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Regional Fed surveys showing further manufacturing acceleration in August

Winnie Tapasanun

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The Chicago Fed National Activity Index (CFNAI) was at -0.08 in July, down from an upwardly revised +0.06 in June (-0.02 initially) and up from -0.12 in May (-0.19 previously), today’s report from the Federal Reserve Bank of Chicago showed, indicating that economic activity was below its historical trend for the second time in three months in July after slightly above the historical trend in June. The latest CFNAI was above a low of -0.50 in October 2025 but below a reading of +0.02 in July 2025 and a high of +0.39 in February 2025.

The index's three-month moving average (CFNAI-MA3), which smooths out the m/m volatility in the index, declined to -0.04 in July from an upwardly revised +0.01 in June (-0.05 initially), registering the second negative reading in three months. It was above a low of -0.39 in October 2025 and -0.13 in July 2025 but below a high of +0.07 in February 2025. The CFNAI-MA3 is expressed in standard deviation units from zero (with a value of zero defined as trend real GDP growth). Research at the Chicago Fed indicates that an average reading of -0.70 or below is consistent with the economy being in a recession. Therefore, the July reading suggested that the U.S. economy is not currently in a recession.

The July reading reflected m/m declines in three of the four CFNAI key components and two negative contributions. The contribution of the Production & Income index to the CFNAI eased to +0.01 in July, still the third positive reading in four months, from +0.04 in June; it was below +0.09 in July 2025 and a high of +0.37 in February 2025 but above a low of -0.61 in January 2024. The contribution of the Sales, Orders & Inventories index edged down to +0.02 in July from +0.04 in June; it was above +0.01 in July 2025 and a low of -0.20 in April 2025 but below a high of +0.16 in March 2025. The Employment, Unemployment & Hours index contributed -0.01 in July, the best of three consecutive negative readings, up from -0.05 in June; it was above its recent low of -0.13 in February and -0.12 in July 2025 but below its recent high of +0.05 in January. The contribution of the Personal Consumption & Housing index fell to -0.09 in July, the third negative reading in four months and the lowest level since May 2025, from +0.04 in June; it was below +0.03 in July 2025 and a high of +0.10 in March 2025 but above a low of -0.14 in January 2025.

The CFNAI Diffusion Index—which measures the breadth of change in the component series and is also a three-month moving average—slipped to +0.05 in July, the fourth positive reading in five months, from an upwardly revised +0.09 in June (-0.03 initially). A string of negative readings was posted during the March 2023 to February 2026 period. A reading of zero indicates that all of the indicators are growing at their long-term average. The July reading was above a low of -0.56 in October 2025 and -0.20 in July 2025 but below a high of +0.15 in September 2022.

The CFNAI is a weighted average of 85 indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

These figures are available in Haver's **SURVEYS** database.

- CFNAI down to -0.08 in July, negative for the second time in three months.
- Three of four CFNAI components down m/m; two make negative contributions.
- CFNAI-MA3 down to -0.04, second negative reading in three mths.; still above -0.70 (recession signal).
- CFNAI Diffusion Index down to +0.05, remaining positive for the fourth time in five mths.


Chicago Fed National Activity Index Negative in July After June’s Upwardly Revised Positive Reading

Robert Brusca

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Sweden ended its rate cutting back in the third quarter of 2025. Since then, housing prices have drifted higher. However, housing activity, starts, have had a minor bounce from their lows but no real recovery. Starts are still well below their 2015-2022 levels. But the pace of decline has slowed and given way to oscillation and stability.

Sweden’s inflation rate has fallen back down to its pre-Covid pace. Inflation is no longer a problem there as the headline and core rates for two consecutive quarters are below the 2% mark and look comfortable there. House prices have stabilized. There has not been a year-on-year drop in house prices since 2024-Q1.

