Charles Steindel

State labor markets were little-changed in September. New Jersey and South Carolina recorded statistically significant increases in jobs, while Wisconsin saw a decline (though the Brewers sweeping the Dodgers is likely providing great solace). Five states saw significant drops in their unemployment rates (Florida, Maryland, Nevada, New Hampshire, and Pennsylvania), though none was larger than .2 percentage points. The highest unemployment rates were in DC (5.6%), Oregon (5.1%), California (5.1%), Oregon (5.0%), and Michigan (5.0%). However, Oregon’s rate was not regarded as statistically higher than the nation’s 4.2%.Nebraska, New Hampshire, Hawaii, Vermont, North Dakota, and South Dakota had unemployment rates under 3.0%, while South Dakota’s 2.0% was the lowest in the nation.

Puerto Rico’s unemployment rate increased to 6.2%, reflecting another marked increase in the island’s labor force (July saw a .8% rise), while the island’s job count fell 1,500.

State Labor Markets in September 2026

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Andrew Cates

The AI boom faces a problem beyond the technology itself: its prospective customers must be able to afford it. Investment in computing capacity is adding to demand for power, equipment and capital before comparable productivity gains have spread across the economy. If those pressures weaken customers’ spending power, they may also constrain the revenues needed to justify the build-out. AI can fulfil its technical promise while disappointing those who finance it.

This helps explain why weakness outside technology should concern technology investors. The immediate beneficiaries of infrastructure spending are easy to identify. The eventual returns depend on a much broader group of businesses earning enough from AI to pay for its services. Those two stages need not proceed at the same pace.

**The costs arrive first**
Every investment boom creates demand before it creates productive capacity. For AI, the timing matters because several essential inputs are slow to expand. Power stations, grid connections and transformers take years to deliver. A well-funded buyer can secure priority without increasing what is immediately available to everyone else.

Electricity makes the constraint tangible. Data centres add demand to networks already serving competing needs. Fuel prices, weather and available generating capacity also matter, so rising power costs cannot simply be attributed to AI. Nevertheless, the build-out can intensify local shortages. For other users, the consequences include higher operating expenses and delays to investment, even if they have yet to adopt the technology.

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Finance adds another hurdle. Infrastructure must earn enough to cover depreciation and the cost of capital as well as operating expenses. Wider technology credit spreads suggest greater scrutiny of that calculation. Broader corporate spreads have remained comparatively stable: evidence of a general AI-driven credit squeeze is still lacking. The immediate concern is that substantial commitments are being financed before their customer revenues are secure.

**The customer must earn a return**
For an adopting business, the relevant calculation extends beyond the subscription. Integration, training and organisational change require money and management time. The savings or additional sales must justify the full cost. A company facing weak demand or pressure on margins has reason to proceed cautiously, negotiate harder or defer spending.

There is encouraging evidence of diffusion. Reported AI use among US businesses rose from below 18% in January to almost 24% in early October. But adoption often remains confined to a limited range of functions. Growing use does not yet establish how much customers will spend, or how profitable that spending will be for suppliers.

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Productivity growth and subdued unit labour costs leave room for optimism. Benefits may already be emerging. The uncertainty concerns their breadth and timing relative to the capital committed. Strong orders within the infrastructure supply chain cannot indefinitely substitute for returns earned by eventual users.

**The test for markets**
The potential feedback is therefore clear. An investment surge puts pressure on scarce inputs. Some prospective customers face higher costs before enjoying the savings. Their caution then constrains suppliers’ pricing and revenues, just as those suppliers must service a larger capital base. This is a vulnerability to test, rather than an established explanation for recent market weakness.

The financing outlook could make that test harder. Blue Chip forecasts envisage Aaa corporate yields above 6% through much of 2027 while nominal GDP growth slows towards 4.5%. This comparison is no direct measure of corporate profitability. It nevertheless points to a less forgiving environment for projects whose returns arrive late.

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The decisive evidence will be measurable savings for users and sustained cash generation for providers. Those gains would strengthen customer spending and validate the infrastructure. Weak margins and disappointing monetisation would expose the gap between investment commitments and the income available to support them. AI’s capabilities may be extraordinary. Its financial returns still depend on customers with the means and incentive to pay.

