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Teaches econometrics and forecasting at the University of Colorado Denver. He has over 15 years of econometric experience in both the private and public sector.

Daniel L. Jerrett, Ph.D.

Abdel M. Zellou, Ph.D.

Bootcamp and Econometric Tools 1 & 2

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Haver partners with SmartMacro Labs to offer a two week immersive online course introducing participants to the power of the Python programming language. This applied hands-on training develops statistical economics skills with a concentration on economics and finance.

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US is big leader in global surge in private AI investment

Michael J. Moran

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The consumer price index for April matched expectations with an increase of 0.6%. As universally expected, the energy component led the increase, rising 3.8%. The pace in April was notably slower than the jump of 10.9% in March, but it was still brisk by recent standards (third fastest in the past three years and well ahead of the average monthly increase of 0.2% in 2025).

Several media reports have portrayed the current energy episode as the most pronounced disruption in history. Possibly. The average increase in the energy component of the CPI totaled 7.3% in March and April. Only one two-month increase has exceeded this total, and that jump might be viewed as a special factor (driven by hurricanes in August and September 2005 that closed drilling rigs and energy transport in the Gulf of Mexico). Other episodes, although not matching the latest two-month increase, have come close. Energy prices jumped in the aftermath of Russia’s invasion of Ukraine, and other instances of instability in the Middle East have caused problems (oil embargo in 1973, Iranian revolution in 1979, and Iraq’s invasion of Kuwait in 1990). Whether or not the current disruption is the most pronounced in history will depend on what unfolds in the months ahead.

Thus far, the pressure on energy prices has been concentrated in oil-based products (gasoline and fuel oil). Surprisingly, prices of natural gas have not changed meaningfully. Natural gas services for consumers as reported in the CPI dipped in March and April, and Henry Hub prices have eased on balance over this two-month period as well. Futures prices for natural gas also have been tame. The cost of electrical services in the CPI have started to move, increasing 2.1% in April. Prices of natural gas for consumers and electricity are included in the energy services component of the CPI. As shown in the chart below, the pickup in electrical charges has not had much influence on the year-over-year change.

The food component of the CPI rose 0.5% in April. The change might be viewed as benign, as it followed a flat reading in March. However, food prices rose 0.4% in February, leaving an average of 0.3% in the past three months, an uncomfortable pace.

The core CPI rose 0.4% in March, a pace well ahead of that desired by the Federal Reserve. However, a special factor tied to the government shutdown in October led to a sharp increase in rental rates in April (0.5%, versus an average of 0.2% in the prior six months). Rental rates in the CPI are based on six-month averages, and because of the government shutdown, observations for October 2025 were not available. The Bureau of Labor Statistics, in the absence of data, used a value of 0.0% for the increase in rental rates for October. That reading led to understatements of the rental component of the CPI from October of last year through March of this year. The reading of 0.0% dropped out of the April calculation, and thus a jump in the six-month average and the rental component for April. This distortion probably added 0.1 percentage point to the core CPI in the latest month. Without this distortion, the core CPI most likely would have increased 0.3%, a still-firm pace.

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

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- The increase in gasoline prices slowed from the blistering pace in March, but April still brought the third sharpest increase in the past three years.
- Fluctuating food prices left a high-side average change in the past three months.
- The core component was distorted by an anomaly in rents, but the pace was still brisk excluding rents.

April CPI: More Energy Pressure; Food and Core Uncomfortable

Winnie Tapasanun

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The NFIB Small Business Optimism Index edged up to 95.9 in April, the first m/m increase since December, after a three-point decline to 95.8 in March, according to the Small Business Economic Trends survey conducted by the National Federation of Independent Business. The index was below its 52-year average of 98.0 for the second consecutive month and down from a peak of 105.1 in December 2024 but above a low of 88.5 in March 2024. Seven of the 10 index components rose, while three fell. The NFIB Small Business Uncertainty Index declined to 88 in April following a four-point increase to 92 in March, remaining well above its historical average of 68. The index was below its record high of 110 in October 2024 but above its recent low of 84 in December 2025 and a low of 65 in November 2023.

The outlook for business conditions in the next six months remained positive for the 18th straight month in the latest survey. The net balance of respondents expecting the economy to improve dropped to 4% in April, the lowest level since October 2024, on top of a seven-point decline to 11% in March; these readings were well below a high of 52% in December 2024 but significantly above a record low of -61% in June 2022. Expected real sales fell to a net 3% in April, the weakest reading since April 2025, from 7% in March; the latest figure was below a high of 22% in December 2024 but above a low of -18% in August 2024. A net -8% of respondents reported higher nominal sales in the past three months, down from -5% in March and marking the lowest reading in four months; the latest result remained below the most recent positive reading of 1% in February and a peak of 9% in June 2021 but above a low of -20% in October 2024.

Plans to expand the business fell to 7% in April, the lowest reading since October 2024, from 11% in March; the latest figure was down from a high of 20% in December 2024 but up from a low of 2% in March 2023. Plans to make capital outlays rebounded to 17% in April from 16% in March; these numbers were still below a high of 28% in November 2024 and a peak of 31% in October 2021. Expected credit conditions inched up to -4% in April after holding at -5% in March and February; this result was slightly below a high of -2% in December 2024 but above a low of -11% in November 2023. Meanwhile, a net -2% of respondents viewed current inventory stocks as “too low” in April, up from -5% in March.

