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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.

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Remote Training: Applied Time Series in Python

US labor's share of total income at a series low

Tian Yong Woon

In this week’s Letter, we look at Southeast Asia’s race to host the data centres behind the AI boom, and at how much of the gain stays at home. Asia already anchors the AI hardware supply chain, from Taiwan’s chip fabrication to South Korea’s memory, while Southeast Asia has centred on packaging, testing and assembly (chart 1). The region is now moving to the final stage: hosting the computing capacity itself. Malaysia offers the clearest example. National growth held above 5% in 2024 and 2025, but Johor grew 8.0% last year as its services sector expanded 9.9% (chart 2). Foreign direct investment underpins the boom, with Malaysia’s FDI position in information and communication tripling between 2022 and 2025 (chart 3). Strains on power and water have followed, prompting new tariffs and tighter approvals. Thailand is on a similar path. Digital industries, including data centres, took almost half of approved FDI in 2025, while approvals elsewhere fell (chart 4). Concentration in the water-stressed Eastern Economic Corridor and gaps in oversight have led the Board of Investment to pause new data centre applications. Singapore offers a cautionary tale. Operating surplus in its data processing and hosting industry rose roughly sevenfold between 2018 and 2024 (chart 5). Yet resource constraints prompted a moratorium on new data centres from 2019 to 2022, which partly redirected investment to Johor. Finally, we ask where the gains go (chart 6). Imported equipment absorbs much of the build phase, while foreign ownership, depreciation and thin staffing shrink what residents keep once facilities are running. The wedge between GDP and national income is largest where facilities are foreign-owned and capital-heavy, as under the region’s FDI-led model.

**The AI supply chain and Asia**
Asia already sits at the heart of the AI hardware supply chain (chart 1). Taiwan leads in logic fabrication, packaging, testing and server assembly, while South Korea leads in high-bandwidth memory. China holds leading positions in packaging, testing and data centres. Southeast Asia’s role has so far sat further along the chain. Malaysia plays a significant part in packaging and testing, Vietnam in testing and Thailand in server and rack assembly. The region’s ambitions are now moving to the final stage. Malaysia and Singapore already play a significant role in hosting data centres, while Thailand, Indonesia, Vietnam and the Philippines are emerging players. For economies that earned their place by assembling and testing chips, hosting the computing capacity those chips power is a natural next step. It is also a resource-hungry one, as the rest of this Letter shows.

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**Malaysia**
Malaysia’s economy has held up well. Real GDP grew above 5% in both 2024 and 2025, helped by electrical and electronics (E&E) exports, which rose 18.3% to MYR 711.6bn last year. Within that national picture, Johor stands out (chart 2). The state’s GDP grew 8.0% in 2025, outpacing Malaysia as a whole for a third straight year. The gap has also widened, from 0.6 percentage points in 2023 to 2.8 points in 2025. Services have done most of the work, and now make up 54.8% of Johor’s economy. Johor’s services output expanded 9.9% in 2025, against 4.0% for its manufacturing, and accounted for two-thirds of the state’s growth. The ongoing data centre boom has been a key driver, with the industry classified within information and communication services.

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Foreign direct investment underpins the boom. Malaysia’s FDI position in information and communication, the sector that includes data centres, tripled from MYR 39.0bn in 2022 to MYR 117.4bn in 2025 (chart 3). Net inflows over four quarters have climbed from MYR 2.9bn in 2022 to MYR 38.1bn in the year to Q2 2026. Johor is the main destination, hosting over 70% of Malaysia’s operational data centre capacity, and the Johor-Singapore Special Economic Zone offers preferential tax incentives for the sector. The facilities are hungry for power and water, and authorities have responded on both fronts. A dedicated ultra-high-voltage tariff took effect in July 2025, followed by a separate water tariff for data centres in August. Approvals have also tightened. Johor has capped water usage effectiveness, and the federal government said in October that states without sufficient water will not host new projects.

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**Thailand**
Thailand is on a similar path. Approved FDI applications in digital industries, which include data centres and cloud services, reached THB 553.0bn in 2025, up from THB 95.2bn in 2024 (chart 4). Their share of total approved FDI rose from 13.1% to 48.5%, and they more than accounted for the overall increase. Approvals outside digital industries fell 7.0%. The projects cluster in the Eastern Economic Corridor (EEC) south-east of Bangkok, notably in Chonburi and Rayong, where parts of the region already face water scarcity. The concerns echo Malaysia’s: strain on power and water, and gaps in oversight. Some operators can set up without seeking Board of Investment (BOI) promotion, and Thailand lacks a unified system for overseeing the industry. Policy has shifted accordingly. The BOI has accepted no new data centre applications since April 2026, and the cabinet approved a national data centre policy committee in August.

