Charts of the Week: Resilience on Narrow Foundations

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.

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.

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.

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.

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.

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.