Tom Moeller

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Economic growth of 1.2% (SAAR, 1.2% y/y) during the second quarter followed a
0.8% Q1 gain, revised from 1.1%. GDP's increase disappointed expectations for a
2.6% rise in the Action Economics Forecast Survey. Inventory decumulation
subtracted 1.2 percentage points from GDP growth. It was the largest of five
consecutive quarterly subtractions. Growth during 2015 was revised to 2.6% from
2.4% estimated earlier. The GDP price index increased 2.2% (1.2% y/y), the
quickest increase in a year. A 1.9% rise had been expected.
Accompanying the slowdown in overall output growth, domestic final demand
improved. A 2.1% rise (2.0% y/y) in domestic final sales was the quickest
increase in three quarters. Consumer spending growth led the improvement with a
4.2% rise (2.7% y/y), the quickest gain since Q4'14. It was led by an 8.4% rise
(4.4% y/y) in durable goods purchases. Recreational goods &amp; vehicle buying
jumped 14.3% (9.3% y/y), the quickest rise since Q1'12. Spending on home
furnishings &amp; appliances rose 8.3% (6.8% y/y) and motor vehicles buying
gained 4.5% (-0.8% y/y). In the nondurable goods area spending rose 6.0% (3.1%
y/y), powered by an 8.6% gain (2.7% y/y) in food &amp; beverage spending.
Apparel buying rose 4.1% (1.5% y/y), but gasoline &amp; fuel oil purchases
fell 1.2% (+2.4% y/y). Spending on services strengthened 3.0% (2.3% y/y), the
largest increase since Q4'14. It reflected a strengthened 4.2% rise (1.2% y/y)
in housing &amp; utilities and a 3.8% increase (4.2% y/y) in medical care.
Recreation spending declined, however, at a 4.5% rate (+1.3% y/y).
Outside of personal spending, final demand declined. Business fixed
investment fell at a 2.2% rate (-1.3% y/y), the third consecutive quarterly
shortfall. Structures spending fell 7.9% (-7.0% y/y) and equipment purchases
were off 3.5% (-1.9% y/y). Computer purchases declined 5.9% (+3.8% y/y) but
industrial equipment buying gained 12.0% (3.1% y/y). Purchases of intellectual
property products rose 3.5% (3.5% y/y).
Residential investment declined at a 6.1% annual rate (+6.2% y/y), the first
decline since Q1'14.

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Spending by governments eased 0.9% (+0.9% y/y) as state &amp; local
government purchases fell 1.3% (+1.0% y/y). Federal government spending eased
0.2% (+0.7% y/y), but defense spending declined 3.0% (-0.8% y/y).
Foreign trade added 0.2 percentage points to overall economic growth. The
addition was due to a 1.4% rise in exports (-1.2% y/y) following three straight
quarters of decline. Goods exports rose 2.7% (-1.3% y/y) while services exports
eased 0.9% -1.1% y/y). Imports slipped 0.4% (+0.2% y/y), off for the second
straight quarter. Goods imports fell 0.9% (-0.4% y/y), but services imports
gained 1.5% (2.9% y/y). 