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**Singapore**
Singapore offers a cautionary tale. Data centres sit within its information and communications (ICT) sector, which grew at double-digit rates around the turn of the decade and peaked at around 18% in 2021 (chart 5). The industry that houses them, data processing and hosting, also includes internet search. Its operating surplus, the profit component of value added, rose roughly sevenfold from SGD 1.1bn in 2018 to SGD 7.6bn in 2024, with the sharpest jump in 2019. That growth came up against resource constraints. Singapore imposed a moratorium on new data centres from 2019 to 2022, yet the industry’s surplus still nearly doubled over the period, to SGD 5.9bn. The cap on new capacity was also a partial driver of data centre investment into neighbouring Johor. For its neighbours, Singapore’s experience shows that the gains from data centres eventually run up against the resources needed to host them.

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**Gains from data centres**
Then there is the question of where the gains go (chart 6). The build phase is a one-off. Headline investment looks large, but much of it goes on imported servers, chips and equipment, which higher imports offset in GDP. What remains is domestic value added from construction, fit-out and local services, which fades once building is complete. The operating phase recurs each year, but less of it accrues to residents than GDP implies. If a facility is foreign-owned, the after-tax profits accruing to its owners are counted in GDP but not in gross national income (GNI). Depreciation is further excluded from net national income (NNI), and both measures sit closer to resident welfare than GDP. What stays is local wages and taxes, including corporate tax. Data centres need few staff once running, so their labour share is low and the lasting employment gain small. The wedge between GDP and NNI is therefore largest where facilities are foreign-owned and capital-heavy, as under the FDI-led model above. The chart captures direct effects only, leaving aside supply-chain spillovers and crowding out.

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Asia

Economic Letter from Asia: AI and Data Centres

Winnie Tapasanun

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Wholesale inventories rose a slightly more-than-expected 0.7% (7.6% y/y) in September, the eighth straight m/m gain, after rises of 0.6% in August and 1.2% in July, indicating wholesalers continued to accumulate inventories at a solid pace. A 0.6% m/m September increase had been expected in the Informa Global Markets survey. The year-on-year rate rose to 7.6% in September, the 21st consecutive y/y rise and the fastest pace since March 2023, from 7.5% in August (1.8% in September 2025), remaining well above a low of -0.9% y/y in December 2024 but far below a peak of 25.5% y/y in June 2022.

Durable goods inventories grew 0.6% (8.0% y/y) in September, up for the 11th month running, after a 0.9% rise in August. The September m/m gain in durable goods inventories was led by a 2.5% advance (23.8% y/y) in electrical & electronic goods, followed by increases of 1.3% (4.5% y/y) in hardware, plumbing & heating equipment, 1.3% (4.6% y/y) in miscellaneous durable goods, 0.7% (4.1% y/y) in lumber & other construction materials, 0.5% (15.9% y/y) in professional & commercial equipment, and 0.4% (-2.4% y/y) in furniture & home furnishings. In contrast, durable goods wholesale inventories for metals & minerals (-0.9%; +2.7% y/y), motor vehicles & parts (-0.5%; +0.9% y/y), and machinery (-0.2%; +4.6% y/y) declined m/m in September.

Nondurable goods inventories climbed 0.9% (7.0% y/y) in September, the third successive m/m rise and the seventh in eight months, after a 0.1% uptick in August. The September m/m increase in nondurable goods inventories was driven by a 10.6% rebound (51.9% y/y) in petroleum & petroleum products, followed by rises of 2.6% (3.9% y/y) in apparel, 1.4% (2.7% y/y) in miscellaneous nondurable goods, 1.3% (9.1% y/y) in chemicals, 0.7% (0.6% y/y) in drugs, and 0.2% (4.6% y/y) in paper & paper products. To the downside, nondurable goods wholesale inventories for farm products (-7.4%; +18.9% y/y), alcoholic beverages (-1.8%; -3.3% y/y), and groceries (-0.8%; +1.5% y/y) fell m/m in September.

