the prior four weeks. Demand for all petroleum products weakened 0.9% y/y in the four weeks ending October 24, after slipping 0.1% y/y in the previous four-week period. Crude oil input to refineries declined 1.7% y/y in the four weeks ending October 24, after a 0.3% y/y gain in the prior four weeks.

Gasoline inventories ease 0.1% y/y in the week ending October 24 following a 1.5% y/y gain in the prior week. Residual fuel oil inventories fell 10.0% y/y in the October 24 week after falling 13.0% y/y in the prior week. Working higher, crude oil inventories rose 1.7% y/y in the week of October 24 after rising 2.6% y/y in the previous week.

Measured in days’ supply, gasoline inventories fell to 24.3 days in the week of October 24. The recent low was 22.9 days in the week of November 8, 2024. The supply of crude oil held steady at 26.7 days in the week of October 24. The supply remained below a recent high of 31.9 days in the week of March 3, 2023.

These data are reported by the Energy Information Administration of the U.S. Department of Energy. The price and supply/demand data can be found in Haver’s **WEEKLY** and **USENERGY** databases.

- Gasoline prices are minimally changed.
- Crude oil costs rise further.
- Natural gas prices strengthen.

U.S. Energy Prices Are Mixed in Latest Week

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U.S. light vehicle sales dove 6.9% (-4.5% y/y) in October to 15.48 million units (SAAR) after holding steady at 16.62 million units in September. Sales fell broadly. 

Light truck sales slid 6.9% (-1.4% y/y) in October to 12.90 million units, after rising 0.9% in September. Purchases of domestically-made light trucks fell 7.9% (+1.4% y/y) to 10.10 million units, the lowest level since February, after rising 3.4% in September. Sales of imported light trucks fell 2.8% (-10.3% y/y) to 2.80 million units, following a 7.4% September decline.

Trucks’ 83.3% share of the light vehicle market last month was steady with September and compared to 82.6% in August, and to 80.7% in October of last year. The share has averaged 82.4% so far this year versus 56.5% ten years earlier.

Passenger car sales declined 6.9% (-17.6% y/y) last month to 2.58 million, after falling 4.8% in September. Purchases of domestically-produced cars fell 7.2% (-16.5% y/y) last month to 1.93 million units, after weakening 7.1% in September. Imported auto sales declined 4.5% (-22.0% y/y) to 0.64 million units after holding steady in September.

Imports' 22.2% share of the U.S. light vehicle market rose from 21.4% in September. These compared to a high of 26.3% in November of 2023. Imports' share of the passenger car market edged up to 24.8% last month from 24.2% in September. It reached a high of 38.1% in September 2021. Imports' share of the light truck market increased to 21.7% last month from 20.8% in September.

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

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- Light truck sales and auto purchases decline m/m.
- Total sales decline sharply y/y.
- Imports' market share declines.

U.S. Light Vehicle Sales Fall Sharply in October

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Factory sector activity remains under pressure. The ISM U.S. manufacturing PMI declined to 48.7 in October after rising to 49.1 during September from 48.7 in August, according to the Institute for Supply Management. These figures are below the 50 expansion-contraction dividing line. As a result, they continue to indicate that the U.S. manufacturing sector weakened for the eighth consecutive month. The reading remained remain above, however, a low of 46.9 in October of last year. A November index of 49.4 had been expected in the Action Economics Forecast Survey.

The production component declined to 48.2 last month after rising to 51.0 in September. It remained increased from an April low of 44.0. A lessened 27.3% (NSA) of respondents reported higher production while an increased 22.0% reported lower output levels. The inventory reading fell to a 12-month low of 45.8 from 47.7 in September. A lessened 13.2% (NSA) of respondents raised inventories while a higher 21.7% shed them.

Working higher, the new orders index rose to 49.4 during October from 48.9 in September. An increased 20.4% (NSA) of respondents reported new orders improvement while 26.0% reported a decline. The employment index increased to a five-month high of 46.0 last month after rising to 45.3 in September. An increased 13.1% (NSA) of respondents more hiring while 22.3% reported less. The supplier delivery index rose to 54.2 in October from 52.6 in September. Twelve percent (NSA) of respondents reported slower product delivery speeds while 3.2% reported a quickening.

