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

Sandy Batten

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The Producer Price Index for final demand fell 0.3% m/m (+5.5% y/y) in June following a downwardly revised 0.6% (6.0%y/y) gain in May (previously 1.1% m/m, 6.5% y/y) according to the Bureau of Labor Statistics (BLS). This was the first monthly decline in the headline index since August 2025 and the largest decline since April 2025. The Action Economics Forecast Survey expected an unchanged reading in June. Producer prices excluding food, energy and trade services edged up 0.1% m/m (+5.1% y/y) in June after having jumped 0.8% m/m (5.1% y/y) in May. The PPI excluding food and energy (the previous core index) rose 0.2% m/m (4.7% y/y) in June versus a 0.1% m/m (4.6% y/y) increase in May. A 0.1% m/m increase was expected.

The June decline in the index for final demand was attributable to a 1.4% m/m decline (+7.9% y/y) in prices for final demand goods following a 2.3% monthly rise in May. The index for final demand services increased 0.2% m/m (4.6% y/y) in June after a 0.1% monthly decline in May.

The 1.4% m/m decline in final demand goods prices was the largest since July 2022. Leading the decline in June, prices for final demand energy dropped 6.4% m/m. A 12.0% m/m decline in gasoline prices accounted for two-thirds of the decline in final demand goods prices in June. The index for final demand foods moved down 0.6% m/m, the first monthly decline in three months. Conversely, prices for final demand goods less food and energy increased 0.2% m/m (+5.1% y/y). The indexes for diesel fuel, jet fuel, fresh vegetables (except potatoes), crude petroleum, and thermoplastic resins and materials fell. In contrast, prices for plastic products advanced 1.6% m/m. The indexes for residential electric power and for potatoes also increased.

The index for final demand services rose 0.2% m/m (4.6% y/y) in June after falling 0.1% m/m in May. Over 60% of the advance in June can be attributed to margins for final demand trade services, which moved up 0.4% m/m after a 2.3% m/m decline in May. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand services less trade, transportation, and warehousing increased 0.1% m/m. Conversely, the index for final demand transportation and warehousing services declined 0.1% m/m. The indexes for securities brokerage, dealing, and investment advice; furniture retailing; apparel, jewelry, footwear, and accessories retailing; loan services (partial); and inpatient care rose. In contrast, margins for machinery and vehicle wholesaling declined 8.4%. The indexes for food and alcohol wholesaling and for deposit services (partial) also fell.

Final demand construction costs edged up 0.1% m/m (3.5% y/y) in June, the same monthly increase as in May. Construction prices for private capital investment also edged up 0.1% (3.4% y/y) in June, the same monthly gain as in May.

Prices for intermediate demand processed goods fell 1.2% m/m (+11.1% y/y) in June, the first monthly decline since October 2025 and the largest monthly decline since December 2022. Processed energy goods prices slumped 7.3% m/m, the first monthly decline since January. Processed foods prices edged up 0.1% m/m following a 0.6% m/m jump in May. Prices of processed goods excluding foods and energy rose 0.6% m/m, down markedly from 1.7% monthly gains in both April and May.

The PPI data are published by the Bureau of Labor Statistics and can be found in Haver’s **USECON** database. Further detail is contained in **PPI** and **PPIR**. The expectations figures are available in the **AS1REPNA** database.

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- Led by a 6.4% m/m decline in energy prices, the PPI for final demand fell 0.3% m/m in June.
- Goods prices fell 1.4% m/m, the first monthly decline since January, while services prices rose 0.2% m/m.
- Excluding food, energy and trade margins, the new core measure edged up 0.1% m/m while the old core (excluding just food and energy) rose 0.2% m/m in June.

U.S. Producer Prices Fell in June

Winnie Tapasanun

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The Empire State Manufacturing Index of General Business Conditions rose to a higher-than-expected 15.6 in July following a 13.9-point drop to 5.7 in June, according to the Empire State Manufacturing Survey released by the Federal Reserve Bank of New York. A reading of 8.6 for July had been expected in the Action Economics Forecast Survey. The positive July figure indicated that the business activity in New York State expanded for the fourth consecutive month and at a faster pace; it was a sharp improvement from 3.1 in July 2025 and a low of -29.7 in January 2024, though still below its most recent high of 19.6 in May and a high of 16.8 in November 2024. The percentage of respondents reporting an increase in general business conditions was 39.0% in July, up from 28.9% in June; the percentage reporting a decrease was 23.4%, up from June’s 23.2%. The latest survey was conducted between July 2 and July 10.