On the labor front, 46% of respondents reported that qualified workers to fill job openings were hard to find in April, slightly up from 45% in March. These numbers were up from a low of 43% in August 2025 but below a high of 56% in August 2024 and a peak of 62% in September 2021. A net 13% planned to increase employment in April, up from 12% in March and February; it was above a low of 11% in March 2024 but below a high of 26% in May 2022 and a peak of 32% in August 2021. Notably, 34% reported positions not able to be filled in April, up from 32% in March and registering the highest level since June 2025; these figures remained below a high of 51% in May 2022.

Overall earnings trends had remained in negative territory since December 2019. The measure increased to -19% in April, a still-weak reading, following an 11-point drop to -25% in March. These readings, while up from a low of -37% in August 2024, were below the most recent high of -14% in February and a high of -5% in June 2021.

On the pricing front, actual and expected selling prices, though trending lower, remained at an inflationary level, indicating continued inflationary pressures. The net percent of firms raising their average selling prices rose to 30% in April, the highest reading since December, after a one-point increase to 25% in March. The latest reading was up from a low of 20% in August 2024 but well below a peak of 66% in March 2022. The percentage planning to raise prices increased to 27% in April following a four-point decline to 24% in March; it was below a high of 34% in November 2023 but above a low of 21% in April 2023.

Wage inflation remained relatively high in the April survey. A net 30% of respondents raised compensation during the last three months, down from 33% in March. It was also below a high of 46% in February 2023 and a peak of 50% in January 2022. A net 18% of firms planned to raise worker compensation in the next three months, unchanged from March and marking the lowest reading since July 2025; this remained below highs of 28% in November 2024, 30% in November 2023, and 32% in October 2022.

The quality of labor was cited as the single most important problem facing small businesses, as reported by 18% of NFIB members in April, up from 15% in March and representing the highest since December. Taxes ranked second as the next most important problem, as reported by 17% of respondents in April—the lowest since November—compared with 19% in March and February. Inflation ranked third and remained a key challenge for small businesses, as reported by 16% of respondents in April—the highest since March 2025—compared with 14% in March; these readings were well below a peak of 37% in July 2022. Other concerns (in April vs. March) included poor sales (10% vs. 10%), labor costs (9% vs. 10%), insurance cost/availability (8% vs. 9%), government requirements (8% vs. 7%), and competition from large businesses (7% vs. 7%).

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

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- NFIB Small Business Optimism Idx up 0.1 pts. to 95.9 in Apr., still below its 52-year avg. of 98.0.
- Uncertainty Idx down 4 pts. to 88, remaining well above the historical avg. of 68.
- Expectations for economy down 7 pts. to 4%, lowest since Oct. ’24.
- Expected real sales down 4 pts. to 3%, a one-year low.
- Plans to expand business down 4 pts. to 7%, lowest since Oct. ’24.
- Firms raising avg. selling prices up 5 pts. to 30%, a four-month high.
- Top three business concerns: quality of labor (18%), taxes (17%), and inflation (16%).

U.S. NFIB Small Business Optimism Still Fragile in April

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Existing home sales rose 0.2% m/m (0.0% y/y) to 4.02 million units (SAAR) in April, the second m/m rise in three months, following an upwardly revised 2.9% decline to 4.01 million in March (previously -3.6%; 3.98 mil.), according to the National Association of Realtors (NAR). The Action Economics Forecast Survey had expected April sales of 4.06 million units. Sales remained 37.5% below a high of 6.43 million in January 2022 and 39.1% below a peak of 6.60 million in January 2021. The April gain coincided with an increase in the average 30-year fixed mortgage rate to 6.33% in April, the highest since September 2025, after rising to 6.18% in March, according to Freddie Mac. The sales figures are based on closings of sales contracts signed over the past couple of months.

Existing single-family home sales were flat m/m (-0.3% y/y) at 3.64 million units in April and March after a 3.3% rise to 3.76 million in February, while remaining 36.1% below a high of 5.70 million in January 2022. Sales of condos and co-ops rose 2.7% (2.7% y/y) to 380,000 after holding at 370,000 in March and February, though remaining 47.9% below a high of 730,000 in January 2022.

Regionally, April existing home sales showed a mixed performance. Sales in the Midwest rose 2.2% (-1.0% y/y) to 950,000 in April following a 3.1% decline in March, and sales in the South increased 0.5% (2.7% y/y) to 1.87 million after a 3.1% March decrease; both posted the second m/m gain in three months. Sales in the West, however, slid 2.6% (0.0% y/y) to 750,000, the third m/m slide in four months and a three-month low, on top of a 1.3% March fall. Sales in the Northeast held steady m/m (-8.2% y/y) at 450,000 in April and March after a 6.0% drop to 470,000 in February. Notably, the South remained the dominant region, accounting for 46.5% of total U.S. existing home sales.