The prices index weakened to 58.0 (NSA) during October from 61.9 in September. It was below a high of 69.8 in April, and well above its low of 39.4 in December 2022. A lessened 27.3% of respondents reported higher prices, a nine month low, while an increased 8.7% reported lower.

In other series, the export orders index rose to a seasonally adjusted 44.5 in October after falling sharply to 43.0 in September. It remained up from 40.1 May low. The imports index edged up to 45.2 last month from 44.7 in September. The index is below a high of 52.6 in February.

The ISM figures are based on responses from over 400 purchasing and supply executives from 18 industries, which are weighted according to each industry’s contribution to GDP. These data are diffusion indexes where a reading above 50 indicates expansion; below 50 indicates contraction. The ISM Manufacturing PMI is a composite index based on the diffusion indexes of five of the indexes (seasonally adjusted) with equal weights: New Orders, Production, Employment, Supplier Deliveries, and Inventories. The figures from the Institute for Supply Management can be found in Haver’s **USECON** database; further detail is found in the **SURVEYS** database. The expectations number is available in Haver’s **AS1REPNA** database.

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- Decline reverses all of September increase.					
- Lower production offsets new orders rise.
- Price index falls to nine-month low.

U.S. ISM Manufacturing PMI Eases in October; Price Index Declines Sharply

Rising US long-term real yields point to strong demand for investment funding

US retail sales accelerate even as consumers remain gloomy

Retail gasoline price still well above pre-conflict level and now rising again

PMIs showing widespread revival of global economy

Crude oil price has returned to pre-conflict level but traffic through Hormuz still subpar

Surging orders for computers and electronics propelling durable goods orders

Next year's inflation forecasts are on the rise and above target

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

Elevated energy prices putting intense upward pressure on input prices around the globe

US is big leader in global surge in private AI investment

Larger-than-usual income tax refunds this year are supporting consumer spending

Sharply rising share of AI-related jobs

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

Recent pickup in US defense orders could help support overall growth ahead

Cost of transporting crude oil has soared to series high

Market-based inflation expectations have not yet reflected recent surge in oil prices

Global equity markets are fearing a major economic disruption from soaring oil prices

Is recent drop in sentiment signaling softer growth ahead?

With the Iran conflict, geopolitical risk has soared to alarming levels

Soaring AI-related investment in US underpinning strong contribution of business spending to overall growth

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

US and China big leaders in adoption of AI models

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Jonathan Basile

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The U.S. Employment Cost Index (ECI) expanded at a steady 0.9% rate in the three months ended June, the same quarterly pace as in the first quarter. On a year-over-year (YoY) basis, compensation costs have been running at the same 3.4% figure for three consecutive quarters. This kind of three-quarter stability is unusual for a cyclical indicator, happening just 5% of the time since the 1982 inception of the series. A deeper dive beneath the headline number reveals 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 eased to 3.2% YoY in 2026’s second quarter, the lowest reading in five years. The latter advanced at a 3.8% YoY rate, the highest in five quarters. Moreover, the Bureau of Labor Statistics’ (BLS) unpublished Health Benefits for Private Industry, a subset of ECI benefits, expanded at a much swifter 6.0% YoY. The combination of higher benefit inflation and slower wage inflation implies an environment that is not favorable for corporate profits.

The picture for the private sector is similar to that for all civilian workers, with one difference. Private ECI: Compensation costs are not steady, they are, instead, decelerating. In the second quarter, Private ECI: Compensation downshifted to a 3.3% YoY figure, the lowest since 2021’s second quarter. Private ECI: Wages and Salaries came in at a 3.1% YoY rate, the weakest since 2021’s first quarter. Private ECI: Benefits advanced to 3.8% YoY, the strongest 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 -0.7% 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 oscillating pressures on consumer purchasing power with “real” inflation-adjusted measures. To that end, consumers’ purchasing power loss in 2026’s second quarter, measured by the Real ECI: Wages and Salaries, amounted to a -0.3% YoY decline. This was the weakest since 2022’s fourth quarter. However, outside the pandemic-disruption period, this compression was the worst in 14 years. 

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. Special factors that supported second quarter consumer spending, like the World Cup, also should dissipate as the summer quarter unfolds.