AI’s Costs Are Arriving Before Its Benefits

Paul L. Kasriel

The Treasury released its monthly September 2026 and Fiscal Year (FY) budget data on October 16, 2026. As expected, it showed that interest on the debt exceeded national defense expenditures in FY 2026 and that as a percent of net Treasury receipts, interest on the debt reached 19.5%, the highest at least since 1940. Given the amount of marketable Treasury securities that have to be refinanced in the next three years, not to mention additions to the outstanding stock of Treasury securities due to persistent budget deficits, and given the current and expected level of interest rates, interest on the debt is on track to continue to grow absolutely and relatively. The Treasury is borrowing more and more just to pay the interest on its debt. With an upward-sloping Treasury yield curve (the yields on longer-maturity Treasury securities are higher than those on shorter-maturity issues), Treasury Secretary Bessent is shortening the maturity of outstanding Treasury securities by issuing new short-maturity debt and funding the buyback outstanding longer-maturity debt with short-maturity debt in an effort to mitigate the interest expense on the public debt. But if the Federal Reserve were to increase the federal funds rate in an effort to lower the inflation rate, this would frustrate Treasury Secretary Bessent’s plan. If the Federal Reserve were to reach an “accord” with the Treasury to keep the federal funds rate artificially low, the increase in interest on the public debt could be mitigated. This would be debt default by another name – higher inflation.

Let’s look at some data. Plotted in Chart 1 are the fiscal year observations of net interest payments on federal debt as percent of net receipts of the Treasury (the blue bars) and the monthly observations of the average interest rate on Treasury marketable interest-bearing debt through September 2026 (the red line). In FY 2026, net interest on the federal debt was 19.5%, the highest in decades. The last time interest as a percent of net budget receipts approached FY 2026’s level was in the mid 1980s through the late 1990s, when the average interest rate on marketable debt was considerably higher than it was in FY 2026. For example, the average interest rate on marketable Treasury debt in September 1991 was 8.058% as interest in relation to net receipts was 18.4%. As of September 2026, the average interest rate on outstanding marketable Treasury debt was only 3.518% while interest as a percent of net receipts was a full percentage point higher than it was in FY 1991. Obviously, the reason for this is that there is a much larger outstanding stock of federal interest-bearing debt.

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Because the federal government will be running deficits for as far as the eye can see, the amount of outstanding federal debt will continue to increase, which, unless interest rates should fall precipitously, means that interest expenditures on Treasury debt will continue to increase. But let’s leave increases in the outstanding Treasury debt aside and look at just the amount of debt that has to be refinanced in the next three years.

Plotted in Chart 2 are the quarter-end percentages of outstanding Treasury marketable debt that is maturing in the next 36 months (the blue bars) and the outstanding stock of Treasury marketable debt (the red line). At the end of 2026:Q3, 55% of the outstanding $31.831 trillion of Treasury debt or $17.507 trillion is maturing and, barring a fiscal miracle, will have to be refunded. Again, this is just the amount of debt that will have to be refunded. Again, barring a fiscal miracle, there will be additional new amounts of debt to be sold because of expected persistent budget deficits.

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So, there is a lot of Treasury debt that needs to be refunded in the next three years, not to mention the increasing amounts of debt to fund future deficits. (By the way, the FY 2026 federal budget deficit was $1.99 trillion). What is the interest-rate outlook for refunding the debt maturing and the new debt that has to be issued to fund the coming deficits? It is higher than the current average interest rate on outstanding marketable Treasury debt. Plotted in Chart 3 are the monthly observations of the average interest rate on outstanding marketable debt (the black bars), the end-of-September 2026 levels of the one-year Treasury security rate (the blue line), the implied one-year interest rate one year ahead (the red line) and the implied one-year interest rate four years ahead (the green line). As you can see, all of these interest rates, actual or implied by the current yield curve, are considerably higher than the current average interest rate on outstanding Treasury marketable debt. This suggests that budget interest expenditures are going higher not only because of additions to the outstanding debt but also because of higher interest rates on refunded debt.