The GDP price index increased 2.2% (1.2% y/y) as the residential investment
price index jumped 5.2% (3.1% y/y). Higher energy prices raised the PCE price
index 1.9% (0.9% y/y). Excluding food &amp; energy, the PCE price index
increased 1.7% (1.6% y/y). The business fixed investment price index gained 1.1%
(0.5% y/y).&nbsp; 
The GDP figures can be found in Haver's USECON and USNA
database. USNA contains virtually all of the Bureau of Economic Analysis'
detail in the national accounts, including the integrated economic accounts and
the recently added GDP data for U.S. Territories. The Action Economics consensus
estimates can be found in AS1REPNA.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>
	
 


 <thead>
 <tr>
 <th class="firstcol" scope="col" ><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM" ;>Chained
 2009 $ (%, AR</a>)</th>
 <th scope="col" >Q2'16 (Advance Estimate)</th>
 <th scope="col" >Q1'16 </th>
 <th scope="col" >Q4'15</th>
 <th scope="col" >Q2'16 Y/Y</th>
 <th scope="col" >2015</th>
 <th scope="col" >2014</th>
 <th scope="col" >2013</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Gross Domestic Product</td>
 <td >&nbsp;1.2</td>
 <td >&nbsp;0.8</td>
 <td >&nbsp;0.9</td>
 <td >1.2</td>
 <td >2.6</td>
 <td >2.4</td>
 <td >1.7</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Inventory Effect</td>
 <td >-1.2</td>
 <td >-0.4</td>
 <td >-0.4</td>
 <td >-0.7</td>
 <td >0.2</td>
 <td >0.0</td>
 <td >0.2</td>
 </tr>
 <tr>
 <td class="firstcol" >Final Sales</td>
 <td >2.4</td>
 <td >1.3</td>
 <td >1.2 </td>
 <td >1.9</td>
 <td >2.4</td>
 <td >2.5</td>
 <td >1.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Foreign Trade Effect</td>
 <td >0.2</td>
 <td >0.0</td>
 <td >-0.5</td>
 <td >-0.1 </td>
 <td >-0.7</td>
 <td >-0.1</td>
 <td >0.3</td>
 </tr>
 <tr>
 <td class="firstcol" >Domestic Final Sales</td>
 <td >2.1</td>
 <td >1.2</td>
 <td >1.7</td>
 <td >2.0</td>
 <td >3.1</td>
 <td >2.6</td>
 <td >1.2</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" colSpan="8" >Demand Components</td>
 </tr>
 <tr>
 <td class="firstcol" >Personal Consumption Expenditures</td>
 <td >4.2</td>
 <td >1.6</td>
 <td >2.3</td>
 <td >2.7</td>
 <td >3.2</td>
 <td >2.9</td>
 <td >1.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Business Fixed Investment</td>
 <td >-2.2</td>
 <td >-3.4</td>
 <td >-3.3</td>
 <td >-1.3</td>
 <td >2.1</td>
 <td >6.0</td>
 <td >3.5</td>
 </tr>
 <tr>
 <td class="firstcol" >Residential Investment</td>
 <td >-6.1</td>
 <td >7.8</td>
 <td >11.5</td>
 <td >6.2</td>
 <td >11.7</td>
 <td >3.5</td>
 <td >11.9</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Government Spending</td>
 <td >-0.9</td>
 <td >1.6</td>
 <td >0.1</td>
 <td >0.9</td>
 <td >1.8</td>
 <td >-0.9</td>
 <td >-2.9</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" colSpan="8" >Chain-Type Price Index</td>
 </tr>
 <tr>
 <td class="firstcol" >GDP&nbsp;&nbsp; &nbsp;&nbsp;</td>
 <td >2.2</td>
 <td >0.5</td>
 <td >0.8</td>
 <td >1.2</td>
 <td >1.1</td>
 <td >1.8</td>
 <td >1.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Personal Consumption Expenditures</td>
 <td >1.9</td>
 <td >0.3</td>
 <td >0.4</td>
 <td >0.9</td>
 <td >0.3</td>
 <td >1.5</td>
 <td >1.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Less Food/Energy</td>
 <td >1.7</td>
 <td >2.1</td>
 <td >1.2</td>
 <td >1.6</td>
 <td >1.4</td>
 <td >1.6</td>
 <td >1.5</td>
 </tr>
 </tbody>
</table>


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Economic growth of 1.2% (SAAR, 1.2% y/y) during the second quarter followed a 0.8% Q1 gain, revised from 1.1%. GDP's increase disappointed expectations for a 2.6% rise in the Action Economics Forecast Survey. Inventory decumulation [...]