Housing completions in this environment have a one-quarter bounce. It’s too early to call this a bottom in completions, but we do have what looks like a spike low in completions. With housing prices creeping back up, having risen for three quarters in a row, the market is beginning to look firmer.

The economy is back in gear, with industrial production rising as of the end of 2024 and logging growth rates of over 4% year-over-year, even after slowing from its rapid recovery from mid-2024 to 2025-Q3.

Sweden shows the signs of having a soft landing in the wake of all the Covid excesses, even with the post-Covid War in Ukraine and the more recent bottlenecks for energy and other supplies in the Strait of Hormuz. Only time will tell if the authorities can continue this run of good policy results.

Monetary policy seems well positioned, with the policy interest rate less than a percentage point above the inflation rate but more than one and one-half percentage points above the core rate of inflation. Interest rates in Sweden were last dropped in late 2025.

Sweden is less affected by the complications in the Middle East and principally uses fossil fuels in its economy to fuel transportation. Apart from that, it has a rich resource of hydro, nuclear, and green energy. This helps give it a buffer against the rollicking prices in the global energy sector and to buffer it from some of that uncertainty.

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Sweden

Sweden’s Housing Market Shows Signs of Life

Tian Yong Woon

In this week's Letter, we examine how Japan's hard-won reflation is being tested by an energy shock and a fiscal turn. Japan has come a long way in achieving substantive inflation and, more recently, real wage growth, substantiating its tightening cycle (chart 1). Q2 real GDP growth nonetheless underwhelmed, dragged partly by a slump in public inventories that may prove one-off (chart 2). More discouraging was private consumption, whose contribution to growth was flat over the quarter. Delving into the household picture, real spending has continued to shrink despite real wage gains in recent months (chart 3). Elevated energy prices appear to be affecting household behaviour, stalling the translation of higher wages into domestic demand-led growth. 

Recent market moves have reflected other drivers, including renewed yen weakness after a short-lived appreciation prompted by intervention. Government bond yields have surged, reflecting both tightening expectations and concerns over Japan's fiscal health, in a climb extending well beyond Japan (chart 4). One potential offset to elevated global oil prices is domestic, and it lies in rice. Last year's constrained supply has evolved into a glut this year, with prices diving (chart 5). Given rice's weight in the consumption basket, the deflationary effects may be significant. Lastly, we turn to fiscal prospects, with talk of the 2027 budget already underway. Investors are watchful of the cabinet's expansionary bias, and how increased spending and food tax cuts may lift bond issuance, with details still scant at this juncture (chart 6).
 
**Japan’s state of play**
Japan has already managed to get many things going in its favour. After decades of low to negative inflation, consumer inflation rose above 2%, though it has since eased to just above 1% (chart 1). Accompanying the pickup in price pressures is wage growth, which has risen in nominal terms over recent years. Only more recently has it grown in excess of consumer inflation, indicating an interim period of real wage growth that generally benefits households. Sustained inflation alongside wage growth is what the Bank of Japan has long sought. With such conditions among others fulfilled, the central bank had some justification to begin normalising monetary policy, with its latest rate hike in June this year. Complications nonetheless remain. Persisting tensions between the US and Iran are keeping oil prices elevated, threatening to upend Japan's recovery in its domestic sector. They have also prompted government measures to support growth and help households tide through price increases. Those measures have drawn their own concerns, especially over Japan's fiscal health, which we discuss in more detail later.

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**Japan’s Q2 GDP**
Touching more on Japan's recent growth readings, the latest Q2 figures grant us an updated snapshot. Real GDP rose 1.1% q/q SAAR, missing estimates, with the drag coming predominantly from private non-residential investment and a sharp decrease in public inventories. Some sources attribute the latter to the release of national oil reserves. If true, that would point to likely one-off growth dampening effects from such a move. These effects aside, the nil contribution of private consumption to growth is more discouraging (chart 2). It underscores some weakness in domestic demand, perhaps as consumers still grapple with rising costs of living. Much of the growth during the quarter was instead driven by government spending and net exports.