The headline index reflects the answer to a single question concerning the state of economic activity and is not calculated from the components. Haver Analytics calculates a composite index from the five major components, which is comparable to the ISM manufacturing index. This calculated index increased to 57.5 in July following a 4.6-point decline to 53.4 in June, representing the seventh straight expansion; it was modestly up from 54.1 in July 2025 and well above a low of 43.0 in January 2024. The index is the average of five diffusion indexes: new orders, shipments, employment, supplier deliveries and inventories, with equal weights (20% each).

In the latest survey, the new orders index jumped to 22.2 in July after a 19.2-point drop to 3.5 in June, marking the seventh consecutive expansion and a sharp improvement from a low of -30.7 in January 2024. The shipments index advanced to 24.4 in July, the highest level since April 2022, following a 10.3-point decrease to 8.6 in June; it was well above a low of -21.7 in April 2024. The unfilled orders index held at 5.0 in July and June after 4.9 in May, indicating unfilled orders expanded for the sixth straight month; the index reached its recent high of 10.8 in March and a low of -24.2 in January 2024. The inventories index increased to 4.0 in July following a 9.7-point decline to 0.0 in June, signaling inventories rose slightly this month after being unchanged. Meanwhile, the delivery times index rose to 13.0 in July from 11.9 in June, with 20.0% of respondents reporting longer delivery times and 7.0% reporting shorter times, indicating that delivery times continued to lengthen.

On the labor front, the number of employees index rose to 11.4 in July after a 1.3-point rebound to 9.6 in June, indicating that employment expanded for the sixth successive month and reached its highest level since December 2022. The index remained well above a low of -9.3 in December 2023 but below a peak of 24.9 in February 2022. In July, a higher 20.9% of respondents reported an increase in employment while 9.6% reported a decline. The average workweek index fell to 2.8 in July from 5.1 in June, remaining positive for the sixth straight month, albeit at a four-month low.

Inflation pressures eased in July but remained elevated. The prices paid index fell to 52.3 in July, the lowest level since April, after a 1.6-point decline to 61.0 in June. Although well below a peak of 84.9 in April 2022, the index remained above a low of 25.9 in December 2024 and a low of 20.8 in December 2023. In July, 55.4% of respondents reported higher prices paid while only 3.1% reported lower prices paid. The prices received index slid to 27.6 in July, a three-month low, from 31.4 in June. The index was above a low of 7.5 in December 2024 and a low of 7.7 in July 2023 but far below a high of 51.9 in March 2022. In July, 31.3% of respondents reported higher prices received while 3.6% reported lower prices received.

Firms remained fairly optimistic about the future business outlook in the latest survey. The index for future business conditions eased to 27.9 in July, the lowest level since April, after a 3.4-point decrease to 30.1 in June, with 49.9% of respondents expecting business conditions to improve over the next six months. Future new orders edged up to 33.2 in July, the highest level since February, from 32.5 in June, while future shipments slipped to 30.6 from 32.2. Growth in future employment slowed to 14.4, the lowest reading since December, from June’s 20.9. Capital spending plans remained positive for the ninth consecutive month in July, with the future capital expenditures index rising to 15.0 from June’s 10.9. Expected prices paid fell to 53.0 in July, the lowest level since March, from 59.4 in June, and expected prices received fell to 41.9, the lowest level since April, from 51.6.

The indexes in this report are diffusion indexes and measure the percentage of respondents indicating an increase minus the percentage indicating a decrease with zero separating expansion from contraction.

The New York Fed survey data are contained in Haver’s **SURVEYS** database. The expectations series is in Haver’s **AS1REPNA** database.

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- General Business Conditions Index up 9.9 pts. to 15.6 in July; fourth straight expansion.
- Shipments (24.4), highest since Apr. ’22; new orders (22.2); unfilled orders (5.0); inventories (4.0).
- Employment (11.4), a solid reading and highest since Dec. ’22.
- Prices paid (52.3) and prices received (27.6) both at three-month lows.
- Firms fairly optimistic: Future Business Conditions Index down to a still-positive 27.9; future prices paid at a four-month-low 53.0.

U.S. Empire State Manufacturing Index Rebounds Strongly in July

Robert Brusca

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Industrial production in the European Monetary Union (EMU) shows only a very minor and idiosyncratic sector acceleration in the nondurable goods sector. Other sectors show trends that are not focused and drift into random variability. Nondurable goods output shows growth of -10.9% over 12 months, improving to a pace of -9.9% over six months annualized and improving further to -8.7% annualized over three months. The irony is that nondurable output is contracting over all these periods, but the contractions are becoming slightly less virulent. It is nothing to base any optimism on despite the technically ‘improving’ trend.

Total output and manufacturing output in the EMU each show strong gains annualized over three months after declines on balance over six months and 12 months. 

