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Weakness in Chinese investment is spreading

Sandy Batten

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Weighed down by further rises in longer-term interest rates, housing construction fell markedly in September, declining an unexpected 5.2% m/m (-7.4% y/y) to 1.221 million units at an annual rate following a 5.9% monthly drop in August and a 4.9% monthly decline in July. The September level is the second lowest since the economy was emerging from the COVID shutdown in the spring of 2020. The Action Economics Forecast survey looked for a 2.0% monthly gain. Residential investment has been a persistent drag on real GDP growth recently, subtracting from quarterly real GDP growth in seven of the previous nine quarters. Today’s release shows total housing starts in Q3 to be meaningfully lower than in Q2, indicating that residential investment will be a drag on GDP growth in Q3.

Single-family starts fell 4.6% m/m (+2.6% y/y) in September, the second monthly decline in the past three months, following a 2.9% monthly increase in August. Usually volatile multi-family starts have been even weaker recently. They fell 6.7% m/m (-24.9% y/y) in September, their fifth monthly decline in the past six months, on top of a 21.5% monthly drop in August.

Looking at the four major geographic regions, starts rose 6.1% m/m (+11.0% y/y) in the South. They were unchanged from August (-30.9% y/y) in the Northeast after a 43.3% monthly plunge in August. Starts in the Midwest posted the third consecutive double-digit monthly decline in September, falling 19.0% m/m (-19.4% y/y). Starts were even weaker in the West in September, plunging 23.2% m/m (-25.4% y/y) but this was after a 25.4% monthly surge in August.

In comparison to the marked decline in housing starts in September, housing permits edged down only 0.2% m/m (-3.0% y/y) to 1.400 million units at an annual rate. This was the fourth monthly decline in the past five months. Expectations were for a small decline in September. Single-family permits fell 4.0% m/m (-4.8% y/y), their third monthly decline in the past four months. More volatile multi-family permits rose 6.1% m/m (-0.2% y/y), more than offsetting a 3.0% monthly decline in August.

Permits increased in three of the four major regions in September. They jumped 13.3% m/m (-2.0% y/y) in the Northeast but this increase failed to offset a 15.8% monthly drop in August. Permits rose a more moderate 1.5% m/m (-1.8% y/y) in the South after having been unchanged in August. They edged up 0.5% m/m (+4.4% y/y) in the Midwest, the third monthly gain in the past four months. By contrast, permits plunged 10.2% m/m (-11.3% y/y) in the West, the first monthly decline in the past three months.

The housing starts and permits figures can be found in Haver’s **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

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- Housing starts fell 5.2% m/m in September to their second lowest level since the COVID pandemic shutdown with upward revisions to both July and August.
- Both single-family and multi-family starts declined in September.
- Permits were little changed in September with a sharp rise in muti-family permits nearly offsetting a meaningful decline in single-family permits.

September U.S. Housing Starts Hit by Rising Interest Rates

Robert Brusca

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**The current situation assessment is mixed**
To the ZEW experts, economic assessments of the current situation in October are split, with slight deterioration reported for the euro area as a whole and a two-point step-back for China. However, for Germany and the United States, there were significant improvements with the month-to-month diffusion indexes improving by 6 points in the U.S. and by 11 points in Germany. Ironically, both of the weakening areas, the euro area and China, have percentile standings above their historic medians, with China at a 76.1 percentile standing and the euro area at a 58.7 percentile standing. Germany and the U.S. show some strengthening month-to-month, but their standings are still below their historic medians. The German standing is at a 42.5 percentile and the U.S. standing is at a 46.2 percentile.

**Economic expectations ease broadly**
Economic expectations, however, are unequivocally weaker across the reporting countries. There were declines in expectations in Germany of 6.6 points, in the U.S. of 5.3 points, and in China of 4.2 points; each of these three reporters shows a measurable slippage in October. Among the three countries showing slippage, only Germany continues to report economic expectations ranking above its historic median, at a standing of its 53rd percentile (a ranking above 50 means above median).

**Inflation makes a sharp step back**
The real story of the ZEW survey this month, however, is on inflation where the inflation expectations dropped sharply across the board. For the euro area, expectations dropped 26 diffusion points; in Germany, they dropped 24 diffusion points; in the U.S., they dropped 22 diffusion points; and in China, they dropped by 15 diffusion points. Inflation expectations are above their median now only in China, with a 62nd percentile standing. In the U.S., inflation expectations have dropped to a 28th percentile standing.

**Rising short-term rates continue as inflation is expected to abate**
With the decline in inflation expectations, however, short-term interest rate expectations rose by 2 points in the euro area and by 5.2 points in the United States, while in China there was a step-back of 4.1 diffusion points. All three areas, however, have short-term rate expectations well above the historic median levels.

