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Higher energy prices providing most of the boost to recent increase in EA inflation

Robert Brusca

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The S&P Global PMI data for October show a very broad worsening, with only 6 of 25 reporting countries logging month-to-month improvement. However, the average PMI reading for the total PMIs on an unweighted basis in October yields a value of 52.1 compared to 52.8 in September, a modest drop for such broad weakening. The group median, however, was unchanged at 52.3 in October compared to 52.3 in September. The number of jurisdictions contracting in October rose to 7 from 5 in September, back to where it was in August and back to its six-month average for the number of reporters contracting.

There is no single number that can adequately pin down exactly how this diverse group of countries is performing; no single metric can characterize the global economy adequately. However, we can see from the various metrics that there's a good deal of irregularity, and the deterioration itself may not have been large. There's a fairly broad-based deterioration that occurred from September to October. Even so, the average reading in October is slightly below the three-month average of 52.4, which is stronger than its six-month and 12-month readings for the pooled group average. The group median, at 52.3, is nearly the same as the 52.4 reading for the last three months, which is a reading above its six-month and 12-month values. In short, there appears to be some mixing around and oscillation of the performance metrics by some of the reporting countries, but not so clear erosion.

The average reading for the group consisting of the United States, the United Kingdom, and the European Monetary Union shows 52.1 for the 12-month average, 52.4 for the six-month average, and then a rise to 53.9 for the three-month average. The October reading for this group at 53.6 is below the three-month average. But the October reading is still above the six-month and 12-month averages.

The shaded areas in the table identify periods when the readings are below 50, indicating a decline in activity in PMI terms. There are five reporting areas that have this characteristic over three months, six months, and 12 months. They are France, Brazil, Zambia, Egypt, and Qatar.

Despite various degrees of improving or deteriorating, there are 17 reporters that record total PMI values above 50 over three months, six months, and 12 months. And there are 16 that show expansion over each of the last three months. Growth rules.

At least growth has been the rule. It's not clear that there's been a lot of strength. To assess strength, we look at the queue percentile standings that rank the current October readings against all previous values back to January 2021. Queue percentile standings have an average value of 52.1% and a median of 48%. The average is about two percentile points above the neutral diffusion reading of 50, while the median across these reporters is about two percentile points below the neutral reading, indicating no change in output. There are 11 reporters with queue standings below their 50th percentile, putting them below their medians for the period. Among the weakest reporters are Qatar at a 4.3% standing and Brazil at a 7.2% standing; Australia and Zambia have standings at their respective 17th percentiles. That leaves 14 countries above their 50% mark and, therefore, above their historic medians. Only two countries log standings in their 90th percentiles, Kenya and Nigeria. Other than these two, the highest standings are in the 70th percentile, such as the U.S. (at a 79.7 percentile), Spain, Germany, Singapore, and Japan. The more advanced countries have standings at higher percentile markers; however, France and Italy are exceptions with readings that are in their respective 30th percentiles.

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The global economy is in a period of significant transition with countries fighting off inflation stemming from war in the Middle East owing to substantially higher oil prices, but also from the interruption of other supply lines, and the ongoing conflict between Ukraine and Russia. All of this, of course, is occurring in the aftermath of COVID; the main COVID disruption ended slightly less than five years ago. It has been a difficult period. And it is leading now to some significant political displacements, with Europe seeing significant domestic discord particularly over fiscal positions. And the U.S. just recently witnessed a significant loss of support for the Republican Party in power, paving the way for some new and unknown policy tilts in the period ahead as Democrats will rule in the Senate and the House for the next two years.

Composite Global PMIs Lose Breadth but Not Much Strength

Jonathan Basile

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The September Job Openings and Labor Turnover Survey (JOLTS) portrayed optimism for the U.S. labor demand picture as the third quarter came to an end. On the surface, total nonfarm job openings rose 333,000 in September, following August’s 145,000 decline. This left the current level of 7.523 million up 4.9% compared to a year ago. Looking closer in, however, job openings have yet to reattain the April 2026 high (7.585 million), running 2.0% annualized below this point. Large one-month industry gains were notable in Professional & Business Services (106,000) and State and Local Excluding Education (104,000).