U.S. GDP Growth Disappoints as Inventories Are Reduced

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<title>Chicago Purchasing Managers Index Recovers Sharply by Tom Moeller&nbsp;
July 29</title>
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Economic growth of 1.2% (SAAR, 1.2% y/y) during the second quarter followed a
0.8% Q1 gain, revised from 1.1%. GDP's increase disappointed expectations for a
2.6% rise in the Action Economics Forecast Survey. Inventory decumulation
subtracted 1.2 percentage points from GDP growth. It was the largest of five
consecutive quarterly subtractions. Growth during 2015 was revised to 2.6% from
2.4% estimated earlier. The GDP price index increased 2.2% (1.2% y/y), the
quickest increase in a year. A 1.9% rise had been expected.
Accompanying the slowdown in overall output growth, domestic final demand
improved. A 2.1% rise (2.0% y/y) in domestic final sales was the quickest
increase in three quarters. Consumer spending growth led the improvement with a
4.2% rise (2.7% y/y), the quickest gain since Q4'14. It was led by an 8.4% rise
(4.4% y/y) in durable goods purchases. Recreational goods &amp; vehicle buying
jumped 14.3% (9.3% y/y), the quickest rise since Q1'12. Spending on home
furnishings &amp; appliances rose 8.3% (6.8% y/y) and motor vehicles buying
gained 4.5% (-0.8% y/y). In the nondurable goods area spending rose 6.0% (3.1%
y/y), powered by an 8.6% gain in (2.7% y/y) food &amp; beverage spending.
Apparel buying rose 4.1% (1.5% y/y), but gasoline &amp; fuel oil oil purchases
fell 1.2% (+2.4% y/y). Spending on services strengthened 3.0% (2.3% y/y), the
largest increase since Q4'14. It reflected a strengthened 4.2% rise (1.2% y/y)
in housing &amp; utilities and a 3.8% increase (4.2% y/y) in medical care.
Recreation spending declined, however, at a 4.5% rate (+1.3% y/y).
Outside of personal spending, final demand declined. Business fixed
investment fell at a 2.2% rate (-1.3% y/y), the third consecutive quarterly
shortfall. Structures spending fell 7.9% (-7.0% y/y) and equipment purchases
were off 3.5% (-1.9% y/y). Computer purchases declined 5.9% (+3.8% y/y) but
industrial equipment buying gained 12.0% (3.1% y/y). Purchases of intellectual
property products rose 3.5% (3.5% y/y).
Residential investment declined at a 6.1% annual rate (+6.2% y/y), the first
decline since Q1'14.
Spending by governments eased 0.9% (+0.9% y/y) as state &amp; local
government purchases fell 1.3% (+1.0% y/y). Federal government spending eased
0.2% (+0.7% y/y), but defense spending declined 3.0% (-0.8% y/y).
Foreign trade added 0.2 percentage points to overall economic growth. The
addition was due to a 1.4% rise in exports (-1.2% y/y) following three straight
quarters of decline. Goods exports rose 2.7% (-1.3% y/y while services exports
eased 0.9% -1.1% y/y). Imports slipped 0.4% (+0.2% y/y), off for the second
straight quarter. Goods imports fell 0.9% (-0.4% y/y), but services imports
gained 1.5% (2.9% y/y). 
The GDP price index increased 2.2% (1.2% y/y) as the residential investment
price index jumped 5.2% (3.1% y/y). Higher energy prices raised the PCE price
index 1.9% (0.9% y/y). Excluding food &amp; energy, the PCE price index
increased 1.7% (1.6% y/y). The business fixed investment price index gained 1.1%
(0.5% y/y).&nbsp; 
The GDP figures can be found in Haver's USECON and USNA
database. USNA contains virtually all of the Bureau of Economic Analysis'
detail in the national accounts, including the integrated economic accounts and
the recently added GDP data for U.S. Territories. The Action Economics consensus
estimates can be found in AS1REPNA.