**Low inflation expectations boost bond values**
The reduction in inflation expectations has had the biggest impact on long-term interest rate expectations. Those have fallen in Germany by 13.2 diffusion points; they've fallen in the U.S. by 18.3 diffusion points; and they've fallen in China by 5.0 diffusion points. The ZEW experts apparently think that central banks are going to continue to raise interest rates and the impact is going to be to flatten yield curves globally.

**ZEW experts’ outlook for stocks**
The final market expectation of the ZEW experts is that stock markets generally are seen improving in this environment. For the euro area, there's a 4.1-point improvement; for Germany, a 5.8-point improvement; and for China, the diffusion index is 4.9 points higher. Only the U.S. has a slightly weaker outlook as the outlook falls by 2.3 diffusion points. All the stock market expectations are above their historic medians, generally ranging between readings above 50, at the 54th percentile to the 57th percentile, except for China, where the stock market expectation is in its 83rd percentile, extremely strong.

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**What the consolidated outlook implies**
To sum up, the outlook of the ZEW officials this month sees current conditions as mixed, economic expectations as lower, inflation expectations as much lower, and short-term interest rates generally creeping a little bit higher, with the impact being to reduce long-term interest rates significantly and allow stock markets to improve in most places except in the U.S. The most significant thing about these expectations is a sharp step-back in inflation expectations for the overall inflation expectation across the euro area, in Germany, and the United States. Those readings average less than a 40th percentile standing at a time that the economic expectations are slightly stronger than that in percentile levels. While both show contraction, inflation expectation rankings are weaker than growth rankings. The outlook for short-term interest rates is much stronger in percentile terms, but the outlook for long-term interest rates is weaker in percentile terms. That is the focus of stimulus.

ZEW forecasters seem to be not very concerned about the short term, but apparently they are hedging their bets about the long term, as economic expectations are weaker and long-term rates are easing and logging weak levels on a historic ranking basis. The one element about this outlook that may seem a bit incongruent is that stock markets continue to post above-median results as economic expectations and long-term interest rates fall significantly. I suppose the message from the ZEW experts is that they expect the drop in the interest rates to help stock markets more than the weakness in the future economic conditions will hurt them.

ZEW Survey Shows a Sharp Reduction in Inflation Concerns

Winnie Tapasanun

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The Housing Market Index (HMI) from the National Association of Home Builders/Wells Fargo fell 9.4% m/m to 29 in October following an 8.6% decrease to 32 in September (unrevised) and a 2.9% increase to 35 in August (unrevised), indicating a further deterioration in homebuilder sentiment and overall housing-market conditions. October marked the fourth m/m fall in five months and the lowest level since June 2012. The year-on-year rate decelerated to -21.6% in October, the deepest y/y decline since September 2025, from 0.0% in September (-14.0% in October 2025). The HMI had remained below the breakeven 50 level since May 2024. The October index, lower than 37 in October 2025, was 48.2% below a high of 56 in July 2023 and 67.8% below a record-high 90 in November 2020.

Notably, the average 30-year fixed mortgage rate held at 7.40% in the weeks of October 15 and October 8, remaining the highest since the week of November 16, 2023, compared to 6.86% during all of September, according to Freddie Mac. The rate was above its recent low of 5.98% in the February 26 week but below a peak of 7.79% in the week of October 26, 2023.

All three HMI components declined this month. The index of present single-family sales conditions slid 5.7% (-15.4% y/y) to 33 in October, the fourth m/m slide in five months and the lowest level since June 2012, after a 10.3% decrease to 35 in September. The index was 46.8% below a high of 62 in July 2023 and 65.6% below a record-high 96 in November 2020. The index of expected single-family sales for the next six months dropped 13.5% (-40.7% y/y) to 32, the third m/m fall in four months and the weakest level since November 2022, after a 14.0% September drop to 37. The index was 51.5% below a high of 66 in December 2024 and 64.0% below a record-high 89 in November 2020. The index measuring traffic of prospective buyers plunged 21.7% (-28.0% y/y) to 18, the lowest reading since April 2020, after holding at 23 in September, August and July. The index was 55.0% below a high of 40 in July 2023 and 76.6% below a record-high 77 in November 2020.

By region, the HMIs were down m/m in the West, Midwest and South this month, while up in the Northeast. The index for the West plummeted 33.3% (-35.5% y/y) to 20 in October, the first m/m decline since July and the lowest level since December 2011, reversing a 7.1% rise to 30 in September. The index for the Midwest tumbled 12.5% (-16.7% y/y) to 35, the lowest level since January 2024, after an 11.1% September fall to 40. The index for the South fell 6.9% (-22.9% y/y) to 27, matching its weakest level since June 2012, following a 12.1% September slide to 29. In contrast, the index for the Northeast rebounded 5.7% (-32.7% y/y) to 37 in October following a 16.7% drop to 35 in September.

