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

Winnie Tapasanun

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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

Robert Brusca

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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

Jonathan Basile

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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

Michael J. Moran

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With inflation and tighter monetary policy now front-line issues, the price index for personal consumption expenditures is arguably the most important component of this report. Results for September were as expected, with the headline measure increasing 0.5% and the core index (excluding food and energy) increasing 0.3%. Although the results were not surprising, they were unsettling, as they reinforced the notion that inflation has accelerated this year. The headline measure rose 3.6% on a year-over-year basis, up two ticks from the reading in August and well above the increase of 2.8% in 2025. Excluding food and energy, the increase of 0.3% in September left the year-over-year increase at 3.1%, versus 3.0% in August and 2.9% over the 12 months of 2025. The core index has picked up only modestly, but it has moved in the wrong direction relative to the 2% target of the Federal Reserve.

Most of the price acceleration this year has occurred in the goods sector. Energy prices stand out as a force driving goods prices higher, but pressure has also been evident in recreational goods and apparel. Inflation in the services sector has been approximately steady, although at an uncomfortable pace (3.5% so far this year versus 3.3% in 2025). A services measure closely followed by many analysts and Federal Reserve officials has quickened a bit more (3.6% versus 3.2% in 2025).

The price indexes will probably capture most of the media and market attention, but the income and consumption components are important as well. Nominal personal income rose 0.2% in September, a change that translated to a decline of 0.3% after adjusting for inflation. September marked the second consecutive decline in real personal income, and the year-over-year change totaled only 0.5%. Personal income has been trending downward in the past few years, reflecting primarily an easing in the labor market. Inflation has added to the softening trend.

Real consumer spending has been well maintained this year, including the third-quarter advance of 3.8% (annual rate). However, the recent performance has been choppy, with most of the third-quarter increase reflecting strong spending in August (real expenditures up 0.6%). Consumer activity was moderate in July (0.2% in real terms) and essentially unchanged in September.

The monthly spending figures feed into GDP on a quarterly average basis, and thus the September figures offer hints on prospects for the fourth quarter. Real outlays in September, although up less than 0.1%, were still ahead of the average for Q3. Thus, even if spending showed no real growth in the next three months, the GDP accounts would show an increase of 0.8% in the final quarter of the year (annual rate, assuming no revisions to existing data). If outlays were to grow 0.2% in each of the next three months, the growth of real consumer spending in Q4 would total 2.4%.

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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- Inflation was as expected in September, but still unsettling.
- Inflation eroded increases in nominal income and consumption.


Personal Income, Consumption, and Prices in September

Andrew Cates

**Factories do the lifting**
The October flash purchasing managers' surveys carried a consistent message. Output is still expanding across most of the advanced world, but the pace eased almost everywhere, and the balance between sectors has shifted. German manufacturing recorded its strongest reading in years and now sits comfortably above German services; the same ordering holds in Japan and, more narrowly, across the euro area as a whole. A year ago factories were the laggard in every one of these economies. The United States remains the outlier in both level and mix, with services still ahead and composite output far above anything in Europe, while France slipped back below the expansion threshold and Australia fell further still. Germany's ifo survey, released in the same week, pointed the same way: a fourth consecutive improvement in business climate, driven by expectations rather than by any assessment of present conditions, which in fact slipped. Firms might be positioning for a recovery they cannot yet see in their order books.

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**Good news on growth, less bad news on prices**
For most of this year the global data have surprised on the upside for activity more than for inflation, and equity markets have moved with that gap. The pattern is not new, but its persistence through an energy price shock is notable. Core CPI inflation has been stubbornly unremarkable: around two and a half per cent in the United States, the euro area and Japan, with none of the three moving materially higher over the past six months even as headline rates climbed. Unit labour costs tell a similar story outside Japan, where they are rising faster and accelerating. On the evidence so far, the energy shock has not been spreading into wages, services prices or expectations in the way that would compel further restraint.

