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

Tian Yong Woon

In this week's Letter, we dive into the latest Blue Chip Financial Forecast (BCFF) survey results in light of key developments around Asia and the broader world economy. We find that, despite the recent flare-up in US-Iran tensions, panellist expectations for policy rates remain little changed, bar the US (chart 1). Central banks are still seen as likely to continue diverging significantly across regions in response to the volatility in global oil prices (chart 2). The latest on the US-Iran conflict brings hopes of another deal on the horizon, as part of a broad on-again, off-again pattern. Those hopes have sent crude oil prices lower, albeit with flows through the Strait of Hormuz remaining at a trickle (chart 3). As global oil supply remains constrained, one key area to watch is Chinese crude oil imports (chart 4), which have slumped since the conflict broke out. There is no telling when Chinese buying will recover, if ever, and if so, by how much. Moving to Japan, and taking these developments into account, the Bank of Japan held its policy rate steady at its recent meeting. Inflation risk is still flagged as being tied to the upside (chart 5). That may threaten to upend real wage gains this year, should a price flare-up materialise extensively enough. Yen intervention talk has also returned to the fore, with the US and Japan confirming recent intervention moves. Both have signalled that more may come if needed, although the yen remains squarely within its longer-term weakening trend (chart 6).
 
**Blue Chip Financial Forecasts**
Last week, we published the August 2026 Blue Chip Financial Forecast survey results. Despite the flurry of recent headline developments around the world, we found panellist expectations only modestly changed from last month. In particular, views of 12-month ahead policy rates were little changed or unchanged for every economy bar the US (chart 1). US expectations now point to slightly higher policy rates than a month ago. Among the economies covered by the survey, the highest expected 12-month ahead policy rates still relate to Australia, followed by the US and the UK. At the other end, the lowest expected rates relate to Japan and Switzerland. The slightly higher expected US policy rate may well incorporate, among other factors, the recent re-escalation in US-Iran tensions and the inclinations of new Fed Chair Warsh. We return to those tensions in a later section below.

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Touching further on the recent oil price volatility, the survey also gauged how panellists expect central banks to respond. Half of panellists (50%) thought no generalisation was possible, since central bank responses are likely to continue diverging significantly across regions. A sizeable minority (30%), however, expected central banks to stay on hold for longer until underlying trends become clearer. The US-Iran MoU has recently broken down, with an associated rebound in energy prices. Even so, most panellists (55%) reported no change this month in how they assess the balance of risks between employment and inflation. In both the US and the rest of the world, a majority saw upside risks to inflation as the greater concern (US: 67%; ex-US: 60%). Only a small minority pointed to downside risks to employment (US: 10%; ex-US: 12%), with the remaining 25% or so viewing the risks as broadly balanced.

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**Energy**
Digging deeper into the Strait of Hormuz situation, the latest position at the time of writing is that the US is holding off additional military strikes on Iran. A deal on the Strait with Iran is reportedly close, with negotiations set to resume today. All of these developments came after the latest BCFF survey period. In the meantime, US-Iran hostilities have been on-again, off-again, and with them the accessibility of the crucial Strait as a trade waterway. That pattern has left crude oil prices whipsawing of late (chart 3), underscoring how fluid the Middle East situation remains. Beneath all the oil price movements, shipping flows remain reduced to a trickle, a small fraction of pre-conflict levels.

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Against this backdrop one key factor worth some discussion is China's crude oil imports. These slumped following the outbreak of the conflict, though part of that slump may have been involuntary, with the Strait closure limiting available supply. An animated map tracks the evolution of Chinese crude imports over time (chart 4). Among other things, it shows the slump in recent months, denoted by the fading red shading over China. It also shows the rise of Russia as a key source of imports over the past decades. More recently, Brazil has risen as a source, as supplies through the Strait of Hormuz, and by extension from much of the Middle East, got choked off. It remains to be seen whether Chinese imports will recover any time soon, and if so, by how much. There is also an interplay between crude oil prices, Chinese importers' sensitivity to those prices, and eventual Chinese imports.