The NAHB has compiled the Housing Market Index since 1985. It reflects survey questions which ask builders to rate sales and sales expectations as "good," "fair" or "poor" and traffic as "very high," "average" or "very low". The figures are diffusion indexes with values over 50 indicating a predominance of "good"/"very high" readings. In constructing the composite index, the weights assigned to the individual index components are: 0.5920 for single-family detached sales, present time, 0.1358 for single-family detached sales, next six months, and 0.2722 for traffic of prospective buyers. The regional indexes run back to December 2004.

These data are included in Haver's **SURVEYS** database. The Informa Global Markets survey is in Haver's **MMSAMER** database.

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- HMI weakens m/m for the fourth time in five mths. in Oct., indicating most builders remain pessimistic about the current and near-term housing outlook.
- All three HMI components down, w/ the steepest m/m drop in prospective buyer traffic (-21.7%).
- Mixed regional performance m/m: down in the West (-33.3%), Midwest (-12.5%) and South (-6.9%); up in the Northeast (+5.7%).

U.S. Housing Market Index Drops in October to Lowest Level Since June 2012

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Japan’s sector surveys are showing some progress. However, the most recent observation from the METI sector indexes shows that the tertiary sector in August, which is the services sector in Japan, eased slightly to an index level of 106.8 from 106.9 in July. The rank for this sector based on growth over the last year is in its 64.1 percentile standing; that compares to the industry index that actually stepped down more sharply in August to 101.9 from 104.4 but still has a growth rank in the 84th percentile. The METI indexes can also be ranked according to the index levels rather than their growth rates; on that basis, the tertiary index ranks much higher in its 98th percentile, while the industry index ranks only at its 18th percentile on data back to 2012. You can see that a lot of this is from the post-COVID period since the change in the index from January 2020 to date is a decline of 6.3% for the industry index and an increase of 4.6% for the tertiary index. Japan's economy has clearly been hobbled since the onset of COVID and the recovery from it.

While the METI sector indexes show weakness in August, the leading economic index rose to a level of 118 from a level of 117.6 in July; the year-over-year growth rate ranking of the LEI is in its 92.5 percentile, quite strong. The index level ranked back to 2012 on the same timeline as the METI indexes has a 98.3 percentile standing. These are very different takes on the economy compared to METI, albeit based on different conceptual readings.

**Economy Watchers**
Other indexes weighing in on growth in the Japanese economy come from the economy watchers index, where that overall index rose in August to a diffusion value of 46.4 from 45.7 in July. Over the past year, its growth rate (for the change in the diffusion index) ranked in its 53.5 percentile, while its index level rank is only in its 36.6 percentile. The economy watcher shows a year-over-year growth ranking above the 50th percentile for the retail sector, for eating & drinking places, for employment, and for the future index, with only the services sector lagging behind at the 40th percentile standing. However, when we rank the levels of these sector indexes, which are diffusion indexes, only the eating & drinking places category has a percentile standing above the 50th percentile, which means it's the only sector above its median value on data back to 2012. Meanwhile, all the August values for the diffusion readings themselves are below 50, indicating sector contraction across the board. 

**Teikoku**
A separate set of readings comes from Teikoku, where the manufacturing and wholesaling indexes both have readings above the 50th percentile, at the 59th percentile for wholesaling and at the 81st percentile for manufacturing. These are also diffusion indexes; if we look at the levels of the indexes, both manufacturing and wholesaling also have level rankings that are strong in the 80th percentile for manufacturing and in the 64th percentile for wholesaling. Retailing is at the 43rd percentile standing, while services and construction are weaker, with readings closer to their lower third, at the 34th percentile standing for services and at the 35th percentile standing for construction. Like the economy watchers index, these are also diffusion indexes and all of the raw diffusion readings are below 50, showing sector contraction in August.

**Every sector tells a story**
These various indexes tell differing stories depending on the index doing the telling. But the stories aren't so different overall. They show generally that the manufacturing sector is doing well recently, although industry ranks much lower in the METI framework than manufacturing ranks in the Teikoku framework. Services have a sub-50 percentile standing for both growth and level in both the economy watchers and the Teikoku framework, whereas in the METI framework, the services sector is above its median on the same timeline. One of the reasons for the weaker industrial index in the METI framework is that the designation ‘industry’ mixes manufacturing with mining, and the mining sector has been lagging. The differences in the services categories are harder to explain, with much stronger growth in both the ranking and the levels in the METI framework compared to the economy watchers or the Teikoku. However, in the economy watchers segment, the employment index growth rank is quite high in the 71st percentile, but in level terms it's still weak at the 30th percentile. That seems to provide a sort of halfway house to understanding the differences. From that index, it would appear that recent employment growth has picked up, very likely underpinning the services sector. However, the employment index, compared to where it's been historically, remains weak; that leaves the strong reading for the tertiary index ranking as the odd man out and harder to explain.