While the secular trends are not clear in showing persistent accelerations or decelerations for the most part, it's true that output across the consumer industries continues to show contraction on all timelines. When we move to intermediate goods and capital goods, we're looking at output showing increases over 12 months, six months, and three months. Even if there are not clear progressions, the persistence of output gains is notable. This again underscores the extent to which expansion is being carried ahead by business and not by the consumer, even in Europe.

On a quarter-to-date (QTD) basis (two months into the second quarter), output is generally showing increases, with the exception of consumer durable goods showing an output decline at a 2.4% annual rate. Top-line growth is still very unimpressive, with total industrial production at a 0.6% annual growth rate and manufacturing alone at a 0.4% annual growth rate; neither of these is strong, solid, or impressive.

Turning to the percentile standing data that evaluate the strength of year-over-year growth on a historic timeline, we see that manufacturing and total output growth log percentile standings just below the 30th percentile. Consumer goods, as an aggregate category, have a 1.3% standing, which is extremely weak. That standing consists of a 29% standing for consumer durables and a 1.3 percentile standing for consumer nondurables output.

Once again, it is intermediate and capital goods that are the backbone of support for output. Intermediate goods’ annual growth rate has a 63-percentile standing, and the year-over-year growth rate for capital goods has a 52.9 percentile standing. Both being above the 50% mark puts them above their median for the period of analysis; that period extends back to August 2006, roughly a 20-year period.

I previously reported on the country detail. The country detail shows accelerating manufacturing output in Ireland, Portugal, and Sweden (Sweden that is not a monetary union member). Austria, a monetary union member, shows persistent deceleration, while the rest of the countries in the group show somewhat chaotic patterns.

While the percentile standing for year-over-year growth in manufacturing is at the 27th percentile mark for the whole of the monetary union, that amalgamation includes size weighting for that evaluation. If we take the unweighted averages for the percentile standings for 11 of the oldest monetary union members, their average individual ranking is much higher at a 48.3 percentile mark. Clearly, there are great differences by country across the monetary union, and this gives the ECB an additional headache in trying to make one monetary policy for such a varied group of economies.

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Europe

IP in EMU Remains Weak

Michael J. Moran

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Most analysts were looking for a dip in the CPI because of a likely retreat in gasoline prices, but the published decline of 0.4% in the headline index was noticeably softer than the consensus estimate of -0.1%. Gasoline prices did not disappoint, with a drop of 9.7% offsetting approximately one-quarter of the cumulative surge in the prior three months. Prices of fuel oil fell almost as much as gasoline prices, and electricity charges contributed to the softness with a decline of 1.0%. The price of natural gas services was the only major energy item to increase in June (0.5%). All told, the energy component of the CPI fell 5.7% after climbing 19.6% in the prior three months.

The drop in energy prices was notable, but the core component provided a bigger surprise by posting a decline, the first since a series of three consecutive decreases during the pandemic. Before the pandemic-related retreat, the core component fell only twice from 1990 to 2019. The drop in June was minuscule (-0.02%), but the fact that it carried a minus sign was striking.

Both the goods and services components of the core index contributed to the restraint. Prices of goods other than food and energy fell 0.1%. The Bureau of Labor Statistics publishes six key subcategories of core goods, and five of them fell in June. Apparel prices stood out with a decline of 0.6%. Prices of core services were nearly unchanged at 0.03%, restrained by declines in medical services and motor vehicle insurance. Airfares, which showed upward pressure from rising fuel prices in the prior three months, posted a nondescript increase of 0.2%. The modest increase in the prices of core services led to a dip in the 12-month average increase after stepping up in April and May. The trend in core goods prices continued its gradual deceleration (chart, below right).

Food prices in June rose 0.2%, a reading comfortably within the range of the past few years.

The Consumer Price figures can be found in Haver's **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

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- The energy component retraced a portion of its surge in the prior three months.
- Prices excluding food and energy provided a surprise by posting a rare decline.

June CPI: Cooling Energy Prices and a Restrained Core Component

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The NFIB Small Business Optimism Index rose to 97.4 in June, the highest level since February, after a 0.6-point decline to 95.3 in May, according to the Small Business Economic Trends survey conducted by the National Federation of Independent Business. The index was slightly below its 52-year average of 98.0 for the fourth consecutive month and down from a peak of 105.1 in December 2024, albeit above a low of 88.5 in March 2024. Seven of the 10 index components rose, while three fell. Meanwhile, the NFIB Small Business Uncertainty Index edged down to 89 in June following a three-point increase to 91 in May, remaining well above its historical average of 68. The index was below its record high of 110 in October 2024 but above its recent low of 84 in December 2025 and a low of 65 in November 2023.