Total nonfarm hires did not have the same feel as job openings. Despite rising back-to-back in August (125,000) and September (131,000), the current 5.402 million rate stood 4.7% annualized below the March 2026 high (5.535 million). Granted, the year-over-year trend was up 3.0%, but this didn’t shake hires out of the 4.9-5.6 million range that has been in place since mid-2024. Moreover, one industry – accommodation & food services (up 158,000) – was responsible for more than the entire gain in September nonfarm hires. This questions the sustainability of the rise.

Total nonfarm quits advanced 321,000 to 3.365 million in September, reaching the highest level since March 2025’s 3.456 million. The 12.5% year-over-year rise bucked the prior trend that had seen just three trailing 12-month increases in the previous 48 months. From a technical standpoint, September’s gain was the fifth largest on record, suggesting a high hurdle to improve from the end of the third quarter. Like with hires, accommodation & food services (up 197,000) had a sizable influence, questioning the strength of the aggregate signal. To be sure, September’s quits ran counter to the 173,000-drop in job leavers, the Bureau of Labor Statistics’ Household Survey’s sister quits gauge, that fell to a 16-month low of 10.5% of the total unemployed in September.

Nonfarm layoffs fell in September by 127,000 to 1.641 million. This left the YoY comparison at -9.6% for September. While this reinforced the wider “low fire” narrative, the current level of layoffs remained in the wider 1.6-1.9 million range that has been in place since July 2024. Since bottoming in 2022, nonfarm layoffs have moved in a similar manner to the higher frequency series, weekly continuing claims. JOLTS layoffs are reported with a lag relative to continuing claims. The latter’s sideways movement in September (1.709 million) and October (1.709 million month-to-date average) suggests no further improvement in the near-term pink slip picture.

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The nonfarm hires-separations spread acts as a channel check for the monthly change in nonfarm payroll employment (NFP). The JOLTS report points to mixed results for NFP revisions in this Friday’s U.S. Employment report. The hires-separations spread in August was revised down to 96,000 from the previous 122,000; the -26,000 difference translates to the direction of the NFP revision. For September, the hires-separations spread came in at 83,000 versus the 29,000 initial NFP gain for that month, implying a +54,000 adjustment. Taken together, the net two-month revision would be +28,000.

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

- Large industry gains drove September increases in job openings and hires.
- Quits jump ran counter to alternative job leavers.
- Hires-Separations point to mixed nonfarm payroll revisions.

U.S. JOLTS: Labor Demand Improved in September

Winnie Tapasanun

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Total factory orders rose a more-than-expected 1.8% m/m in September, the third straight monthly rise, after a 0.3% increase in August, according to data from the U.S. Census Bureau. The Action Economics Forecast Survey had expected a 1.2% m/m September increase. The year-on-year growth rate accelerated to 10.5% in September, the highest since April, from 8.8% in August (+3.6% in September 2025), while remaining far below the April 2021 peak of 39.6%. Factory orders excluding defense grew 2.0% (10.8% y/y) in September following a 0.4% gain in August, and factory orders excluding the transportation sector climbed 1.3% (11.1% y/y) after a 0.4% rise; both posted the third consecutive m/m increase.

Notably, orders for nondefense aircraft & parts surged 28.3% in September after rises of 0.3% in August and 12.0% in July. Orders for defense aircraft & parts rose 5.8% (-30.7% y/y) following a 2.3% August increase and a 13.0% July drop, while orders for ships & boats fell 9.9% after a 0.7% August decline and a 6.4% July gain.

Durable goods orders advanced 1.9% (10.0% y/y) in September after a 0.1% uptick in August (in line with +1.8% m/m in the advance report on October 27), marking the fourth successive m/m increase and the sixth in seven months. The September m/m gain was led by a 4.6% rebound (8.0% y/y) in transportation equipment, followed by increases of 1.5% (16.3% y/y) in machinery, 0.8% (16.7% y/y) in computers & electronic products, 0.5% (8.6% y/y) in fabricated metal products, and 0.4% (20.3% y/y) in primary metals. In contrast, durable goods orders for electrical equipment, appliances & components (-0.3%; +4.8% y/y) and furniture & related products (-0.3%; +1.3% y/y) declined m/m in September.