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Perhaps this interest-on-debt “cancer” could be put into remission by paring future budget deficits? Perhaps. But tax increases have become the “third rail” of politics in this country. By the way, if the AI hype pans out, future tax revenues will be adversely affected because, under our current federal tax system, capital-derived income is taxed at a lower rate than labor income. If AI results in lower employment, labor taxation will be reduced. If we are politically unable to raise taxes, perhaps we can pare spending. Chart 4 speaks to the difficulty of slowing federal spending. As the chart shows, in FY 2026, as a percent of total net federal budget outlays, combined Social Security and Medicare expenditures, interest expenditures and national defense expenditures accounted for 37%, 14% and 13%, respectively. These three categories add up to 64% of total net federal expenditures. In the coming years, all three of these categories are expected to increase in absolute terms. If the federal government were to seriously contemplate cutting Social Security or Medicare benefits, there would be a “roll” on Washington, D.C. of senior citizens in their wheelchairs. Then there are Veterans’ benefits, which would be politically (and morally) difficult to slow. Perhaps Homeland Security outlays could be slowed if we reduced the number of ICE agents and their unmarked side-swiping vehicles chasing undocumented residents who have not been charged with any criminal offenses (much less convicted) or who are following the asylum rules under which they were admitted into the US. The Big Beautiful Bill will result in Medicaid savings by making it more difficult for low-income households to qualify for benefits, but there are political limits here, too.

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Because all of our federal debt is denominated in US dollars and, via the Federal Reserve and the banking system, we can “print” US dollars, I suspect and fear that we will try to inflate our way out of this debt “disease”. After all, we measure many of our federal budgetary metrics as a percent of nominal GDP. By creating more inflation, we can create more nominal GDP, the denominator of most of our budgetary-measurement fractions.

We are not the only nation that faces fiscal challenges. France has been in the news lately regarding its fiscal problems. Most of Europe, including the UK face fiscal challenges, in part because of aging populations and the budget expenditures related to retirees. Income equality and stagnant living standards are plaguing Europe and the US. This is creating social unrest. Witness the recent street protests in France, Italy and Spain. Regrettably, there is little fiscal “headroom” to address these challenges. Quoting a British diplomat who had served in China in the 1930s, “May you live in interesting times.”

Interest on the Public Debt Is a Metastasizing Budgetary Cancer

_**Weak growth and divided governments complicate fiscal repair and the investment needed to improve productivity.**_

Europe is caught in a difficult circle. Weak growth is undermining confidence in governments, while political fragmentation makes it harder to agree on the reforms and budgets that might restore it. Higher debt-servicing costs leave less room to reconcile competing demands. Economic disappointment and political division risk reinforcing one another, limiting the ability to strengthen growth.

There is no painless way out. Spending cuts can depress activity and alienate voters, while further borrowing may add to the debt without improving the capacity to service it. Higher productivity offers a more promising escape: AI could raise incomes and tax revenues enough to ease the burden. But the investment needed to secure those gains competes for capital and energy, potentially raising Europe’s costs well before it raises European incomes.

That delay matters for monetary policy. Further ECB tightening might restrain inflation, yet also weaken investment and demand in economies struggling to grow. Europe must therefore improve its capacity to invest and govern while managing the immediate pressures on household incomes and public finances.

**The difficulty of governing**
France illustrates the problem. Its minority government is struggling to secure support for a budget intended to curb the deficit. In Spain, a parliamentary defeat over measures to ease the housing crisis has prompted a snap election. In Germany, regional gains by the far-right AfD are putting the governing coalition under pressure. Different economic circumstances have produced a common difficulty: assembling durable support for difficult choices.

Those choices are becoming more expensive. Voters want better services and relief from living costs, while defence and energy security require greater spending. At the same time, governments must refinance debt issued when interest rates were much lower. Rising interest bills leave less room to satisfy these demands, making political agreement harder just as the cost of failing to reach it increases.