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Japan

Japan Shows Growth Progress and Ongoing Weakness

Tian Yong Woon

In this week’s Letter, we examine Asia’s contrasting fortunes in the IMF’s latest forecasts: strong growth among the economies benefiting from the AI boom, and rising inflation among those exposed to energy and food price shocks. The October WEO leaves the global growth forecast unchanged from April, but Taiwan and South Korea have received sharp upgrades, while Thailand and the Philippines face the largest upward inflation revisions among the Asian economies shown (chart 1). The gains in the two chip exporters rest heavily on semiconductor shipments, with exports at times contributing more to GDP growth than the headline rate itself (chart 2). That positioning captures substantial rent from the AI upcycle, yet it also concentrates risk. This month’s chipmaker-led selloff, sparked by a Chinese memory breakthrough, showed how quickly a single sector can drag down entire benchmarks (chart 3). The same exposure applies to growth, should competition intensify or demand falter. On inflation, Thailand and the Philippines have already absorbed an energy spike from the continued closure of the Strait of Hormuz (chart 4). A potential food shock now threatens to add a second layer, with rice futures rising and global production set to fall as a strong El Niño takes hold (chart 5). China, finally, saw growth pick up to 4.5% y/y in Q3, at the floor of its 4.5% to 5% target. Yet its two-speed pattern persists, with booming exports outpacing contracting investment and weak consumption, leaving growth reliant on external demand (chart 6). 

**The latest IMF WEO forecasts**
The IMF’s October World Economic Outlook keeps global growth at 3.1% for 2026 compared to April forecasts, but the stable aggregate masks a marked reallocation across economies. Taiwan and South Korea stand out in Asia (chart 1), with Taiwan’s 2026 growth forecast roughly doubles to above 10%, while South Korea’s rises from below 2% to above 3%. Both upgrades owe much to the AI buildout, given their role as major producers and exporters of related goods. Inflation tells a different story. Thailand and the Philippines, along with the US and the euro area, all carry higher CPI forecasts than in April, shown by rightward shifts in the chart. The drivers are several and affect each economy with differing intensity. One is elevated oil prices, as the Strait of Hormuz remains effectively closed to commercial shipping. Another is food, as El Niño begins to weigh on crops. For China, growth expectations are little changed at 4.5%, but the price outlook has softened further, with average inflation now seen near 1%.

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**Growth and concentration risks**
The growth upgrades rest heavily on exports, particularly semiconductors (chart 2). This is a recent development: export growth in both economies has accelerated sharply only over the past two years. In Taiwan, the contribution of exports to GDP growth has exceeded the headline growth rate itself in recent quarters. In South Korea, semiconductors account for the bulk of nominal export growth, with chips alone contributing more than 50 percentage points as export growth neared 70% y/y. The positioning of both economies has allowed them to capture substantial rent from the AI upcycle. That same positioning, however, also concentrates their exposure to a single sector, a risk that has become more visible in recent weeks.

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Concentration risks surfaced in financial markets this month, with chipmaker-led selloffs in Taiwanese, South Korean and US equities (chart 3). On 12 October, Chinese memory maker CXMT announced progress on a higher-density DRAM design, and the KOSPI fell 5.5% the next day as SK Hynix and Samsung slid. The rout deepened on 15 October, when the KOSPI fell nearly 9% and triggered a circuit breaker. Other drivers were also at play, including hotter-than-expected US inflation. Because chipmakers have gained weight in major indexes over the years, a selloff in that one sector now produces large moves in the broad benchmark. The KOSPI, which more than doubled from end-2025 to its June peak, has since given back much of that gain. The same logic applies to growth. High exposure lets an economy capture more of the upside in an upcycle. However, substantial alternative suppliers or a collapse in demand would erode that driver and leave a sizeable dent in overall growth.

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**Inflation**
Turning to inflation in emerging Asia, Thailand and the Philippines saw the largest increases in their IMF average inflation forecasts, while Indonesia and India saw moderate upward revisions. As chart 4 shows, the former two have already undergone major inflation spikes through the energy channel. Transport fuel inflation in the Philippines surged in 2026, lifting headline CPI to around 6% y/y, while energy inflation in Thailand rose above 15% before easing. Much of this reflects surging oil prices from the continued closure of the Strait of Hormuz. The IEA has described the closure as the largest supply disruption in the oil market’s history. Food inflation, by contrast, has so far stayed relatively contained across all four economies. The looming threat of an adverse food supply shock, however, would add another layer of upward pressure. Should it materialise while the Strait remains closed, headline inflation would be pushed higher still.

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Commodity markets have already begun to move (chart 5). Although a food supply shock has not yet substantively materialised, markets are starting to price in a potential squeeze from adverse weather. Rough rice futures have rebounded sharply from their lows around the turn of the year, climbing back above 1,600 cents per hundredweight. On the supply side, OECD data point to a decline in world rice production this year. The weather outlook offers little relief. NOAA’s 8 October update expects a strong to very strong El Niño through January to March 2027, persisting through March to May. The WMO puts the likelihood of El Niño persisting through February 2027 at nearly 100%, with dry conditions expected across Asia and the Pacific. Given that persistence, supply-driven price pressure on rice and other staples may continue for some time yet.

