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US and China big leaders in adoption of AI models

Robert Brusca

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I have offered the table (below) as a presentation of French inflation statistics that is ‘too early’ largely because the report comes with a headline and without supporting detail. But the headline is too intriguing to wait for the details to emerge. To try to bridge that gap, I present the French detailed data for the CPI with the trends calculated based on a one-month lag. I also supplement that with the current report from Germany where the topical HICP reading for January is available, as it is for France. But Germany has also issued its domestic CPI data with detail. So, I present the domestic CPI trends without lag for Germany as a way to gain some better understanding about what's going on with inflation in the euro area and to gain perspective on France.

**French-German comparisons; French results**
Of course, Germany is not France. We can't simply assume that the trends that we're seeing in Germany in January will translate through to France. But what we can do is notice what similarity/difference is there and point out that the sharp lowering of inflation in France is a French phenomenon and not a phenomenon that is shared by Germany. Therefore, the trend is not likely broadly applicable to the European Monetary Union.  French inflation is running at only 0.4% over 12 months (!), annual rates of 0.2% over six months and three months; these are exceptionally low rates of inflation.  In January, the French HICP index fell month-to-month by 0.1%.

**German trends**
The German behavior is not really similar to this with the HICP at 2.1% over 12 months and then rising to annual rates of 2.8% over three months and six months, substantially similar to the sorts of numbers reported for headline inflation in the United States. The German domestic CPI reports slightly improving trends with annual inflation at 2.1%, six-month inflation at 2.1% at an annual rate, and at 1.6% over three months, inflation is tucked inside of the ECB 2% target over three months. The German CPI excluding energy - the early proxy that we have for the core rate - is at 2.4% over 12 months, 2.5% over six months and then drops to 2% annualized over three months. The month-to-month German data have been well behaved but not as weak as the monthly inflation numbers for the HICP headline monthly in France.

**Different inflation in France and Germany; but a similar trend?**
So we have two bits of evidence here: one is that French inflation has really been behaving and it's quite weak. The other is that while German inflation is running at a higher pace and generally above the ECB target, there are also signs that German inflation is starting to come down over more recent periods.

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**An unusual macroeconomic event… in progress**
These observations, in some sense, clash with the early PMI data that show widespread improving breadth in January across global manufacturing PMI reporters. Manufacturing is showing signs of firming while the inflation picture is showing signs of coming under control at least in the European Monetary Area. While we tend to think of growth and inflation as going hand-in-hand, that is of inflation as being pro-cyclical, that's not a rule, and we see a departure from that usual pattern in these unfolding data. Will they continue to unfold that way?

**What do you believe?**
All of this raises questions as to whether the inflation portion is real, whether the manufacturing growth portion is real, or whether they are both real and that monetary policy has been able to, because of its careful implementation, support growth and help to bring inflation lower at the same time.

**Conventional trend unfolding in the U.S.**
These are intriguing questions and we're going to continue to ask them and watch trends in the months ahead. The U.S., early in the year, has reported out a very strong manufacturing ISM value that also has shown some pressure in its pricing gauge, a more conventional hint that growth is picking up and inflation might be picking up along with it.

**The tariff stick**
Of course, there's a lot to consider here, a lot of irons are in the fire, a lot of contrary policies being run. There is a big change in U.S. tariff policy with the U.S. using the big stick and geopolitical relationships are resetting as well, with the two effects having some interaction with one another creating some difficulty for analysis.

**Growth warming up in the U.S., and a new Fed chair… in waiting**
U.S. economy is showing signs of some significant pickup in growth in a recent ISM report on manufacturing. Inflation, that has not showed much tendency to decline recently, continues to run over the top of the Fed's target; however, there's been a new Federal Reserve Chairman nominated and there's a great deal of talk and discussion in the U.S. about what that means. What will he bring to the table? Everyone knows full-well that the President has been looking to get interest rates reduced! Nonetheless he has promoted for Federal Reserve chairmanship a former FOMC member with the known voting record who has tended to lean to the hawkish side of policy. This is a person who also supports shrinking the Fed’s balance sheet. As a result of these contrary pieces of analysis, there's a good deal of uncertainty in the U.S. about what the nomination of the new Fed chair, Kevin Warsh, is going to mean for policy. Once he has been approved, and Mr. Powell has departed in May, what then? It is indeed starting out to be an interesting year. Interesting trends and interesting unanswered questions.

Europe

Inflation Tamed in France’s ‘Too-Early’ January Inflation Report

Winnie Tapasanun

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The ISM U.S. manufacturing PMI rose to a stronger-than-expected 52.6 in January, the first m/m rise since August, from 47.9 in December and 48.0 in November, data from the Institute for Supply Management showed. The January reading, above the 50 expansion-contraction dividing line, indicated that the U.S. manufacturing sector expanded for the first time since January 2025 following 26 consecutive months of contraction. A reading of 48.4 for January had been expected in the Action Economics Forecast Survey. The January manufacturing PMI, above 50.5 in January 2025 and a low of 47.0 in October 2024, marked the highest level since August 2022, while remaining below a peak of 63.8 in March 2021.