**Weak growth weakens consent**
The roots of this difficulty extend well beyond the latest political disputes. The World Bank’s political-stability measure shows a broad deterioration across advanced economies over the past decade. Germany has suffered a particularly marked decline, whereas Greece and Italy have improved or held their ground after earlier periods of upheaval.


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The familiar distinction between a stable European core and a fragile periphery is consequently less useful than it once was. More troubling, political confidence has weakened even in countries where debt burdens have become more manageable. Better financial ratios have not necessarily brought a stronger mandate to govern.

One reason is that the inflation surge after 2019 raised nominal incomes and reduced debt ratios without necessarily improving households’ living standards. Governments benefited from a change in the arithmetic that many voters experienced as a loss of purchasing power. That is a poor foundation on which to seek consent for further restraint.

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The importance of living standards is apparent in the next exhibit. Across the countries examined, stronger gains in real output per person since 2019 have been associated with greater political stability, with Germany and Greece illustrating the contrast. The relationship does not establish causation, but it underlines the importance of growth to governments’ ability to sustain support for economic policy.

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Voters are more likely to accept higher taxes or restrained spending when they believe their prospects are improving. Stagnation instead turns adjustment into an argument over who must bear the loss. As that argument obstructs reform and investment, the weakness of growth becomes both a cause and a consequence of political division.

The nationalist right has gained influence in this environment. In Germany, mainstream parties’ refusal to cooperate with the AfD limits its route to federal power, but its electoral strength already shapes the debate. Elsewhere, more governments involving the nationalist right are a credible prospect. Their ability to improve economic outcomes will depend on reconciling promises with available resources and carrying through reforms. Winning an election does not resolve the constraints that made voters restless.

**Unequal capacity to adjust**
The scope for policy also depends on the balance sheets governments inherit. Europe’s aggregate position is not uniformly alarming: the composite of economic and political indicators below suggests overall vulnerability is no worse than a decade ago. Yet the differences between countries have widened, leaving a common monetary policy to operate across increasingly unequal economic circumstances.

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The country rankings show where those differences are concentrated.

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France’s debt burden extends beyond the state. Combined public and private borrowing is substantially greater relative to GDP than in Italy, and its private credit burden has increased since 2019. Higher debt-servicing costs can therefore restrain household spending and business investment as well as public expenditure. The resulting weakness in activity could further obstruct fiscal repair.

Italy’s large public debt, by contrast, is partly offset by lower private leverage, a current-account surplus and banks funded heavily by deposits. Greece has also reduced its public debt ratio substantially. These differences are another reason to set aside inherited assumptions about a sound core and a vulnerable periphery, and examine the resources and obligations of each economy as a whole.

The rankings should be read as a summary of these constraints, rather than a forecast of economic outcomes. What matters for policy is how debt, external balances and political capacity interact. A government with limited fiscal room and weak public support will find it particularly difficult to cushion a slowdown while maintaining investment.

**Productivity offers support, not immediate relief**
Stronger growth would ease both the financial burden and the political struggle over how to bear it. With ageing limiting the expansion of Europe’s workforce, much of that growth must come from higher productivity. AI could contribute by enabling workers and businesses to produce more, supporting earnings, household incomes and the tax revenues needed to service public debt.

The difficulty is that the means of securing this improvement impose costs of their own. Computing capacity requires substantial investment, dependable electricity and stronger networks. Governments and technology companies are competing for the finance and physical resources needed to build them, while the returns arrive only as the technology is put to productive use.

Europe may therefore bear part of the cost of the global AI boom before capturing much of its benefit. Competition for capital raises borrowing costs, while expensive energy deters investment at home. Economies burdened by weak growth and heavy debt are least well placed to endure this delay.

Improving power supply, infrastructure and regulatory certainty would help attract the investment Europe needs. But these improvements take time and often require public money, adding to the immediate financing demands they are intended eventually to relieve. Productivity remains the most promising route out of the predicament. It cannot be treated as relief already delivered.

**The ECB’s difficult interval**
The ECB must make policy while that adjustment is under way. Energy inflation may warrant restraint if it spreads into wages and broader price-setting. Yet further tightening could raise debt-servicing costs before new investment has expanded productive capacity, weakening the very spending on which a more durable improvement depends.