Nondurable goods orders, which equal nondurable goods shipments, rose 1.8% (11.0% y/y) in September, the third straight m/m gain and the ninth in 10 months, after a 0.5% rise in August. The September m/m increase was driven by a 5.2% jump (39.7% y/y) in petroleum & coal products, followed by gains of 2.0% (10.4% y/y) in chemical products, 1.3% (2.4% y/y) in beverage & tobacco products, and 0.2% (1.5% y/y) in food products. To the downside, nondurable goods shipments for apparel (-1.9%; +6.9% y/y), leather & allied products (-1.2%; +7.0% y/y), textile mills (-0.9%; -2.8% y/y), paper products (-0.2%; +2.7% y/y), and plastics & rubber products (-0.2%; +3.3% y/y) fell m/m in September. Meanwhile, nondurable goods shipments for printing (+0.3% y/y) and textile products (-0.1% y/y) were virtually unchanged m/m following August’s declines.

Total shipments strengthened 1.3% (10.2% y/y) in September, the third consecutive m/m rise and the ninth in 10 months, after a 0.1% uptick in August. Excluding transportation, shipments grew 1.3% (10.3% y/y), the 10th m/m gain in 11 months, on top of a 0.5% August increase. Shipments of durable goods industries rebounded 0.9% (9.4% y/y), up for the ninth time in 10 months, reversing a 0.2% August decline. This reflected m/m gains in almost all durable goods shipments categories, led by a 1.6% advance (13.6% y/y) in machinery, followed by increases of 1.5% (9.8% y/y) in transportation equipment, 1.4% (9.7% y/y) in computers & electronic products, 0.6% (7.9% y/y) in miscellaneous durable goods, 0.4% (17.8% y/y) in primary metals, 0.3% (7.5% y/y) in fabricated metal products, and 0.1% (2.2% y/y) in wood products. In contrast, durable goods shipments for nonmetallic mineral products (-0.5%; +1.8% y/y) and furniture & related products (-0.4%; +1.1% y/y) fell m/m in September, while those for electrical equipment, appliances & components were essentially unchanged m/m (+5.9% y/y) following seven successive m/m rises.

Unfilled orders rose 0.9% (9.0% y/y) in September, up for the 14th month running, after rising 0.6% in August, July, and June. Excluding transportation, unfilled orders climbed 0.8% (7.8% y/y), also up for the 14th straight month, on top of a 0.9% August rise. Backlogs of durable goods grew 0.9% (9.0% y/y) in September, with m/m gains across categories, led by increases of 2.0% (11.3% y/y) in primary metals, 1.0% (8.3% y/y) in computers & electronic products, and 0.9% (9.7% y/y) in transportation equipment.

Inventories were up 0.4% (3.1% y/y) in September, the 11th consecutive m/m gain, after a 0.5% rise in August. Excluding transportation, inventories rose 0.4% (2.9% y/y), up for the eighth successive month, following a 0.5% August increase. Durable goods inventories grew 0.3% (3.5% y/y) in September, the 12th straight m/m gain, after climbing 0.5% in August, while nondurable goods inventories rose 0.5% (2.5% y/y), the seventh m/m increase in eight months, after rising at the same pace in August.

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 +1.8% (+10.5% y/y) in Sept., third straight m/m rise; 17.6% above the Jan. ’24 low.
- Durable goods orders +1.9%, fourth consecutive m/m increase; nondurable goods orders +1.8% and shipments +1.3%, ninth m/m gains in 10 mths.
- Transportation orders +4.6%, led by a 28.3% jump in nondefense aircraft orders.
- Unfilled orders +0.9%, up for the 14th month running.
- Inventories +0.4%, 11th successive m/m increase.

U.S. Factory Orders Up More Than Expected in September on Strong Nondefense Aircraft Orders

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The Swiss inflation rate is the envy of every central banker in the G7 and beyond. Yet, Swiss inflation has turned north in October, with the headline HICP rate gaining 0.4% in October, the Swiss domestic headline metric rising by 0.4% on the month, and the Swiss domestic core inflation rate remaining flat at a 0% change on the month.

**Inflation breadth is gaining**
In October, Swiss inflation showed acceleration in 72.7% of the categories, a sharp increase from September when inflation accelerated in only 18.2% of the categories. However, in August, inflation month-to-month had accelerated in 81.8% of the categories.