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**Japanese households**
And therein lies the puzzle, whereby Japan has seen sustained real wage growth over the past few months. At the same time, real household spending has persistently shrunk (chart 3). The largest slumps in June came in apparel, furniture and utilities. These underscore a dialling back of expenditure as elevated costs of living continue to bite, even as real earning power has improved. Thus, at least for now, the supposed transmission mechanism from improved wages to consumption has not yet fully materialised. That may hampers so-called domestic demand-led growth, and may complicate monetary policy decision making should such a bottleneck persist. 

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**The Japanese yen and yields**
However, recent market moves in Japan have been driven more by a range of other factors. The yen appreciated in late July (chart 3), following intervention by Japanese and US authorities. The spurt proved short-lived, underscoring the limited ability of intervention to buck broader trends. Those trends reflect rate differentials and the currency effects of trade deficits, the latter sharpened by the energy price shock. Japanese government bond yields have likewise surged this year, lifted by the Bank of Japan's rate hikes and expectations of more to come. Fiscal dynamics have also played a part, as discussed in a later section. The climb is not confined to Japan, extending to the US, the UK and Germany, among others. The move perhaps reflects wider macro concerns, with elevated crude oil prices raising the prospect of more persistently high inflation. That feeds expectations of tighter monetary policy, whilst worries over ballooning government debt financed by bond issuance add further pressure. Both concerns show up most prominently at the longer end of the curve.

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**Rice dynamics in Japan**
Coming back to Japan-specific dynamics, a developing phenomenon lies in diving rice prices, driven by ongoing excess rice supply. This may present an offset against the inflation-inducing effects of surged energy prices. The picture contrasts with last year, when constrained rice supply saw prices surge. The government even had to unlock its reserves to help clear the demand and supply balance at more reasonable levels. Those high prices nonetheless turned away many buyers, and the resulting inventory buildup has contributed partially to today's glut. An expected bumper crop this year would likely add further to the glut. Some sources report that advance payment prices have already fallen below production costs.

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**Japan’s fiscal prospects**
Given the spectre of elevated global oil prices and their hit on Japanese households' cost of living, PM Takaichi's cabinet is now taking these into account. It is doing so alongside its desire to boost growth when compiling the budget for fiscal year 2027. The government has already approved a two-year food tax cut to 1%, from 8%. It has also approved the removal of investment limits from ministries' budget requests, to foster growth and enable crisis management. These moves have fed investor perceptions of a more fiscally expansionary direction, fuelling concerns about Japan's fiscal position. Reduced revenue from the tax cut, coupled with likely increased spending, has raised expectations of swelling government bond issuance. Little has been said so far on how the shortfall will be financed apart from debt issuance. That lack of detail has exerted downward pressure on government bond prices, and, alongside expectations of tighter BoJ policy, has driven yields upward in recent weeks.

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Asia

Economic Letter from Asia: Heating Up

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The S&P PMIs show a mixture of strength and weakness in August. However, the readings on average show the composite stronger in August than in July, the manufacturing readings stronger in August than in July, and the services readings slightly stronger in August than in July. That suggests there's broad sectoral improvement underway. However, there's still a great deal of irregularity. The composite indexes rose in five of the eight early reporting countries, with Australia, France, and Germany showing monthly weakening. Despite the weakening in France and Germany, the European Monetary Union showed better conditions on balance. Manufacturing sectors improved in August except for the United States, India, and the United Kingdom. France and Germany also had the only weakening service sectors in August.

Apart from August, the three-month, six-month, and 12-month averages, compiled only on completed data through July, show a bit more weakening. Five countries show composite readings weakening over three months compared to six months, with only the U.S., India, and Australia getting stronger. Over six months, all of the reporters’ composite values are weaker compared with their 12-month values on average, with only Japan getting stronger. For 12 months compared to 12 months ago, all the reporters are stronger and they're stronger on almost all of their readings except for the U.S. The U.S. composite is weaker over 12 months on average, compared to 12 months ago, and its service sector is weaker. The EMU composite is stronger, but the service sector is weaker compared to 12 months ago.