The case for caution is therefore economic, not simply political. Higher rates can restrain demand, but cannot supply electricity or secure parliamentary agreement. They can also weaken investment and make fiscal adjustment harder. The ECB must weigh the risk of persistent inflation against the danger of adding to the constraints on growth.

Monetary policy cannot resolve those constraints on its own. Governments must provide credible budgets and the conditions for productive investment, while the ECB judges how much demand restraint is needed to prevent inflation from becoming entrenched. Neither can safely assume that the other will compensate for failures within its own remit.

**What would constitute progress?**
Progress will require more than a temporary improvement in debt ratios or a new set of investment commitments. Governments need to sustain agreement on budgets without sacrificing the spending that raises productive capacity. Businesses need the infrastructure and certainty to put new technology to work. Households need to see that adjustment can lead to better living standards.

The evidence to watch is consequently practical: whether announced budgets are implemented, whether investment expands productive capacity, and whether output per person and real incomes improve. These outcomes will determine whether fiscal pressures ease and political support strengthens, or whether weak growth continues to undermine both.

Higher productivity could break the circle linking weak growth and political division. Until its gains arrive, Europe must manage the costs of adjustment without undermining the investment needed to make that adjustment succeed. There is no easy solution, but the priority is clear: restore the capacity to deliver sustained improvements in living standards.

Europe

Europe’s Growth Problem Is Also a Political Problem

Sharmila Whelan

Korea is emerging from the extraordinary political turmoil of 2024–25, triggered by former President Yoon Suk Yeol’s declaration of martial law in December 2024 and subsequent impeachment. The Lee government has since consolidated its political position, winning 12 of 16 major mayoral and provincial contests in June. 

Political upheaval was not the only challenge. Last year was difficult for Korean exporters too, and external headwinds remain. Korean goods continue to face 15% US import duties, with tariffs on certain products rising by a further 10–12.5% in July 2026 under measures related to forced-labour policies. 

Yet Korea—and its exporters in particular—has bounced back. Riding the global semiconductor upcycle and successfully diversifying export markets, exporters have seen both volumes and pricing power rebound sharply. In August, export volumes rose at a double-digit rate for the ninth consecutive month, climbing 26% YoY, while export prices surged 40.7%. 


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Source: Haver Analytics & Westbourne Research 

Korean exporters are nimble. Production diversification is a game they have been playing for years, well before Trump’s 2025 global tariff war. Exploiting comparative advantages, particularly lower labour costs, Korean companies have expanded assembly operations and supply chains across Asia, increasing their resilience to global trade tensions. 

Vietnam and Thailand are good examples. Korean intermediate and capital goods feed into local production and processing, with Vietnam emerging as an important production base for semiconductors, electronics, rubber and plastics, basic metals and electrical equipment. 

Increasingly, however, these ASEAN hubs are gateways to final demand elsewhere. The share of Korean chip and electronics exports to Vietnam ultimately destined for the US rose from 12.8% in 2016 to 21% by 2022, while China's share increased by more than eight percentage points to 19.4%. Meanwhile, the share absorbed by ASEAN final demand has fallen. 


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Korea has therefore pursued a two-pronged strategy: investing directly in major final markets, particularly the US, while continuing to use connector countries as production hubs. 

The strategy is working. Korean exporters continue to hold their own in major markets—in the US, riding the AI capex wave; in Europe, despite rising protectionism; and in China, despite cut-throat competition, rapid growth in indigenous Fourth Industrial Revolution technologies and weak consumer demand. 


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**Korea Inc.**

The corporate profit cycle is strengthening, and it is not just chip companies, although they lead the improvement. The cycle bottomed in 2022 but did not move into a firm upswing until 2024, when average returns and EBITDA margins of listed companies rose above their pre-Covid 2013–19 averages. Gross margins followed last year, with all three metrics continuing to improve in the first half of 2026. 