The median price of all existing homes (NSA) rose 2.1% (0.9% y/y) to $417,700 in April—the third consecutive m/m rise and the highest since August 2025—following a 2.8% increase to $409,100 in March ($408,800 previously) and three straight m/m declines. Prices were 3.5% below a high of $432,700 in June 2025 but 15.8% above a low of $360,800 in January 2023. The median price of an existing single-family home climbed 2.2% (1.0% y/y) to $422,300 in April, the highest since August 2025, after a 2.7% increase to $413,300 in March. The median price of condos and co-ops, up for the fourth time in five months, rose 1.6% (1.1% y/y) to $374,100, the highest since June 2025, following a 3.9% March rebound to $368,100. Regionally, overall prices increased m/m in April in the Northeast (+3.7%; +4.8% y/y), Midwest (+1.9%; +3.6% y/y), West (+1.7%; -1.4% y/y), and South (+1.2%; +0.4% y/y).

Inventories of homes for sale rose for the fourth consecutive month in April. The number of existing homes for sale (NSA) advanced 5.8% (1.4% y/y) to 1.47 million units, the highest level since October 2025, following a 5.3% March rise to 1.39 million. The supply of homes on the market at the current selling rate (NSA) increased to 4.4 months, the highest in six months, from 4.2 months in March. The recent high of 4.6 months was in August 2025, while a record low in supply of 1.6 months was in January 2022.

The data on existing home sales, prices and affordability are compiled by the National Association of Realtors. The data on single-family home sales extend back to February 1968. Total sales and price data and regional sales can be found in Haver's **USECON** database. Regional price and affordability data and national inventory data are available in the **REALTOR** database. Mortgage interest rates can be found in the **WEEKLY** database. The expectations figure is from the Action Economics Forecast Survey, reported in the **AS1REPNA** database.

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- April sales +0.2% m/m to lower-than-expected 4.02 mil.; 0.0% y/y after five straight y/y declines.
- Sales m/m up in the Midwest (+2.2%) and South (+0.5%), down in West (-2.6%), flat in Northeast; sales y/y up only in South (+2.7%).
- Median sales price +2.1% (+0.9% y/y) to $417,700, highest since Aug. ’25.
- Unsold inventory +5.8% (+1.4% y/y) to six-month-high 1.47 mil. units; 4.4 months' supply.

U.S. Existing Home Sales Up Modestly in April, Second M/M Gain in Three Months

Tian Yong Woon

In this week’s Letter, we track the dual drivers of AI optimism and the ongoing Middle East conflict, and how they continue to shape market prices and investor expectations. AI-related enthusiasm has remained a key support for equity markets, particularly in highly exposed indexes in Taiwan and South Korea, while continued oil supply bottlenecks stemming from the closure of the Strait of Hormuz have kept crude prices elevated (chart 1). These dual forces are also evident in the latest Blue Chip Economic Indicators survey. Year to date, all Asian economies have seen upward revisions to inflation forecasts, while the most AI-exposed advanced Asian economy, Taiwan, has recorded a particularly large upgrade to real GDP growth expectations (chart 2). Looking more closely at the monetary policy implications of higher oil prices, this month’s survey shows an increasing share of panellists expecting central banks to resume or extend tightening cycles, marking a modest shift from last month’s results (chart 3). This shift is already partially reflected in recent data, with average inflation across Asia edging higher and several central banks already opting to tighten policy in response (chart 4).

Looking ahead, attention will likely centre on the Trump–Xi summit taking place in Beijing later this week. While any potential for additional Chinese mediation efforts regarding the Middle East conflict will be closely watched, developments on the US–China trade front should not be overlooked given the range of unresolved issues (chart 5). Finally, despite recent headline focus on the Middle East, China has continued to post steady export growth, while also managing to temper excessive domestic producer competition. Together, this has supported a combination of firmer external demand and more stable pricing dynamics—an “all-win” outcome for now (chart 6).

**AI vs. the Middle East conflict**
The divergence between AI-driven equity market optimism and the persistence of elevated crude oil prices amid the ongoing Middle East conflict remains striking. On the one hand, equity markets—particularly in AI-heavy economies such as Taiwan and South Korea (chart 1)—have largely shrugged off concerns over energy supply disruptions. Investors remain focused on the upside potential from the current AI buildout cycle, driven by the rising computational demands of increasingly capable AI models. More recently, attention has shifted toward the scalability and broader applications of physical AI, including humanoid robots, and their potential implications for manufacturing, healthcare, and even household use. On the other hand, crude oil prices remain well above pre-conflict levels. The latest development is the US rejection of Iran’s most recent peace proposal, underscoring that a swift resolution to the US-Iran conflict remains unlikely.

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**The latest Blue Chip Economic Indicators survey**
The divergence described above is also evident in our Blue Chip Economic Indicators surveys, with the May edition providing further insight (chart 2). Largely reflecting higher energy prices stemming from the ongoing Strait of Hormuz disruption—though other factors have also played a role—panellists have made significant upward revisions to their 2026 CPI inflation forecasts year to date. Australia has seen the largest upgrade at +1.4 ppts, while other economies have recorded more moderate increases, including India (+0.8 ppts) and South Korea (+0.7 ppts). The growth outlook, however, is more mixed. Taiwan stands out with a substantial +4.7 ppt upgrade to its growth forecast, likely reflecting continued optimism around AI-related investment. By contrast, Australia and Japan have each seen modest downgrades of 0.2 ppts.