The disinflationary takeaway from the nominal and real wage picture for household income supports the Fed’s inaction to hold rates steady at the July 29 FOMC meeting. The combination of higher benefit/lower wage growth generating a profit squeeze is another disinflationary takeaway for corporate income that sides with the Fed doves.

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 growth was steady.
- But faster benefit growth is not favorable for profits.
- Slower wage growth is employers' reaction.

Steady Employment Cost Index Reveals Divergent Wages and Benefits

Robert Brusca

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The harmonized index of consumer prices (HICP) for the European Monetary Union (EMU) surged in July, rising by 0.5% after having sagged in June with a -0.1% month-to-month change. The ceasefire that had temporarily been arranged with Iran in June has given way to the reality of ongoing war and ongoing strikes against tanker traffic. While there are some ongoing talks among the combatants, there is not a lot of hope for another ceasefire that's going to last. Both the United States and Iran have their own particular needs to have a ceasefire. But Iran took the last ceasefire as an opportunity to rebuild, recalibrate, apparently strengthen its military capabilities, and then extend its demands for control of the Strait of Hormuz. These were all nonstarters from the U.S. perspective, and I presume from a global perspective as well. The conditions necessary to underpin a ceasefire with some staying power simply do not exist anymore. The U.S. has resorted to hitting Iran harder.

As a result, energy prices have moved back up and inflation in July moved back up in the EMU. Inflation shows a 2.9% rise over 12 months, a 4.1% annual rate of increase over six months, and a 2.6% annual rate of increase over three months. All of these are excessive with respect to the ECB objectives.

Over six months inflation is excessive in the EMU and in its four largest economies: Germany, France, Italy, and Spain. The best (the lowest) inflation performance is in Germany at 3%, while the worst inflation performance is in Italy at 5.2%. These four countries all exceed the ECB’s desired pace of 2% over 12 months as well. Twelve-month Spanish inflation runs at 3.8%, while in France inflation nails down the low side at 2.3%. Over three months, conditions are more varied because we're mixing in this one-month period of very good inflation news with two months of not so good inflation news. Over three months, Spain still logs a 4.4% increase in its HICP at an annual rate, but France logs 1.2% and Italy logs 1.6%; Germany's pace comes in at 2.8%.

We have core inflation or inflation excluding energy metrics (ex-energy in the case of Germany) for three of the four large countries. These metrics for July ranged from a 0.2% increase month-to-month in Germany to a 0.4% increase in core inflation in Italy. The ex-energy or core measures are within reach of the ECB’s target when applied to the core on a country basis. For Germany, the pace is 2.2% over 12 months, on the low side; for Italy, it’s at 1.6%. But excessive inflation persists for Spain where the core measure is at 3%. Over six months, results are highly similar to what we see over 12 months, but over three months we see German inflation at 2.3%, Italy at 2.4%, and Spain at 3.1%. All of these core or ex-energy measures become uncomfortable over three months.

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It's clear that the situations in the Middle East—including Iran pressuring traffic through the Strait of Hormuz as well as the crimping of the flows into the Red Sea toward the Suez Canal by the Houthis—are contributing to these uncertainties and to the high short-term inflation rates.

We're talking about central banks now managing shocks, not about creating expectations involving macroeconomic developments. Policymaking has clearly transitioned into a different kind of world where central banks are onlookers and have no way of anticipating, and therefore no way of guiding investors over what to expect in the future because nobody knows.

This state of uncertainty is uncomfortable, but markets can deal with it, and the economies have so far been able to manage it. Although it's not quite the same kind of disruption, the global economy has been dealing with the uncertainties from the Russian attack in Ukraine for quite a bit longer. Currently, that conflict is beginning to turn more in favor of Ukraine as it has discovered a way to strike Russia internally and disrupt its oil production. The beat goes on as the uncertainty ramps up.

Despite the devastation rained on Iran in the attacks from the United States and Israel, Iran continues to surprise with an ability to mount counterattacks in the Strait of Hormuz. It is a fragile enough and an important enough waterway that it has been able to be disrupted by Iran with its remaining missiles and drone resources. All of this simply makes the future much more difficult to assess because it sets the bar extremely high for the kind of dominance the U.S. needs to achieve in order to open the Strait of Hormuz wide with no risk of attack. For now, that objective is a bridge too far. Despite everything the U.S. has done, it still hasn't done enough.