&nbsp;
<table width="1782" class="centered" border="0" cellSpacing="0">
 <thead>
 <tr>
 <th class="firstcol" scope="col" width="746"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM" ;>Chained
 2009 $ (%, AR</a>)</th>
 <th scope="col" width="147">Q2'16 (Advance Estimate)</th>
 <th scope="col" width="147">Q1'16 </th>
 <th scope="col" width="147">Q4'15</th>
 <th scope="col" width="147">Q2'16 Y/Y</th>
 <th scope="col" width="148">2015</th>
 <th scope="col" width="148">2014</th>
 <th scope="col" width="148">2013</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" width="746">Gross Domestic Product</td>
 <td align="center" width="147">&nbsp;1.2</td>
 <td align="center" width="147">&nbsp;0.8</td>
 <td align="center" width="147">&nbsp;0.9</td>
 <td align="center" width="147">1.2</td>
 <td align="center" width="148">2.6</td>
 <td align="center" width="148">2.4</td>
 <td align="center" width="148">1.7</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="746">&nbsp; Inventory Effect</td>
 <td align="center" width="147">-1.2</td>
 <td align="center" width="147">-0.4</td>
 <td align="center" width="147">-0.4</td>
 <td align="center" width="147">-0.7</td>
 <td align="center" width="148">0.2</td>
 <td align="center" width="148">0.0</td>
 <td align="center" width="148">0.2</td>
 </tr>
 <tr>
 <td class="firstcol" width="746">Final Sales</td>
 <td align="center" width="147">2.4</td>
 <td align="center" width="147">1.3</td>
 <td align="center" width="147">1.2 </td>
 <td align="center" width="147">1.9</td>
 <td align="center" width="148">2.4</td>
 <td align="center" width="148">2.5</td>
 <td align="center" width="148">1.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="746">&nbsp; Foreign Trade Effect</td>
 <td align="center" width="147">0.2</td>
 <td align="center" width="147">0.0</td>
 <td align="center" width="147">-0.5</td>
 <td align="center" width="147">-0.1 </td>
 <td align="center" width="148">-0.7</td>
 <td align="center" width="148">-0.1</td>
 <td align="center" width="148">0.3</td>
 </tr>
 <tr>
 <td class="firstcol" width="746">Domestic Final Sales</td>
 <td align="center" width="147">2.1</td>
 <td align="center" width="147">1.2</td>
 <td align="center" width="147">1.7</td>
 <td align="center" width="147">2.0</td>
 <td align="center" width="148">3.1</td>
 <td align="center" width="148">2.6</td>
 <td align="center" width="148">1.2</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" colSpan="7" width="1630">Demand Components</td>
 </tr>
 <tr>
 <td class="firstcol" width="746">Personal Consumption Expenditures</td>
 <td align="center" width="147">4.2</td>
 <td align="center" width="147">1.6</td>
 <td align="center" width="147">2.3</td>
 <td align="center" width="147">2.7</td>
 <td align="center" width="148">3.2</td>
 <td align="center" width="148">2.9</td>
 <td align="center" width="148">1.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="746">Business Fixed Investment</td>
 <td align="center" width="147">-2.2</td>
 <td align="center" width="147">-3.4</td>
 <td align="center" width="147">-3.3</td>
 <td align="center" width="147">-1.3</td>
 <td align="center" width="148">2.1</td>
 <td align="center" width="148">6.0</td>
 <td align="center" width="148">3.5</td>
 </tr>
 <tr>
 <td class="firstcol" width="746">Residential Investment</td>
 <td align="center" width="147">-6.1</td>
 <td align="center" width="147">7.8</td>
 <td align="center" width="147">11.5</td>
 <td align="center" width="147">6.2</td>
 <td align="center" width="148">11.7</td>
 <td align="center" width="148">3.5</td>
 <td align="center" width="148">11.9</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="746">Government Spending</td>