However, in terms of standings, the queue percentile standings for the group are quite good and have been clearly progressing over recent months. The average composite queue standing is in its 60th percentile. For manufacturing, it's in its 63rd percentile, while for services, the average is only in its nearly 49th percentile, just barely below its historic median. Manufacturing PMIs are on a long climb higher. The composite queue readings are dragged down by services, particularly in India but also in Germany and France. The U.K. and Japan have readings above 50 but by the thinnest of margins. The U.S. has a strong service sector by ranking, in its 80th percentile compared to where it's been since 2021. The next strongest ranking is a 69th percentile standing in Australia, and after that, it's a 57th percentile standing in the EMU. The services reading has been in a trendless oscillation since at least mid-2022.

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Global conditions are changing in some ways for the worse since the Middle East is looking more intractable. Markets seem to see oil prices as higher for longer as Iran has a death-grip on the Strait of Hormuz. And that is about the only leverage it has, except for its ability to shoot off a rogue missile or drone to try to catch defense systems napping or to attack a ship in the strait. It’s more than enough to prevent normalcy. For now, it is a very uneasy stalemate. It has markets on edge, inflation rates are rising, and bond markets are on their back foot or worse. Fiscal budgets are already stretched globally, and more military spending appears to be on tap. For now, equity markets are still plugged into optimism.

Flash S&P PMIs Show Ongoing Improvement Amid Unsettled Geopolitics

Sandy Batten

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The Current Activity Diffusion Index from the latest Manufacturing Business Outlook Survey (MBOS) conducted by the Federal Reserve Bank of Philadelphia rose further to 47.4 in August, a five-year high, after having jumped to 41.4 in July from 10.3 in June. A reading of 25.0 for August was expected by the Action Economics Forecast Survey. Almost 57% of respondents reported increases in current activity (up from 53% in July and 32% in June), far exceeding the 9.6% reporting decreases (down from 11.7% in July and 21.9%); 28.8% of respondents reported no change in current activity (up from 24.% in July). Survey responses were collected from August 10- August 17.

The headline index is the answer to just one question: whether activity increased, decreased or was unchanged from the previous month. Haver Analytics calculates an ISM-adjusted current activity diffusion index from the five key component indexes using the methodology employed to construct the national ISM index. This figure slipped to 57.5 in August from 58.1 in July but was still well above the critical 50 value that separates contraction from expansion.

For the component indexes, the current new orders and shipments indexes both declined in August but remained above their long-run non-recession averages. The new orders index fell 7 points to 30.1. Almost 46% of respondents reported an increase in new orders, 16% reported a decrease, and 36% reported no change. The shipments index declined from 33.7 to 27.7 in August with 41% of respondents reporting an increase (down from 45% in July) and 12% reporting a decrease versus 9% in July. Delivery times continued to lengthen in August but at a slower pace than in July with the index slipping to 3.7 in August from 9.6 in July.

The August survey showed tighter labor market conditions. The employment index rose 18 points to 27.9, its highest reading since April 2022. Nearly 33% of respondents reported an increase in employment levels (up from 13% in July), 5% reported decreases (up from 3% in July), and 62 percent reported no change (down from 83%), the lowest reading in two years. The average workweek index rose from 14.0 to 26.5, the highest reading since December 2021.

Both price indexes declined in August to their lowest readings since February but remained above their long-run non-recession averages. The prices paid index fell 13 points to 40.9 in August. Nearly 41% of respondents reported increases in input prices (down from 54% in July), while none reported decreases (unchanged); 59% reported no change (up from 46%). The current prices received index declined 10 points to 17.7. More than 21% of respondents reported increases in the prices of their own goods, 3% reported decreases, and 74% reported no change.