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**The bond market draws a different inference**
The rise in bond yields reflects the financing demands of the current expansion as well as expectations for monetary policy. Upside surprises across the G10 have coincided with a climb in the ten-year Treasury yield, which remains well above its level at the start of the year despite retreating from its peak. Investment upswings typically require substantial capital, but the scale of spending on AI infrastructure is adding to demand for finance at a time when governments also face large borrowing needs. Spending on data centres, computing equipment and the electricity infrastructure to run them requires funding today against returns expected much later. Higher yields raise borrowing costs and reduce the present value of those prospective returns, making the investment harder to justify.

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**Incomes are not the engine**
Strip the expansion back to the household and the picture thins considerably. Real disposable income per head is growing by a little over half a per cent in the United States and less than that in the euro area; in Britain and Japan it is falling. Consumption has nonetheless held up, which means that saving has given way. The October confidence surveys suggest households themselves are not comfortable with the arrangement. German consumer climate weakened further to among its lowest readings on record, British confidence dropped sharply, and French and euro area measures both deteriorated. American households are the exception only in part: the Conference Board's headline rose on a firmer assessment of current conditions, while its expectations component sits below the level the Conference Board itself associates with recession risk, and the Michigan measure remains pinned near its historical floor.

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**Spending the portfolio**
In the United States the gap between weak income growth and resilient consumption has been bridged by wealth. The relationship in the data is unusually tight: when household net worth runs ahead of its trend relationship with income, households save less out of current income, and when it falls behind, they save more. The latest observation sits at the far right of more than a hundred quarters of history, with net worth some ninety percentage points of disposable income above trend, and almost all of that excess held in equities. This is not a borrowing story and it need not end badly. But it does mean that consumption is now underwritten by asset valuations rather than by earned income, and that a sustained fall in equity prices would transmit to slower spending through the saving rate rather than through the credit channel.

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**The revisions point to one place**
The narrowness shows up in the forecasts as clearly as in the data. Since January, the Blue Chip consensus for next year's growth has been raised meaningfully only for Taiwan and South Korea, with marginal upgrades for India and the United States. Germany, France, Mexico, Brazil, Canada, Britain and Japan have all been marked down. The upgrades track the semiconductor supply chain almost exactly. That concentration is visible in the American capital stock too, where spending on information processing equipment and software has risen by more than forty per cent since the end of 2023 while every other category of business investment has fallen, and which now accounts for a substantially larger share of real business investment than it did before the pandemic. An expansion resting on one capital spending cycle, one stock market and a falling saving rate is a resilient one, but it is not a broad one. That is the case for central banks to tread carefully before leaning against it further.

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Four central banks are deciding policy this week, and the first two have set the tone. The Federal Reserve left its policy rate unchanged while the Bank of Canada delivered a further quarter-point increase. The European Central Bank reports today and the Bank of Japan at the end of the week. Markets have given them an awkward backdrop. Ten-year Treasury yields have climbed by roughly a third of a percentage point since the summer, touching 5.3 per cent at the start of this month before easing back towards 5 per cent, while equities have gone almost nowhere, the S&P 500 having traded in a narrow range since early August. The October flash surveys, meanwhile, left little doubt that the global expansion is still intact, though factories are now doing more of the work than at any point in the past two years (chart 1). Activity data have been beating expectations by more than prices have, and world equities have broadly moved with that gap (chart 2), yet bond markets have drawn a different inference from the same run of numbers, pushing yields and financing costs higher as the surprises accumulated (chart 3). The composition of the demand behind those numbers is where the discomfort lies. Real household incomes are barely growing in the United States and the euro area and are falling outright in Britain and Japan (chart 4), while American consumption leans to an unusual degree on a stock of household wealth that sits far above its historical relationship with income (chart 5). Forecasters have marked up next year's growth almost exclusively where semiconductors are made (chart 6). The expansion is real. The question for policymakers is how much weight it can bear.