The outlook for business conditions in the next six months remained positive for the 20th straight month in the latest survey. The net balance of respondents expecting the economy to improve advanced to 13% in June, a four-month high, following a one-point decline to 3% in May; these readings were far below a high of 52% in December 2024 but significantly above a record low of -61% in June 2022. Expected real sales climbed to a net 9% in June, a five-month high, from 1% in May; the latest figure was below a high of 22% in December 2024 but above a low of -18% in August 2024. A net -4% of respondents reported higher nominal sales in the past three months, up from -5% in May and marking the highest reading in four months; the latest result remained above a low of -20% in October 2024 but below the recent positive reading of 1% in February and a peak of 9% in June 2021.

Plans to expand the business inched up to 8% in June from 7% in May and April; the latest figure was down from a high of 20% in December 2024 but up from a low of 2% in March 2023. Plans to make capital outlays rebounded to 20% in June from 16% in May; these numbers were still below a high of 28% in November 2024 and a peak of 31% in October 2021. Expected credit conditions slipped to -5% in June, a three-month low, from -3% in May; this result was slightly below a high of -2% in December 2024 but above a low of -11% in November 2023. Meanwhile, a net 0% of respondents viewed current inventory stocks as “too low” in June, up from -4% in May and matching the highest reading since August 2025 (also 0%); the positive reading of 1% was recorded in May 2025.

On the labor front, 51% of respondents reported that qualified workers to fill job openings were hard to find in June, up from 46% in May and registering the highest level since September 2024. These numbers were above a low of 43% in August 2025 but below a high of 56% in August 2024 and a peak of 62% in September 2021. A net 11% planned to increase employment in June, up from 9% in May; it matched a low of 11% in March 2024 but remained below its recent high of 19% in November 2025 and a peak of 32% in August 2021. Notably, 32% reported positions not able to be filled in June, up from 29% in May (the lowest level since May 2020); these figures remained below a high of 51% in May 2022.

Overall earnings trends had remained in negative territory since December 2019. The measure fell to -20% in June, the lowest level in three months, following a four-point increase to -15% in May. These readings were below the most recent high of -14% in February and a high of -5% in June 2021 but above a low of -37% in August 2024,

On the pricing front, actual and expected selling prices remained at an inflationary level, indicating continued inflationary pressures. The net percent of firms raising their average selling prices rose to 38% in June, the highest reading since February 2023, after a six-point increase to 36% in May. The latest reading was up from a low of 20% in August 2024 but well below a peak of 66% in March 2022. The percentage planning to raise prices eased to a still-elevated 32% in June following a seven-point rise to 34% in May (the highest level since November 2023); these readings remained above a low of 21% in April 2023.

Wage inflation remained relatively high in the June survey. A net 28% of respondents raised compensation during the last three months, down from 31% in May and marking the lowest since November 2025. It was also below a high of 46% in February 2023 and a peak of 50% in January 2022. A net 17% of firms planned to raise worker compensation in the next three months, slightly down from 18% in May and matching the lowest reading since July 2025; this remained below highs of 28% in November 2024, 30% in November 2023, and 32% in October 2022.

Inflation was cited as the single most important problem facing small businesses, as reported by 21% of NFIB members in June, up from 18% in May and representing the highest since October 2024; these readings were well below a peak of 37% in July 2022. Taxes ranked second as the next most important problem (alongside labor quality), as reported by 19% of respondents in June, unchanged from May. Labor quality also remained a key challenge for small businesses, as reported by 19% of respondents in June—the highest since December—compared with 13% in May (the lowest level since December 2016). Other concerns (in June vs. May) included labor costs (8% vs. 14%), government requirements (8% vs. 10%), insurance cost/availability (8% vs. 8%), poor sales (7% vs. 7%), and competition from large businesses (5% vs. 6%).

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

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- Uncertainty Idx down 2 pts. to 89, remaining well above the historical avg. of 68.
- Expectations for economy up 10 pts. to 13%, a four-month high.
- Expected real sales up 8 pts. to 9%, a five-month high.
- Plans to expand business up 1 pt. to 8%, highest in three mths.
- Firms raising avg. selling prices up 2 pts. to 38%, highest since Feb. ’23.
- Top three business concerns: inflation (21%), taxes (19%), and labor quality (19%).

U.S. NFIB Small Business Optimism Rebounds in June to a Four-Month High

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Industrial production in Japan fell by 0.5% in May after rising by 0.7% in April and declining by 0.2% in March. Manufacturing output rose by 0.1% in May after rising by 0.4% in April and declining by 0.3% in March. Total industrial output shows a 0.7% gain over 12 months, a 3.4% annual rate gain over six months, and zero change in output over three months. For manufacturing, 12-month output is up 0.7%; over six months, output is up at a 6.1% annual rate; and over three months, output is up by 0.8% at an annual rate.