The diffusion index for future general activity jumped 39 points to 73.6 in August, its highest reading since August 1983. The future new orders index increased 31 points to 66.0, and the future shipments index rose 24 points to 63.5, each reaching its highest reading in more than five years. Firms continue to expect increases in employment over the next six months. The future employment index rose 6 points to 35.4, after having declined for four consecutive months. Both future price indexes moved further above their long-run averages, mostly offsetting last month’s declines. The future prices paid index rose 6 points to 62.9, and the future prices received index increased 18 points to 59.8. The index for future capital expenditures increased 18 points to 48.2, its highest reading in 53 years.

The Manufacturing Business Outlook Survey (MBOS), conducted by the Federal Reserve Bank of Philadelphia, is a monthly survey of manufacturers in the Third Federal Reserve District. Participants indicate the direction of change in overall business activity and in the various measures of activity at their plants. The diffusion indexes in the MBOS represent the percentage of respondents indicating an increase minus the percentage indicating a decrease. The indexes range from -100 to +100 with positive values indicating an increase in activity. The series from the survey dating back to May 1968 can be found in Haver’s **SURVEYS** database. The expectations forecast figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- The headline index increased to 47.4 in August, a five-year high, after having jumped to 41.4 in July. Expectations were for a meaningful decline to 25.0.
- However, the ISM-adjusted index edged down to 57.5 in August from 58.1 in July but was still well above the critical 50 level.
- Price indexes declined in August but remained elevated.
- Delivery times continued to lengthen but at a slower pace than in July.
- The diffusion index for future general activity climbed 39 points to 73.6 this month, its highest reading since August 1983.

U.S. Philly Fed Manufacturing Index Rose to Five-Year High in August

Andrew Cates

**US Data Soften, and the Short End Takes Note**
One of the week’s most noteworthy developments has been the loss of momentum in the US data. Citigroup’s economic surprise index for the United States, shown in the chart below, has rolled over in recent weeks as activity releases — a disappointing employment report chief among them — have fallen short of expectations. The two-year Treasury yield, which reflects the market’s read on the Federal Reserve’s likely path, has moved a little lower in sympathy, as investors trim the odds of the further tightening that a hawkish July meeting had briefly put on the table. The message is that the short end of the curve remains, as it should, data-dependent and cyclical. What makes the present moment unusual is the contrast with the long end which, as some of the charts that follow help to explain, has been moving firmly in the opposite direction.

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**Japan’s Weak Domestic Demand Ties the BoJ’s Hands**
Japan sits awkwardly in the current conjuncture. The yen has fallen to levels last seen decades ago, and the pressure on the authorities to intervene, and on the Bank of Japan to tighten in the currency’s defence, has been building. Yet the latest national accounts, decomposed in the chart below, show why the Bank of Japan may hesitate. Growth has slowed through the first half of the year, and the composition is unflattering: private demand has been soft, and such growth as there has been has leaned heavily on net exports rather than on domestic strength. A central bank confronting a weak domestic economy is poorly placed to raise rates aggressively merely to support its currency, and that is precisely the bind in which the Bank of Japan now finds itself.

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**Rearmament Adds a New Claim on the Public Purse**
Among the structural forces now bearing on long-term rates, few are as visible as the marked increase in defence spending. The chart below sets military expenditure as a share of GDP in 2025 against its level three years earlier, and the increases are both broad and steep — most dramatic among the front-line states of Europe, where Poland, the Baltics and the Nordics have raised their burdens by two to three points of GDP in the space of three years. This is a large and, for the most part, non-negotiable claim on public resources, arriving when budgets are already stretched. Financed as it largely must be by borrowing, it adds directly to the supply of government debt that the world’s saving must absorb — and so to the upward pressure on the rates at which that debt is issued. For more discussion about this check out the analysis from Peter D’Antonio and Shashwat Indeevar in [Efforts to Mitigate Military Risk Have Unintended Consequences.](https://www.haver.com/articles/efforts-to-mitigate-military-risk-have-unintended-consequences)