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We also observed subtle shifts in panellists’ expectations regarding how central banks are likely to respond to the recent surge in oil prices (chart 3). In the May survey, compared with April, a larger share of panellists (26% versus 17%) now expects central banks to resume or extend tightening cycles. Correspondingly, a smaller share expects policymakers to simply look through the energy-driven inflation shock or delay easing moves. This shift in expectations likely reflects several factors, including the increasingly protracted closure of the Strait of Hormuz and growing recognition that a quick resolution remains unlikely. While a US-Iran peace agreement would be a direct route to restoring normal shipping flows, the Strait could potentially be reopened through enhanced security arrangements even in the absence of a formal peace deal. Nonetheless, the latest developments suggest that neither outcome appears imminent.

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**Inflation and Policy Rates in Asia**
The shifts in panellists’ expectations are already beginning to show up in the hard data. Average consumer inflation across Asia rose in the immediate aftermath of the Middle East conflict, although inflation rates remain well below the peaks seen during earlier price shocks, such as those in the early 2020s. Chart 4 also shows that the average policy rate in Asia has edged higher in recent months. This reflects a combination of central banks that have kept policy rates unchanged—which still represent the majority in the region—and those that have already raised rates to contain inflation and keep inflation expectations anchored. Taken together, these developments suggest that the gradual easing trend that had been in place since around mid-2024 is beginning to reverse, albeit only marginally at this stage. While the shift remains modest, it points to a regional policy stance that is becoming somewhat less accommodative in response to renewed inflation pressures.

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**China and the Trump-Xi Summit**
With all that aside, one key event that Asia observers will likely focus on this week is the Trump–Xi summit, scheduled to take place later this week in Beijing and officially confirmed by China earlier today. The meeting had previously been delayed due to the Middle East conflict. While markets will be watching for any signal that China may play a greater mediating role in de-escalating tensions in the Middle East, attention will also be firmly on the state of US–China relations. In particular, any extension of the current trade truce, or incremental improvements in bilateral trade conditions, will be closely scrutinised. This includes developments around Chinese imports of US agricultural goods, as well as US access to Chinese exports such as rare earths, among other strategic goods. At the same time, China’s trade balance with the US—while meaningfully narrowing over 2025—has recently entered a phase of relative stabilisation, and its broader global trade surplus has also levelled off after expanding further in 2025 despite the reduced US surplus (chart 5).

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That said, the recent focus on the Middle East conflict has somewhat displaced attention from China’s structural overcapacity concerns. This shift has also coincided with policy efforts by Chinese authorities to curb excessive domestic competition and reduce disorderly price competition in key industrial sectors. In combination with sustained external demand—particularly for high-tech products, including select electronics and AI-related goods—China has recently seen producer prices move back into inflationary territory. At the same time, exports and new export orders have continued to show healthy growth, pointing to a more balanced external demand backdrop (chart 6). Taken together, these dynamics suggest a near-term “all-win” configuration of firmer pricing power alongside resilient external demand, albeit one that will likely remain sensitive to both geopolitical developments and the durability of the current AI-driven investment cycle.

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Asia

Economic Letter from Asia: Of Bits and Barrels

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Nonfarm payrolls rose 115k in April, exceeding an expected gain of 70k. The increase represented the second consecutive advance, ending a nine-month string of up and down shifts. The erratic changes in prior months had left average job growth close to zero, but the new results showed a solid six-month average of 55k.

The soft results in prior months reflected respectable gains in the health-care sector that were largely offset by declines in other areas. However, job growth excluding health care also rose for the second consecutive month, and the six-month average moved into positive territory (although barely so, 1K). The construction industry has done well recently, and employment in wholesale and retail trade has improved as well. Employment in the business-services sector has inched up recently. Employment remained weak in financial services and information (motion pictures, publishing, internet-based services).

The unemployment rate was unchanged at 4.3 percent, but when calculated with more precision it showed an increase of almost 0.1 percentage point (4.337% versus 4.258% in March). The steady reading was soft in that both the labor force and employment as measured by the household survey declined, with the drop in employment exceeding the shift in the size of the labor force (-226K and -92k, respectively). The broad unemployment rate rose 0.2 percentage point to 8.2%, but it remained below the recent high of 8.7% in November of last year. A jump in the number of individuals working part time for economic reasons dominated a drop in the number of individuals marginally attached to the labor force (those that would like a job but are not actively searching).

The Bureau of Labor Statistics published an increase of 0.2% in average hourly earnings, but the change almost rounded down to 0.1% (0.161%). Most monthly changes in the past year have been in a range of 0.2% to 0.4%, with a slight downward drift developing recently. The year-over-year change in April totaled 3.6% versus readings close to 4.0% in most of 2025.

The employment and earnings data are collected from surveys taken each month during the week containing the 12th day of the month. The labor market data are contained in Haver's **USECON** database. Detailed figures are in the **EMPL** and **LABOR** databases. The expectations figures are in the **AS1REPNA** database.

