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Abdel M. Zellou, Ph.D.

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

Winnie Tapasanun

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Total factory orders increased a less-than-expected 0.1% m/m in January following a 0.4% decline in December and a 2.7% gain in November, data from the U.S. Census Bureau showed. The Action Economics Forecast Survey had expected a 0.3% m/m January increase. The year-on-year growth rate eased to a three-month-low 4.4% in January from 4.5% in December (+3.2% in January 2025), remaining far below a peak of 39.6% in April 2021. Notably, orders for defense aircraft & parts plunged 23.8% m/m in January following an 11.8% jump in December and a 3.5% increase in November, while orders for nondefense aircraft & parts rose 3.8% after a 22.7% December drop and a 98.2% November surge. Factory orders excluding defense rebounded 0.4% (3.8% y/y), the second m/m gain in three months, following a 0.9% December decline. Factory orders excluding the transportation sector rose 0.4% (1.4% y/y), the third successive m/m rise, after a 0.6% December increase.

Durable goods orders were unchanged (+10.3% y/y) in January after a 0.9% decline in December (matching 0.0% m/m in the advance report on March 13). The flat January reading reflected a 0.8% orders decrease (+20.1% y/y) in transportation equipment after a 4.6% December drop, alongside m/m declines of 0.6% (+7.6% y/y) in electrical equipment, appliances & components and 0.4% (+3.7% y/y) in furniture & related products. Other major durable goods orders categories rose m/m in January, led by a 1.3% gain (8.3% y/y) in computers & electronic products, followed by m/m increases of 0.7% (8.7% y/y) in primary metals, 0.5% (5.8% y/y) in fabricated metal products, and 0.2% (6.1% y/y) in machinery.

Nondurable goods orders, which equal nondurable goods shipments, increased 0.3% (-1.4% y/y) in January following a 0.1% uptick in December and four straight m/m declines. The January m/m rise was led by a 1.3% rebound (-12.8% y/y) in petroleum & coal products, followed by gains of 1.1% (-0.2% y/y) in printing, 1.0% (4.2% y/y) in apparel, 0.6% (2.8% y/y) in textile products, 0.4% (0.0% y/y) in food products, and 0.1% (0.1% y/y) in paper products. To the downside, the following nondurable goods shipments declined m/m in January: textile mills (-2.1%; -1.3% y/y), leather & allied products (-1.2%; -10.2% y/y), beverage & tobacco products (-0.5%; +3.2% y/y), and plastics & rubber products (-0.3%; +0.4% y/y). Meanwhile, shipments for chemical products were virtually unchanged (+3.5% y/y) in January following three consecutive m/m increases.

Total shipments rose 0.5% (2.4% y/y) in January, the third m/m rise in four months, following a 0.7% rebound in December. Excluding transportation, shipments increased 0.4% (1.1% y/y), the fourth m/m gain in five months, after a 0.5% December rise. Shipments of durable goods industries grew 0.6% (6.3% y/y), also up for the fourth time in five months, after a 1.2% December gain. This reflected m/m durable goods shipments rises of 1.6% (6.4% y/y) in computers & electronic products, 1.0% (9.4% y/y) in transportation equipment, 0.9% (3.9% y/y) in nonmetallic mineral products, 0.6% (4.7% y/y) in fabricated metal products, 0.4% (8.6% y/y) in primary metals, 0.3% (4.0% y/y) in electrical equipment, appliances & components, and 0.3% (-3.0% y/y) in wood products. By contrast, durable goods shipments for furniture & related products (-0.7%; +1.4% y/y) and machinery (-0.4%; +6.9% y/y) fell m/m in January, while shipments for miscellaneous durable goods were flat (+2.1% y/y) following six straight m/m gains.

Unfilled orders grew 0.8% (11.1% y/y) in January, the sixth consecutive m/m increase, on top of a 0.9% rise in December. Excluding transportation, unfilled orders rose 0.4% (1.8% y/y), also up for the sixth straight month, after a matching 0.4% December rise. Backlogs of durable goods climbed 0.8% (11.1% y/y) in January, reflecting m/m increases across nearly all categories of durable goods unfilled orders, led by rises of 1.0% (17.4% y/y) in transportation equipment and 0.9% (5.1% y/y) in electrical equipment, appliances & components, partially offset by a flat reading (+2.1% y/y) in primary metals.