Europe

EMU HICP Flares After Sag

**The Fed stays its hand**
With US inflation still running above target and the economy expanding at a solid pace, the case for a further hold commanded a clear majority — but not the whole committee. The decision to stand pat for a fifth straight meeting drew three dissents, from members who wanted to raise rates without further delay: a rare and public split, and the sharpest the committee’s new leadership has yet faced. The futures market, by contrast, had been far less conflicted. A hold was the firm favourite going in, with only about a one-in-three chance of a hike attached, so the outcome itself surprised few. Where the real uncertainty now lies is in the path beyond this meeting. The rates implied by the September, December and March contracts no longer describe an easing cycle at all; if anything they lean towards further tightening, with a move as soon as September now a live possibility — a marked change from the cuts that had been priced earlier in the year. Tellingly, the statement accompanying the decision singled out strong capital investment and productivity growth, the very forces that run through the rest of this week’s charts.

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**Expensive money, for the right reasons**
If official rates are going nowhere fast, the same cannot be said of the real cost of long-term capital. The US 10-year inflation-protected yield has risen to around its highest in twenty years, and the timing is instructive: it has moved closely with the Citigroup economic surprise index, climbing as incoming data have repeatedly beaten expectations. That distinction matters. A real yield rising because the economy keeps surprising to the upside is a very different thing from one pushed higher by, say, fiscal policy scares. It potentially points instead to genuine strength in the demand for capital — and, as the charts that follow suggest, to an investment cycle that is beginning to turn.

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**A recovery led from the factory floor**
The composition of the July flash surveys is as notable as their level. As chart 3 below suggests, in most of the major economies the manufacturing reading now sits above that for services — the points falling below the diagonal — reversing the pattern of much of the post-pandemic period, when services did the heavy lifting. A manufacturing-led upturn is characteristic of an investment cycle rather than a consumption one, and it fits the wider picture: it is firms, not households, that are stepping up their spending, whether on artificial intelligence, electrification, defence or the reshoring of supply chains.

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**Orders confirm the turn**
Survey balances are one thing; hard orders are another, and they are pointing the same way. A composite of manufacturing new orders across the United States, Japan, Germany and Canada has turned firmly higher, corroborating the message of the flash surveys. The strength is genuine, though it warrants a caveat. Some of it reflects lumpy and volatile items, Japanese machinery orders among them, and much of the wider investment surge is defensive as much as productive, directed at security and resilience rather than at raising the economy’s productive capacity. Whether it ultimately pays off will turn on that distinction — and on whether it is funded out of profits or increasingly out of borrowing.

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**Markets at ease with higher rates**
Equities, remarkably, have taken all of this in their stride, holding near record highs even as real yields have climbed. The reason can be read in the way assets move together. The correlations that broke down in 2022, when rising real yields hit shares and bonds alike and government bonds ceased to hedge equity risk, have since reverted to something closer to their historical norm. That normalisation is the mark of a market persuaded that higher rates reflect stronger growth rather than an inflation problem. It is a coherent view, and may prove right; but it rests on the assumption that the investment now under way delivers the productivity gains its champions promise. This week’s rotation out of the artificial-intelligence winners, and the sharp fall in chip stocks led by South Korea, show how quickly that assumption can be called into question.

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**The constraint beneath the boom**
For all the enthusiasm about capital spending, the boom is running into a physical wall, and nowhere is that clearer than at sea. Rebased to their 2024 average, Baltic freight rates tell a strikingly selective story. Since the breakdown of the US–Iran understanding and the associated escalation in the Middle East, the cost of shipping crude oil, refined products and gas has surged, while dry-bulk rates — grain, iron ore, coal — have barely moved. This is not a broad freight boom but a targeted repricing of the risk to the world’s energy arteries, above all the Strait of Hormuz. It is a fitting coda to the week: an investment cycle straining against the availability, and the security, of the energy and resources on which it ultimately depends.