**Pressure is evident in all measures**
Switzerland is dealing with real inflation pressures. The 12-month inflation rate has hit a recent high at 1.6%, still an enviably low pace on the HICP measure. The Swiss domestic headline inflation rate is at 1.5%, while the Swiss core rate continues to be mild at a 0.5% increase over 12 months.

**Acceleration is also real**
Turning to the sequential numbers, the HICP inflation rate moves up from 1.6% over 12 months to a 2.1% annual rate over six months to a 3.6% annual rate over three months, a clear pattern of acceleration. The Swiss domestic headline inflation rate is at 1.5% over 12 months, moves up to 1.9% over six months, and elevates to a 3.9% annual rate over three months. The Swiss core inflation rate, which is only 0.5% over 12 months, rises to 0.8% over six months and to 1% over three months, all expressed at annual rates.

**Controlling for administered prices**
A lot of prices in Switzerland face administrative conditions, and there is a separate index for prices excluding administered prices. However, those also show inflation is moving up in October. The index excluding administered prices rose by 0.2% in October after rising 0.1% in September. The sequential move in the index excluding administered prices is up by 0.9% over 12 months; it’s up to a 1.3% annual rate over six months and to 1.6% at an annual rate over three months.

**Broad acceleration identified by diffusion gauges**
Looking at the detailed Swiss categories, inflation accelerates in 81.8% of the categories over three months compared to six months, and in 54.5% of the categories over six months compared to 12 months. Then, 72.7% of the categories over 12 months show acceleration compared to the pace of 12 months ago. Inflation, on all these horizons, clearly is accelerating in more categories than it is decelerating. The tendency for acceleration appears to be moving higher based on the three-month diffusion reading of 81.8%.

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**Monetary policy remains on hold**
Despite the rising pressures and a rising inflation rate, the Swiss National Bank (SNB) has kept policy steady, with the policy rate unchanged at 0% at its last meeting in late September. The SNB recognizes that markets have moved interest rates up and that there's a focus on events in the Middle East. But thus far, it has chosen to keep interest rates at its unchanged low levels. At the time of the last meeting, there had been an increase in market rates and some deterioration in the Swiss franc exchange rate in some sense offsetting one another. The bank's policy deliberations noted that inflation expectations remained well anchored.

The next monetary policy meeting for Switzerland will come on December 10. Switzerland has been the clear inflation success globally since COVID, the war, oil, and other supply shocks have struck. While it clearly is experiencing some inflation transmission from the global economy, and while some of that has even crept into its core rate, the core remains quite stable and low.

Switzerland

Even Swiss Inflation Heads North

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The ISM U.S. manufacturing PMI rose to a higher-than-expected 55.5 in October from 54.5 in September and 54.6 in August, according to data from the Institute for Supply Management. The October reading, above the 50 expansion-contraction threshold, indicated the U.S. manufacturing sector expanded for the 10th consecutive month and at the fastest pace since July. A reading of 54.7 for October had been expected in the Action Economics Forecast Survey. The latest manufacturing PMI was above a contractionary 48.8 in October 2025 and a low of 47.0 in October 2024, while remaining below a peak of 63.8 in March 2021.

The production index advanced to 59.0 in October from 56.7 in September, indicating production expanded for the 12th straight month and at the highest level since November 2021. The index was above a low of 44.8 in April 2025 but below a peak of 66.5 in March 2021. In October, 27.6% (NSA) of respondents reported higher production while 11.5% reported lower production. The new orders index edged up to 55.5 in October from 55.3 in September, signaling new orders grew for the 10th successive month and at the fastest rate since July. The index remained well above a low of 41.8 in January 2023 but below a high of 67.0 in May 2021. In October, 24.2% (NSA) of respondents reported higher new orders while 16.9% reported declines. The inventories index rebounded to 51.4 in October from 48.6 in September, showing the fourth expansion in five months and matching the highest level since June. The index was below a high of 52.7 in March 2025 but above a low of 43.8 in October 2024. Meanwhile, the supplier deliveries index ticked up to 59.1 in October from 59.0 in September, indicating slowing delivery performance for the 11th straight month after faster deliveries in November 2025. In October, 21.2% (NSA) of respondents reported slower delivery speeds while 3.1% reported faster speeds.

On the labor front, the employment index slipped to 52.4 in October from 52.7 in September, showing employment expanded for the fourth consecutive month but at a slower pace, following 33 months of contraction. The index was above a low of 44.1 in November 2025 but below a high of 56.5 in March 2022. In October, 14.4% (NSA) of respondents reported higher employment while 10.8% reported lower hiring.