The production index rebounded to 55.9 in January from 50.7 in December, suggesting production expanded for the fourth time in five months and reached the highest level since February 2022. The index was above its recent low of 44.8 in April 2025 but below a peak of 66.5 in March 2021. An increased 25.7% (NSA) of respondents reported higher production in January while a lessened 15.5% reported lower production. The new orders index jumped to 57.1 in January from 47.4 in December, indicating new orders expanded for the first time since August and hit the highest level since February 2022. The index remained well above a low of 41.8 in January 2023. An increased 31.4% (NSA) of respondents reported higher new orders in January while a lessened 17.6% reported declines. The inventories index increased to 47.6 in January from 45.7 in December, marking the ninth straight month of contraction. The index was below its recent high of 52.7 in March 2025 but above a low of 43.8 in October 2024. Meanwhile, the supplier deliveries index rose to 54.4 in January from 50.8 in December, indicating slower delivery performance for the second successive month after faster deliveries in November. In January, 12.7% (NSA) of respondents reported slower delivery speeds while 4.0% reported faster speeds.

On the labor front, the employment index improved to 48.1 in January from 44.8 in December, signaling that employment contracted for the 28th straight month after a brief expansion in September 2023; however, January’s contraction was the slowest since January 2025. The index was up from its recent low of 44.4 in March 2025 but below its recent high of 49.7 in January 2025 and a high of 56.5 in March 2022. In January, 13.7% (NSA) of respondents reported higher employment while 18.3% reported less hiring.

On the pricing front, the prices paid index rose to 59.0 (NSA) in January after holding at 58.5 in December and November, indicating raw materials prices rose for the 16th straight month and at the fastest pace in four months. The index remained well above a low of 39.4 in December 2022 but significantly below a high of 87.1 in March 2022 and a peak of 92.1 in June 2021. An increased 29.0% (NSA) of respondents reported higher prices in January while 11.1% reported price declines.

In other ISM series not included in the composite index, the new export orders index rose to 50.2 in January from 46.8 in December, indicating new export orders expanded for the first time since February 2025. The index was up from its recent low of 40.1 in May 2025 but down from its recent high of 52.4 in January 2025 and a high of 57.1 in February 2022. The imports index rebounded to 50.0 in January from 44.6 in December, suggesting imports were unchanged after nine consecutive months of contraction. The index was above a low of 39.9 in May 2025 but below its recent high of 52.6 in February 2025 and a high of 55.4 in February 2022. The order backlog index advanced to 51.6 (NSA) in January from 45.8 in December, showing backlog levels expanded for the first time since September 2022 and reached the highest level since August 2022. The index was up from a low of 37.5 in May 2023 but far below a peak of 70.6 in May 2021.

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

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- ISM Mfg. PMI up to a higher-than-expected 52.6 in Jan.; first expansion since Jan. ’25.
- Production (55.9) expands for the fourth time in five mths.; new orders (57.1) expand for the first time since Aug.; both at their highest since Feb. ’22.
- Employment (48.1) contracts for the 28th straight mth. after expanding in Sept. ’23.
- Prices Index (59.0) shows prices rising for the 16th consecutive mth., the fastest increase in four mths.
- Exports (50.2) expand for the first time since Feb. ’25; imports (50.0) unchanged after nine mths. of contraction.

U.S. ISM Manufacturing PMI Rebounds in January; Highest Level Since August ’22

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**An unexpectedly happy New Year in manufacturing land**
It's a new year - and a fine new year it is, baby! S&P manufacturing PMIs are showing consistent and broad improvement on a monthly and sequential basis. In January, of the 18 early reporting countries only 5 showed worsening conditions. The median reading for the month moved to 50.8 in January from 50.1 in December and 49.0 in November. It's a slow-motion slog, but on the other hand, it is a steady up creep from November. The PMI's median is up by 1.8 points since November, which may be small potatoes, but it's still significant progress.

Over three months the median reading rises to 50.0, compared to a reading of 49.5 on average over six months and a reading of 49.0 on average over 12 months. These sequential readings are also showing slow but clear stepwise improvement.

**Breadth**
In terms of breadth, in January 72.2% of the reporters showed month-to-month improvement, compared to 44% showing month-to-month improvement in December and 50% showing improvement in November. Yes, the recent performance has shown improvement versus deterioration, and in the two prior months, diffusion has been pretty close to a 50-50 proposition. Then, in January, the upside exploded to a 72.2 percentile reading. Sequential data show that over 12 months 38.9% of the reporters showed improvement compared to a year earlier; over six months 50% of the reporters showed improvement compared to performance over 12 months. Over three months there was improvement of 61.1% of the reporters compared to their six-month metrics.

**Unexpected strength**
These are steady and consistent improving readings, with some explosive improvement in the most recent three-month or one-month periods. This report is really something that was quite unexpected since the trend has been flat, sitting in this position of minor contractive lethargy for quite some time.