Inventories edged up 0.1% (0.8% y/y) in January, the third successive m/m increase, after a 0.1% uptick in December. Excluding transportation, inventories were unchanged (+1.0% y/y) for the second consecutive month. Durable goods inventories grew 0.2% (1.7% y/y) for the fourth straight month, while nondurable goods inventories fell 0.2% (-0.6% y/y), the fourth m/m fall in five months, after a 0.3% December decline.

The factory sector data are available in Haver’s **USECON** database. The Action Economics Forecast Survey is in the **AS1REPNA** database.

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- January factory orders +0.1% m/m (+4.4% y/y); second m/m gain in three months and 7.7% above the Jan. ’24 low.
- Durable goods flat; nondurable goods orders +0.3% m/m; shipments +0.5% m/m.
- Transportation orders -0.8% m/m, led by a 23.8% plunge in defense aircraft orders.
- Unfilled orders +0.8%, the sixth straight m/m rise.
- Inventories +0.1%, the third consecutive m/m increase.

U.S. Factory Orders Up Marginally in January on Weak Defense Aircraft Orders

Kathleen Stephansen, CBE

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Mortgage applications dropped 10.9% w/w (+37.5% y/y) in the week ending March 13, after rising 3.2% w/w (44.7% y/y) in the week ending March 6, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Applications for loans to purchase a house rose 0.9% w/w (11.8% y/y) in the latest week, after a rise of 7.8% w/w (10.8% y/y) in the week ending March 6.  Applications for loan refinancing dropped 18.5% w/w (+68.8% y/y) in the week ending March 13, following a small advance of 0.5% w/w (80.7% y/y) in the week ending March 6.

The effective interest rate on a 30-year fixed-rate loan rose 12bps to 6.48% in the week ending March 13 from 6.36% in the week ending March 6. The rate on 15-year fixed-rate mortgages rose 13bps to 5.84% in the latest week from 5.71% in the in the prior week. The 30-year Jumbo rate rose 14bps to 6.49% in the March 13 week from 6.35% in the March 6 week. The rate on a 5-year ARM jumped 40bps to 5.90% in the week ending March 13 from 5.50% in the week ending March 6, reaching the highest level since the January 2 week when it stood at 5.98%.

The share of applications for refinancing an existing loan dropped to 52.3% of total applications in the week of March 13 from 57.8% in the March 6 week. The adjustable-rate mortgage (ARM) share of activity edged down to 8.0% in the March 13 week from 8.9% in the March 6 week.

The average size of a mortgage loan declined 3.4% w/w (+0.5% y/y) to $404,000 in the week ending March 13, following a decline of 1.3% w/w (-0.4% y/y) to $418,100 in the week ending March 6. The average size of a purchase loan rose 2.0% w/w (1.0% y/y) to $455,300 in the latest week, after declining 1.0% w/w (-3.1% y/y) to $446,400 in the March 6 week. The average size of a loan to refinance a mortgage dropped 10.1% w/w (+6.9% y/y) to $357,300 in the week ending March 13, following a drop of 1.9% w/w (+7.2% y/y) to $397,400 in the week ending March 6.

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.

- Applications for loans to purchase edged up, while applications for loan refinancing plummeted.
- Effective interest rate on 30-year fixed loans rose 12bps to 6.48%.
- Average loan size declined.

U.S. Mortgage Applications Dropped in the March 13 Week

Robert Brusca

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The ZEW survey, which is a survey of German financial experts, showed a weakening in March as the **economic situation** deteriorated sharply in the wake of the start of the war in Iran. For the euro area, the reading dropped to -29.9 in March from -13.6 in February; for Germany, the reading surprisingly improved a slight bit to -62.9 from -65.9; for the United States, a positive reading of 4.5 was still posted; however, it was down significantly from +19.6 in February. China’s reading fell to -33.7 from -31.5. The rank standings for these readings on data back to late-1992 for most reporters, but only back to April 2021 for China, shows the euro area at a reading near its median over this span. While Germany and the U.S. are substantially below their medians, with percentile standings near 30% for Germany and near the 40th percentile for the U.S. China logs a stronger queue standing above its median at 68.3%.