On the pricing front, the prices paid index declined to a still-elevated 75.2 (NSA) in October from 77.9 in September, indicating raw materials prices rose for 25 months running but at a slower rising pace. The index remained well above a low of 39.4 in December 2022 but below a high of 87.1 in March 2022 and a peak of 92.1 in June 2021. In October, 53.1% (NSA) of respondents reported higher prices while only 2.8% reported price declines.

In other ISM series not included in the composite index, the new export orders index rebounded to 51.2 in October from 50.9 in September, indicating new export orders grew for the fourth successive month and the fifth in six months. The index was up from a low of 40.1 in May 2025 but down from a peak of 57.1 in February 2022. The imports index rose to 52.9 in October from 51.0 in September, suggesting imports expanded for the ninth consecutive month and at the strongest rate since July. The index was above a low of 39.9 in May 2025 but below a peak of 61.0 in June 2021. The order backlog index slid to 54.6 (NSA) in October from 56.4 in September, showing backlog levels grew for the 10th straight month but at a slower pace. The index was well above a low of 37.5 in May 2023 but 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 55.5 in Oct.; 10th straight month of expansion.
- Production (59.0) highest since Nov. ’21; expanding for the 12th consecutive mth.
- New orders (55.5) highest since July; 10th successive mth. above 50.
- Employment (52.4) expanding for the fourth straight mth., albeit at a slower rate.
- Prices Index (75.2) down modestly, still indicating prices rising for 25 mths. running.
- Exports (51.2) up and imports (52.9) at a three-month high; both expanding.

U.S. ISM Manufacturing PMI at a Three-Month High in October; Production & New Orders Accelerating; Employment Moderating

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The PMI story for October shows PMIs weakening in 11 of the 18 countries that report manufacturing data. The manufacturing PMIs ticked down only slightly month-to-month, falling in 11 of eighteen reporters in October. The median reading over 12 months, six months, and three months progresses from 51.2 over 12 months to 52.2 over six months to 52.1 over three months. There's really not much change there to base a lot of analysis on; conditions have been substantially the same across this broad group of countries.

Sequentially the PMI data show that over three months 13 of the 18 early reporting countries have lower PMI values with only 5 showing better values. Over six months, six countries show worsening results with 12 showing improvement. Over 12 months, only four countries show worsening results with 14 showing improvement. As we look at the breadth of improvement versus deterioration from 12 months to six months to three months, there's a narrowing, a clear narrowing, in terms of the breadth of countries showing conditions getting better compared to those showing conditions getting worse. However, that statement also exists in the same world where the median for the group hasn't changed very much over any of those horizons.

**Understanding this period – is it representative?**
To get a broader perspective, we can look at the rank or queue percentile standings that give us a percentile standing for each of the reporting countries or areas on data back to January 2021, a relatively broad period. However, it's not a time span in which activity was particularly strong. Still, using the EMU Commission readings on the EMU as a benchmark, the average back to 1990 shows the ranking of the current period average assessment has nearly normal average for the shorter period that makes the short period average seem representative in terms of the longer timeline as well. The reading for October is only 3% below the EMU mean on data back to 1990. So, the rankings over this period may also be a reasonable proxy for longer term rankings in the broadest sense.

There was some strength in the recovery and in the immediate post-COVID. And then there was the invasion of Ukraine that really knocked things back down. Subsequently there were U.S. tariffs imposed that created another international kerfuffle, and then the attack by Hamas on Israel, and the subsequent attempt to rein in Iran by the U.S. and Israel with significant knock-on effects that are largely still in place involving the difficulty for oil and other commodities to pass safely through the Strait of Hormuz. So, rankings on this timeline are not for a period of robust growth, but then that is not unusual, statistically. Part of that is that our period begins on a post-COVID high with activity having rebounded. The median percentile standing for this group on data back to January 2021 is a 67.2 percentile standing, which places it just barely into the top third of all observations on this timeline. Only three countries log percentile standings in the top 20% of all their observations during this span. They are Japan, Indonesia, and Malaysia, all Asian economies. The weakest readings on the period, at readings of around 25% and lower, include India at a 20.9 percentile standing, Turkey at a 22.4 percentile standing, and Brazil at a very weak 6th percentile standing. The grouping of these weakest economies includes two BRIC economies plus Turkey.