**Most reporters log readings that imply growth**
The percentile ranking data show that only six of the 18 countries—one third of reporters—have percentile readings below the 50th percentile, based on data going back to January 2022. 12 of the 18 reporters have percentile standings in the 70th percentile or higher, and 4 of 18 are in the 80th percentile range.

**Strong showing in the U.S. a growth leader**
The breadth of this improvement is quite impressive. The table chronicles the S&P manufacturing PMIs. The chart plots these data for three regions but substitutes the U.S. ISM manufacturing reading freshly released today along-side the S&P readings. The U.S. ISM in January has simply exploded to the upside. That report’s headline snapped up to 52.6 in January from 47.9 in December; it was the strongest reading since the middle of 2022. The order diffusion reading jumped to 57.1, a month-to-month jump of nearly 10 points; the production diffusion rating rose by 5 points monthly; the prices-paid reading continued to snake higher; export and import ratings both rose relatively sharply. If the U.S. is a bellwether for how the rest of the world is going to perform, that bell is ringing loudly in January. The U.S. ISM standing evaluated on data back to 1996 gives an ISM queue standing at its 48.9 percentile – closing in on absolute normal.

**Some U.S. detail…**
The U.S. weakness in imports would probably have something to do with tariffs. There also may be some negative spillovers that would affect exports, but exports would also depend more directly on activity overseas, which the PMI data from S&P suggests has begun to pick up. Employment, which showed an improvement on the month, is still lagging with a 31-percentile standing. However, the rest of the manufacturing readings are really quite solid, quite strong. And in terms of levels instead of rankings, all of the U.S. PMI readings are above their 50% mark in the ISM survey except for inventories and employment. Employment has a 48.1 percentile standing - not a terrible result, especially for a sector whose employment share has been dropping chronically for decades.

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**Has the worm turned for the US economy?**
U.S. economy has been through some difficult spots. Economists have focused on various Trump policies and how they've raised the level of uncertainty which is bad for economic activity. However, despite this assessment, the U.S. economy has continued to perform well during this period. And it has been very strong as the end of the year drew to a close. This is even in the face of what became a government shutdown (and, in fact, another, perhaps smaller, shutdown may loom as Democrats seek to bring pressure to bear on ICE through their ability to influence the budget process). Month-to-month all the U.S. manufacturing ISM components strengthened. That included the inflation reading (or prices paid) at a 54-percentile standing, above their median but not an extreme reading. This is a much more brilliant report than had been expected for the U.S., and of course, in the context of much better report on the global economy from the S&P indexes.

**Ahead…**
The Fed seems to want to argue that the effect of tariffs is now mostly water under the bridge. And if that's true, we should also expect the deleterious effect of tariffs on U.S. exports and activity to have reached a peak and to be in a more diminishing mode looking ahead. There are also arguments about how much U.S. productivity is going to stay in place on the contribution of artificial intelligence. And for the moment, those trends both look good, solid, and strong. If the U.S. is going to grow like this, the outlook for global manufacturing is really quite excellent. This is a wonderful surprise for the new year. Hey, it's a new year, baby. Time to drop the pessimism?

S&P MFG PMIs Power Ahead; PMIs Improve; U.S. ISM blasts a hole through MFG Pessimism

Tian Yong Woon

This week, we examine Artificial Intelligence through an Asian lens, focusing on how the region fits into the broader AI value chain. While the US clearly dominates at the frontier—spanning cutting-edge AI model capabilities, chip design, and data centres—it remains heavily reliant on more foundational segments of the value chain.

We begin with first principles, looking at the raw material inputs required to produce AI chips, where China continues to hold a dominant position (chart 1). We then turn to the chips themselves, highlighting Taiwan’s well-known leadership in advanced semiconductor manufacturing and its critical role for both the US and China (chart 2). That said, recent efforts by both the US and China to reduce external dependence are beginning to show up in the data (chart 3), and could reshape this landscape in the years ahead. Next, while the US still leads in data centre capacity—the infrastructure essential for training and deploying AI models—several Asian economies, notably Malaysia, are seeking to capture a larger share of this rapidly expanding segment. These efforts have been met with strong interest from global technology firms, translating into sizable foreign direct investment inflows (chart 4).

Underpinning the entire AI ecosystem, however, are rapidly rising electricity requirements. China is now the world’s largest consumer of electricity, while other aspiring AI players, including India, will also need to confront the growing energy demands that come with deeper participation in the AI space (chart 5). At the same time, economies that have made significant shifts toward certain renewable energy sources must contend with higher electricity prices. This may create pressure to slow—or in some cases reconsider—the pace of the green transition in order to remain competitive in the intensifying race for AI-related resources (chart 6).