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**Where the Strain Falls: The Sectoral Balances**
To see where these pressures come to rest, it helps to view the economy through the flow-of-funds accounts, in which the financial balances of the four sectors — households, companies, government and the rest of the world — must sum to zero. The chart below sets out that anatomy for the advanced economies. Households remain in surplus almost everywhere, and governments are in deficit across the board — the United States most strikingly. But the column that matters most is the corporate one. For two decades the corporate sector was a dependable net saver, quietly supplying the rest of the economy with funds; that is no longer uniformly so. Several of the majors — Germany, the Netherlands and Sweden among them — now show corporates in deficit, as firms begin to invest more than they earn. The significance is that the corporate sector is turning from a supplier of the world's saving into a competitor for it, just as governments remain the borrowers of first resort. With two of the four sectors now drawing on the same finite pool at once, the price of that saving — the real long-term interest rate — has every reason to rise.

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**And Where the Saving Is: The Glut, Now Chinese**
If governments are competing for the world’s saving, it is worth asking where that saving actually resides. The chart below traces the pool of global saving over time and, more tellingly, its composition. Two decades ago Ben Bernanke described a global saving glut concentrated in emerging Asia and among the oil exporters; that glut has not dispersed but concentrated further, with China’s share rising from around a twentieth of the world total at the turn of the century to more than a quarter today. This is the reservoir on which deficit governments and a reviving investment cycle must both draw. Whether it continues to be recycled into Western debt as readily as before — a matter increasingly bound up with politics as much as economics — will do much to determine how far long-term rates ultimately climb.

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**Will It Pay? The Productivity Question**
Our final chart brings the argument to its decisive question. A higher cost of capital is bearable if the investment it finances raises the economy's productive capacity, for then the growth arrives to service it. Total factor productivity — the part of output growth not explained by adding more capital or labour, and so the nearest thing economists have to a measure of pure efficiency — is where that payoff would show up. Raw productivity figures are hard to read over short horizons, however, because firms work their existing machines and employees harder when demand is strong and ease off when it is weak. The San Francisco Fed's series, shown in the chart below, separates the two effects: the pale bars capture that cyclical variation in the utilisation of capital and labour, while the darker line strips it out to leave utilisation-adjusted TFP — the cleaner read on genuine, underlying efficiency. It is the darker line that should give pause. Even as capital spending on artificial intelligence and its infrastructure has surged, underlying productivity growth has slipped into negative territory in the most recent quarters. It is early, and the gains from a technology of this kind may take years to appear in the aggregate data. But the figures are a reminder that the payoff on which the whole edifice rests is, for now, a matter of faith more than evidence — and that the cost of capital is rising regardless.

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Financial markets have been unsettled this week by a familiar cast of forces, though the balance among them has shifted. Renewed tension in the Middle East has nudged oil prices higher without seriously disturbing the wider tone, while in Japan the yen’s slide to multi-decade lows kept the authorities on intervention watch and the Bank of Japan under pressure to act. But the development that has dominated is the continued climb in long-term interest rates, which across the major economies now stand close to their highest in two decades — a move driven far more by real yields than by any meaningful revival of inflation fears. That the long end should be rising even as disappointing US data have led investors to pare back their expectations of further Federal Reserve tightening — the short end falling as the long end climbs — is a thread running through this week's charts. We begin with that near-term picture: a softening in US data surprises and the accompanying, albeit very modest, easing at the short end of the curve (chart 1), together with the fragile state of domestic demand in Japan that complicates the yen’s defence (chart 2). We then turn to the deeper forces pushing long rates higher. Rearmament is adding a large and largely non-negotiable claim on the public purse, with defence budgets across Europe climbing steeply (chart 3). The flow-of-funds accounts show where the strain comes to rest, with governments across the advanced world in deficit and drawing on a finite pool of saving (chart 4) — saving that is concentrated, more than ever, in China (chart 5). And beneath it all lies the question of whether the investment now under way will deliver the productivity gains needed to justify a higher cost of capital; the latest US figures give little comfort (chart 6).