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**China**
China’s latest data show a pickup in growth but continue to describe a two-speed economy (chart 6). Real GDP growth accelerated to 4.5% y/y in Q3 from 4.3% in Q2, landing at the floor of the 4.5% to 5% target. In September, industrial production growth edged up to 5.5% y/y and retail sales growth to 1.1% y/y. Fixed asset investment, however, fell 7.2% y/y over January to September, matching the decline to August and underscoring persistent domestic weakness. The gap between the two sides of the economy remains wide. Exports grew 36.3% y/y in September, while retail sales growth has hovered near zero for much of the year. Outward-facing indicators such as exports and industrial production thus continue to outpace domestic-facing ones. Meeting this year’s growth target still hinges on the external sector, just as some trading partners push back against China’s widening surplus. A pivot towards consumption-led growth remains a tall task.

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Asia

Economic Letter from Asia: Chips and Rice

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Industrial production (IP) rose a more-than-expected 0.7% m/m in September after increases of 0.1% in August (0.0% initially) and 0.2% in July (unrevised), data from the Federal Reserve Board showed, indicating industrial activity remained on an upward trend. A 0.4% m/m September increase had been expected in the Action Economics Forecast Survey. The latest reading marked the sixth straight m/m rise and the seventh in eight months. The year-on-year growth rate accelerated to 2.2% in September, the highest since January, from 1.4% in August (1.6% in September 2025). The September IP index at 104.0 was 4.7% above a low of 99.3 in November 2024 and 4.8% above a low of 99.2 in January 2024. On a quarterly basis, IP rose 0.7% q/q in Q3 ’26 (1.7% y/y), the sixth quarterly rise in seven quarters, after a 1.2% gain in Q2 ’26 (1.5% y/y), with the annualized growth rate moderating to 2.8% in Q3 from 4.8% in Q2.

By **industry groups**, manufacturing production grew 0.3% (1.1% y/y) in September, the seventh m/m increase in eight months, after a 0.2% decline in August (-0.3% initially) and a 0.1% uptick in July (+0.2% previously). Durable goods production edged up 0.1% (3.7% y/y) in September, the eighth m/m gain in nine months, following a 0.5% slide in August. Within durables, most categories rose m/m in September, led by a 1.6% rebound (1.3% y/y) in primary metals, followed by rises of 1.4% (6.9% y/y) in machinery, 1.3% (5.4% y/y) in electrical equipment, appliances & components, 0.9% (2.2% y/y) in nonmetallic mineral products, 0.6% (3.3% y/y) in fabricated metal products, 0.5% (4.4% y/y) in aerospace & miscellaneous transportation equipment, 0.1% (9.5% y/y) in computer & electronic products, and 0.1% (2.1% y/y) in miscellaneous durable goods. To the downside, durable goods categories for motor vehicles & parts (-3.0%; -0.8% y/y), furniture & related products (-1.2%; -4.1% y/y), and wood products (-0.1%; +1.5% y/y) posted m/m output decreases in September. Notably, aircraft & parts production fell 0.5% (+5.9% y/y) after a 1.3% August decline and six consecutive m/m increases.

Nondurable goods production rose 0.4% (-1.1% y/y) in September following no change in August and a 0.4% decline in July. The September output rise was led by a 1.9% recovery (-2.2% y/y) in printing & related support activities, followed by gains of 1.0% (-1.3% y/y) in chemicals, 0.7% (0.9% y/y) in petroleum & coal products, 0.4% (-1.5% y/y) in food, beverages & tobacco, and 0.1% (4.3% y/y) in apparel & leather goods. In contrast, nondurable goods categories for paper (-1.1%; -3.2% y/y), plastics & rubber products (-0.9%; +0.7% y/y), and textiles & product mills (-0.6%; 0.0% y/y) registered m/m output declines in September.

Utilities output advanced 3.5% (8.7% y/y) in September, the fifth m/m rise in six months, after a downwardly revised 1.5% increase in August (+1.8% initially), reflecting a 3.7% jump (9.6% y/y) in electric utilities output and a 2.1% rebound (3.1% y/y) in natural gas utilities output. Mining activity moved up 0.2% (2.8% y/y), the sixth straight m/m gain and the seventh in eight months, on top of an upwardly revised 0.5% August rise (+0.1% initially).

By **market groups**, construction supplies production rebounded 1.0% (1.6% y/y) in September, the fourth m/m rise in five months, following a 0.7% decrease in August. Materials production climbed 0.7% (2.6% y/y), the sixth successive m/m increase and the seventh in eight months, after a 0.3% August rise. Consumer goods output rose 0.7% (-0.1% y/y) after no change in August and July, reflecting a 1.5% decline (-2.8% y/y) in durable consumer goods and a 1.2% gain (0.7% y/y) in nondurable consumer goods. Meanwhile, business equipment output was virtually unchanged m/m (+6.7% y/y) after a 0.1% August easing and eight straight m/m increases.