The large economies are doing well compared to their performance over this timeline, with the euro area economies having a 76.1 percentile standing, Germany, in particular, having a 76.1 percentile standing, the U.S. having a 79.1 percentile standing, the U.K. having a 73.1 percentile standing, and Japan having an 80.6 percentile standing. However, in contrast, France, with all of its fiscal trouble, has only a 53.7 percentile standing over the same period. Oil prices are shooting up again as the U.S. midterm elections draw near. There is a creeping rumor mill of commentary that suggests that the U.S. will be increasing hostilities against Iran after the midterm elections. That buzz has markets on edge and oil prices are moving higher again.

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To be sure, the outlook is quite uncertain and the potential for things to go wrong and to get worse is certainly present. Markets are largely undisturbed, perhaps because fiscal policy globally remains supportive and expansive and then, in the U.S., because the tremendous amount of investment in AI is underpinning growth and the buildout of data centers is helping to generate more income and support consumer spending. However, if things go very wrong in global politics, it's unclear that the tech revolution in the United States is going to be enough to support conditions, and that's where the problem breaks out.

Concerns about growth might be greater than what market momentum would seem to suggest. Bond markets are certainly wary about inflation and some of the recent talk about monetary policy has made it clear that central banks may not have as firm of a grip on what inflation is or on how to deal with it, particularly in an era where we're getting repeated supply shocks. Monetary policy is not geared up to deal with supply shocks. That really falls into the realm of fiscal policy, but fiscal policy has its hands tied in many places because it's been so overused.

There is a clear lesson here, but I'm not sure we're going to learn it. Fiscal policy has to be used sparingly. If fiscal policy is not brought back down to normal levels of spending and if it just ratchets up during the business cycle, countries find themselves at an extreme part of the business cycle, as we are now, with high debt-to-GDP ratios and suddenly very worried about what's going to happen to that ratio if growth falls short. Monetary policy has coddled the inflation rate to preserve employment which also has developed, not surprisingly, in an era with so much excess fiscal policy. But doing so allows even more inflation to get out of control and then that might require a much more crushing increase in interest rates which, given the high debt levels, would have an even more crushing impact on the economy. So, what have we learned here? Anything?

Monetary policy has played the same game that fiscal policy has. It has been inattentive to the underlying inflation pace in the U.S., in particular. Inflation has overshot its target for five and a half years. Inflation in other countries has been too high for too long as well, now with another surge of inflation coming in the guise of another supply shock. Central banks aren't even sure what they're supposed to do with supply-shock inflation. In some quarters, economists think they should do very little, except that inflation is already excessive; a central bank that doesn't do anything to an inflation rate that accelerates when it's already over target is going to have huge credibility problems.

While these issues may seem mundane at the moment, the debt-to-GDP ratio is not exactly the stuff of headlines, but maybe it should be. What if it puts us in an era of fiscal dominance and tries to subvert monetary policy? We could wind up in a situation that is less like the Great Inflation of the 1970s and more like the downturn of the Great Depression. You can't dig yourself out of depression if you've already racked up too much debt and if monetary policy is hamstrung because the inflation rate is too high. We've kicked the can far too hard, and far too far, down the road. That does not go on forever. We're beginning to see the cul-de-sac at the end, and we don't have any plans for what to do when we get there.

S&P MFG PMIs Show Modest Global Slowing

Tian Yong Woon

In this week’s Letter, we examine what distinguishes Asia’s economies, how those differences have evolved, and whether the AI boom is reinforcing them. Using 13 indicators covering income, economic structure, trade, demographics and public finances, we group 16 Asian and other major economies according to their similarities (chart 1). Principal component analysis then helps identify the main patterns behind these groupings (chart 2). The results distinguish the developed economies and Singapore from the rest of Asia, while also separating the more industrialised Asian economies from the younger, more agricultural economies of India, Indonesia and the Philippines (charts 3 and 4). These structural divisions have proved persistent: every economy finished 2025 in the same cluster as in 2019, despite some movement in between (chart 5). The AI boom is now providing a stronger lift to semiconductor exporters and economies attracting data centre investment (chart 6). Without substantial structural change elsewhere, the gaps between these groups could widen even as their membership remains stable.