Wholesale sales jumped a larger-than-expected 2.8% (19.8% y/y) in September, the third straight m/m increase and the 12th in 13 months, on top of a 2.0% gain in August, indicating wholesale demand strengthened further. A 1.1% m/m September increase had been expected in the Action Economics Forecast Survey. Durable goods sales rose 1.3% (23.8% y/y) in September, the third consecutive m/m rise and the 10th in 11 months, after a 2.4% increase in August. The September m/m gain in durable goods sales was led by a 6.7% advance (37.5% y/y) in metals & minerals, followed by increases of 2.7% (19.8% y/y) in machinery, 2.6% (42.9% y/y) in electrical & electronic goods, 0.7% (19.5% y/y) in miscellaneous durable goods, and 0.2% (34.0% y/y) in professional & commercial equipment. In contrast, durable goods wholesale sales for motor vehicles & parts (-1.2%; +1.5% y/y), furniture & home furnishings (-1.0%; +12.5% y/y), hardware, plumbing & heating equipment (-0.5%; +6.8% y/y), and lumber & other construction materials (-0.1%; +6.6% y/y) decreased m/m in September.

Nondurable goods sales surged 4.4% (15.9% y/y) in September, the largest m/m gain since March, stronger than a 1.5% rebound in August. The September m/m increase in nondurable goods sales was driven by an 18.8% surge (62.8% y/y) in petroleum & petroleum products, followed by rises of 4.4% (26.5% y/y) in farm products, 2.3% (-2.6% y/y) in miscellaneous nondurable goods, 1.2% (19.0% y/y) in chemicals, 0.5% (-2.5% y/y) in alcoholic beverages, and 0.1% (2.4% y/y) in groceries. To the downside, nondurable goods wholesale sales for drugs (-1.5%; +4.7% y/y), paper & paper products (-0.8%; +4.9% y/y), and apparel (-0.6%; +1.3% y/y) fell m/m in September.

Wholesale sales outpaced inventory growth in September, pushing the inventory-to-sales ratio in the wholesale sector down to 1.21 in September, matching its lowest reading since May, from 1.23 in August (1.34 in September 2025); it was below a high of 1.42 in June 2023. The durable goods I/S ratio dipped to 1.49 in September, the lowest since July 2021, from 1.50 in August; it was below a high of 1.87 in March 2024. The durable goods I/S ratio ranged from 2.65 for machinery to 0.98 for electrical & electronic goods. The nondurable goods I/S ratio eased to 0.92 in September, the lowest since May, from 0.95 in August; it was below a high of 1.06 in March 2023. The nondurable goods I/S ratio ranged from 2.41 for apparel to 0.39 for petroleum & petroleum products.

The wholesale trade figures are available in Haver's **USECON** database. The expectations figure for inventories is contained in the **MMSAMER** database. Expectations for sales are from the **AS1REPNA** database.

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- Wholesale inventories +0.7% in Sept., eighth straight m/m gain; +7.6% y/y, highest y/y pace since March ’23.
- Durable goods inventories +0.6% (+8.0% y/y), 11th consecutive m/m increase.
- Nondurable goods inventories +0.9% (+7.0% y/y), seventh m/m rise in eight mths.
- Wholesale sales +2.8% (+19.8% y/y), 12th m/m gain in 13 mths., w/ durable goods sales up 1.3% and nondurable goods sales up 4.4%.
- I/S ratio down to 1.21, matching its lowest level since May.

U.S. Wholesale Inventories Increase in September; Sales Jump

Robert Brusca

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Japan's leading economic index, released by the Cabinet Office, has moved up from much lower readings in mid-2025. In July and August, it made two sizable moves higher, reaching a peak in August at an index level of 118. However, in September, the index fell sharply to a level of 116.4, a sharper fall than had been expected (but this reading is still preliminary). After the fall, the September reading is only marginally higher than its readings in May and June of this year. 

The leading index has been boosted by rising share prices until recently, and the interest rate spread has also signaled advance as the Bank of Japan has been raising rates.

As a reference, I include the consumer confidence indicator where we see that confidence has been mildly rising since April of this year; yet, the gradient has been extremely mild and it comes after a more lengthy period of weakness for that indicator, so that the year-over-year increase in confidence shows a 1.1% rise. However, the change over 24 months for consumer confidence is negative. But over the same 24 months, the May index is up by 7.4%, and share prices and the interest rate spread also show increases over that two-year span.