**Macro expectations** fell more clearly and sharply for all the reporters in March. For Germany, the drop was to -0.5 in March from +58.3 in February, while the U.S. drop was to -28.7 from -5.1 in February. China’s drop was to -15.8 from +13.1 in February. The standings for these March readings place China at a 1.7 percentile standing, the U.S. at a 16.1 percentile standing, and Germany at a 25.1 percentile standing. All of them are quite weak in the lower quartile of their respective queues of data.

With oil prices jumping sharply, **inflation expectations** have simply skyrocketed on the month. For the euro area, the reading that was near 0 in February jumped to 79 in March. For Germany, a reading of -2.3 in February surged to 79.2 in March. For the U.S., an inflation expectation of 43.1 in February nearly doubled to 80.4 in March. For China, a February reading of 10.5 ran up to 56.0 for March. The queue percentile standings for the March readings rose to the 98th percentile for the euro area, Germany, and the U.S., while China's standing also moved up strongly to its 93rd percentile, when ranked over a shorter period extending back to April 2021.

With inflation going up, **short-term interest rate expectations** rose as well. Those expectations rose in the euro area, the U.S., and China. For each of these reporters, there was a significant increase in the short-term rate expectations. The euro area expectation survey value has a standing in its 70.9 percentile, China’s standing is at its 55th percentile, while the U.S. standing is still below its median at its 22.4 percentile.

**Long-term rate expectations** moved up in all areas as well, with Germany's new reading having a 66.8 percentile standing, China at a 75th percentile standing, and the U.S. at a 59th percentile standing. Each one of these is above its historic median. Long-term expectations are elevated.

**Stock markets** in all areas weakened in March compared to February, with most showing declines of about 50% or so in this survey. The queue standings for the new readings are all in the lower 25th percentile of their respective data queues. Some of them are significantly lower, such as Germany, which stands only in its 9th percentile. On balance, the attack in Iran has been a game-changer for economic perceptions and expectations. Markets are wary. And everyone knows the centerpiece is the Strait of Hormuz. But that does not make it much easier to handicap the future.

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Germany

Germany’s ZEW Survey Sours

Sandy Batten

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Industrial production (IP) rose a slightly larger-than-expected 0.2% m/m in February following an unrevised 0.7% monthly jump in January and small upward revisions to November (0.2% m/m vs. 0.1% previously) and December (0.3% m/m versus 0.2% m/m previously), according to data released by the Federal Reserve Board. The Action Economics Survey looked for a 0.1% monthly gain. The y/y rate slowed to 1.4% in February from 2.3% in January. The annual rate in February was the slowest since last August. However, IP has trended up over the past several months, growing at a 4.2% annual rate since last October although it is still 1.4% below its November 2018 peak.

Manufacturing output increased 0.2% y/y (1.3% y/y) in February following an upwardly revised 0.8% monthly gain in January (previously +0.6% m/m). Mining production increased by a solid 0.8% m/m (1.4% y/y) in February with the previously reported 0.2% monthly decline in January revised up meaningfully to a 0.9% monthly gain. This was the third monthly increase in mining in the past four months. Utilities output slid 0.6% m/m (+2.5 y/y), the first monthly decline in three months, after a downwardly revised 0.1% m/m increase in January (previously 2.1% m/m). This reflected unchanged electricity production and a 4.7% m/m decline in natural gas distribution.

Within manufacturing, durable goods production edged up 0.1% m/m (2.4% y/y) in February following an upwardly revised 1.1% monthly jump in January (previously 0.8% m/m). Activity in February was volatile across sectors. For example, output of electrical equipment and appliances rose 1.1% m/m and output of motor vehicles and parts jumped 1.7% m/m. By contrast, machinery output fell 1.2% m/m while miscellaneous production declined 1.1% m/m. Output of nondurable manufactured goods increased 0.2% m/m (0.3% y/y) in February after a 0.5% monthly gain in January (revised up slightly from 0.4% m/m). Output of plastics and rubber products rose 0.5% m/m in February on top of a 1.8% monthly jump in January; chemical production increased 0.9% m/m following a solid 1.2% monthly gain in January. By contrast, output of textiles slumped 1.7% m/m, and petroleum production declined 1.6% m/m, its first monthly decline in four months.

By market groups, output of consumer goods was unchanged in February (-0.2% y/y) following a 0.3% monthly increase in January (revised down from 0.7% m/m). Production of business equipment edged up 0.2% m/m (6.4% y/y) in February after a 0.9% m/m increase in January. Output of construction supplies dropped 0.2% m/m (+0.3% y/y) following a 1.1% monthly jump in January. Output of materials increased 0.3% m/m (1.7% y/y) in February on top of an 0.8% monthly gain in January.