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Charts of the Week: The Cost of Capital Climbs

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance declined 6,000 to 206,000 in the week ending August 15, from 212,000 in the week ending August 8, revised from 209,000. The four-week average was 204,000 in the August 15 week, up from 199,750 in the August 8 week. Claims remain largely range-bound at historically low levels between 200,000 and 230,000. The Action Economics/Haver Analytics Survey looked for 210,000 claims to have been filed.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”— increased by 18,000 to 1.799 million in the week ending August 8 from 1.781 million in the week of August 1, revised from 1.777 million. The four-week moving average rose to 1.789 million in the August 8 week from 1.787 million in the August 1 week. The insured unemployment rate remained unchanged at 1.2% in the week of August 8.

The insured unemployment rate varies greatly across individual states and territories. In the week ending August 1, the highest unemployment rates were in Oregon (2.00%), Minnesota (2.09%), Massachusetts (2.12%), Rhode Island (2.20%), Puerto Rico (2.57%), and New Jersey (2.62%). The lowest rates were in South Dakota (0.27%), Florida (0.36%), Alabama and North Carolina (both 0.40%), Louisiana (0.43%), Arkansas (0.48%), and North Dakota (0.49%). Rates in other notable states include California (1.90%), New York (1.70%), Pennsylvania (1.69%), Illinois (1.57%), and Texas (1.10%). These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986.

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- New claims declined by 6,000 to 206,000 in the week of August 15.
- Continuing claims rose by 18,000 to 1.799 million in the week ending August 8.
- The insured unemployment rate was unchanged at 1.2% in the week of August 8.

U.S. Initial Unemployment Claims Declined in the Week of August 15

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The U.K. CBI (Confederation of British Industry) survey saw orders advance to a diffusion reading of -25 in August from -45 in July. Despite this huge shift, the percentile standing of the August measure is only in its 27th percentile. This ranking emerges after the third largest month-to-month change in the orders reading since late 1993.

In contrast, export orders made their largest monthly change in their month-to-month reading in August, and that boosted the diffusion reading to zero in August from -33 in July. This has impact of boosting the rank or queue standing to its 86.9 percentile, a strong historic standing. We are seeing strong increases in orders in August. These improvements are not always boosting the readings into a zone of strength or even normalcy, but they have taken the readings out of the extreme weak tails of their respective distributions.

**Looking ahead...**
The output volume diffusion reading, looking ahead to the next three months, improved to -7 in August from -30 in July. The month-to-month change in the reading is the seventh largest back-to-back improvement in that series. The expected output reading, however, is still only in its 16th percentile despite the extremely large monthly change.

On the other hand, the price expectations jumped to 22 in August from 11 in July, logging the 19th largest month-to-month increase, again on data back to late 1993. Average prices rank in their 84th percentile. So, their recent sizeable rise has pushed them up to the high distribution levels. Manufacturing output, which lags the CBI survey, is still much weaker and draws from a weaker period, judging from the CBI readings.

Growth seems to have picked up, but unfortunately so has inflation. The U.K. CPI-H measure rose by 0.6% m/m in July. It is now on an accelerating plane from 3.1% over 12 months to 3.4% annualized over six months to an annual pace of 3.7% over three months. Core inflation has been excessive and has popped over three months.

The U.K. situation remains a difficult one. Economic growth has not been very good. The party leader and labor party PM recently stepped down and has been replaced. Inflation has been excessive for a while. Despite deflating, inflation is moving back up again, and despite the unwind, it did not get back to 2% when it eased.