Through September, the Economy Watchers index is showing modest contraction in its headline and modest expected contraction in its future index, with a percentile standing for the Economy Watchers current index in its 47th percentile, whereas the outlook index is only in its 41st percentile; neither one of those is registering much strength. Both of those readings are below their historic medians; the median on ranking data occurs at a percentile standing of 50%.

The detail from the Economy Watchers index tells us that households are expressing some degree of normalcy in current conditions that is showing contraction but that nonetheless has a historic percentile standing above its median, ranking in its 53.4 percentile. The eating and drinking places category is a reading that tends to be volatile and depends on the overall state of the economy. It is showing less shrinkage in September than in August, but it has a queue standing that is elevated, in its 60th percentile, relatively firm. Manufacturers also have a queue percentile standing above neutral. But the overall picture remains modest.

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**Summing up**
The leading index reflects these modest conditions for growth. However, even with these cooling LEI readings, the Bank of Japan is still set for a rate hike, perhaps as soon as its next meeting. While the Cabinet Office leading index has declined, the current conditions index continues to improve in September. Thus, growth in Japan is balanced and strong enough that action against too-high inflation remains likely. The economy also will be benefiting from some fiscal stimulus. But financial conditions and particularly foreign exchange rate behavior could shift and set a new background and create a new policy dilemma at the drop of a hat.

Japan

Japan’s LEI Weakens in September

Michael J. Moran

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Nonfarm payrolls rose 165K in October, marking one of the best readings of the past few years and easily beating the expected increase of 65K. Moreover, the results in August and September were revised upward by a combined total of 84K. The new figures left the six-month average at 82K, a far better performance than the average monthly increase of only 10K in all of 2025.

Several sectors stood out on the strong side of job growth. Employment in the business-service category jumped 70K, the strongest showing since mid-2022, when the economy was still experiencing the post-Covid boom. In addition, business services contributed importantly to the upward revisions in August and September (an additional 52K jobs). Manufacturing industries are showing signs of life, as they posted their fifth consecutive monthly gain (up 19K) and added 10K to the revisions total. The health-care sector, a reliable area for job growth, had posted below-average results in the prior five months, but the gain of 55K in October brought it close to its long-run average.

The headline unemployment rate dipped 0.1 percentage point to 4.1%, a reading comfortably within the range of 4.0-4.5% seen in the past two years (although above readings in the neighborhood of 3.5% in the latter part of 2022 and the early months of 2023). It was a “strong” drop in unemployment in the sense that job growth as measured by the household survey exceeded the increase in the size of the labor force (463K versus 421K). October marked the third consecutive month of strong gains for employment and the labor force in the household survey, ending a string of eight months of generally negative results.

Although the headline unemployment rate eased in October, the broad unemployment rate (the so-called U-6 measure) rose 0.3 percentage point to 7.9%. This measure includes individuals working part-time involuntarily and individuals who would like a job and have searched for employment in the past 12 months but have not looked in the past four weeks. Both of these metrics rose in October, contributing to the increase in broad unemployment. The jump in the U-6 measure reversed a good portion of the noticeable improvement since late last year.

Average hourly earnings rose 0.4% in October, matching the firmest increase of the year thus far. The latest results left the year-over-year change at 3.1%, about equal to the readings in the prior two months, suggesting that the downward trend in wage growth may be starting to stabilize.

The surge in energy prices this year has pushed CPI inflation above the annual increase in average hourly earnings, leaving a drop in aggregate real wage income. However, the financial position of the typical wage earner is difficult to assess because the recent period of negative real wage growth followed several years of real gains, which followed sharp real declines during the inflation burst in 2021-22. The ups and downs over the past several years have been largely offsetting, but individuals in total have registered real wage gains. Still, the surge in prices this year has been sharp enough to generate strains for many households. The strains certainly seem to have had an influence on the midterm elections.

The average workweek is an underappreciated element of the monthly employment report; it receives little attention in the financial press and is not scrutinized by financial market participants. However, it is an important indicator. The current workforce comprises more than 159 million individuals, and thus a change of just a few tenths of an hour can have a noticeable effect on production. The average workweek remained at 34.4 hours for the third consecutive month in October, a better showing than readings of 34.2 to 34.3 in the prior two years or so.

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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- Payrolls posted a solid gain; Aug/Sep revised upward.
- Headline unemployment edged lower, although broad unemployment rose.
- Average hourly earnings exceeded expectations.