In special classifications, output of selected high-tech industries rose 0.7% m/m (8.6% y/y) following an upwardly revised 2.6% monthly jump in January (previously 1.9% m/m). Output of motor vehicles and parts rose a solid 1.7% m/m (-0.7% y/y) in February on top of an upwardly revised 2.4% m/m surge in January (previously 1.3% m/m). The February gain was led by a 2.2% monthly increase in motor vehicle production. Manufacturing output excluding selected high-tech industries was up 0.2% m/m (1.0% y/y) in February after a 0.7% monthly rise in January. Manufacturing output excluding selected high-tech industries and motor vehicles and parts was unchanged in February (+1.2% y/y) following a 0.6% monthly increase in January.

Capacity utilization was unchanged at 76.3% in February, 3.1%-points below its long-term (1972-2025) average, from an upwardly revised 76.3% in January (previously 76.2%). The January/February reading was the highest since last July. Manufacturing capacity utilization was also unchanged at 75.6% in February, 2.6%-points below its long-term (1972-2025) average.

Industrial production and capacity data are in Haver’s **USECON** database. Additional detail on production and capacity utilization can be found in the **IP** database. The expectations figures come from the **AS1REPNA** database.

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- Total industrial output increased 0.2% m/m in February, slightly larger than expected.
- There was no revision to January, but there were small upward revisions to November and December.
- Manufacturing output increased 0.2% m/m, mining rose 0.8%, while utilities production slid 0.6% m/m.
- The headline rate of capacity utilization was unchanged in February and remained well below its long-term average.

U.S. Industrial Production Edged Up in February

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Canadian orders fell by 3.3% in January after running flat in December and falling by 1.1% in November.

The top-line sequential growth in orders shows contraction over 12 months, six months, and three months, with the pace of contraction having gotten more severe over the most recent three months.

In January, orders declined, while unfilled orders rose but decelerated from their December growth rate. Manufacturing shipments fell, durables shipments fell, durable shipments excluding motor vehicles fell, and motor vehicle shipments fell. In addition, nondurables orders declined in January although at a lesser pace than in December.  Among this key batch of industrial statistics, only manufacturing inventories rose in January, increasing by 0.9%.

Progressive growth rates from 12 months to six months to three months show progressively weaker growth in shipments of durable goods, durables excluding motor vehicles, and motor vehicle shipments themselves. Inventories are also shrinking, and at a progressively faster pace over shorter periods. The headline series for orders shows a 16.5% annual rate contraction over three months, compared with a contraction pace of 7.4% over 12 months. There is no sign of stabilization in orders, and this shows up plainly in the data or on the chart.

The column heading marked “standing” shows that the standings of all the items listed in the stub are below 50%, placing each entry below its median based on data back to 1999. Judging from 12 month growth rates, the only exception is unfilled orders, which are right at the 50.4 percentile mark. For the most part, the shortfalls from their respective medians are quite severe, with the low standings for manufacturing shipments and durable goods shipments at 7.4%, out done only by a 1.8 percentile standing for motor vehicle shipments growth. The table also ranks the categories on six month growth rates, providing a slightly shorter term view to see how much conditions improve. On that basis, and viewed in that way, most of the rankings do improve. In fact, all rankings improve compared to the year over year growth rate rankings except for three: unfilled orders, durable goods shipments, and durable goods shipments excluding motor vehicles.

The six-year growth from January 2020 to date shows declines in real terms (inflation-adjusted net changes) for unfilled orders, durable goods shipments, durables shipments excluding motor vehicles, and inventories of manufactured goods. Increasing on balance over six years are orders and total manufacturing shipments, but by very thin margins. Motor vehicle shipments are up by 0.7% in real terms over six years, while nondurables shipments are up by 2.1% on balance over the same period. It has been a very difficult period for industry to cope with the strains from COVID, the war in the Ukraine, and more recently, the imposition of tariffs by the United States.