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The Federal Reserve left its policy rate unchanged at the conclusion of last night’s meeting, a decision that had been widely expected — the futures market went in pricing only around a one-in-three chance of a hike — but one that split the committee unusually sharply, with three of its members dissenting in favour of an increase to counter inflation that has now run above target for more than five years (chart 1). Yet whatever the near-term path of official rates, the real cost of capital has already moved decisively. The real ten-year yield has climbed to around its highest in two decades, and it has done so in step with a run of firmer-than-expected economic data (chart 2). Behind that resilience lies an investment cycle that is quietly gathering pace. The July flash surveys show the upturn led, unusually, by manufacturing rather than services (chart 3), and the hard data are beginning to agree, with manufacturing orders across many major economies turning firmly higher (chart 4). Equity markets, for their part, have taken elevated real rates in their stride, the bond–equity relationships that fractured in 2022 having since been restored (chart 5) — the signature of a market that believes it has entered a higher-return, investment-led regime. The optimism is not unqualified. A fresh round of US tariffs and a sharp sell-off in chip stocks, led by South Korea, are reminders that the payoff from all this spending is far from assured. And the boom is colliding with a physical constraint: since the breakdown of the US–Iran understanding, Baltic tanker and gas freight rates have surged even as dry-bulk rates have stayed calm (chart 6), a pointed warning about the security of the world’s energy arteries.

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Charts of the Week: The Price of an Investment Boom

Michael J. Moran

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The price index for personal consumption expenditures, the inflation measure targeted by the Federal Reserve, fell 0.1% in June, led by a drop of 5.9% in the energy component. The decline pushed the year-over-year increase to 3.7%, down from 4.1% in May but still above readings of 2.9% in January and February, before the Iran conflict became a factor.

The drop in the energy component would be more encouraging were it not for the re-escalation of fighting with Iran and renewed pressure on oil prices. The average prices of crude oil and gasoline in July are likely to be below those in June, raising the prospect of another drop in the energy component of the PCE price index. However, prices near the end of the month climbed above the June average, leaving upside risks for August.

While the energy component dominated the change in the headline price index, other items also were restrained. Food prices rose 0.3%, although they almost rounded down to 0.2% (0.253%) and the monthly change was comfortably within the range of the past few years. The core index (excluding food and energy) rose only 0.1%, matching the lightest readings in the post-pandemic period (although a few observations were smaller if rounded to more than one decimal point). The core index has risen 3.3% in the past year, down from 3.4% in May, but still far above the Federal Reserve’s target of 2.0%.

The Fed pays close attention to a subcomponent of the core index (services excluding energy and housing), which has been responsible for much of the advance in the core index in recent years. This measure, too, was restrained in June (0.1%), but the year-over-year change of 3.8% remained near the top of the range of the past two years.

Personal income rose 0.2% in June, with employee compensation, non-farm proprietors’ income, and dividends all posting favorable results. The increase translated into a gain of 0.3% after adjusting for inflation, following an advance of 0.2% in May. The back-to-back increases are notable in that they perhaps signal the end of a soft patch that began in the closing months of 2025. The growth of real personal income slipped into negative territory in March, influenced by the surge in energy prices, but growth had been decelerating since October of last year and had slipped to a pace of less than 1.0% before the conflict with Iran became a factor. Results in the past two months suggest that real income growth might be returning to a firm path.

Real income growth in the past two months certainly supported spending by households, as real consumption expenditures rose 0.4% in both May and June. For the second quarter, the GDP report published today showed annual growth of 3.2%, a brisk pace. Moreover, the firm results at the end of the quarter brighten prospects for the third quarter. With real outlays in June already above the average for Q2, the summer quarter is likely to show a higher average than that in Q2. Indeed, even if real PCE remains unchanged over the July-September period, the average for Q3 would translate to real PCE growth of approximately 2.0% (annual rate).

The active spending by consumers has provided solid support for the economy, but it has come at the expense of an eroding saving rate. The saving rate averaged 5.5% in 2023 and 2024, peaking at 6.4% in January 2024. Deceleration since then left the saving rate at 2.7% in June. One could put either a positive or negative spin on the downward trend. An optimist could argue that wealth gains from the stock market are allowing many households to live the high life. Others might counter that affordability issues leave households with little ability to save. These explanations for a low saving rate are not mutually exclusive; both are likely having an influence.