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Charts of the Week: Resilience on Narrow Foundations

Sandy Batten

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Real GDP grew 3.4% q/q saar in Q3 following a 2.2% increase in Q2 and a 2.5% gain in Q1, according to the Advance release from the BEA. The Action Economics Forecast Survey looked for a 3.1% quarterly gain. Over the first three quarters of this year, GDP has grown at a 2.7% annual rate, well above its longer-term trend. Compared with a year ago, GDP was up 2.1% in Q3, Domestic demand was very strong in Q3. Final sales to domestic purchasers jumped 5.0% q/q (2.9% y/y), its fastest quarterly pace since the economy reopened from the Covid shutdown, up from 3.8% in Q2 and 2.3% in Q1. Final sales to private domestic purchasers (the Federal Reserve’s preferred measure of aggregate demand) rose 4.9% at an annual rate in Q3 (3.3% y/y) versus 4.6% in Q2 and 1.8% in Q1. For the first three quarters of 2026, final sales to domestic purchasers rose 3.7% at an annual rate while final sales to private domestic purchasers increased 3.8%.

Personal consumption expenditures and business spending on equipment and intellectual property continued to provide much of the boost to overall GDP growth in Q3. PCE grew 3.8% q/q saar in Q3, accounting for 2.5%-points of overall GDP growth, the same increase and contribution as in Q2. The composition of the Q3 increase was somewhat different from that in Q2. Spending on goods slowed to 3.0% from 4.5% in Q2, reflecting slower spending growth for both motor vehicles and furnishings, and a decline in spending on recreational goods and vehicles. By contrast, spending on services picked up to 4.1% in Q3, its fastest quarterly pace Q2 2022, from 3.4% in Q2. One note of caution: the continued strength in consumer spending has come at the expense of saving with the saving rate declining to 4.1% in Q3, its lowest reading since Q4 2022 and calling into question the sustainability of the recent strength in spending.

Business spending on equipment remained very strong in Q3, posting its third consecutive double-digit quarterly gain. Equipment spending jumped 20.9% q/q saar in Q3 on top of a 13.4% quarterly gain in Q2 and a 15.5% quarterly increase in Q1. The Q3 increase was the largest since Q3 2020 and was led by a 37.3% annual rate surge in spending on information processing equipment. Business spending on intellectual property increased a solid 8.4% in Q3 though a slowdown from the 9.2% in Q2 and 15.6% in Q1, due mostly to a slowdown in spending on software from very lofty levels. Together, these two added 1.6%-points to total GDP growth. Business construction spending also made a meaningful contribution to overall growth in Q3 for the first time in six quarters. It rose 5.4% and added 0.2%-point to GDP growth. Quarterly gains, apart from a decline in manufacturing, were widespread across sectors with a particularly large increase in construction of data centers (128% annual rate gain). After a surprising 2.8% q/q increase in Q2, residential construction fell 3.4% in Q3, its sixth quarterly decline in the past seven quarters.

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Inventories returned to a growth supporter in Q3 after having declined in each of the preceding five quarters. Inventories increased $20.3 billion (2017$) in Q3 and added 1.6% points to overall GDP growth. Government spending also contributed to growth in Q3 after having been essentially unchanged in Q2. Total government spending increased 5.3% q/q saar in Q3, adding 0.9%-point to GDP growth, versus a 0.1% quarterly decline in Q2. Federal government spending rebounded, jumping 15.8% q/q after a 2.4% quarterly decline in Q2, reflecting sizeable increases in both defense (11.7%) and nondefense (22.2%) spending. By contrast, spending by state and local governments was essentially unchanged in Q3 following a 1.2% gain in Q2.

As was widely anticipated from the quarterly trade reports, the trade balance widened markedly in Q3 with net exports subtracting 3.3%-points from overall GDP growth, the third largest quarterly subtraction in the history of the series dating back to 1947, on top of a 1.1%-point subtraction in Q2. Imports jumped 19.7% q/q saar, largely reflecting a 58.7% annual rate increase in imports of capital goods. It seems that the rising pace of AI build outs is being supplied predominantly by foreign production—notably semiconductors. Imports of consumer goods edged up only 1.0%. By contrast, exports declined 5.7%, the first quarterly decline in three quarters, with weakness relatively widespread across major sectors.