**Asia in clusters**
K-means clustering offers a simple way to sort economies by how alike they are. The algorithm assigns each economy to one of k groups, placing it with the group whose average profile it most closely resembles. The number of groups, k, is a hyperparameter: the analyst chooses it, rather than the algorithm learning it from the data. We apply the method to 16 Asian and other major economies, using 13 indicators covering wealth, sectoral structure, the external sector, demographics and public finances. With k set at three, distinct groups emerge (chart 1). The developed economies form one cluster, the rest of Asia, including China and Korea, forms a second, and Singapore stands alone as a third. Raising k to four leaves the developed group and Singapore unchanged. Instead, it draws finer distinctions within emerging Asia, with India, Indonesia and the Philippines breaking away to form a cluster of their own. We explore why Singapore stands apart, and which indicators drive these splits, in the sections that follow.

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To see what drives these groupings, we turn to principal component analysis. Each principal component is a composite of the indicators, built to capture as much of the variation across economies as possible. The first component captures the most, the second captures the most of what remains, and so on. Indicators that move closely together, and that account for much of that variation, tend to load on the same component (chart 2). In 2025, the first component explains 41.6% of the variation. It correlates strongly and positively with GDP per capita, the services share of GDP, old-age dependency and migrant stock, and strongly negatively with agriculture’s share of GDP. In effect, it captures the profile of a developed economy. The second component explains a further 27.9%, and correlates most strongly with exports, net FDI inflows and fiscal balances, all markers of the external sector and public finances. Together, the two account for 69.5% of the variation in the dataset, and their loadings have been broadly stable since 2007.

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The indicator profiles suggest why the algorithm has sorted the economies as it has. The developed economies in cluster 4, Japan among them, share several common traits (chart 3). These include comparatively high GDP per capita, large shares of services and government consumption in GDP, and, for the most part, high old-age dependency ratios. Together, they are the hallmarks of economies that are already developed but ageing. Singapore stands out on several fronts, which may explain why it forms a cluster of its own. Its exports and net FDI inflows are exceptionally high relative to GDP, alongside comparatively high GDP per capita, a large migrant stock and a healthy fiscal balance. Its government debt ranks among the highest in the sample, but this can be misleading, as it measures gross debt. Singapore has no net debt, with government financial assets well in excess of its liabilities. Its borrowing is invested rather than used to fund spending.

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Emerging Asia presents a contrasting picture (chart 4). India, Indonesia and the Philippines make up cluster 2, with comparatively low GDP per capita and large agricultural shares of GDP. Their populations are comparatively young, with low old-age dependency ratios, yet their labour force participation rates are also comparatively low. The Philippines stands out further for its very high share of household consumption in GDP. Cluster 1 gathers the more industrialised economies of China, Korea, Malaysia, Thailand and Vietnam. All five have high manufacturing shares of GDP, with Korea’s the highest in the sample. Malaysia, Thailand and Vietnam also have comparatively high export shares of GDP, and most of the group retains some agricultural base. China, by contrast, has the lowest household consumption share in the cluster. Taken together, the two clusters separate economies that have already built a sizeable industrial base from those still weighted towards agriculture.

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Despite the upheavals since the pandemic, the clusters ended 2025 where they stood in 2019 (chart 5). The only temporary change in cluster membership was Indonesia’s move to cluster 1 from 2022 to 2024 before returning to its original group in 2025. The chart also shows where relative positions shifted, and it is worth stressing that these changes are relative to the rest of the sample. Positions on GDP per capita, agriculture and export shares, net FDI, old-age dependency and migrant stock barely moved, suggesting these structural needles are hard to shift. Fiscal balances and government debt saw the largest reshuffles. Fiscal balances improved markedly for Australia, Japan, India and Indonesia, but worsened for Germany and the UK. These readings run to 2025, and this year’s tilt towards looser fiscal policy in Japan, Indonesia and much of Europe would alter the picture. Even so, no economy ended the 2019–2025 period in a different cluster. More gradually, Malaysia and Vietnam have raised their manufacturing shares of GDP, in keeping with their emergence as hubs for manufacturing and AI-related goods.