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Canada

Canada’s Industrial Orders Falter

Tian Yong Woon

In our Letter this week, we examine the ongoing Iran war through an Asian lens. Geopolitical uncertainty and crude oil prices have remained elevated (chart 1), despite early reports concerning the potential for a brief conflict that tempered investor caution. Attention has now centred on the Strait of Hormuz, through which a significant share of global oil typically flows. With shipments now nearly halted (chart 2), much of the world’s energy flow has effectively stalled. While these developments have broad global implications, their impact on Asian economies is more nuanced. This partly reflects differences in energy mixes across the region (chart 3), as well as the historical relationship between oil prices and energy inflation (chart 4). Further compounding the challenges faced by Asian oil importers are currency effects: a broader risk-off turn in markets has weighed on several Asian currencies (chart 5), raising the local-currency cost of energy imports. Amid these pressures, several regional central banks are also set to decide on policy this week (chart 6), alongside major Western counterparts such as the Federal Reserve. Near-term rate cut expectations have been pushed back in many cases amid renewed inflation concerns, while in some Asian economies markets are even pricing in the possibility of further rate hikes.

**The Iran war**
Two weeks in, the Iran war continues with no clear end in sight. Crude oil prices and geopolitical risk therefore remain elevated, as shown in chart 1, despite earlier news that had briefly tempered investors’ heightened caution. Even reports that the 32 members of the International Energy Agency are set to release around 400 million barrels in emergency reserves have done little to curb the surge in crude prices. Latest reports indicate that reserves for Asia will be released immediately, while supplies for Europe and the Americas will only become available from the end of March. Meanwhile, uncertainty surrounding the Strait of Hormuz continues to underpin elevated prices. The strait—currently blocked by Iran—handles roughly 20% of global oil flows. Iran has recently indicated that it may allow ships from certain countries to transit the waterway, though the situation remains fluid.

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To illustrate the severity of the current choke point along the Strait of Hormuz, chart 2 shows the 7-day moving average of shipping volumes through the strait, based on estimates from the International Monetary Fund. The average has effectively fallen to zero for tanker traffic, while overall shipping volumes—including container ships, dry bulk carriers, and other vessels—have also dropped close to zero. This stands in stark contrast to the multi-million metric tons of average daily shipping volumes typically observed previously. While such shipping estimates may not capture every vessel and can be partially circumvented, the broader picture remains clear: the flow of energy—the lifeblood of the global economy—is now severely constrained. Strategic reserves may provide a temporary buffer, but a prolonged blockage would be difficult to sustain indefinitely and could carry significant economic consequences.

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**Asia’s exposure**
While the ongoing blockage of the Strait of Hormuz presents a global oil supply shock, its implications for Asia are more nuanced. Among Asian economies, Singapore stands out with the highest oil share in primary energy consumption—nearly 90%—while China has the lowest at just above 18%, as shown in chart 3. Other Asian economies generally fall between 25% and 50%. China’s relatively low oil share largely reflects its greater reliance on other energy sources, particularly coal and renewables. A high oil share in energy consumption alone does not necessarily constitute a major vulnerability in the context of an external supply shock. However, many Asian economies remain heavily dependent on imported oil to meet their energy needs. The combination of these two factors—significant oil intensity in energy consumption and high reliance on oil imports—places much of the region in a potentially precarious position.

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Given Asia’s exposure to external oil supply shocks—now immediately visible through higher oil prices—one of the most direct channels of concern is inflation. Chart 4 illustrates what could potentially unfold, based on the historically strong correlations between Asian economies’ energy-related components of CPI inflation and Brent crude oil prices, which serve as a benchmark for global crude prices. In several cases, the relationship is substantial; for example, Thailand records a five-year correlation coefficient of nearly 0.8. That said, the relationship is not uniformly strong across all economies. In places such as Taiwan and South Korea, the correlation appears weaker, which may partly reflect domestic policy measures such as price caps—though the durability of such interventions remains uncertain. Moreover, governments that maintain energy subsidies or similar support mechanisms could face increasing fiscal strain, as higher global oil prices gradually erode available fiscal resources.

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As if these pressures were not sufficient, Asia’s oil importers also face compounding currency effects. The deterioration in the global geopolitical environment has dampened risk sentiment broadly, which often weighs on Asian currencies, as shown in chart 5. With crude oil prices surging due to the supply shock, and regional currencies weakening at the same time, the cost of importing oil is being pushed higher by two forces simultaneously—higher global oil prices and adverse exchange rate movements. This dual pressure further amplifies the burden on many Asian economies that rely heavily on imported energy.