October Employment Report: Firm in Most Respects

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German industrial production rose by 0.7% in September after rising 1% in August. Consumer goods and capital goods sectors also had strong gains in each of the last two months. Intermediate goods showed milder and more erratic output results and trends.

Sequentially, IP headline gains are 0.5% over 12 months; that rises to a 1.5% annualized pace over six months but edges slightly lower to a 1.3% pace over three months. Still, there are output gains on all horizons, and the three-month and six-month gains are each stronger than the year-on-year.

Consumer goods output sequentially is less buoyant even over three months, largely because of a huge drop in July that gains in August and September could not erase. So, the sequential output trend for consumer goods is erratic despite two solid months of back-to-back gains. Capital goods output shows acceleration and building momentum, with its annualized pace at 8% over three months. Intermediate goods output shows contractions over each of the sequential horizons and a tendency toward deceleration.

September data conclude the data for Q3. On a full quarter-over-quarter basis, output is falling in two of three sectors. The exception is capital goods, where output posts a quarterly gain of just 0.4% at an annual rate.

To put growth in a greater perspective, annual growth rates of output ranked on data back to 2006 place total German IP growth at a 50.8 percentile standing. Capital goods have a 52.4 percentile standing for growth, while consumer goods growth is a laggard at a 36.7 percentile standing and intermediate goods at a 42.7 percentile standing. Only total IP growth and capital goods have standings above their respective 50% mark, placing them above their median gain on this horizon.

German manufacturing output, real orders, and real sales show erratic-to-weaker trends. Manufacturing output shows gains on all sequential horizons, while real orders and real sales are both showing significant declines as well as a pattern of deceleration. Manufacturing output and real sales are falling in Q3. But in terms of ranked year-over-year growth rates, real orders and real sales have standings above their historic median rates.

The survey indicators for the German economy show a progression toward strength over the last three months, and so do the sequential readings, for the most part. All the indicators are higher month-to-month. But their percentile standings, conducted on levels of these survey data, all register below median standings on data back to 2006. Recent performance is good, but it is weak in a historic context.

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Data for three early reporting EMU members, France, Spain, and Portugal, show output increases in September. However, their respective sequential footprints are not as upbeat. France shows output declines over each sequential horizon; Spain and Portugal are erratic. However, Spain’s IP growth rate over 12 months is above its median result, while France and Portugal have IP growth rates ranking near the lower third of their respective historic queues of growth rates for output.

On balance, the German data reported are fairly solid, with the surveys being quite upbeat. Real orders and real sales trends are cautionary and must be monitored. The three European reporters underline the fact that Europe is faring less well than Germany. Just another reason to be wary of good news. But what we do have here is a nice slug of good news. Maybe it can last?

Germany

German IP: Solid Gains in September; Strong Survey Results

Andrew Cates

**Half a pass-through**
Interest-rate expectations have moved higher this year, but long-term bond-yield forecasts have risen by much less. The Blue Chip Financial Forecasts panel has repeatedly revised its policy-rate outlook upwards, reflecting a more restrictive monetary environment, while making more modest adjustments to longer-term yields (chart 1). This divergence might suggest that forecasters expect tighter monetary policy to prove less persistent than current interest-rate settings imply, or that other forces are impacting longer-term yields. Japan provides an important contrast. There, long-term yield forecasts have risen more sharply than policy-rate expectations, reflecting growing concerns about government borrowing and fiscal sustainability. The broader message is that bond markets are responding not only to the outlook for monetary policy, but also to differences in fiscal conditions and the credibility of public finances.

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**The market has already voted**
South Korea offers a striking example of the gap between market prices and economic forecasts. The KOSPI has fallen sharply since its June peak, yet consensus growth projections have continued to improve (chart 2). Korea's position at the heart of the global semiconductor supply chain makes it especially sensitive to changes in expectations for AI spending. Its equity market may be signalling a turn in the investment cycle that forecasters have yet to acknowledge. Equities are imperfect predictors, of course, and a correction need not foreshadow an economic downturn. But the divergence may now be too large to dismiss.

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**Borrowers have stopped asking**
The latest Federal Reserve loan officer survey published this week offers a less reassuring view of the American economy. Demand for mortgages, commercial property loans and broader business credit has weakened sharply and together (chart 3). That matters because conventional (i.e. non-AI-related) investment has already been lacklustre. Large-scale technology construction may be sustaining aggregate capital spending, but it does not mean the wider private sector is eager to expand. Monetary policy could already be restraining the borrowers it reaches most directly, even as the most conspicuous investment boom continues elsewhere. This is an uncomfortable imbalance for the Fed — and a warning against treating strong headline investment as evidence of broad-based strength.