**AI chip material production**
We begin with the most critical raw inputs required to produce AI chips. Beyond silicon—the foundational material on which chips are built—China commands substantial market share and dominance in the production of other key chipmaking materials, notably gallium and germanium. China accounts for a near-total share of global gallium production and roughly 68% of germanium output (chart 1), levels that effectively give it the ability to steer these markets. China has demonstrated this leverage before, most recently through temporary export restrictions on critical minerals enacted last year amid tit-for-tat measures between the US and China. Those controls were eventually paused following a subsequent US–China trade agreement. Even so, the episode served as a stark reminder of China’s strong negotiating position in the semiconductor supply chain—despite the US retaining leadership in the sophistication and advancement of AI models.

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**AI chip production**
Next, we revisit the production of AI chips themselves. This area has featured prominently in financial market discussions and, by extension, has driven sharp swings in tech-sector equity valuations in recent years. As is now widely understood, Taiwan remains by far the world’s leading producer of AI chips, serving as the primary import source for the two largest importers of these products: the US and China. While firms such as Nvidia lead in advanced chip design, it is typically Taiwanese manufacturers—most notably TSMC—that translate these designs into physical chips, turning blueprints into deployable products. To date, the depth of manufacturing expertise and production capability among major Taiwanese producers remains unrivalled, leaving the global AI chip industry heavily dependent on these firms for actual fabrication.

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That said, recent major commitments by TSMC to expand manufacturing capacity in the US state of Arizona mark an important shift. These moves, which also culminated in a US–Taiwan trade deal, could gradually onshore more AI chip production to the US and reduce the heavy geographic concentration in Taiwan. That process, however, is likely to take several years to fully materialise. For China, earlier US efforts to restrict access to externally supplied AI chips—particularly at the high end—have also accelerated Beijing’s push toward greater self-reliance. Some middle ground has emerged more recently, with US approval for the sale of Nvidia’s older-generation H200 chips to China. These chips were reportedly approved conditionally by Chinese authorities for purchase by firms such as Alibaba, Tencent, ByteDance, and DeepSeek. Even so, the race to expand domestic capability and production—across not just the most advanced chips, but semiconductors more broadly—is now firmly under way in both the US and China, as shown in chart 3.

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**Data centres**
We next turn to a key component of the infrastructure underpinning AI models and systems: data centres. While the US and China host the bulk of global data centre capacity, several other Asian economies are positioning themselves to capture rising demand for this infrastructure as part of their broader growth strategies. Malaysia, for instance, has increasingly emerged as a viable destination for data centres, with major technology firms such as Google, Microsoft, and Amazon already having announced sizeable investments. More recently, India has also sought to claim a share of this rapidly expanding space, with the government rolling out generous incentives—including a tax holiday of up to two decades for foreign companies operating data centres in the country. That said, the construction and operation of data centres require substantial technical expertise and, at a more fundamental level, large and reliable energy supplies—a topic we turn to in the next section.

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**Energy**
Finally, we turn to the resource underpinning it all: energy. The immense electricity requirements associated with training and deploying AI models in data centres have become increasingly apparent. As a result, economies seeking to expand data centre capacity or capitalise on this wave of demand, such as Malaysia and India, must ensure that electricity supply grows commensurately. At present, China stands out as the world’s largest consumer of electricity. Based on 2024 data, it demanded more than 10,000 TWh over the year—exceeding the combined consumption of the next several major users, including the US, India, Russia, and Japan. As chart 5 illustrates, many developed economies, particularly in Europe, are also net importers of electricity, suggesting constraints in domestic generation capacity. However, even economies that are not net electricity importers may not be fully insulated from external energy dependencies, as they often rely on imported primary energy inputs—such as crude oil or gas—to generate electricity.

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Additionally, many developed economies have, over the past decades, increased the share of renewable energy in their overall energy mix. While this shift is socially responsible, particularly in terms of reducing carbon footprints, it has also tended to coincide with higher electricity prices. This reflects the fact that many renewable energy sources have yet to reach efficiency levels that make them fully cost-competitive with fossil fuels. At the same time, geopolitical flashpoints, notably the Russia–Ukraine war, have underscored the risks of inadequate energy security. Repeated disruptions stemming from other tensions, including US trade actions, have further pushed past ambitions for a rapid green transition out of the spotlight Compounding these challenges, the immense energy demands associated with AI, together with the continued availability of relatively cheap fossil fuels, create a strong temptation for some countries to slow the pace of their energy transition—or, in some cases, risk reversing earlier progress. This challenge is also faced by Asian economies seeking to capture a larger share of the AI value chain.

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Asia

Economic Letter from Asia: The AI Resource Race

Michael J. Moran

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The Producer Price Index rose 0.5% in December, exceeding both the expected increase of 0.2% and the average advance of 0.3% in the prior six months. However, a surge of 0.7% in the service category accounted for much of the increase. The service component often moves erratically, and thus the sizeable increase in the headline index is not especially troubling. Within services, trade services are especially volatile, and prices here jumped 1.7% in December. Lower prices of food and energy (-0.3% and -1.4%, respectively) offset some of the pressure in the service area.

Prices of goods excluding food and energy, a grouping that shows less volatility than the food, energy, and service areas, rose 0.4% in December. The increase exceeded the average of 0.3% in the prior six months, but goods destined for export pushed the measure higher, jumping 0.7%. Goods intended for the domestic market (consumers, businesses, governments) saw price increases close to the recent average of 0.3%.