In **special classifications**, factory output of selected high-tech industries advanced 1.5% (17.5% y/y) in September, the sixth consecutive m/m rise and the 11th in 12 months, adding to a 1.1% gain in August. Manufacturing production excluding selected high-tech industries rose 0.2% (0.7% y/y) following a 0.3% decline in August and no change in July. Manufacturing production excluding selected high-tech and motor vehicles & parts grew 0.5% (0.8% y/y), the third m/m increase in four months, reversing a 0.3% August decrease.

Capacity utilization rose to 76.9% in September, the highest since December 2023, from 76.4% in August (76.3% initially) and 76.4% in July (76.3% previously). The Action Economics Forecast Survey forecasted 76.5%. The September reading was 2.5 percentage points below its long-run (1972–2025) average. Manufacturing capacity utilization inched up to 75.9% in September from 75.8% in August (75.7% initially). The September rate was 2.3 percentage points below its long-run average.

Industrial production and capacity data are in Haver’s **USECON** database. Additional detail on production and capacity utilization can be found in the **IP** database. The expectations figures come from the **AS1REPNA** database.

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- September IP +0.7% (+2.2% y/y), sixth consecutive m/m increase; on an upward trend.
- Manufacturing +0.3% (+1.1% y/y), seventh rise in eight mths., w/ durables +0.1% and nondurables +0.4%.
- Selected high-tech +1.5%, sixth straight m/m gain; motor vehicles -3.0%, third successive m/m drop.
- Utilities +3.5% (+8.7% y/y), fifth rise in six mths., led by a 3.7% jump in electric utilities output.
- Mining +0.2% (+2.8% y/y), up for the sixth month running.
- All key categories in market groups gain m/m except business equipt. (0.0%).
- Capacity utilization up to 76.9%, highest since Dec. ’23; mfg. capacity utilization up to 75.9%.

U.S. Industrial Production Tops Forecasts in September; Manufacturing IP Rebounds

Michael J. Moran

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The consumer price index and the producer price index both showed unsettling increases in September, and export and import prices followed this lead. Import prices jumped 1.1% in September, easily exceeding an expected increase of 0.6%, while export prices surged 2.2%, dwarfing an expected change of 0.7% (expectations from the survey of Action Economics). The monthly results left the year-over-year increase at 8.1% for import prices and 11.6% for export prices.

The industrial-supply category stood out on the import side, increasing 2.7%, which left an advance of 20.4% in the past 12 months. Petroleum prices were the driving force behind the monthly change in this category, with a jump of 4.6%. September followed three quiet months for prices of petroleum products, leaving the level of prices below the peak in May. Prices of imported capital goods, responding to strong business investment in the US, have registered notable increases every month this year, ranging from 0.4% to 1.3%. September brought an increase of 0.9%, which left a year-over-year change of 8.4%.

Prices of imported motor vehicles and non-auto consumer goods had been quiet for much of last year and early this year, but both have registered noticeable increases in recent months. Prices of motor vehicles rose 0.6% in July, held that advance in August, and increased another 0.3% in September. The year-over-year change has moved from -0.4% in June to 1.1% in September. Prices of imported consumer goods declined 0.5% over the 12 months of 2025, but after increases in six of the nine months this year, the year-over-year increase moved to 2.7% in September. 

Some observers might be seeking clues to the effects of tariffs on import prices. However, prices in this report are based on invoices before the imposition of tariffs. If a foreign business wished to absorb a tariff in order to remain competitive in the US, that would be reflected in a lower price or a smaller increase than would have occurred otherwise. Such unpacking is difficult with these figures.

On the export side, the monthly increase of 2.2% in the headline measure was led by the industrial-supply category (4.0% mo/mo, 23.3% yr/yr), no doubt influenced by petroleum products. Prices of capital goods also rose noticeably (0.5% mo/mo, 4.2% yr/yr), but the pressure was less intense than that for imported capital goods. The food component provided a surprise. After increasing at an average monthly rate of 0.6% in the first eight months of the year, prices of exported food jumped 2.7% in September, leaving a year-over-year increase of 9.0%.

Like their counterparts on the import side, prices of exported motor vehicles and non-auto consumer goods have stirred recently. After showing modest changes from late 2025 through the first six months of this year, prices of exported motor vehicles have increased at an average monthly rate of 0.5% in the past three months. Prices of exported non-auto consumer goods, after four quiet months, jumped 1.1% in September, leaving a year-over-year increase of 4.0%.

These import and export price series are not seasonally adjusted; they can be found in Haver’s **USECON** database. Detailed figures are available in the **USINT** database. The expectations figure from the Action Economics Forecast Survey is in the **AS1REPNA** database.

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- Higher prices of industrial supplies and capital goods stand out.
- Prices of motor vehicles and non-auto consumer goods are stirring.