These trends show that output continues to grow for manufacturing as well for total industry, but not by a great margin. In fact, there are still a number of industries still fighting off negative trends, such as textiles, where output falls over three months, six months, and 12 months, as well as investment goods and mining, both of which show declines over three months, six months and 12 months. One year ago, all of these sectors were showing year-over-year declines except for manufacturing, which was up by 0.5% over 12 months. Manufacturing output is now up by 0.7% year-over-year, with consumer goods up by 1.8%, intermediate goods output up by 2%, and investment goods falling by 3%. Japan is currently trying to fight off a legacy of weakness. The strength of the rebound is being borne by consumer goods and intermediate goods, with investment goods undergoing significant contractive effects.

Manufacturing is showing gains on all three sequential horizons. Utilities output is showing growth on each horizon, and actually shows gathering strength, rising by 0.9% over 12 months, at a 1.4% annual rate over six months, and at a very strong 7.9% annual rate over three months.

In the quarter-to-date (QTD) basis, most of these sectors are losing the battle against weakness, with most industry or sectors showing declines two months into the new quarter. Overall output declines at a 0.2% annual rate. Manufacturing output falls at a 2.2% annual rate, intermediate goods output falls at a 0.2% annual rate, and investment goods output falls at a 7.2% annual rate. The only exception is consumer goods output, which is rising at a solid 5.3% annual rate, but that's not strong enough to drag all of industrial output or even manufacturing into the plus column.

Manufacturing output currently is at about 87.7% of its past peak. Activity in electric and gas utilities are at 90.4% of their past peak, while mining is only at 59.6% of its past peak of activity. Comparing levels of output to where they were in January 2020, manufacturing is at 94% of that value, with total industry also at 94% of that value. Consumer goods are at 98% of that value, intermediate goods at 92%, and investment goods at 93%. Mining is only at 74% of its January 2020 value, while electric and gas utilities have moved beyond the January 2020 level and are 3.3% higher than they were and early 2020.

Since 2020, it has been a relatively difficult time for the global economy. The Japanese statistics show only one sector that has managed to create positive growth compared to its level in January 2020. The current month is a mix of plus-and-minus activity changes. Sequential trends generally show more positives than negatives, but there are still a lot of negatives in train that keep Japanese manufacturing from reaching clearly solid footing. When the Strait of Hormuz opened, it appeared that Japan would be in a position to build on its recovery, but now, with the failed peace agreement and failed ceasefire, the strait once again has been closed and the outlook is shrouded in negativity.

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Japan

Japan’s IP Is Fighting Off Weak Trends

Industrial output in Norway fell by 1% in May after rising by 0.6 in April and falling by 1.1% in March. The seesaw act for output continues. Over broader horizons, however, output is falling. It falls by 0.1% over 12 months, falls at a 1.1% annual rate over six months, and falls at a 6.2% annual rate over three months, giving us a clear sequential trend toward falling and decelerating output. Utilities output has chaotic trends, as do mining and quarrying; however, manufacturing shows a clear trend toward output acceleration, with a 2.1% output increase over 12 months, a 2.6% annual rate rise over six months, and a 9% annual rate increase over three months.

Manufacturing sectors show consumer goods output increasing in May, also showing secular acceleration from 12 months to six months to three months. Durable goods, however, are the fly in the ointment, with output up 2.2% over 12 months, accelerating over six months, and then dropping at a 20.4% annual rate over three months. However, consumer nondurables show growth and acceleration, with a 12-month gain of 1.8%, rising to a 3.6% annual rate increase over six months and a 10.9% annual rate increase over three months. Intermediate goods output trends return to more difficult times and show declines over 12 months, six months, and three months, but not a clear path of deceleration. Capital goods output is up 5.4% over 12 months and at an 8.5% annual rate over three months, but there is an intervening soft spot with output up at only a 3.4% annual rate over six months.

Against this background, inflation in Norway showed solid increases in May, rising by 0.2% overall and by 0.3% for the core HICP. However, sequentially inflation gains 3% over 12 months, rises at a 3.8% annual rate over six months, and then backs down to a 1.2% annual rate over three months. The core HICP is steadier, with a 3.4% gain over 12 months, rising to a 3.8% annual rate over six months, and then backing down to 3.2% at an annual rate over three months. That's a set of growth rates that are more stable than either accelerating or decelerating.