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**Monetary Policy**
Given the ongoing surge in crude oil prices and the still-fluid situation in the Middle East, it is perhaps unsurprising that market expectations for near-term central bank easing in several economies have been dialled back. In some cases, expectations of rate hikes have even begun to build, largely on the back of renewed inflation concerns. That said, if the spike in crude oil prices ultimately proves transitory, there would in principle be little reason to delay policy easing if economic conditions warrant it. The key uncertainty now lies in how long the current surge will persist. Alongside the Americas and Europe, Asia will see a series of central bank decisions in the coming week, including from the Reserve Bank of Australia, Bank Indonesia, and Central Bank of the Republic of China (Taiwan). Unlike in many other economies—where investors largely expect policy rates to remain unchanged in the near term—markets are pricing in another 25-basis-point rate hike at the Reserve Bank of Australia’s meeting this week. Meanwhile, expectations for near-term rate cuts by Bank Indonesia may be pushed further out, given the ongoing uncertainty surrounding Iran and the associated inflation risks.

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Asia

Economic Letter from Asia: Strait Squeeze

Michael J. Moran

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New figures show that real GDP grew 0.7% in the fourth quarter of 2025, revised down from the initial estimate of 1.4%. The pace was among the slowest of the past few years, but the result was not especially troubling, as the government shutdown acted as a notable constraint on economic growth. Federal spending fell 16.7% in Q4, which subtracted 1.2 percentage points from the advance in GDP.

Other sectors performed reasonably well, as shown by an increase of 1.9% in final sales to private domestic purchasers, a pace close to the economy’s potential. (In addition to government spending, final sales to private domestic purchasers excludes the influence of net exports and inventory investment. It is sometimes called private domestic final demand – PDFD.)

Although the pace of PDFD was respectable, it was the source of most of the downward revision to GDP growth, with the new figure one-half percentage point off the initial estimate of 2.4%. Consumer spending made the largest contribution to the downward revision with growth slowing from 2.4% to a still-respectable 2.0%. Most of the adjustment occurred in the service area, but spending on services remained firm with growth of 2.7%.

Business investment spending also was lighter than previously believed (2.3% versus 3.7%). The revision, however, was not especially surprising, as most of the adjustment occurred in construction of business structures, which has been notably soft recently. Indeed, investment in structures has now declined for eight consecutive quarters. Business outlays for software also were revised downward (3.8% versus 7.1%), but spending on equipment was a bit firmer than previously estimated (3.9% versus 3.2%).

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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- Consumer spending and business investment in structures accounted for most of the adjustment.
- Although growth was slow, the results were not alarming.

Revised Q4 GDP: Downward Adjustment Leaves Modest Growth

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The monthly report on personal income and consumption contains a wealth of information on the earnings and spending of households, but the price measures in the report are likely to receive more scrutiny than the other measures. Two factors account for the keen interest in the inflation figures. The price index for personal consumption expenditures is the measure targeted by the Federal Reserve, and thus observers will be using the index to assess the likelihood of additional easing in monetary policy. In addition, the conflict in the Middle East is drawing more attention to inflation risks.

The inflation results for January were unfavorable, with the headline measure increasing 0.3% and the index excluding food and energy advancing 0.4%. The latest results left the year-over-year advance in the headline measure at 2.8%, down one tick from the reading in January, but still noticeably above the Fed’s target of 2.0%. The increase in the core index pushed the year-over-year change to 3.1% versus 3.0% in January. Both the direction of change and the deviation from target are likely to weigh heavily on Fed deliberations.

The inflation readings in the report dampened firm increases in nominal income flows. Total personal income rose 0.4% in January, but this nominal advance translated to a real gain of only 0.2% (and rounding up to get there; 0.152% when calculated with more precision). Employee compensation was among the strongest components of income with an increase of 0.5% (0.2% in real terms). Dividend income was robust with an increase of 2.0%, but it is perhaps too early to get excited about the increase. Dividends also rose sharply in January of 2024 and 2025 only to be largely offset by declines in February. Hold the champagne until next month.

Although income growth was respectable, consumers spent cautiously. Nominal outlays rose 0.4%, but this translated to an increase of only 0.1% after adjusting for inflation. The modest increase sets the stage for a possibly slow quarter for consumer spending in the GDP accounts. If real outlays were to remain at their January level for the next two months, growth of real consumer spending in the GDP accounts would total only 0.8% in Q1. Increases of 0.2% in both February and March would lift growth of consumer spending to 1.6% in the first quarter, still noticeably shy of the 2.9% average in the prior three years.