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**Japan**
Moving to Japan, and taking the above developments into account, we also saw last week that the Bank of Japan (BoJ) held its policy rate at 1% (chart 5). The hold came with some warnings about the possible rate of future inflation, leading some investors to infer that another policy rate hike may well be on the horizon. Specifically, the BoJ warned in its updated outlook report that underlying CPI inflation risks deviating above the price stability target of 2%. The central bank's updated forecasts echo that sentiment, with CPI inflation less fresh food now seen at 2.5% for fiscal 2026, albeit down from 2.8% in April. CPI inflation less fresh food and energy is also seen at 2.5% for fiscal 2026, slightly down from 2.6%. However, another positive development has taken place despite the latent upside risks to inflation, in the form of wages. Real wages have grown consistently this year, although that may be upended if the inflation rate accelerates to outpace wage growth.

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Last but not least is the recent talk about intervention in the Japanese yen market. Japan's Ministry of Finance, in a rare admission, confirmed earlier today that Japan and the US jointly conducted yen intervention to support the currency on Friday. The ministry added that the two countries will not hesitate to jointly intervene again. Additionally, US Treasury Secretary Bessent said the US will consider increasing the size of the Fed's Foreign and International Monetary Authorities (FIMA) repo facility in coming months. The facility provides temporary dollar liquidity, allowing Japan to raise dollars without outright sales of US Treasuries and easing funding pressures for intervention needs. As shown on chart 6, the yen has embarked on a depreciating trend since early 2025 against a basket of trading partner currencies. That weakening has come even despite a broad narrowing of policy yield differentials between the BoJ and its major central bank peers. The BoJ has persisted with gradual rate hikes, whilst major peers mostly stood pat.

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Asia

Economic Letter from Asia: On Again, Off Again

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

Andrew Cates

**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.

U.S. GDP Increased 1.5% in Q2

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance rose 9,000 to 197,000 in the week ending July 25, from 188,000 in the week ending July 18, revised from 187,000. The four-week average was 202,750 in the July 25 week, down from 207,750 in the July 18 week. The Action Economics/Haver Analytics Survey looked for 205,000 claims to have been filed.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—declined by 7,000 to 1.782 million in the week ending July 18, from 1.789 million in the week ending July 11, revised from 1.796 million. The four-week moving average declined to 1.798 million in the July 18 week, from 1.804 million in the July 11 week, revised from 1.805. The insured unemployment rate remained unchanged at 1.2% in the week of July 18.

The insured unemployment rate varies greatly across individual states and territories. In the week ending July 11, the highest unemployment rates were in Oregon (2.04%), Minnesota (2.11%), Massachusetts (2.15%), Rhode Island (2.33%), Puerto Rico (2.55%) and New Jersey (2.65%). The lowest rates were in South Dakota (0.28%), Florida (0.33%), Louisiana (0.42%), North Carolina (0.41%), Alabama (0.45%), and Arkansas (0.48%). Rates in other notable states include California (1.91%), New York (1.74%), Pennsylvania (1.69%), Illinois (1.58%), 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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- New claims rose by 9,000 to 197,000 in the week of July 25, after reaching their lowest level since 1969 in the July 18 week.
- Continuing claims declined by 7,000 to 1.782 million in the week ending July 18.
- The insured unemployment rate was unchanged at 1.2% in the week of July 18.


U.S. Initial Unemployment Claims Rose in the Week of July 25

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GDP in the second quarter accelerated for most of the countries in the monetary union. The overall figure for the EMU improved to 1.8% as an annualized quarter-over-quarter gain from 0% in the first quarter and 0.8% in the fourth quarter. Among the 8 early reporters of GDP, there was a deceleration in Italy, Germany, and Belgium, while the other five countries showed an increase in their growth rates in the second quarter compared to the first quarter.

The four largest monetary union economies showed a technical weakening, but at the one-digit level, growth was 1.1% in the second quarter, the same as in the first quarter. The rest of the monetary union saw an increase in growth from -2.9% annualized in the first quarter to a gain of 3.7% at an annualized rate in the second quarter, a huge shift.

On a year-over-year basis, growth rates improved for all but three countries: Belgium, France, and Spain. For Spain, the year-over-year growth rate was unchanged at 2.7% in the second quarter. For France, the growth decelerated from 0.8% in the first quarter to 0.7% in the second quarter; for Belgium, the growth rate slowed from 0.8% to 0.5%.