In the quarter-to-date (QTD) basis, industrial production is falling 4.6%; this is two months into the second quarter. On the other hand, manufacturing output is rising QTD at a 4.9% annual rate, with consumer nondurables showing strong positive growth along with intermediate goods output. There is a solid gain of 3.1% at an annual rate from capital goods. The QTD inflation trends remain somewhat mixed, with a weak headline showing a 1.6% annual rate, against a core HICP at a 3.4% annual rate rise, the latter gain being well in step with its sequential results.

The far right-hand column compares industrial production over the broad period from just before COVID (in January 2020) looking at the ratio of the level of output in May 2026 to its index value in January 2020. Remember that IP data are inflation-adjusted, so these are real data. Over this span, industrial production excluding construction is up by approximately 10%, with utilities output up at about 21%, mining and quarrying up about 5%, and manufacturing up a little more than 7%. This is a 5½-year period. Consumer goods output is up by 2.7%, led by consumer nondurables which rise 4.1% on the period and against durable goods output where there is a decline of about 13% on that timeline. Intermediate goods output drops slightly on the timeline by less than half a percentage point, while capital goods output is up at a solid and strong 23% gain. Looking at prices over the same period, the headline HICP is higher by 27% while the core is higher by 24%.

The weakened output shows the stresses and strains of the period, with weak gains in place over the last 5½ years and with the consumer showing considerable wear and tear, leaving consumer goods output lower on balance over this 5½-year span. It hasn't been such a bad time for capital goods, where output rose by 23% over the period. Inflation got out-of-the-box and grew quite strongly. The headline HICP grew by 27% since January 2020, a duration of time during which, sticking to its target, would have implied a gain in the price level of only 11.5%.

**Ongoing overshooting**
Even now central banks are trying to decide how to come to grips with the inflation pressures from that. Pressures continue to linger and threaten the economies. Of course, there are some new factors in place, but that's the nature of inflation: if it's not one thing, it's something else. And failing to respond to the one thing means that you're going to get hit even worse when it becomes something else. This is the lesson the central banks haven't learned during this period. 

**Have central banks learned their lesson?**
Noting that inflation is over target and then forecasting that it's going to come back down to target over some period ahead puts the inflation performance at risk to whatever happens between now and the end of that period ‘ahead.’ If that forecast isn't perfectly right and if there's something else that disturbs the path of prices, what will happen is that an inflation that is already over the top of the target will push even farther over the top of the target and the dilemma faced by the central bank will become even worse. This is why kicking the can down the road generally is not a very good strategy, but it's one that virtually all the central banks pursued in the wake of COVID. So, will central bankers come to see inflation that is here and now as a here-and-now problem to be addressed here and now, or as a candidate for tomorrow land? The ECB seems to be changing, and the Fed has formed task forces. What about Norway and the rest of the world? Norway did push its target rate up as the ECB hiked. But what is its plan?

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Norway

Norwegian IP Struggles, but Manufacturing Shows Some Strength

Tian Yong Woon

In this week's Letter, we examine the underbelly of the AI boom, the risks that sit beneath its optimism. Start with the public mood: American concern about AI has grown alongside adoption over the past three to four years (chart 1). Those worries span mass job displacement, misuse of top-end models by bad actors, and fears of being left behind. The first of these is already surfacing: in June, AI was again the most cited reason for announced US layoffs, with year-to-date AI-linked cuts above 100,000 (chart 2). Technology led all sectors in overall cuts, though the data do not isolate how many were AI-driven. Among those hit, the young are arguably the most exposed to these labour effects. They enter a labour pool swollen by displaced professionals, just as AI masters the entry-level tasks where they would start. India and Indonesia illustrate the stakes on youth NEET, the share not in education, employment, or training, both above 20% and among Asia's highest (chart 3). Beyond the labour market, the same optimism reshapes asset prices. The rally has lifted AI-related valuations to historic highs and concentrated a few names in cap-weighted indexes (chart 4). That raises correlation and the risk of a sharper index fall should the rally unravel. The same concentration runs through economies via exports, from Taiwan's advanced chips to South Korea's memory (chart 5). Its footprint is physical too, and cuts both ways: data-centre investment has lifted growth in Johor, Malaysia (chart 6) while straining local power and water. None of this argues against riding the AI wave, which still promises real productivity and welfare gains. Rather, these are caveats that investors and policymakers must keep in view, since the story is not all upside.

**AI-related concerns**
AI adoption has exploded over the past three to four years, and Americans' concerns have risen alongside it (chart 1). That is understandable, given how advanced and broad AI's proven applications have become. They now span everyday tasks and subject-specific work across fields such as finance and production, as well as tech and development, the sector AI was born in. Major concerns run from mass AI-induced job displacement to a more recent fear, that top-end models fall into the wrong hands and are used by bad actors. A further worry is distributional: AI advances are powerful and could deliver leaps in productivity, yet they may also leave many people behind. Those most exposed include workers already displaced from their jobs and people facing scarcer basic resources as AI demand competes for them. Others simply lack equitable access to AI tools or their benefits.