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**Where the credit is going instead**
US credit has not disappeared. It has increasingly changed its route. US banks have expanded lending to non-bank financial institutions at a remarkable pace in recent months, and such loans now account for a much larger share of bank balance sheets than they did before the pandemic (chart 4). Some of that money ultimately supports borrowers through private funds and other intermediaries, making the final destination of credit harder to trace. The IMF has also drawn attention to complex financing arrangements within the technology sector. None of this proves that AI investment is chiefly funded through these channels. It does hint that conventional bank-loan data provide an incomplete picture of leverage and risk. A less visible credit cycle is not necessarily a safer one.

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**Lead times lengthen again**
This week’s manufacturing PMI surveys suggest that supply constraints are returning just as demand is becoming more uneven. Manufacturers across major economies report longer delivery times and renewed pressure on input costs (chart 5). Competition for electrical equipment and specialist components, alongside tariffs and disrupted trade routes, are probably adding to the strain. This is arguably not a repeat of the supply shock of 2021–22. But it is a reminder that inflation can persist even when ordinary borrowers and consumers are retrenching. Central banks face the familiar difficulty of responding to higher prices without unnecessarily amplifying weakness elsewhere.

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**No room at the margin**
Fiscal policy offers little comfort. France's debt burden has risen markedly since 2019, while its primary balance and credit standing have deteriorated. Japan faces its own scrutiny, and the UK is hardly immune. By contrast, several countries once regarded as Europe's fiscal weak links have reduced their debt ratios and improved their standing (chart 6). The old division between prudent core and vulnerable periphery no longer fits the evidence. That helps explain why sovereign bond investors are paying closer attention to fiscal credibility. Yet the deeper concern is what happens if private investment falters. Governments with limited fiscal room may find themselves asked to support an economy at precisely the moment markets are least willing to finance the response.

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The US midterm elections have significantly altered the political landscape in Washington. Democrats have secured control of both houses of Congress, ending unified Republican control and introducing a period of divided government for the remainder of President Trump's term. Concerns about living costs and the war with Iran appear to have influenced voting patterns, contributing to Democratic gains that exceeded expectations. The economic implications are arguably mixed. Divided government could limit the scope for further tax cuts and additional public spending, but may also complicate negotiations over budgets and federal borrowing. The election arrives at an awkward moment for markets. Confidence in the AI investment boom has already been shaken by doubts over financing, valuations and eventual returns. Greater scrutiny of data centres and energy demand adds another uncertainty, but politics did not create the underlying problem. Nor is technology the only source of unease. This week's charts show forecasters struggling to keep pace with changing interest-rate expectations (chart 1), a Korean equity market at odds with increasingly optimistic growth projections (chart 2), and a marked retreat in US loan demand (chart 3). Yet lending to non-bank financial institutions continues to expand (chart 4), supply pressures are reappearing (chart 5), and stretched public finances are unsettling sovereign bond markets (chart 6). The common theme is a world economy whose apparent resilience conceals growing imbalances — and markets that may be recognising them before forecasters do.

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Charts of the Week: When Expectations Meet Reality

Sandy Batten

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Nonfarm business productivity (output per hour) jumped 3.6% q/q saar in Q3 following an upwardly revised 2.1% quarterly gain in Q2 (previously 1.4%). The Action Economics Forecast Survey expected a 2.7% quarterly increase in productivity. Compared with a year, productivity was up 2.1%, slightly slower than 2.3% y/y in Q2. Since productivity growth began to accelerate at the beginning of 2023, it has grown at a well above trend 2.7% annual rate, likely a reflection of AI and other technology advances. Strong productivity is a key factor for boosting real incomes and restraining inflation pressures.

Nonfarm business output (a little different from real GDP) increased 3.7% q/q saar in Q3 versus an upwardly revised 2.4% in Q2 (previously 1.7%). By contrast, real GDP grew 3.4% q/q in Q3. Hours worked edged up 0.1% q/q in Q3 following an unrevised 0.3% quarterly increase in Q2. Compensation growth slowed to 2.9% in Q3 from an upwardly revised 4.0% increase in Q2 (previously 2.6%). Compared to a year ago, compensation growth slowed to 4.5% y/y from 4.9%. With quarterly productivity growth exceeding compensation growth in Q3, unit labor costs fell 0.7% q/q in Q3 after an upwardly revised 1.9% quarterly gain in Q2 (previously +1.2%). The Action Economics Forecast Survey looked for a 1.1% q/q increase in unit labor costs in Q3. The y/y rate of advance for unit labor costs slowed, to 2.4% y/y in Q3 from 2.6% in Q2.