While the latest report on producer prices showed several notable shifts, underlying trends were little changed. The year-over-year increase in final-demand prices (the headline measure in this report) totaled 3.0% in December, a reading comfortably within the range evident since mid-2024 (chart, above left). The year-over-year increases in the goods and services categories changed only marginally: slightly higher for services and a tad lower for goods (chart, above right).

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The monthly report on the PPI also includes prices on intermediate goods and services, which might provide insight into final prices in coming months. The service category has been moving along a steady path, with year-over-year changes running in a range of approximately 1.5% to 2.5%. Prices of intermediate goods have been trending upward, moving from deflation during much of 2023-24 to an average year-over-year increase of approximately 3.5% in the past four months.

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.

- Prices of food and energy declined in December, but service prices surged.
- Prices of goods excluding food and energy rose more than the recent average, but the change did little damage to the underlying trend.

December PPI: Marked Shifts in Volatile Areas; Underlying Trends Steady

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GDP in the European Monetary Union rose by 1.3% at an annual rate quarter-to-quarter in the fourth quarter of 2025. This is a step up from 1.1% in the third quarter and from 0.6% in the second quarter. Year-over-year growth in the monetary union slowed to 1.3% in the fourth quarter compared to 1.4% in the third quarter and 1.5% in the second quarter; however, GDP growth is holding up well, and the quarterly profile suggests that the current growth rate is solid.

**Early-stage GDP reporters**
At this early stage, only seven countries have reported publicly GDP figures, and we see them in the table. Among them, the strongest growth rate in the fourth quarter is from Portugal at 3.2%, followed by Spain at 3.1%, and then the Netherlands at 2.1%; the weakest growth rate reported in the table is from France at 0.7% at an annual rate in Q4.

**Quarterly acceleration/deceleration**
In the fourth quarter with GDP measured quarter to quarter, GDP has accelerated in the monetary union from 1.1% in Q3 to 1.3% in Q4. At the country level, there are accelerations in Germany, Italy, Portugal, and Spain; the Netherlands logs the same growth rate in Q3 as in Q4 at 2.1%. Belgium and France log slowdowns, with Belgian growth posting a 0.8% annual rate in Q4 compared to 1.0% in Q3 and with France at 0.7% in Q4 compared to 2.1% in Q3.

**Year-on-year trends**
Year-over-year trends are different from this, however. On a year-over-year basis, the monetary union shows slightly slower growth at 1.3% in Q4 compared to 1.4% in Q3. Accelerating comparisons show Belgium, France, Germany, Italy, and the Netherlands all on rising growth rate profiles for year-on-year growth. Growth slows quarter-to-quarter in Portugal and in Spain.

**Growth in historic context**
The year-on-year growth rate overall ranked on data back to 1997 shows only Italy and Portugal with rates of growth above their respective medians for the period (back to 1997). Italy's growth rate has a 55.4 percentile standing, the same as for Portugal. Spain’s 48.9 percentile standing places its growth rate near its median, while the other countries produce growth rates largely in the mid-30th to low 40th percentiles for this period.

**Large economy/small economy**
Comparing growth rates for the largest four economies to the rest of the monetary union, we have the large economies growing stronger quarter-to-quarter in the fourth quarter of 2025 at 1.4% compared to 1.2%; this is a reversal of the pattern that we saw in Q3 and Q2. In fact, the year over year growth rates show the four largest economies growing slower than the rest of the monetary union, for the last four quarters. In the fourth quarter, they have a 40.2 percentile standing on growth rates back to 1997 while the rest of the monetary union comes in very close to its median growth rate with a percentile standing at 48.9%. It doesn't appear that any particular part of the monetary union is doing especially well, but the smaller countries appear to be closer to normal than the larger countries where growth remains more significantly challenged than it has been over the last 30 years.

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EMU GDP Steps Up on the Quarter

Andrew Cates

**Global Growth Conditions**
Flash PMI readings for January 2026 point to a global growth backdrop that remains uneven, with notable differences across economies in both activity levels and recent momentum. Several economies, including the UK, Australia and Japan, are firmly in expansionary territory above the 50 threshold and have also recorded solid positive three-month gains, suggesting some strengthening in activity entering the new year. The euro area and Germany are also comfortably above 50, indicating ongoing expansion, although recent momentum has been more subdued compared with some peers. France stands out as the main laggard, with the composite PMI still below the expansion threshold despite an improvement over the past three months. The US, meanwhile, has seen some softening in recent momentum even as activity remains in expansionary territory. India continues to post the strongest headline reading, though with little additional acceleration. Overall, the flash PMI data continue to portray a global economy that is expanding, but in a differentiated and uneven fashion rather than through a synchronised upswing.