The overall monetary union growth rate rose to 1% in the second quarter compared to a 0.5% increase in the first quarter. The four largest economies showed stronger growth at 1.1% year-over-year compared to 1% last quarter, while the rest of the monetary union showed a GDP gain of 0.5% compared to a year-over-year decline of 0.9% in the first quarter.

Evaluating growth over a longer timeline, three early-reporting monetary union members have standings in their growth rates above their respective 50th percentiles. Those countries are Portugal at 69.6%, Italy at 60.9%, and Spain at 51.1%.

The four largest monetary union economies, pooled together, have a growth ranking year-over-year in their 43.5 percentile. The rest of the monetary union has a growth ranking at the 25th percentile. From this, we can conclude that most of the growth has come from the four large economies, even though in the current quarter it's the smaller economies that seem to be performing much better.

On these same timelines, the United States posted a weaker quarterly growth rate in the second quarter at 1.5%, compared to 2.1% in the first quarter. U.S. growth at 2.1% year-over-year is slower than its 2.7% year-over-year growth rate in the first quarter; it has a queue-percentile standing of its growth rate on data back to 2001 in its 37.5 percentile, a standing well below its historic median for the period. U.S. consumer spending held up pretty well in Q2 and business investment spending remained strong, but the trade account did a turnaround and sucked a lot of life out of the growth rate in the second quarter, keeping the U.S. economy as an important driver of global growth.

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European GDP Improves in Q2

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The June Job Openings and Labor Turnover Survey (JOLTS) portrayed less optimism for the U.S. labor demand picture as the second quarter came to an end. After running up to a two-year high in April, total nonfarm job openings fell 178,000 in June after May’s 48,000 decline. This left the current level of 7.359 million up a modest 2.2% compared to a year ago. Looking farther back, job openings loosely traveled in the 7.0-7.5 million range since June 2024. The latest showing reinforced the sideways track for labor demand.

Total nonfarm hires had the same feel to them. Back-to-back moderate gains in May (37,000) and June (96,000) saw hires come in at a 5.348 million rate at second quarter’s end. Hires stood just 0.4% above the June 2025 figure. Relative stability in hires goes as far back as late-2023. The current figure fits within the 5.1-5.6 million range since that point.

Total nonfarm quits rose 79,000 to 3.232 million in June, up from a downwardly revised 3.153 million in May. The current job openings level is nearly in line with readings from six months ago (December’s 3.225 million) and twelve months ago (June 2025’s 3.254 million). The year-over-year (YoY) rate of -0.7% was still in the red, though.

To be sure, since September 2022, quits have posted 43 YoY declines over a 46-month span. The compression streak continues to stand figuratively above (but literally below) the other two longest since the December 2000 inception of the series: 26 of 27 months from December 2001 to February 2004 and 33 straight from June 2007 to February 2010. Quits’ persistent compression translates to persistent wage disinflation impulses from this cyclical money grab dynamic.

Nonfarm layoffs were little changed in June, rising a mere 5,000 following May’s 94,000 advance. This left the YoY comparison at -4.2% in June. For perspective, the current 1.766 million level of layoffs nearly bisected the 1.6-1.9 million range that has been in place since July 2024. Since bottoming in 2022, nonfarm layoffs have moved in a similar manner to the higher frequency series, weekly continuing claims. JOLTS layoffs lag continuing claims, but the sideways movement at least through June is not suggestive of a notable improvement in the news from pink slips anytime soon.

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The nonfarm hires-separations spread acts as a channel check for the monthly change in nonfarm payroll employment (NFP). The JOLTS report implies that NFP revisions for May and June could disappoint significantly to the downside. The hires-separations spread in May and June was -8,000 and -3,000, respectively. This compares with respective monthly NFP gains of 129,000 and 57,000.

Were this risk realized, it would be the first back-to-back net NFP downward revisions since November and December 2025. This would change the tone of recent revisions back to pessimism from optimism as three of the four months from January to April saw net upward adjustments. In every month of 2025, NFP monthly changes were revised down from the first print to the third print. This would makes the January to April 2026 stretch look more like an aberration than a trend.

The Job Openings and Labor Turnover Survey (JOLTS) data are available in Haver’s **USECON** database.

- Sideways tracks reinforced for job openings and hires.
- Quits continue to signal wage disinflation.
- Hires-Separations point to May and June downward nonfarm payroll revisions.

U.S. JOLTS: Labor Demand Takes a Breather in June

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