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**AI-driven job displacement**
Some of the fears US workers first had about AI-driven job displacement are already playing out. In June, AI was again the most cited reason for announced job cuts in the US (chart 2). That pushed year-to-date job cuts attributed to AI above 100,000, more than half of all AI-tagged cuts since AI became a selectable reason in 2023. The data come from the latest survey by Challenger, Gray & Christmas. This likely reflects AI's disproportionately heavy impact on certain industries such as technology, which again led all sectors in cuts. At the same time, announced hiring plans stayed subdued, leaving laid-off workers with limited opportunities to find new roles. All of this is occurring even as market valuations remain elevated on the broader wave of AI optimism.

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**AI and youth unemployment**
Arguably among those bearing the brunt of these labour-related effects are the youth. Many have graduated on a curriculum built largely for a pre-AI era. They now enter a labour pool swollen by experienced professionals whom AI has displaced. At the same time, AI is proving especially capable at the entry-level tasks on which young workers usually start. An elevated youth unemployment rate only intensifies the competition young people face for gainful employment. On the broader NEET measure, which also captures youth who are neither working nor studying, India and Indonesia stand out. On the latest available WDI data, both have youth NEET rates above 20%, among the highest in Asia and above the global average (chart 3). Should employers in these economies adopt AI aggressively across processes and production, including physical AI such as humanoid robots, the problem could worsen. Yet firms that stay purely labour-intensive risk losing out to rivals using more efficient, and perhaps cheaper, AI-driven methods.

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**Concentration risk**
The recent wave of AI optimism has pushed the equity valuations of major AI developers and AI-related goods producers to historically high levels. These gains are partly backed by strong earnings and upbeat forward guidance. Most major indexes are weighted by market capitalisation, so a counter's weight tracks its price. As these counters have outperformed their peers (chart 4), their index weight has risen close to mechanically, when holding the number of shares constant. This raises concentration risk, since a small group of counters now carries more of the index and moves it more closely. So, if the rally in these counters were to unravel deeply, it would drag the broader index down more heavily with it.

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AI-related concentration risk is not confined to equity indexes; it also shows up in the growth of major economies. In Asia, that risk usually runs through a country's exports. Take Taiwan, the world's largest advanced semiconductor exporter, as an example. As chart 5 shows, its recent export growth has come more than entirely from integrated circuits and from infocomm and audiovisual equipment. Other goods categories have often contributed negatively in recent months. This is good news for the Taiwanese economy, which sits right at the centre of the global AI boom. Yet it is also a source of concentration risk, should AI-related goods demand collapse or substantial alternative supply emerge elsewhere. A similar story applies to South Korea, through its role in supplying high-end memory chips.

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**Data centres, energy, and water**
Finally, rapidly advancing AI promises major productivity gains and broad improvements to daily life. Yet AI infrastructure rests on resource-intensive inputs: the energy needed for data centre compute, and the water needed to cool those centres. Both may deprive real people of the very resources they need to survive. One recent hotspot is Malaysia, which has courted a wave of foreign direct investment to expand its data centre footprint in the state of Johor. These capital inflows are welcome, and have lifted state-level growth through the construction sector (chart 6). But they have also raised concerns about straining local grids and water supplies, possibly leaving less for residents. Among estimates, a recent one puts data centres at around 40% of Johor's electricity demand by 2035. That is pressuring the state to expand generation capacity and grid access to match the data centre pipeline already in place. Its neighbour Singapore faced similar strains earlier, and has since repositioned itself as a hub for the most advanced and efficient data centres, partly because of its severe land constraints. 

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Asia

Economic Letter from Asia: The AI Underbelly

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Industrial production (IP) edged up a slightly less-than-expected 0.1% m/m in June, the fourth monthly gain in five months, following a 0.1% increase in May (unrevised) and a downwardly revised 0.8% rise in April (+0.9% previously), according to data from the Federal Reserve Board. A 0.2% m/m June increase had been expected in the Action Economics Forecast Survey. The year-on-year rate decelerated to 1.1% in June, the lowest since March, from 1.7% in May (0.7% in June 2025). The June IP index at 102.6 was 3.3% above a low of 99.3 in November 2024 and 3.4% above a low of 99.2 in January 2024. IP rose 1.0% q/q in Q2 2026 after a 0.3% q/q rebound in Q1 2026, rising at a 4.0% annualized rate following a 1.1% Q1’26 annualized pace.