 <td align="center" width="147">-0.9</td>
 <td align="center" width="147">&nbsp;1.6</td>
 <td align="center" width="147">0.1</td>
 <td align="center" width="147">0.9s</td>
 <td align="center" width="148">1.8</td>
 <td align="center" width="148">-0.9</td>
 <td align="center" width="148">-2.9</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" colSpan="7" width="1630">Chain-Type Price Index</td>
 </tr>
 <tr>
 <td class="firstcol" width="746">GDP&nbsp;&nbsp; &nbsp;&nbsp;</td>
 <td align="center" width="147">2.2</td>
 <td align="center" width="147">0.5</td>
 <td align="center" width="147">0.8</td>
 <td align="center" width="147">1.2</td>
 <td align="center" width="148">1.1</td>
 <td align="center" width="148">1.8</td>
 <td align="center" width="148">1.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="746">Personal Consumption Expenditures</td>
 <td align="center" width="147">1.9</td>
 <td align="center" width="147">0.3</td>
 <td align="center" width="147">0.4</td>
 <td align="center" width="147">0.9</td>
 <td align="center" width="148">0.3</td>
 <td align="center" width="148">1.5</td>
 <td align="center" width="148">1.3</td>
 </tr>
 <tr>
 <td class="firstcol" width="746">&nbsp;Less Food/Energy</td>
 <td align="center" width="147">1.7</td>
 <td align="center" width="147">2.1</td>
 <td align="center" width="147">1.2</td>
 <td align="center" width="147">1.6</td>
 <td align="center" width="148">1.4</td>
 <td align="center" width="148">1.6</td>
 <td align="center" width="148">1.5</td>
 </tr>
 </tbody>
</table>

&nbsp;
Chicago Purchasing Managers Index Recovers Sharply 
by <a href="http://haver.com/comment/Moeller.html">Tom
Moeller</a>&nbsp;&nbsp;July 29, 2016
Chicago purchasing managers reported that their Business Barometer surged to
56.8 this month following a May decline to 49.3. The figure was at the highest
level since January 2015, and exceeded expectations for 50.4 in the Action
Economics Forecast Survey.
Haver Analytics constructs an ISM-Adjusted Index using the Chicago
numbers, comparable to the overall ISM index to be released tomorrow. Our figure
increased to 52.9, the highest level since October. During the last ten years,
there has been a 61% correlation between the adjusted Chicago Purchasing
Managers index and real GDP growth.
Increases in the component series were widespread. Most notable was a 14.4
point gain in the new orders index to 63.2, the highest level since October
2014. The order backlog measure also surged 12.0 points to the highest level
(59.7) since March 2011. The production and inventory indexes increased
moderately to 56.3 and 50.0, respectively.
The employment figure also declined 3.3 points to 45.0, the lowest level
since November 2009. During the last ten years, there has been an 80%
correlation between the employment figure and the m/m change in factory sector
employment. Supplier delivery speeds quickened, prompting a decline in the
index.
The prices paid reading eased to 55.7, leaving the Q2 average of 56.4 above
the Q1 mean of 43.3. An increased 25% (NSA) of respondents reported paying
higher prices while 10% paid less.
The MNI Chicago Report is produced by MNI/Deutsche Borse Group in partnership
with ISM-Chicago. The survey covers a sample of over 200 purchasing
professionals in the Chicago area with a monthly response rate of about 50%. The
ISM-Adjusted headline index is calculated by Haver Analytics using these data to
construct a figure with the ISM methodology. The figures can be found in Haver's
SURVEYS database. The Consensus expectations figure is available in AS1REPNA.