The pick-up in the CBI index is encouraging, but it is coming with increased price pressures. Relatively more of the improvement in orders is from exports, so the domestic economy is not looking like it will generate much in the way of sustainable inflation. A lot of inflation is still coming from energy, and no one really knows how to handicap that.

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United Kingdom

U.K. Industry Shows Sharp Improvement in CBI Survey

Jonathan Basile

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The U.S. Income and Spending report revealed headline inflation trends cooling in the last couple of months relative to higher price pressures in the immediate aftermath of the Iran War. The personal consumption expenditures (PCE) price index rose 0.2% month-over-month (MoM) in July after a 0.1% MoM decline in June. This is a noticeable contrast relative to the prior monthly run rates in March (0.7%), April (0.4%) and May (0.5%) and the MoM average over the previous five years (0.3%). Shorter-run PCE price trends have decelerated sharply: two-month annualized from April’s 6.7% to July’s 0.4% and three-month annualized from May’s 6.4% to July’s 2.2%. However, the smoother six-month annualized rate remained at an elevated 4.1%, and the year-over-year (YoY) rate was steady at 3.7% for a second straight month.

The underlying core PCE price index showed the same pattern as the headline figure in the last two months. July’s 0.2% MoM gain after June’s 0.1% MoM advance was in stark contrast to the 0.3-0.4% run rates exhibited from December 2025 to May 2026 and the 0.3% average over the previous five years. Given the recent core cooling, the two-month annualized rate eased to a 2.4% pace, less than half February’s 5.2% local high and the lowest level since April 2025. While this is the best progress toward the Fed’s 2% inflation target in over a year, other inflation trends continue to have 3-handles: 3.0% three-month annualized; 3.5% six-month annualized; 3.3% YoY rate. Moreover, the annual core PCE inflation rate has been above the Fed’s 2% target for 65 months in a row.

The consumer spending picture stalled in volume terms at the beginning of the third quarter. Real personal consumption expenditures were unchanged MoM in July. This marked the softest consumer performance since January’s 0.2% MoM decline. To be sure, real consumer spending was revised up slightly in the second quarter from a 3.2% quarter-over-quarter annualized rate to 3.4%. With one month on the books, the third quarter-to-date annualized rate is starting out at 1.7%, half that of the prior three-month period.

Nominal consumer spending rose 0.2% MoM, less than the 0.5% sequential increase in nominal disposable personal income (DPI). In dollar terms, spending underperformed DPI by about $89 billion, the same amount of the increase in personal saving from June to July. These dynamics produced a four-tenth rise in the saving rate to 3.0% from 2.6% in the previous period.

The July saving rate uptick should be viewed as a brief pause in an otherwise downward sloping path. To maintain spending in the last few years, consumers have whittled down the saving rate over time from the January 2024 high of 6.4% to the current level that is less than half that figure. Historically, a falling saving rate usually is a reflection of buoyant consumer confidence and optimistic income expectations. Neither were on display in Tuesday’s Conference Board Consumer Confidence report for August. This suggests that the lower trend in savings likely is not voluntary.

Forward-looking Consumer Expectations fell to 68.2, remaining below the 80 level for a 19th consecutive month. Conference Board considers this threshold a warning flag that points to heightened consumer pessimism and elevated risk of a near-term economic downturn. Conference Board’s Income Expectations, a subcomponent of Consumer Expectations, provides a focused viewpoint on the outlook for consumer spending. August’s 3.1-point fall to a net 3.8 fully arrested the improvement in the 15 months ended June 2026. This suggests a more cautious near-term spending outlook should be warranted.

The personal income and consumption figures are available in Haver’s **USECON** database with detail in the **USNA** database. The Action Economics forecasts are in **AS1REPNA**.

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- Headline and Core PCE price measures cooled in the last two months.
- Real spending stalled in July.
- Saving uptick should be viewed as a pause in the downtrend.

U.S. Income and Spending: Inflation Progress Amid Spending Stall

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