Import & Export Prices in September: Pressure on Both Sides of the Trade Ledger

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Think of this as though it's mixed doubles in tennis. This is a chart of the PPI pressures in the monetary union, while the table is a more detailed decomposition of pressures within the HICP consumer price measure. The PPI report is a graphic depiction of where the pressures are coming from in the inflation process at the primary levels. It shows us that the greatest pressures are coming from intermediate goods, where the kick to inflation is the strongest. Next, capital goods prices at the producer level are rising on a milder gradient, enjoying an increase at a pace above 2%. However, consumer goods prices in the PPI framework are weak, with a growth rate that has migrated back down toward zero. Yet in the overall HICP data, consumer prices at the consumer level are showing considerable pressure. They're also showing considerable upward momentum, and they're showing us broad inflation pressures all on their own.

The pressures we see in consumer prices are not being pushed up through the producer-price process per se. However, depending on how you look at or think about consumer prices, we know that PPI prices are part of the cost of consumer goods and transportation costs are actually part of the cost of selling to the public as well. That requires not just the production of consumer goods but also the transportation of them to the wholesale location and then to the retail location. Transportation costs are an important part of consumer prices, and we're more aware of that these days because people do a lot more online shopping. They can see the difference between going to the store for a good and having it delivered to their house, where they have to pay an explicit delivery charge. A delivery charge would reflect the fact that somebody has to come to deliver it, but also that a vehicle has to be driven and that vehicle has to be fueled. The PPI shows us that a lot of the pressure being passed on is coming through that fuel channel.

Despite the fact that there's not a lot of cost-push pressure coming from the producer-price stage of production to the consumer, that certainly does not mean that final product consumer price pressures don't exist. We see those pressures in the detailed consumer price report exhibited in the table. As of September, the HICP headline was up 3.8% over 12 months, with the core at 2.5%. Both of those ring the cash register at a pace too high for the ECB target. As of September, that 3.8% pace is at a 90.8 percentile standing on year-over-year inflation data back to 2001, a 25-year comparison. But the lower 2.5% core pace still has an 85.6 percentile standing on that same timeline. These metrics tell us that not only is inflation too high by the standards of the European Central Bank, but they are also significantly elevated compared to what they've been historically.

We provide year-over-year inflation rates for detailed categories within the HICP as well as in the right-hand column, the rankings of inflation for those different categories. Inflation clocks a pace above the 50% ranking for nine of the categories in the HICP presented in the table. In contrast, only five categories have rankings below 50%. The 50% level is significant for rankings because it identifies the median for each of these measures, so we have above-median inflation in nine categories and below-median inflation in only five.

At the bottom of the table, we look at the percent of categories for which inflation is accelerating over three months and over six months. Over three months, inflation is accelerating for 56% of the categories, whereas over six months inflation is accelerating in 50% of the categories. Acceleration tendencies are neutral; by this, I mean that, in data back to 2001, the average percent accelerating over three months is 50% and the average accelerating over six months is 50.2%, so that inflation accelerating or decelerating over this broad period has been an even-handed proposition, with inflation accelerating about half the time and decelerating about half the time. That's just a statement about the proportion of categories that are accelerating; the next question is how strong the acceleration is, because the ranking at the far-right hand side of the table shows that, for three-month inflation, the ranking for the proportion of categories that are accelerating is at 53.9%, whereas over six months, the ranking is at 53.7%. The table also shows the median inflation for the categories listed in the table as well as the average. In September, the median category saw inflation at 2.7%, while the average category was at 2.9%. The median rank of inflation on data back to 2001 is at 63.6%, while the average rank of inflation back to 2001 is 59.9%. There was a slight step down in the median and average inflation rates between August and September even though the inflation rate had gone up between the two periods.

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These data show inflation diagnostics vary depending on what aspect of inflation we look at, whether it's producer or consumer inflation, and depending on the time horizon that we choose, and whether we're looking at the level of inflation, the change in inflation, or inflation’s tendency to accelerate. All of these are reasonable and even necessary ways to look at inflation in order to understand how virulent it is and how it compares to trends historically. That is a much more complicated exercise than just understanding if inflation is running above or below a central bank’s 2% target.

The inflation-level data are high in terms of both the headline and the core measures. The breadth of inflation across the categories is tilted to being high based upon a comparison of historic rankings that allows comparison of each category to its own history. The proportion of categories with accelerating inflation is also troublesome. Inflation, while not roaring as it did in the 1970s, appears to have insinuated itself broadly in the developed economies because it has been lurking and pressuring prices in different ways for so long. With supply shocks coming unpredictably, it is hard to be optimistic about containing inflation. When central bankers seem more worried about doing something that will protect their reputations and contain expectations rather than actually reducing inflation, you can be sure inflation will linger.