By **industry groups**, manufacturing production was virtually unchanged m/m (+1.1% y/y) in June after increases of 0.1% in May (0.0% initially) and 0.7% in April (unrevised). Durable goods production dipped 0.1% (+3.2% y/y) in June, the first m/m easing since March, following a 1.0% rise in May. Within durables, most categories fell m/m in June, led by a 0.8% drop (-1.1% y/y) in wood products, followed by declines of 0.7% (+2.9% y/y) in machinery, 0.6% (+5.7% y/y) in electrical equipment, appliances & components, 0.6% (+3.3% y/y) in nonmetallic mineral products, 0.2% (+5.0% y/y) in aerospace & miscellaneous transportation equipment, 0.2% (+2.1% y/y) in fabricated metal products, and 0.2% (+1.9% y/y) in miscellaneous durable goods. To the upside, the following durable goods categories rose m/m in June, including output rises of 0.7% (1.2% y/y) in motor vehicles & parts, 0.3% (-5.0% y/y) in furniture & related products, 0.2% (1.5% y/y) in primary metals, and 0.1% (9.2% y/y) in computer & electronic products. Notably, aircraft & parts production climbed 0.3% (9.1% y/y), the fifth straight m/m rise, after a 1.0% May increase.

Nondurable goods production rose 0.2% (-1.1% y/y) in June, the fourth m/m gain in five months, following a 0.9% decrease in May. The June output rise was led by a 2.1% rebound (-0.9% y/y) in petroleum & coal products, followed by increases of 1.9% (2.1% y/y) in apparel & leather goods, 0.4% (-1.9% y/y) in printing & related support activities, 0.1% (-0.7% y/y) in food, beverages & tobacco, and 0.1% (0.7% y/y) in plastics & rubber products. To the downside, the following nondurable goods categories fell m/m in June, including output declines of 0.4% (-4.6% y/y) in paper, 0.3% (-4.7% y/y) in textiles & product mills, and 0.2% (-1.3% y/y) in chemicals.

Mining activity grew 0.4% (2.4% y/y) in June, the third successive m/m gain and the fourth in five months, after a 1.1% increase in May (+1.3% initially). Utilities output, up for the second time in three months, rose 0.4% (0.3% y/y) following a 0.7% May decline (-0.4% initially), reflecting a 0.9% rebound (1.3% y/y) in electric utilities output and a 3.3% decline (-6.7% y/y) in natural gas utilities output.

By **market groups**, consumer goods output rebounded 0.3% (-1.2% y/y) in June after a 0.6% decline in May, reflecting gains of 0.4% (-0.9% y/y) in durable consumer goods and 0.3% (-1.2% y/y) in nondurable consumer goods. Materials production inched up 0.1% (1.3% y/y), the fourth m/m increase in five months, after a 0.3% May rise. In contrast, business equipment output fell 0.4% (+5.4% y/y), the first m/m fall since March, following a 0.9% May gain. Construction supplies production slid 0.4% (+1.5% y/y), the second m/m decline in three months, after a 1.0% May increase.

In **special classifications**, factory output of selected high-tech industries rose 0.5% (11.0% y/y) in June on top of a 1.8% advance in May, marking the third consecutive m/m gain and the eighth in nine months. Manufacturing production excluding selected high-tech industries held steady m/m (+0.8% y/y) in June after four straight m/m gains, while manufacturing production excluding selected high-tech and motor vehicles & parts dipped 0.1% (+0.8% y/y) for the second successive month.

Capacity utilization held at 76.1% for the third consecutive month in June (with May’s reading revised down from 76.2%). The Action Economics Forecast Survey forecasted 76.2%. The June reading was 3.3 percentage points below its long-run (1972–2025) average. Manufacturing capacity utilization slipped to 75.7% in June from an upwardly revised 75.8% in May (the highest since September 2025; 75.7% initially). The June rate was 2.5 percentage points below its long-run 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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- June IP +0.1% (+1.1% y/y), fourth m/m increase in five months.
- Manufacturing unchanged (+1.1% y/y), w/ durables -0.1% and nondurables +0.2%.
- Selected high-tech +0.5%, eighth gain in nine mths.; motor vehicles +0.7%, sixth rise in seven mths.
- Mining +0.4% (+2.4% y/y), third consecutive m/m increase.
- Utilities +0.4% (+0.3% y/y), led by a 0.9% rebound in electric utilities output.
- Key categories in market groups post mixed results.
- Capacity utilization steady at 76.1%; mfg. capacity utilization marginally down to 75.7%.

U.S. Industrial Production Up Slightly in June; Manufacturing Flat

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