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- Nonfarm payrolls advance for the second consecutive month.
- Unemployment rate steady; average hourly earnings tame.

April Employment: Signs of Improvement

Andrew Cates

**Resilient Output, Rising Prices**
Against the backdrop of ongoing tensions in the Middle East and the associated rise in energy prices, global manufacturing activity has shown a notable degree of resilience. The latest PMI data suggest that output continues to expand at a steady pace, defying what might typically be expected in the face of a renewed energy shock. Several factors appear to be underpinning this resilience, including continued momentum in AI-related investment, a partial easing of earlier US tariff-related disruptions, and a sustained ramp-up in defence-related production. At the same time, however, the chart highlights a clear firming in output prices, pointing to a re-emergence of cost pressures within the global manufacturing sector. This combination—resilient activity alongside rising price pressures—reinforces the view that the current shock is feeding more into inflation dynamics than into an outright contraction in global output, at least for now.

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**Supply Chains Stir Again**
If the resilience of global manufacturing suggests that activity is holding up, this next chart highlights where the strain is re-emerging—on the supply side. Both the Baltic Dry Index and broader measures of global supply chain pressure have begun to move higher again, pointing to a renewed tightening in shipping capacity and logistics conditions. While nowhere near the extremes seen during the pandemic, the recent upturn is notable in the context of heightened geopolitical risk, particularly given the vulnerability of key shipping routes through the Middle East. Disruptions to energy flows and maritime traffic, alongside rising insurance and freight costs, are feeding through into global trade costs more broadly.

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**Oil Production Constraints**
If the previous chart highlights rising supply chain frictions, this one shows how those pressures are now feeding directly into production decisions. Crude oil output among key producers has begun to adjust in response to disruptions around the Strait of Hormuz, with countries such as Saudi Arabia, Iran and the UAE facing growing constraints on their ability to export. With shipping routes impaired, production has increasingly been diverted into storage—but this is not a limitless buffer. As storage capacity tightens, producers are effectively forced to scale back output, not because of weak demand, but due to logistical bottlenecks. This dynamic helps explain the recent softness in aggregate production levels and underscores the supply-driven nature of the current energy shock. Looking ahead, even a reopening of key routes may not immediately normalize flows. Elevated inventories, constrained tanker capacity, and evolving OPEC dynamics—not least the UAE’s departure—suggest that supply adjustment could remain uneven, prolonging upward pressure on energy prices and, by extension, global inflation.

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**A More Hawkish Bias** 
If supply-side pressures are beginning to reassert themselves, the implications for monetary policy are becoming increasingly evident. The latest Blue Chip Financial Forecasts survey points to a growing consensus that policy rates are more likely to move higher over the next twelve months across most major economies, with expectations for further tightening particularly evident in Japan, the euro area, Canada and Australia. This reflects a broader reassessment of the inflation outlook, as persistent energy-related pressures raise the risk of more durable price dynamics. That said, the picture is more nuanced in the US and the UK, where the consensus view still leans toward modest easing over the coming year. However, market pricing and broader sentiment appear to be shifting more quickly, with an increasing number of participants questioning whether rate cuts will materialise at all. Indeed, in both the US and the UK, there is a growing sense that further tightening could yet be required if energy-driven inflation proves more persistent, underscoring the increasingly uncertain and finely balanced policy environment facing central banks.

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**US Credit Conditions: Neither Tight Nor Loose**
If the policy outlook is becoming more finely balanced, credit conditions appear to be reflecting a similar sense of equilibrium. The latest US Senior Loan Officer Opinion Survey (SLOOS) suggests that, in aggregate, bank lending standards are no longer tightening meaningfully but nor are they easing materially either. This is consistent with the chart, where the share of banks tightening standards has moved closer to neutral territory following earlier periods of more pronounced tightening. As a result, the broader credit backdrop does not currently point to strong deleveraging pressures, nor does it suggest a renewed wave of credit expansion. Instead, the private sector appears to be in a holding pattern, with balance sheets broadly stable and credit conditions neither acting as a significant headwind nor a meaningful tailwind to growth.

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**Labouring the point**
If supply-side pressures and policy uncertainty are shaping the near-term outlook, labour market dynamics—and in particular wage growth—remain central to how this ultimately feeds through into inflation. The latest Indeed wage tracker suggests that while wage pressures have eased from their peaks across most major economies, they remain elevated relative to pre-pandemic norms. This is especially evident in the UK, where posted wage growth continues to run at comparatively high levels, underscoring persistent domestic cost pressures. More broadly, the stickiness of wage growth helps explain why central banks remain cautious in declaring victory over inflation. Even as energy-driven price pressures fluctuate, the risk is that tight labour markets and firm wage dynamics sustain underlying inflation at levels above target. In that sense, labour market conditions remain a critical transmission channel—determining whether the current supply shock proves temporary or evolves into a more persistent inflationary regime.