With energy prices receding in Q3 following their Q2 surge, quarterly GDP inflation slowed accordingly. The rise in the GDP price index slowed to 2.3% q/q saar in Q3 from 6.1% in Q2. Energy prices fell 7.4% q/q at an annual rate in Q3. PCE inflation (the measure targeted by the Fed) slowed to 2.1% from 5.0% while core PCE inflation (excluding food and energy prices) slowed to 2.5% from 3.3%.

The GDP data can be found in Haver’s **USECON** and **USNA** databases. **USNA** contains virtually all of the Bureau of Economic Analysis detail in the national accounts. The Action Economics consensus estimates can be found in **AS1REPNA**.

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- The quarterly gain was led by personal consumption, business spending on equipment, and inventory rebuilding.
- Net exports subtracted 3.3%-points from overall growth, the third largest quarterly drag in the history of the series.
- Domestic demand growth accelerated to well above trend.
- Reflecting the retreat in energy prices in Q3, GDP inflation decelerated markedly.

U.S. GDP Jumped 3.4% in Q3 with Strong Domestic Demand

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance dropped by 1,000 to 194,000 in the week ending October 24 from 195,000 in the week ending October 17, revised from 194,000. The four-week average was 196,750 in the October 24 week, down from 198,000 in the October 17 week, revised from 197,750. The Action Economics/Haver Analytics Survey looked for 198,000 claims to have been filed. These weekly data underscore the downward trend in claims in place since the second half of last year.

This downward trend is echoed in the total number of unemployment insurance beneficiaries—also known as “continuing claims”—. They fell 21,000 to 1.701 million in the week ending October 17, down from 1.722 million in the week ending October 10, revised from 1.728 million. This is the lowest level since the September 19 week. The four-week moving average was 1.710 million in the October 17 week, essentially unchanged from the October 10 week, revised from 1.711 million. The insured unemployment rate was unchanged at 1.1% in the October 17 week, where it has held since the week of August 29.

The insured unemployment rate varies greatly across individual states and territories. In the week ending October 10, no state had an insured unemployment rate above 2.00%; the highest was in New Jersey (1.96%). The lowest rates were in South Dakota (0.21%), Louisiana (0.28%), Florida (0.30%), Alabama and North Dakota (both 0.33%), North Carolina (0.35%), Arkansas (0.36%), Nebraska (0.39%), Iowa (0.40%), Kentucky (0.42%), Kansas (0.43%), Georgia, Idaho, New Hampshire, Tennessee and Wyoming (all 0.47%), Virginia (0.48%), and Mississippi and Wisconsin (both 0.49%). Rates in other notable states include Texas (0.93%), Pennsylvania (1.19%), Illinois (1.29%), New York (1.36%) and California (1.67%). 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 1,000 to 194,000 in the week of October 24.
- Continuing claims fell by 21,000 to 1.701 million in the week ending October 17.
- The insured unemployment rate was unchanged at 1.1% in the week of October 17.

U.S. Initial Unemployment Claims Dropped in the Week of October 24

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The U.S. ISM Services PMI declined to a lower-than-expected 54.5 in October from 54.9 in September and 55.4 in August, data from the Institute for Supply Management showed, indicating expansion in the services sector for the 28th straight month but at the slowest pace since July. The Action Economics Forecast Survey had expected 54.7 for October. The latest reading was above 52.0 in October 2025 and a low of 49.4 in June 2024, while remaining below its recent high of 56.1 in February and a record-high 67.5 in November 2021. The 12-month average was 54.3, pointing to continued growth in the U.S. services sector.