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So where does this leave us, this year and beyond? Since 2025, several of these trends have accelerated. Taiwan, Korea, China and even Singapore have capitalised heavily on the AI boom, with chip exports surging and powering growth (chart 6). On a rolling 12-month basis, Korea’s semiconductor exports have more than doubled from their December 2025 level. China’s and Singapore’s are up by roughly three quarters and three fifths respectively, and Taiwan’s by about a third. Malaysia and Thailand, meanwhile, are riding the AI data centre wave. Singapore, an earlier mover, offers a cautionary tale: it paused new data centre approvals from 2019 to 2022, given the power and land demands of such facilities. India, Indonesia and the Philippines, by contrast, remain comparatively agricultural and less export dependent. Absent substantial structural change in these economies, the divergence may continue to widen, even as each economy stays within its current cluster.

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Asia

Economic Letter from Asia: Asia in Clusters

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The U.S. Employment Cost Index (ECI) expanded at a slower 0.8% rate in the three months ended September, the softest quarterly pace since the fourth quarter of 2025 (0.7%). On a year-over-year (YoY) basis, compensation costs have been running at the same 3.4% figure for four consecutive quarters. The four-quarter stability in the annual trend is highly unusual for a cyclical indicator that oscillates with long-term wage cycles over time; it has occurred just 2% of the time since the 1982 inception of the series. A deeper dive beneath the headline ECI figure reveals persistently opposing paths for wages and benefits.

There is a trend divergence between ECI: Wages and Salaries and ECI: Benefits for all civilian workers. The former continued to grind down to 3.1% YoY in 2026’s third quarter, a fresh five-year low. The latter picked up to a 3.9% YoY rate, the highest in three years. Moreover, the Bureau of Labor Statistics’ (BLS) unpublished Health Benefits for Private Industry, a subset of ECI benefits, expanded at a 6.4% YoY pace, matching the 2025 fourth quarter’s 20-year high. The combination of higher benefit inflation and slower wage inflation shows an environment where employers’ management of compensation costs is falling directly on employees.

The details for the private sector are similar to that for all civilian workers. Private ECI: Compensation costs edged up to a 3.4% YoY figure in the third quarter. This marked the first uptick in the YoY compensation trend in five quarters. It was not due to higher wage pressures, though. Private ECI: Wages and Salaries was steady at a 3.1% YoY rate, the lowest since 2021’s first quarter. Private ECI: Benefits advanced to 3.9% YoY, the highest since 2023’s third quarter.

The spread between Private ECI: Wages and Private ECI: Benefits illustrates private sector profit pressure. In the second quarter, the -0.8-percentage point spread was the lowest in 14 years. Benefit costs are determined by market forces and are an expense beyond any private companies’ control. Wages and salaries, on the other hand, are an important line item completely under the purview of C-suite executives. The easing in private wage pressures suggests that firms are opting to trim one cost at the expense of another. From private workers’ perspective, the higher benefit/lower wage growth results in faster growth for paychecks, but slower growth for take-home pay.

The BLS report also has an alternative way to observe vacillating pressures on consumer purchasing power with “real” inflation-adjusted measures. To that end, consumers’ purchasing power loss in 2026’s third quarter, measured by the Real ECI: Wages and Salaries, amounted to a -0.6% YoY decline. This was the weakest since 2012’s first quarter (-0.9% YoY). The 14-year low also echoed other periods of economic stress during the Great Recession and the 2000s Housing Bust.

Lack of forward momentum from the Real ECI: Wages and Salaries fundamentally does not support an accelerating profile for Real Consumer Spending over the near term. To that end, this week’s Income and Spending report indicated a September stall in Real Consumer Spending at the same time that Real Income metrics – personal income less transfer and disposable personal income – posted the first monthly declines in five months.

The employment cost index measures the change in the cost of labor, free from the influence of employment shifts across occupations and industries. It is provided by the Bureau of Labor Statistics and is available in Haver’s **USECON** database. Consensus estimates from the Action Economics Forecast Survey are in Haver’s **AS1REPNA** database.

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- Compensation costs ease in Q3.
- Wage pressures at a five-year low.
- Benefit costs at a three-year high.

Employment Cost Index: Unusually Steady Compensation Trend Reveals Slower Wage and Faster Benefit Cost Growth

Andrew Cates

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

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

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

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

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

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

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

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Charts of the Week: When Expectations Meet Reality

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