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**The US dollar**
Alongside the uneven global growth signals, financial markets have also begun to reflect a shifting pattern in demand for US assets. The chart below shows a notable depreciation in the broad nominal effective exchange rate of the US dollar through the first half of 2025, followed by a period of relative stabilisation in the second half of the year and a more abrupt weakening at the start of 2026. While the earlier decline likely reflected narrowing growth and interest-rate differentials, the recent sharper move points more clearly to changing capital-flow dynamics and a partial erosion of the dollar’s safe-haven appeal. Although far from a disorderly adjustment, the renewed softness has revived discussion of a broader “sell America” theme, suggesting that geopolitical uncertainty and policy risk may now be playing a larger role in currency markets alongside traditional cyclical drivers.

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**Consumer confidence in the US and Europe**
The recent depreciation in the US dollar has coincided with a marked relative weakness in US consumer confidence compared with other major economies. As the chart illustrates, this week’s data from the Conference Board revealed that US sentiment has fallen well below its long-run average and now sits at notably weaker levels than in both the euro area and the UK (based on normalised readings), where confidence has shown tentative signs of stabilisation. The deterioration in US readings appears less related to financial conditions and arguably more reflective of political uncertainty and a softening in labour-market perceptions.

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**Financial markets and data surprises**
Despite the recent softness in the US dollar and signs of shifting capital flows, global equity markets have remained relatively upbeat, reflecting a still-supportive macro backdrop. As the chart illustrates, periods of stronger global growth surprises have tended to coincide with weaker inflation surprises, a combination that has historically been favourable for risk assets and has again been evident in recent months. This pattern tentatively points to an improving supply-side dynamic, where activity has been outperforming expectations without a corresponding resurgence in price pressures. One possible factor behind this development is the early impact of productivity-enhancing technologies, including artificial intelligence, which may be helping to lift growth while easing inflation constraints at the margin.

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**The US economy and AI**
Hard data released this week also continue to point to robust demand for advanced technology products in the US economy. The latest durable goods orders figures showed further strength in new orders for computers and related products, reinforcing the upward trend evident over the past two years. At the same time, recent trade data highlight a sustained rise in US imports of information and communications equipment, suggesting that domestic investment demand is being complemented by strong inflows of high-tech capital goods. Together, these series underscore the resilience of technology-related spending, consistent with ongoing investment linked to digitalisation, cloud infrastructure and artificial intelligence.

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**Industrial production in Taiwan**
The strength in US technology-related demand is also being echoed upstream in global supply chains, particularly in East Asia. As the chart shows, Taiwan’s industrial production has rebounded sharply over the past year, led by a pronounced acceleration in output of computers, electronic and optical products. Growth in electronic parts and components has likewise strengthened, outpacing the broader industrial sector and underscoring the central role of the semiconductor and advanced electronics cycle in the current upturn. This pickup aligns closely with the robust US orders and import data discussed above, suggesting that strong end-demand for high-tech equipment is translating into rising production across key manufacturing hubs.

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Financial markets have seen renewed gyrations in recent weeks, with a weaker US dollar, higher interest rate volatility and shifting capital flows reviving discussion of a “Sell America” narrative — so far more a marginal rebalancing than a wholesale retreat. The Federal Open Market Committee left the federal funds rate unchanged at its latest meeting, as widely expected, but communications around the outlook for future easing were arguably a little more hawkish than anticipated, reinforcing a cautious and increasingly data-dependent policy stance. In our charts this week we begin with January’s flash PMIs, which point to ongoing expansion across most major economies but with clear cross-country divergence in momentum (chart 1). That uneven real-economy picture has been mirrored in FX: the broad trade-weighted dollar depreciated through the first half of 2025, stabilised later in the year, but has now softened more abruptly at the start of 2026—suggesting a shift in risk premia and capital-flow dynamics (chart 2). Consistent with that, consumer confidence has weakened noticeably in the US relative to the euro area and UK, with the deterioration looking more tied to politics and labour-market perceptions (chart 3). Even so, global equity sentiment has remained comparatively upbeat, supported by a still-favourable macro mix in which global growth surprises have tended to run ahead of expectations while inflation surprises have been softer—tentatively consistent with an improving supply-side backdrop that markets increasingly associate with AI (chart 4). Finally, that theme is reinforced by hard activity indicators: US orders and imports of advanced technology products remain strong (chart 5), and Taiwan’s production data show a parallel surge in electronics output upstream (chart 6), pointing to a still-powerful global tech cycle even as broader macro and market narratives become more unsettled.

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Charts of the Week: Weaker Dollar, Stronger Tech

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Total factory orders rose a more-than-expected 2.7% m/m in November after a 1.2% drop in October and a 0.2% increase in September, data from the U.S. Census Bureau showed. November registered the third m/m rise in four months following m/m declines in July and June. The Action Economics Forecast Survey had expected a 0.6% m/m November increase. The year-on-year growth rate accelerated to 5.4% in November, the fastest pace since June, up from 2.3% in October and -0.9% in November 2024, while remaining well below a peak of 39.6% in April 2021. Notably, orders for nondefense aircraft & parts surged 97.6% m/m in November after falling 17.9% in October and 6.8% in September. Factory orders excluding defense rebounded 3.2% (5.3% y/y), the first m/m increase since August, after a 0.8% October decline. Factory orders excluding the transportation sector grew 0.2% (1.0% y/y), the second m/m increase in three months, after a 0.1% October easing.