Manufacturing productivity growth slowed markedly in Q3, to 0.3% q/q saar from an upwardly revised 2.9% quarterly gain in Q2 (previously 2.4%). Factory output rose only 1.3% q/q in Q3 following an upwardly revised 5.8% q/q jump in Q2 (previously +5.4%). Hours worked increased 1.0% q/q, down from 2.9% (unrevised) in Q2. Compensation growth picked up to 3.0% from an upwardly revised 2.4% in Q2 (previously 2.1%). With the slowdown in productivity growth and the pickup in compensation growth, unit labor costs jumped 2.7% q/q in Q3 after a 0.4% quarterly decline in Q2 (previously -0.3%). Compared with a year ago, manufacturing unit labor costs were up 4.0% y/y, the highest yearly rate of advance since Q4 2024.

Today’s release also contained benchmark revisions from the beginning of 2021. They were modest but generally positive. Over the 22 quarters of revision, productivity grew at a revised 1.62% annual rate, compared to 1.50% prior to the revisions.

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

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- Output per hour jumped a larger-than-expected and well above trend 3.6% q/q saar in Q3 with an upward revision to Q2.
- Compensation growth slowed to 2.9% q/q resulting in a 0.7% quarterly decline in unit labor costs. 
- Benchmark revisions back to the beginning of 2021 were modest but generally positive, pushing up productivity growth from Q4 2020 to 1.62% from 1.50%.

U.S. Productivity Jumped in Q3 2026

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance dropped by 6,000 to 189,000 in the week ending October 31 from 195,000 in the week ending October 24, revised from 194,000. The four-week average was 194,750 in the October 31 week, down from 197,000 in the October 24 week, revised from 196,750. Claims matched the July 18 week’s level and remain range-bound at historically low levels. The Action Economics/Haver Analytics Survey looked for 196,000 claims to have been filed.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—rose 23,000 to 1.718 million in the week ending October 24, up from 1.695 million in the week ending October 17, revised from 1.701 million. The four-week moving average was 1.710 million in the October 24 week, little changed from 1.709 million in the October 17 week. The insured unemployment rate was unchanged at 1.1% in the October 24 week.

The insured unemployment rate varies greatly across individual states and territories. In the week ending October 17, no state had a rate above 2.00%; the highest rates were in Massachusetts (1.71%), Washington (1.82%), and New Jersey (1.98%). The lowest rates were in South Dakota (0.22%), Louisiana (0.28%), Florida (0.31%), Alabama (0.33%), North Carolina and North Dakota (both 0.34%), Arkansas (0.37%), Iowa and Nebraska (both 0.39%), Kansas and Tennessee (both 0.43%), New Hampshire (0.46%), Georgia (0.47%), Kentucky, Mississippi and Virginia (all 0.48%), and Idaho (0.49%). Rates in other notable states include Texas (0.93%), Pennsylvania (1.21%), Illinois (1.28%), New York (1.40%) and California (1.70%). 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 declined by 6,000 to 189,000 in the week of October 31.
- Continuing claims rose by 23,000 to 1.718 million in the week ending October 24.
- The insured unemployment rate held at 1.1% in the week of October 24.

U.S. Initial Unemployment Claims Dropped in the Week of October 31

**Momentum past its peak**
The global economy is losing momentum, but not yet its resilience. The sentix index of world economic expectations fell for a third consecutive month in November, retreating from its August peak but remaining comfortably in positive territory. The Citigroup global growth surprise index tells a similar story. Although it has eased from its summer highs, it remains firmly positive, suggesting that incoming economic data continue to exceed expectations, albeit by a diminishing margin. Both indicators therefore point to a moderation rather than a reversal in economic momentum. The global economy is still performing better than expected, but the improvement in sentiment and the flow of positive surprises are becoming less pronounced (chart 1).