Haver Analytics constructs a composite index combining the services index and the manufacturing reading. This index slipped to 54.6 in October from 54.9 in September and 55.3 in August, signaling expansion for the 17th consecutive month but at the weakest pace since July. The latest result was above 51.6 in October 2025 and a low of 49.3 in June 2024, albeit remaining below a high of 55.7 in February and a record-high 66.7 in November 2021. These series date back to July 1997.

In the latest services survey, the business activity index fell to 53.8 in October from 56.5 in September and 61.7 in August, indicating continued expansion in business activity for 28 months in a row but at the slowest rate since September 2025. The index was above a low of 50.0 in June 2024 but below a peak of 70.9 in November 2021. In October, 20.8% of respondents (NSA) reported higher activity while 11.4% reported an activity decline. The new orders index decreased to 55.9 in October from 59.8 in September and 60.9 in August, reflecting expansion in new orders for the 17th successive month but at the slowest pace since June. The index was above a low of 47.2 in May 2025 but below a high of 61.0 in February 2023 and a record-high 69.2 in October 2021. In October, 26.1% of respondents (NSA) reported higher new orders while 9.0% reported declines. Meanwhile, the supplier deliveries index (NSA) rose to 56.7 in October from 53.2 in September, indicating slower performance in supplier deliveries for the 23rd straight month, following one month in faster territory in November 2024.

On the labor front, the employment index advanced to 51.4 in October from 50.1 in September, showing employment activity in the services sector expanded for the second straight month after contracting in August and July. The latest reading was above a low of 43.5 in December 2023 but below a high of 54.1 in June 2023 and a peak of 58.9 in April 2021. In October, an increased 16.6% of respondents (NSA) indicated higher employment while a lessened 13.5% reported declines.

On the inflation front, the prices index, above 70 for the seventh time in eight months, edged down to a still-elevated 73.0 in October from 74.0 in September, indicating prices paid by services organizations for materials and services had risen (i.e., above 50) since June 2017. The index was well above a low of 53.9 in March 2024 but below a peak of 83.7 in March 2022. In October, 48.6% of respondents (NSA) reported higher prices while only 4.0% reported price declines.

Additionally, the new export orders index rebounded to 55.2 in October from 46.9 in September, showing new export orders expanded for the fourth time in five months. The imports index climbed to 54.2 in October from 52.9 in September, marking the eighth expansion in nine months. The inventories index slid to 55.4 in October from 57.8 in September, indicating inventories expanded for the ninth consecutive month but at the weakest pace since July, while the inventory sentiment index edged up to 52.1 from 51.7, showing continued expansion since May 2023. The backlog of orders index increased to 58.0 in October from 56.6 in September, marking the fastest pace of expansion since July 2022, following an 11-month period of contraction from March 2025 through January 2026. These series are not seasonally adjusted and not included in the ISM Services PMI total.

The ISM Services PMI is a composite index consisting of four equally weighted diffusion indexes: Business Activity, New Orders, Employment, and Supplier Deliveries. A reading above 50 indicates expansion in the services sector; below 50 suggests contraction. Supplier Deliveries is the only ISM index that is inversed; a reading above 50 indicates slower deliveries. The ISM figures are available in Haver's **USECON** database, with additional detail in the **SURVEYS** database. The expectations figure from Action Economics is in the **AS1REPNA** database.

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- ISM Services PMI down slightly to 54.5 in Oct., still above the 12-month avg. of 54.3.
- Business Activity (53.8) lowest since Sept. ’25; expanding for the 28th consecutive mth.
- New Orders (55.9) lowest since June; growing for 17 mths. running. 
- Employment (51.4) highest since February; second successive mth. above 50.
- Prices Index (73.0) down modestly but above 70 for the seventh time in eight mths., indicating prices rising since June ’17.

U.S. ISM Services PMI at a Three-Month Low, Still Indicating Expansion for the 28th Straight Month

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U.S. ISM Services PMI at a Three-Month Low, Still Indicating Expansion for the 28th Straight Month

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