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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- (Temporary?) relief on price pressures
- Respectable income gain and active spending by consumers

Personal Income, Consumption, and Prices in June

Sandy Batten

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Real GDP grew 1.5% q/q saar in Q2 following a 2.1% increase in Q1, according to the Advance release from the BEA. The Action Economics Forecast Survey looked for a 2.3% quarterly gain. Compared with a year ago, GDP was up 2.1%. The slightly subpar performance in the second quarter was due mostly to significant drags exerted by trade and inventory investment. A 11.5% quarterly surge in imports widened the trade deficit markedly resulting in net exports subtracting 1.0%-point from overall growth. Inventory investment declined $50.8 billion (2017$) in Q2, subtracting 0.7%-point. This was the fifth consecutive quarter in which inventories declined, a very unusual occurrence when the economy is not in a recession.

Personal consumption expenditures and business spending on equipment and intellectual property provided much of the boost to overall GDP growth in Q2. PCE grew 3.2% q/q saar in Q2, accounting for 2.1%-points of overall GDP growth, after a tepid 0.5% quarterly increase in Q1. The Q2 rebound was led by a 5.2% quarterly jump in spending on goods (a 6.8% rise in spending on durables and a 4.4% increase in spending on nondurables) although spending on services rose a solid 2.2%. Larger-than-normal income tax refunds this year likely played a key role in the rebound in PCE in Q2.

Business spending on equipment posted a second consecutive double-digit quarterly gain in Q2, increasing 15.2% on top of a 15.8% quarterly gain in Q1. Business spending on intellectual property increased a solid 8.8% in Q2 though a slowdown from the 13.8% quarterly jump in Q1, due mostly to a slowdown in spending on software. Together, these two added 1.3%-points to total GDP growth. Surprisingly, residential construction added marginally to GDP growth in Q2, posting its first quarterly gain in six quarters. It edged up 1.5% q/q and contributed just 0.1%-point to total GDP growth.

In addition to the drags from weaker inventory investment and a wider trade deficit, business construction spending and federal government spending also subtracted from Q2 GDP growth. In sharp contrast to the strength of business spending on equipment and intellectual property, business construction spending fell 5.0% q/q in Q2, its tenth consecutive quarterly decline, and subtracted 0.1%-point from total growth. Building of data centers has been vigorous, but softness in offices and manufacturing facilities has dwarfed the strength in this relatively new area.

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Total government spending fell 0.8% q/q in Q2 after a 4.4% rebound in Q1, subtracting 0.1%-point from overall growth. A 12.8% q/q slump in federal government nondefense spending accounted for the decline in total government spending. Federal defense spending rose 2.4% and state and local government spending increased 1.1%. Federal defense spending most likely will pick up further in coming quarters because of the escalating conflict in the Middle East.

Led by the solid gains in personal consumption expenditures and business spending, domestic demand posted stellar growth in Q2. Real final sales to domestic purchasers (GDP less inventory investment and net exports) increased a well above trend 3.1% q/q saar in Q2 after a 2.2% quarterly increase in Q1. Compared to a year ago, this measure of domestic demand was up 2.2%. Real final sales to private domestic purchasers (the Fed’s preferred measure of domestic demand) jumped 3.9% q/q in Q2, its largest quarterly gain since Q1 2023, to be up 2.6% from a year ago.

As was generally expected given the surge in energy prices following the escalation of the US-Iran conflict in early March, the GDP price index jumped 6.2% q/q saar in Q2 after rising 3.6% in Q1, reflecting an 87% annualized rise in energy prices. The PCE price index also reflected the jump in energy prices, rising 5.1% q/q in Q2 versus 4.6% in Q1. The performance of the core GDP and PCE price indexes (that is, excluding food and energy prices) was less worrisome. The core GDP price index was up 4.4% in Q2 versus a 3.2% quarterly gain in Q1. However, core PCE price inflation slowed to 3.4% in Q2 from 4.4% in Q1.

The GDP data can be found in Haver’s **USECON** and **USNA** databases. **USNA** contains virtually all of the Bureau of Economic Analysis detail in the national accounts. The Action Economics consensus estimates can be found in **AS1REPNA**.

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- The quarterly gain was led by personal consumption and business spending on equipment and intellectual property.
- Inventory investment and net exports were meaningful drags on overall growth.
- Domestic demand growth accelerated to well above trend.
- Reflecting the jump in energy prices after the escalation of the US-Iran conflict, GDP inflation accelerated markedly.