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Recent developments point to the possibility of a peace settlement in the Middle East, which has offered  some tentative relief to energy markets. Financial markets have responded with cautious optimism, but the outlook remains highly uncertain, with much depending on whether any agreement proves durable and supply disruptions are fully unwound. Against this backdrop, our charts this week highlight a global economy that is holding up better than expected but facing renewed cost pressures. Manufacturing activity remains resilient, supported by AI investment, reduced tariff disruption and defence spending, even as output prices firm (chart 1). Supply-side frictions are also still evident: shipping costs have risen, broader supply chain pressures are rebuilding (chart 2), and crude oil production has been curtailed by export and storage constraints among key regional producers (chart 3). These dynamics have reinforced inflation risks and shifted policy expectations in a more hawkish direction (chart 4). Meanwhile, US credit conditions appear broadly neutral, suggesting neither strong deleveraging nor releveraging pressures (chart 5). Finally, wage growth remains central to the outlook, particularly in the UK, where pressures are still comparatively elevated (chart 6). Taken together, the message is one of resilience under strain: growth is holding up, but the balance between inflation and activity is becoming increasingly delicate, leaving policymakers—and markets—navigating a narrow and uncertain path ahead.

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Charts of the Week: Still Standing

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Construction spending data for March and February were released today to catch up from delays due to the federal government shutdown in October 2025. The value of construction put in place rose a stronger-than-expected 0.6% m/m in March to a seasonally adjusted annual rate of $2,185.5 billion, the first monthly rise since December, following declines of 0.2% in February and 1.9% in January (-0.3% initially), data from the U.S. Census Bureau showed. A 0.3% m/m March increase had been expected in the Action Economics Forecast Survey. The year-on-year rate accelerated to 1.6% in March, the fourth consecutive y/y gain, after holding at 0.4% in February and January (-1.1% in March 2025), though remaining well below a high of 12.9% in December 2023 and a peak of 18.4% in April 2022.

Private construction rose 0.8% (1.0% y/y) to $1,659.0 billion in March, the first m/m increase in three months, after decreases of 0.2% in February and 2.6% in January (-0.6% initially). Residential private construction climbed 1.7% (3.6% y/y) to $929.7 billion in March following a 0.1% downtick in February and a 4.6% drop in January (-0.8% initially). Single-family building recovered 2.7% (-4.2% y/y), the third m/m rise in four months, after a 1.4% February decline; it was 44.9% of the residential private construction. Multi-family building grew 0.3% (0.5% y/y) following a 0.2% February increase and two successive m/m falls; it was 12.4% of the residential private construction. Home improvement building rose 0.9% (14.3% y/y), up for the fifth time in six months, on top of a 1.2% February gain; it was 42.7% of the residential private construction.

Nonresidential private construction fell 0.2% (-2.1% y/y) to $729.4 billion in March, the fifth m/m decline in six months, after a 0.4% decrease in February and no change in January (-0.4% initially). The March decline reflected m/m drops in several nonresidential private construction categories, driven by manufacturing (-1.2%; -17.0% y/y), followed by commercial (-0.6%; +1.5% y/y), lodging (-0.5%; +4.5% y/y), and communication (-0.4%; +1.9% y/y). To the upside, the following nonresidential private constructions rose m/m in March, led by religious (+3.3%; +14.6% y/y), followed by amusement & recreation (+1.3%; +14.2% y/y), office (+1.1%; +9.1% y/y), transportation (+0.4%; +2.3% y/y), utilities (+0.2%; +4.6% y/y), and educational (+0.1%; +7.3% y/y). Meanwhile, health care private construction was essentially unchanged (+1.2% y/y) after a 0.3% February decline.

The value of public construction fell 0.2% (+3.6% y/y) to $526.4 billion in March following a 0.3% decrease in February and a 0.5% gain in January (+0.6% initially), reflecting drops of 2.3% (+0.9% y/y) in residential public construction and 0.2% (+3.7% y/y) in nonresidential public construction. Many nonresidential public construction categories fell m/m in March, led by conservation & development (-3.4%; +7.2% y/y), followed by commercial (-0.7%; -13.2% y/y), transportation (-0.7%; +2.5% y/y), educational (-0.6%; +0.6% y/y), and office (-0.4%; -4.3% y/y). Notably, spending on highways & streets, which accounted for 28.1% of public construction spending, slipped 0.1% (+3.8% y/y), the first m/m decline since October, following a 0.2% February increase. In contrast, the following public constructions rose m/m in March, led by amusement & recreation (+0.8%; +6.3% y/y), followed by utilities (+0.7%; +10.6% y/y), health care (+0.5%; +5.7% y/y), sewage & waste disposal (+0.3%; +9.7% y/y), and public safety (+0.2%; +1.7% y/y). Meanwhile, water supply public construction was virtually unchanged (+5.7% y/y) following a 0.4% February increase and three consecutive m/m decreases.

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

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- Headline +0.6% m/m, first monthly gain in three mths.; +1.6% y/y, fourth straight y/y rise.
- Residential private construction +1.7% m/m, driven by a 2.7% rebound in single-family building.
- Nonresidential private construction -0.2% m/m, fifth decline in six mths.
- Public construction -0.2% m/m, led by a 2.3% drop in residential public building.