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**China's new export engine**
China's export boom is changing character. Traditional manufactured goods, from clothing to furniture, are steadily losing ground in the export mix as semiconductors and computing equipment take a larger share. This is not simply a story of old industries contracting: their export values have also risen. Rather, the extraordinary expansion of technology-related trade, fuelled by AI investment, is changing the balance of China's external sector and, with it, the nature of its influence on global trade. One important caution remains. The surge in semiconductor prices means that higher export receipts cannot be read as an equivalent increase in the volume of goods shipped. Even so, the direction of the structural shift is unmistakable (chart 2).

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**A profits boom with few owners**
The US corporate profits recovery looks impressive in aggregate, but its foundations are narrow. Finance and information have supplied an outsized share of the improvement in recent years, with durable goods manufacturing also making a substantial contribution. Elsewhere, gains have been modest. This matters because the businesses driving the recovery are closely tied to capital-market conditions, technology spending and the availability of finance. A broad-based profits expansion might withstand prolonged monetary restraint more easily. One concentrated in a few capital-sensitive sectors is potentially more exposed if borrowing costs remain elevated or investors become less willing to fund ambitious investment plans (chart 3).

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**The cushion that was never tested**
The world oil market has absorbed an extraordinary disruption with more resilience than might have been expected. OPEC production fell dramatically earlier this year, yet global commercial inventories did not suffer a comparable collapse. Stocks have since declined, but the amount of oil held relative to expected demand remains comfortably above its pre-pandemic norm. This does not prove that supply was plentiful throughout the crisis. It does suggest that the market entered the shock with a meaningful buffer, limiting the pressure on available supplies. If production recovers as geopolitical tensions ease, that cushion could help keep prices under downward pressure. For energy importers, the resulting relief could prove economically significant (chart 4).

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**Rates marked up, prices less so**
The latest Blue Chip Economic Indicators survey points to a notable shift in the outlook for monetary policy. Across most of the major economies shown, forecasters have raised their projections for short-term interest rates in 2027 by more than their inflation forecasts. The divergence is particularly marked in the US, with Japan and Australia showing a similar pattern. In the UK and the euro area, the changes have been more evenly balanced. The implication is that the expected cost of borrowing has risen in real as well as nominal terms across much of the group. This is an important distinction. Markets and forecasters are not simply responding to a higher inflation outlook; they increasingly anticipate that central banks will need to maintain restrictive policy for longer (chart 5).

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**The annual rate flatters**
One reason for this reassessment may lie in the recent behaviour of underlying inflation. Although annual core inflation rates suggest that disinflation has made considerable progress, shorter-term measures tell a less reassuring story. Across much of the advanced world, core prices have been rising faster in recent weeks than the annual figures imply, notably in the US and Japan. This matters because annual comparisons can obscure a renewed acceleration in price pressures. Short-term readings are admittedly volatile, and a few firm observations do not establish a lasting reversal. Nevertheless, the breadth of the recent pickup suggests that the final stages of disinflation may prove more difficult than anticipated, reinforcing the case for central banks to keep interest rates higher for longer (chart 6).

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The world economy faces an unusual combination: cheaper energy but dearer money. Brent crude has fallen from more than $135 a barrel in early October to around $91, as hopes of a negotiated settlement in the Middle East have grown. For energy importers, this offers welcome relief from cost pressures and a boost to real incomes. Bond markets initially responded in kind: the ten-year US Treasury yield fell from 5.31 per cent in early October to 4.84 per cent at the start of November. But that relief has proved short-lived. Stronger-than-expected US core inflation has pushed the yield back towards 5 per cent and reduced expectations of monetary easing. This tension runs through this week's charts. Global economic momentum has softened, though activity remains resilient (chart 1). Beneath the surface, however, the sources of growth have become increasingly concentrated. China's export expansion is being driven by technology (chart 2), while the US profits recovery rests heavily on finance and information (chart 3). Both trends underline the growing importance of technology and capital markets to the global outlook. Meanwhile, oil inventories have remained relatively comfortable despite severe supply disruptions, suggesting that cheaper energy may offer more lasting relief (chart 4). But the monetary outlook is less encouraging. Blue Chip forecasters have raised their interest-rate projections by more than their inflation expectations (chart 5) in recent months, while recent core inflation readings suggest that underlying price pressures remain stubborn (chart 6). The result is an uneasy combination: improving supply conditions should support growth, but persistently high borrowing costs threaten an expansion increasingly dependent on technology investment. Whether cheaper energy can outweigh dearer money is becoming a key question.

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Charts of the Week: Cheaper Energy, Dearer Money

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