Durable goods orders rose 5.3% (12.3% y/y) in November, up for the third time in four months, following a 2.1% decline in October (matching +5.3% m/m in the advance report on January 26). The November rise reflected m/m increases across nearly all major categories, led by a 14.7% rebound in transportation equipment (the third m/m rise in four months and the largest since May; +29.1% y/y), followed by increases of 1.0% (6.0% y/y) in electrical equipment, appliances & components, 0.9% (5.2% y/y) in fabricated metal products, 0.4% (1.4% y/y) in furniture & related products, 0.3% (7.7% y/y) in machinery, and 0.1% (4.4% y/y) in primary metals. Meanwhile, orders for computers & electronic products were virtually unchanged (+5.1% y/y) after two consecutive m/m rises.

Nondurable goods orders, which equal nondurable goods shipments, held steady (-1.3% y/y) in November following a 0.3% decline in October. The flat November reading reflected m/m increases of 5.0% (-9.3% y/y) in leather & allied products, 0.8% (3.6% y/y) in chemical products, 0.5% (-1.5% y/y) in textile mills, 0.3% (1.3% y/y) in apparel, 0.3% (-0.4% y/y) in printing, 0.2% (0.3% y/y) in paper products, and 0.2% (0.6% y/y) in plastics & rubber products. To the downside, the following nondurable goods shipments declined m/m in November: textile products (-1.7%; -0.1% y/y), petroleum & coal products (-1.1%; -12.2% y/y), beverage & tobacco products (-0.6%; +3.8% y/y), and food products (-0.1%; -0.3% y/y).

Total shipments dipped 0.1% (+2.1% y/y) in November following a 0.1% uptick in October and two successive m/m declines. Excluding transportation, shipments rose 0.2% (0.6% y/y), the second m/m rise in three months, after a 0.1% October dip. Shipments of durable goods industries fell 0.3% (+5.6% y/y), the first m/m fall since August, after a 0.5% October increase. This reflected m/m durable goods shipments declines of 1.7% (+10.3% y/y) in transportation equipment, 0.1% (+3.7% y/y) in primary metals, and 0.1% (-3.3% y/y) in wood products. In contrast, the following durable goods shipments rose m/m in November: furniture & related products (1.3%; 2.6% y/y), computers & electronic products (0.9%; 4.9% y/y), fabricated metal products (0.9%; 3.5% y/y), miscellaneous durable goods (0.6%; 2.6% y/y), nonmetallic mineral products (0.5%; 1.0% y/y), and machinery (0.2%; 5.8% y/y). Meanwhile, durable goods shipments for electrical equipment, appliances & components were essentially unchanged (4.2% y/y) in November after five straight m/m rises.

Unfilled orders advanced 1.4% (9.3% y/y) in November, the largest of four consecutive m/m gains, on top of a 0.2% increase in October. Excluding transportation, unfilled orders rose 0.3% (1.3% y/y), up for the fourth straight month, after a 0.3% October rise. Backlogs of durable goods increased 1.4% (9.3% y/y) in November, led by m/m gains of 2.0% (14.7% y/y) in transportation equipment and 0.7% (3.0% y/y) in electrical equipment, appliances & components, partially offset by a 0.1% decline (-0.8% y/y) in computers & electronic products.

Inventories edged up 0.1% (1.1% y/y) in November after holding steady in October and declining 0.1% in both September and August. Excluding transportation, inventories ticked up 0.1% (1.2% y/y), the sixth m/m increase in seven months, after no change in October. Durable goods inventories rose 0.2% (1.5% y/y) following a 0.2% October rise and two successive 0.1% declines, while nondurable goods inventories inched up 0.1% (0.3% y/y) after a 0.2% October decrease.

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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- Factory orders +2.7% m/m in Nov.; +5.4% y/y, largest y/y increase since June.
- Durable goods +5.3% m/m; nondurable goods orders flat; shipments marginally down.
- Transportation orders +14.7% m/m, led by a 97.6% surge in nondefense aircraft orders.
- Unfilled orders +1.4%, biggest of four straight m/m gains.
- Inventories +0.1% after October’s flat reading.

U.S. Factory Orders Rebound in November; Third M/M Gain in Four Months

**The Global Monetary Policy Consensus**
The latest Blue Chip Financial Forecasts survey points to a notably more balanced global monetary policy outlook over the coming year. In contrast to the pronounced easing bias that dominated much of the past two years, expectations are now more symmetric, with a similar number of central banks projected to raise rates as to ease policy. Japan is seen delivering further tightening, while Canada is expected to initiate an interest rate hike in coming months. In Australia’s case, this tightening guidance was reinforced this week, with the Reserve Bank lifting its policy rate by 25 basis points. Elsewhere, and in contrast, the euro area, UK and US are expected to move in the opposite direction.