U.S. Construction Spending Rebounds in March, Exceeding Forecasts

Sandy Batten

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Nonfarm business productivity (output per hour) slowed more than expected in Q1 to 0.8% q/q saar from a downwardly revised 1.6% in last year’s fourth quarter (previously 1.8%). The Action Economics Forecast Survey expected a 1.6% quarterly increase in productivity. Compared to a year ago, productivity rose 2.9% y/y in Q1, up from 2.5% in Q4. Since productivity growth began to accelerate at the beginning of 2023, it has grown at a well above trend 2.6% annual rate, likely a reflection of AI and other technology advances. Strong productivity is a key factor for boosting real incomes and restraining inflation pressures.

Nonfarm business output (not quite the same as real GDP) increased 1.5% q/q saar in Q1 versus a downwardly revised 1.3% in Q4 (previously 1.5%). By contrast, real GDP grew 2.0% q/q in Q1. Hours worked rebounded in Q1, rising 0.7% after falling an unrevised 0.2% in Q4. Compensation growth slowed to 3.1% in Q1 from an unrevised 6.3% in Q4. Compared to a year ago, compensation growth slowed to 4.2% y/y from 5.0%. On a quarterly basis, compensation growth slowed much more than did productivity growth. Consequently, growth of unit labor costs slowed markedly to 2.3% q/q in Q1 from 4.6% in Q4. The y/y rate of advance for unit labor costs also slowed, to 1.2% y/y, its slowest annual pace since Q3 2023, from 2.4% in Q4.

Manufacturing productivity rebounded in Q1, jumping 3.6% q/q saar following a downwardly revised 3.2% quarterly decline in Q4 (previously -2.5%). Factory output increased 3.3% q/q in Q1 following a downwardly revised 3.4% quarterly decline in Q4 (previously -2.8%). Hours worked fell 0.4% q/q in Q1, the seventh consecutive quarterly decline. Factory compensation remained elevated but slowed to 6.1% in Q1 from an unrevised 6.3% in Q4. With the rebound in productivity growth and the slowdown in compensation growth, unit labor cost growth slowed markedly to 2.4% q/q in Q1 from an upwardly revised 9.8% in Q4 (previously 9.1%). However, the y/y pace of unit labor cost growth increased further to 3.7% y/y in Q1 from 3.1% in Q4 and 1.4% in Q3.

The productivity and labor cost data are available in Haver’s **USECON** database. The Action Economics expectations figures are in the **AS1REPNA** database.

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- Output per hour growth slowed to 0.8% q/q saar in Q1 from 1.6%.
- However, longer-term productivity growth remained solidly well above trend.
- Compensation growth slowed to 3.1% q/q resulting in a slowdown in unit labor cost growth to 2.3% from 4.6% in Q4.

U.S. Productivity Growth Slowed in Q1 2026

**A Tug of War Between AI Hope and Geopolitical Shock**
The latest Blue Chip Economic Indicators survey highlights a growing divergence between economies benefiting from AI-driven optimism and those more exposed to the inflationary consequences of renewed geopolitical instability. Taiwan stands out as the clearest AI beneficiary, with growth forecasts revised sharply higher while inflation expectations have risen only modestly, reflecting surging semiconductor demand and continued investment in global technology supply chains. China also remains relatively resilient, supported by ongoing AI-related capital spending and stronger technology sectors. By contrast, the euro area and UK have seen much larger upward revisions to inflation forecasts alongside weaker or declining growth expectations, underscoring their greater vulnerability to the recent Middle East shock and higher energy costs. Korea sits somewhere in between: benefiting from the AI hardware cycle but still exposed to trade and energy headwinds. Overall, the chart illustrates the increasingly important push-and-pull shaping the global outlook: AI optimism and productivity hopes on one side, and geopolitical fragmentation, energy insecurity and supply-side inflation pressures on the other.

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**Forecasters See Contained Pass-Through**
Against this backdrop, our latest Blue Chip special question sought to gauge whether economists believe the recent rise in energy prices will remain largely contained — or whether it risks spilling more meaningfully into underlying global inflation dynamics. The results suggest forecasters have become somewhat less concerned about a broad and persistent inflationary impulse since April. A larger share of respondents in the May survey now expect only a “limited and temporary” pass-through into core inflation, while the proportion anticipating “moderate and persistent” effects has declined noticeably. Very few panelists expect significant second-round effects, implying that most still believe inflation expectations and wage-setting behaviour remain relatively well anchored. In part, this reflects confidence in central bank credibility and the view that softer global demand conditions will constrain firms’ pricing power. Yet the persistence of a sizeable minority still expecting moderate pass-through underscores the uncomfortable tension facing policymakers. 

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**Energy Reawakens as a US Inflation Driver**
While survey respondents generally expect only limited pass-through from higher energy prices into broader inflation, the latest US CPI data provide a reminder that the process may already be underway at the margin. April’s CPI report showed core inflation coming in slightly firmer than expected, suggesting underlying price pressures remain more persistent than many policymakers had hoped. The decomposition of CPI inflation highlights that services continue to dominate overall inflation dynamics, reflecting still-elevated wage and labour-intensive price pressures across the economy. However, the more notable recent development has been the renewed contribution from energy prices, which had previously acted as a disinflationary force through much of 2025. Food inflation has also remained comparatively steady, while non-energy goods prices continue to exert only modest upward pressure despite ongoing tariff and supply-chain concerns. Taken together, the data reinforce the idea that the US economy is not facing a classic demand collapse, but rather a more uncomfortable supply-side environment in which geopolitical energy shocks risk colliding with still-resilient domestic demand, AI-related investment spending and sticky service-sector inflation.