The personal income and consumption figures are available in Haver’s **USECON** database with detail in the **USNA** database. The Action Economics forecasts are in **AS1REPNA**.

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- The inflation rate for personal consumption expenditures remains uncomfortably high.
- Solid income growth, but cautious spending by households.

Personal Income and Consumption

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The value of construction put in place unexpectedly fell 0.3% m/m in January to a seasonally adjusted annual rate of $2,190.4 billion, the first m/m fall since October, after upwardly revised gains of 0.8% in December (+0.3% initially) and 0.6% in November (-0.2% previously), data from the U.S. Census Bureau showed. A 0.1% m/m January increase had been expected in the Action Economics Forecast Survey. The year-on-year rate held at 1.0% in January and December following 10 consecutive y/y declines (+0.4% in January 2025), remaining well below a high of 12.9% in December 2023 and a peak of 18.4% in April 2022.

Private construction declined 0.6% (-0.1% y/y) to $1,661.2 billion in January, the first m/m decrease since October, after a 1.0% increase in December (+0.5% previously). Residential private construction fell 0.8% (+2.3% y/y) to $933.0 billion in January, down for the first time in three months, after a 2.5% gain in December (+1.5% initially). Single-family building slid 0.2% (-5.8% y/y), the 10th m/m slide in 11 months, following a 1.3% December rise; it was 43.9% of the residential private construction. Multi-family building fell 0.7% (+0.4% y/y) after a 0.6% December decline; it was 12.3% of the residential private construction. Home improvement building dropped 1.4% (+12.5% y/y), the first m/m fall since September, after a 4.7% December advance; it was 43.7% of the residential private construction.

Nonresidential private construction fell 0.4% (-3.0% y/y) to $728.2 billion in January, the fourth successive m/m fall and the sixth in seven months, on top of a 0.8% drop in December (-0.7% initially). The January decline reflected m/m decreases across several nonresidential private construction categories, led by manufacturing (-2.0%; -15.0% y/y), followed by educational (-1.1%; +6.3% y/y), religious (-1.1%; +8.3% y/y), amusement & recreation (-0.9%; +10.9% y/y), transportation (-0.2%; +4.6% y/y), and commercial (-0.1%; -0.7% y/y). To the upside, the following nonresidential private constructions rose m/m in January, led by office (+1.1%; +4.8% y/y), followed by health care (+0.4%; -1.8% y/y), communication (+0.2%; +0.4% y/y), and lodging (+0.1%; +0.6% y/y). Meanwhile, utilities private construction was virtually unchanged (+3.4% y/y) in January after five consecutive m/m gains.

The value of public construction rose 0.6% (4.5% y/y) to $529.2 billion in January, the second m/m rise in three months, after a 0.1% downtick in December (-0.5% initially), reflecting a flat reading (+6.8% y/y) in residential public construction and a 0.6% rebound (4.5% y/y) in nonresidential public construction. Several nonresidential public construction categories increased m/m in January, led by spending on highways & streets (+3.3%; +4.1% y/y), which accounted for 28.1% of total public construction spending, followed by conservation & development (+3.1%; +12.2% y/y), health care (+0.8%; +4.6% y/y), and transportation (+0.1%; +5.0% y/y). In contrast, the following public constructions fell m/m in January, led by commercial (-3.7%; +5.2% y/y, followed by office (-1.8%; -3.9% y/y), public safety (-1.8%; +1.1% y/y), utilities (-1.7%; +2.3% y/y), water supply (-0.8%; +9.1% y/y), amusement & recreation (-0.3%; +8.6% y/y), educational (-0.2%; +0.3% y/y), and sewage & waste disposal (-0.2%; +10.9% y/y).

The construction figures can be found in Haver's **USECON** database. The expectations figure is from the Action Economics Forecast Survey in **AS1REPNA**.

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- Headline -0.3% m/m, first monthly decrease in three mths.; +1.0% y/y for the second straight mth.
- Residential private construction -0.8% m/m, led by a 1.4% drop in home improvement building.
- Nonresidential private construction -0.4% m/m, sixth fall in seven months.
- Public construction +0.6% m/m, driven by a 0.6% rebound in nonresidential public building.

U.S. Construction Spending Unexpectedly Declines in January

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