More importantly, companies are now putting those profits to work. Until last year, free-cash-flow yields remained high even as valuations rose, suggesting companies were generating cash but not reinvesting it. This year that has changed. 


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The investment cycle has troughed. Real gross fixed investment has turned positive after contracting from 2Q24 through 4Q25, led by increased spending on IT and semiconductor capacity and R&D. Facilities investment strengthened for a second quarter, rising 6.5% YoY. 

Construction remains the drag. Although the pace of contraction has eased, the sector is being squeezed by a weakening credit cycle, higher interest rates and property measures aimed at reining in prices and speculation. 

Even so, expect the investment cycle to swing upwards as IT-related capex gathers momentum and gross fixed investment begins to outpace economic growth. Leading indicators are supportive: inventory-to-shipment ratios have normalised, capacity utilisation and operating ratios have risen since May, manufacturers are the most optimistic in three months, and machinery demand for equipment investment is growing briskly. 


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The fortunes of Korea Inc.—large companies and the SMEs embedded in their supply chains—remain disproportionately tied to the global semiconductor cycle. For now, that cycle is driving investment higher. 

There are risks. US hyperscalers are starting to pace investment, concerns about AI's unintended consequences are growing, and China's lower-cost open-source models pose an increasingly credible competitive challenge. But demand continues to outpace supply, while greater competition is accelerating innovation and demand for AI hardware. 

There will be ups and downs. Korea's ability to weather a temporary slowdown rests on two things: market dominance and strong corporate balance sheets. 

On the first, Korea is formidable. Samsung Electronics and SK Hynix dominate some of the fastest-growing semiconductor segments. As of 2Q25, Korea accounted for 63% of the global DRAM market, 83% of HBM and 47.5% of NAND chip supply. 

**The Korean consumer** 
Employees of Fourth Industrial Revolution companies—notably Samsung Electronics and SK Hynix—are sharing in their employers' good fortune. Higher bonuses are translating into greater spending on leisure and culture, dining out, automobiles and high-value discretionary goods. 

Consumption in semiconductor-heavy regions is running almost 4% above less-exposed areas. The Bank of Korea estimates the marginal propensity to consume out of after-tax bonus payments at 27% in 2025 and 21% this year. The spillover is now large enough to be visible nationally, accounting for around 2% of last year's growth in private consumption. 


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Great. But not so fast. 

First, the effect remains concentrated in Icheon, Hwaseong and Cheongju—the manufacturing hubs of Samsung Electronics and SK Hynix. Second, the BoK estimates the boost to 2027 GDP growth at just 0.06–0.09 percentage points. Third, semiconductors are not particularly labour intensive: the industry's employment-inducement coefficient is only 2.0 jobs for every KRW1bn of additional demand, compared with 4.9 for shipping and 4.3 for motor vehicles. Finally, overall consumption is also being supported by fuel-cost subsidies, EV purchase subsidies and stock-market wealth effects. 


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Economy-wide wage growth is less encouraging. Average wages rose 2.2% YoY in the first half, down from 3.6% a year earlier and barely keeping pace with inflation. Consumer inflation subsequently accelerated to 3.1% YoY in August, while interest rates are rising and household credit growth is beginning to soften. 

The outlook is therefore for a modest, rather than spectacular, consumer recovery—although Korea's consumption story is still stronger than Japan's, where even robust nominal and real wage growth has failed to persuade households to spend. 

**Inflation and monetary policy** 

The BoK has tightened twice this year, most recently raising the policy rate by 25bp in August to 3%. Expect further hikes. Pipeline inflation remains significant, broad money growth is trending higher and the economy can absorb steeper borrowing costs: real lending rates have turned deeply negative. 


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Where to invest? 

We remain overweight Korean equities, with a bias towards semiconductors, electronics, electrical equipment, capital-goods industrials, export cyclicals and banks, the latter benefiting from improving net interest margins. 


State Labor Markets in September 2026

Charles Steindel

More Viewpoints

AI’s Costs Are Arriving Before Its Benefits

Interest on the Public Debt Is a Metastasizing Budgetary Cancer

Europe’s Growth Problem Is Also a Political Problem

Korea Strikes Back