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**AI: The Powerful Counterweight to Geopolitical Headwinds**
If rising energy prices and geopolitical instability represent one major force shaping the current macroeconomic outlook, the extraordinary surge in AI-related investment represents the other. The latest data from Our World in Data show global private investment in AI accelerating sharply again in 2025, reaching close to $300 billion — more than double the level seen just two years earlier. The United States continues to dominate the global AI landscape, accounting for the overwhelming majority of private investment spending, while China and Europe remain considerably smaller contributors despite continued growth. The scale and speed of the 2025 increase is particularly striking given the broader backdrop of elevated policy uncertainty, trade fragmentation and concerns about slowing global productivity growth. In effect, the global economy is now being pulled in two competing directions: on one side, geopolitical tensions, supply-chain fragilities and more recent energy shocks are weighing on confidence and raising supply-side costs; on the other, AI enthusiasm is driving an enormous wave of capital expenditure, infrastructure build-out and technology-related demand. This helps explain why growth expectations — particularly in the US and parts of Asia — have remained comparatively resilient despite an increasingly uncertain global environment.

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**Industrial Winners and Losers in a Fragmenting Global Economy**
The divergence in industrial performance across advanced economies has become increasingly striking. Taiwan has emerged as one of the clearest beneficiaries of the global AI boom, with industrial production surging as semiconductor demand, data-centre investment and advanced electronics exports continue to accelerate. Denmark has also significantly outperformed, though for very different reasons, with the extraordinary global success of its pharmaceutical sector — particularly weight-loss and diabetes drugs — driving a powerful expansion in manufacturing output. By contrast, the UK and Germany have experienced a far weaker industrial recovery. In both cases, elevated energy costs and greater dependence on imported energy have weighed heavily on industrial competitiveness since the post-pandemic energy shock. Germany’s large manufacturing sector has been particularly exposed to higher natural gas prices and weaker external demand, while the UK has continued to struggle with a combination of high energy costs, weak productivity growth and subdued business investment. The chart highlights an increasingly important feature of the global economy: countries exposed to powerful structural growth themes such as AI or pharmaceuticals are pulling away from those still burdened by energy dependence and deteriorating industrial competitiveness.

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**China’s Pulse Is Picking Up Again**
China’s economic backdrop has shown clearer signs of improvement in recent months, with both the Citigroup Economic Surprise Index and the Yicai High Frequency Economic Activity Index moving higher. The rebound suggests that incoming data have begun consistently outperforming expectations after a prolonged period of disappointment. Part of the recent improvement likely reflects the cumulative effects of policy easing, including targeted fiscal support, infrastructure spending and further efforts to stabilise the property sector. Export demand has also remained more resilient than many expected, helped in part by the continued strength of global technology and AI-related supply chains. At the same time, improving domestic mobility and energy usage indicators point to firmer underlying activity momentum. The Yicai index itself is designed to provide a near real-time pulse of the Chinese economy using a basket of high-frequency indicators including subway usage, air pollution, coal consumption, freight activity, unemployment and bankruptcy trends. While China still faces significant structural headwinds — including weak household confidence, property-sector fragilities and deflationary pressures — the recent pickup suggests that growth momentum may be stabilising at a time when several other major economies are becoming more vulnerable to geopolitical and energy-related shocks.

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The global economy is still caught between two powerful and competing forces. On one side, the AI investment boom continues to support growth, industrial activity and equity markets, particularly in the US and parts of Asia. On the other, renewed Middle East tensions and higher energy prices are adding to inflation risks and broader policy uncertainty. The latest Blue Chip survey reflects this divide clearly: growth expectations have generally held up best in economies tied to AI-related investment and technology supply chains, while inflation forecasts have risen more sharply in more energy-exposed economies such as the UK and euro area (chart 1). Forecasters still largely expect only limited pass-through from higher energy prices into core inflation, although recent US CPI data suggest underlying price pressures remain somewhat sticky (charts 2 and 3). At the same time, the extraordinary continued surge in global AI investment — now approaching $300 billion annually — highlights the sheer scale of capital being deployed into semiconductors, data centres and digital infrastructure, particularly in the United States (chart 4). The divergence in industrial production trends also reinforces the growing gap between economies benefiting from structural growth drivers — such as Taiwan’s semiconductor sector and Denmark’s pharmaceutical industry — and those struggling with higher energy costs and weaker competitiveness, notably Germany and the UK (chart 5). Meanwhile, improving Chinese activity indicators suggest policy support and stronger technology demand may finally be helping to stabilise growth (chart 6). Overall, the world economy remains resilient, but increasingly uneven, with AI-related investment continuing to offset — though not eliminate — the drag from geopolitical fragmentation and rising energy insecurity.

Charts of the Week: The Tug of War

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