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**US manufacturing activity**
The second chart underscores the recent improvement in US economic momentum, highlighted by an unexpected surge in the January ISM manufacturing PMI. After spending much of the past year hovering below the 50 threshold consistent with stagnation, the index jumped sharply back into expansionary territory, signalling a renewed pickup in industrial activity. This rebound has coincided with a broader run of stronger-than-anticipated US economic data, as reflected in the upswing in the Citigroup Economic Surprise Index. Together, these developments point to a US economy that continues to display notable resilience, complicating expectations of monetary easing in the near term.

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**US Bank Lending Standards and Financial Stress** 
The next chart turns to US financial conditions, highlighting the latest readings from the Senior Loan Officer Opinion Survey. The net proportion of banks tightening lending standards on corporate loans and mortgages is now more modest by historical standards, and well below the extremes seen during past episodes of financial stress. Some easing in credit headwinds has occurred alongside relatively subdued readings on the OFR Financial Stress Index, which continues to hover below its long-run average. Together, these indicators suggest that the US financial system has continued to avoid the kind of acute stress typically associated with sharp slowdowns in credit availability—helping to underpin the recent resilience in economic activity.

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**Semiconductor Sales**
The fourth chart highlights the renewed surge in global semiconductor sales, with momentum strengthening sharply over recent months across the Americas, China and the broader Asia-Pacific region. After the cyclical downturn in 2022–23, sales have rebounded to fresh highs, reflecting a powerful revival in demand for advanced chips and related technologies. This upswing has taken place amid intense investor preoccupation with artificial intelligence, with expectations that AI adoption will drive a sustained wave of capital spending on data centres, cloud infrastructure and high-performance computing. In contrast, semiconductor sales in Europe remain comparatively subdued, reflecting the region’s smaller footprint in high-end chip manufacturing, weaker industrial demand, and the ongoing impact of slower economic growth. While semiconductors are inherently cyclical, markets have increasingly interpreted the current rebound elsewhere as structural rather than purely cyclical—underpinned by the belief that AI represents a transformative and durable source of demand growth.

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**Large-Scale AI Models**
The next chart illustrates the rapid proliferation of large-scale AI models globally, with newly updated data for 2025 pointing to a further sharp acceleration in development activity. The United States continues to lead by a wide margin, while China has also seen a steep rise in model deployment in recent years, underscoring the intensifying technological competition between the two economies. Growth in the UK and other regions has been more modest by comparison, highlighting the increasingly concentrated nature of AI innovation. Taken together with the surge in semiconductor sales, these trends help explain the market’s strong preoccupation with AI as a potential driver of future productivity and investment cycles—although the geographic concentration of activity also raises questions about the uneven distribution of any resulting economic gains.

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**An AI Bubble?** 
The final chart draws on the latest Blue Chip Financial Forecasts special questions, highlighting market participants’ perceptions of the economic gains likely to be delivered by artificial intelligence. While a sizeable share of respondents still believe that financial markets may be overestimating AI’s potential benefits, an increasing proportion now judge current expectations to be broadly accurate, with only a small minority viewing the gains as underestimated. Notably, this represents a softening in scepticism compared with the survey results from last month, when concerns about excessive market optimism were more pronounced. The shift suggests a growing acceptance that AI-related investment and innovation could translate into meaningful economic impacts—though uncertainty remains high around the scale, timing and distribution of these gains.

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Financial markets have experienced renewed gyrations in recent weeks, as shifting geopolitical risks, questions around Federal Reserve independence, renewed talk of US dollar “debasement,” and ongoing enthusiasm surrounding artificial intelligence have combined to drive volatility across asset classes. These cross-currents have also contributed to a degree of rotation away from high-flying technology stocks, as investors reassess valuations and the timing of anticipated AI-driven gains. Against this backdrop, the charts in this week’s COTW highlight several important themes. Policy rate expectations now appear more balanced globally, marking a clear shift away from the one-sided easing bias of the past two years (chart 1), even as resilient US data—underscored by the unexpected jump in the January ISM index and a run of positive economic surprises—continues to complicate the outlook for monetary easing (chart 2). At the same time, US financial conditions remain relatively benign, with limited evidence of widespread credit stress or aggressive tightening in lending standards (chart 3). Meanwhile, the sharp rebound in semiconductor sales and the accelerating rollout of large-scale AI models underscore why investors remain so focused on the AI narrative, even as Europe lags behind due to weaker industrial momentum and a smaller footprint in advanced chip production (charts 4 and 5). Finally, while some scepticism about AI’s ultimate economic impact persists, the latest survey results suggest a moderation in concerns that markets are materially overestimating its gains (chart 6). Taken together, these developments paint a picture of a US economy that remains more resilient than many had anticipated, set against a financial landscape increasingly shaped by powerful—if sometimes competing—narratives around geopolitics, policy, and technological transformation.

Charts of the Week: Balanced Policy, Resilient Data and AI Narratives

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Charts of the Week: Balanced Policy, Resilient Data and AI Narratives

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