Europe

EMU HICP Detail and Building Pressures

Andrew Cates

**When the winners stumble**
The market retreat in the week to 16 October was striking for its pattern rather than its scale. Assets that had delivered the largest gains since the start of the year generally suffered the largest losses. For every ten percentage points of year-to-date gains, roughly 1.8 points were surrendered during the week (chart 1). Emerging-market equities and the Nasdaq were among the biggest casualties; broad US bonds and long-dated investment-grade credit edged higher. This looks more like a reversal of crowded positions than a wholesale reassessment of the economic outlook. But that distinction should not be too comforting. When market leadership is narrow, even modest doubts about its durability can prompt an outsized adjustment. Whether this episode proves fleeting will depend partly on the earnings and investment assumptions underpinning those earlier gains.

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**A global expansion with one powerful engine**
This week’s export data from Japan offer a revealing measure of the scale of the AI investment boom. Shipments of semiconductors and electronic parts are growing by more than 50% y/y, while exports of chip-making machinery have also surged. Total exports are rising at a much more modest pace (chart 2). Machinery exports are especially revealing: they reflect investment in future productive capacity, not merely demand for chips today. A weaker yen has inflated export values, but cannot plausibly explain the entire divergence. The strength of this investment cycle is real. So is its concentration. Much of the apparent resilience of global manufacturing now depends on the willingness of a relatively small number of firms to keep building computing capacity. The longer that continues, the more important the eventual returns on that investment become.

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**Britain’s awkward inflation arithmetic**
The latest UK labour-market figures complicate the outlook for inflation and interest rates. Private-sector regular pay growth, after slowing for much of the past two years, has levelled off at around 3% (3 month average, y/y) and edged higher in the latest monthly reading. Unemployment fell to 4.7% in the three months to August from 4.9 per cent in July, while payroll employment has recorded a modest increase (chart 3). Yet vacancies continue to decline, suggesting that demand for labour remains fragile. It would be premature to call this a renewed tightening of the labour market. Equally, the Bank of England cannot assume that wage disinflation will continue unaided. The uncomfortable possibility is that underlying pay pressures are proving sticky even as businesses remain reluctant to hire. That is precisely the combination that makes monetary policy difficult.

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**Housing bears the weight of high rates**
Across much of the advanced world, housing markets have reached a similar destination by different routes. Annual nominal house-price inflation has slowed to close to zero in the US, the UK, Germany and France; Canadian prices are still falling (chart 4). Adjusted for consumer-price inflation, all five markets are losing ground. Their mortgage systems, housing supply and ownership patterns differ substantially. What they share is a prolonged period of expensive finance. The consequences extend beyond homeowners’ paper wealth. Weaker housing markets weigh on construction, household confidence and the collateral available to support borrowing. They also constrain property-related tax revenues. Housing is one of the clearest channels through which more restrictive monetary conditions and higher bond yields are working. It helps explain why an economy that continues to grow can nevertheless feel sluggish to many households.

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**China’s investment problem deepens**
China’s latest figures this week challenge the idea that investment has simply migrated from property development to more productive industries. Real-estate investment is contracting by more than 20% y/y. Manufacturing investment has also turned negative, and investment in power, gas and water supply has followed it below zero after several years of rapid growth (chart 5). These are different sectors, with different drivers, but their simultaneous weakness is telling. Industrial production is still expanding by more than 5% y/y while retail sales are growing by barely 1%. China continues to produce far more vigorously than its households spend. That leaves growth dependent on exports at a time when trading partners are increasingly resistant to absorbing additional Chinese supply. For the rest of the world, the result is weaker Chinese demand alongside continued downward pressure on traded-goods prices.

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**The rising cost of power**
Electricity has continued to emerge as a major constraint on the very investment boom that has helped sustain growth. Wholesale prices have increased sharply across major markets over the past year: French prices are more than three times their earlier level, those in Spain and the UK have roughly doubled, and prices in the US Mid-Atlantic market have risen by close to 80% (chart 6). The causes are not identical. French nuclear availability and Iberian hydrological conditions matter, as do local generation and transmission bottlenecks. It would be too simple to attribute every increase to data centres. Nevertheless, growing demand from electrification and computing is arriving faster than power systems can always accommodate. This matters well beyond the technology industry. Higher electricity costs squeeze households and energy-intensive businesses before any promised productivity dividend from AI becomes visible. The paradox of this expansion is becoming clearer: the investment intended to make economies more productive may, in the meantime, make them more expensive to run at least in the short term.

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The global economy has proved remarkably resilient in the face of war, political uncertainty and persistently high borrowing costs. Yet resilience is not the same as strength. Growth has become increasingly dependent on a narrow investment boom, particularly in artificial intelligence, while its financial and physical costs are mounting. Last week's market retreat exposed the concentration of investor enthusiasm (chart 1), while Japanese exports revealed the growing importance of semiconductor investment to global industry (chart 2). Elsewhere, the picture is less reassuring. British wage disinflation appears to be stalling (chart 3), housing markets remain subdued (chart 4), and China's investment weakness has spread well beyond property (chart 5). Meanwhile, rising electricity prices point to another constraint on growth (chart 6). The underlying question is whether the investment sustaining the expansion can deliver sufficient productivity gains to justify its rising costs.

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