<table width="1782" class="centered" border="0" cellSpacing="0">
 <thead>
 <tr>
 <th class="firstcol" width="984">Chicago Purchasing Managers Index (%, SA)</th>
 <th scope="col" width="113">Jul</th>
 <th scope="col" width="113">Jun</th>
 <th scope="col" width="113">May</th>
 <th scope="col" width="113">Jun '15</th>
 <th scope="col" width="114">2015</th>
 <th scope="col" width="114">2014</th>
 <th scope="col" width="114">2013</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" width="984">General Business Barometer</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">56.8</td>
 <td align="center" width="113">49.3</td>
 <td align="center" width="113">49.2</td>
 <td align="center" width="114">50.3</td>
 <td align="center" width="114">60.7</td>
 <td align="center" width="114">56.0</td>
 </tr>
 <tr>
 <td class="firstcol" width="984">ISM-Adjusted General Business Barometer</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">52.9</td>
 <td align="center" width="113">48.0</td>
 <td align="center" width="113">49.5</td>
 <td align="center" width="114">51.6</td>
 <td align="center" width="114">59.3</td>
 <td align="center" width="114">54.2</td>
 </tr>
 <tr>
 <td class="firstcol" width="984">&nbsp;&nbsp;Production</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">56.3</td>
 <td align="center" width="113">47.4</td>
 <td align="center" width="113">50.4</td>
 <td align="center" width="114">52.5</td>
 <td align="center" width="114">64.5</td>
 <td align="center" width="114">58.2</td>
 </tr>
 <tr>
 <td class="firstcol" width="984">&nbsp;&nbsp;New Orders</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">63.2</td>
 <td align="center" width="113">48.8</td>
 <td align="center" width="113">51.2</td>
 <td align="center" width="114">50.4</td>
 <td align="center" width="114">63.8</td>
 <td align="center" width="114">59.1</td>
 </tr>
 <tr>
 <td class="firstcol" width="984">&nbsp;&nbsp;Order Backlogs</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">59.7</td>
 <td align="center" width="113">47.7</td>
 <td align="center" width="113">42.9</td>
 <td align="center" width="114">44.4</td>
 <td align="center" width="114">54.2</td>
 <td align="center" width="114">48.8</td>
 </tr>
 <tr>
 <td class="firstcol" width="984">&nbsp;&nbsp;Inventories</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">50.0</td>
 <td align="center" width="113">37.9</td>
 <td align="center" width="113">47.9</td>
 <td align="center" width="114">52.1</td>
 <td align="center" width="114">55.9</td>
 <td align="center" width="114">45.6</td>
 </tr>
 <tr>
 <td class="firstcol" width="984">&nbsp;&nbsp;Employment</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">45.0</td>
 <td align="center" width="113">48.3</td>
 <td align="center" width="113">47.2</td>
 <td align="center" width="114">50.3</td>
 <td align="center" width="114">56.0</td>
 <td align="center" width="114">55.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="984">&nbsp;&nbsp;Supplier Deliveries</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">50.0</td>
 <td align="center" width="113">57.8</td>
 <td align="center" width="113">50.7</td>
 <td align="center" width="114">52.5</td>
 <td align="center" width="114">56.5</td>
 <td align="center" width="114">52.5</td>
 </tr>
 <tr>
 <td class="firstcol" width="984">&nbsp;&nbsp;Prices Paid</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">55.7</td>
 <td align="center" width="113">56.5</td>
 <td align="center" width="113">50.4</td>
 <td align="center" width="114">46.8</td>
 <td align="center" width="114">61.0</td>
 <td align="center" width="114">59.8</td>
 </tr>
 </tbody>
</table>

&nbsp;

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<title>Chicago Purchasing Managers Index Recovers Sharply by Tom Moeller&nbsp;
July 29</title>
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Economic growth of 1.2% (SAAR, 1.2% y/y) during the second quarter followed a
0.8% Q1 gain, revised from 1.1%. GDP's increase disappointed expectations for a
2.6% rise in the Action Economics Forecast Survey. Inventory decumulation
subtracted 1.2 percentage points from GDP growth. It was the largest of five
consecutive quarterly subtractions. Growth during 2015 was revised to 2.6% from
2.4% estimated earlier. The GDP price index increased 2.2% (1.2% y/y), the
quickest increase in a year. A 1.9% rise had been expected.
The GDP figures can be found in Haver's USECON and USNA
database. USNA contains virtually all of the Bureau of Economic Analysis'
detail in the national accounts, including the integrated economic accounts and
the recently added GDP data for U.S. Territories. The Action Economics consensus
estimates can be found in AS1REPNA.
&nbsp;
<table width="1782" class="centered" border="0" cellSpacing="0">
 <thead>
 <tr>
 <th class="firstcol" scope="col" width="746"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM" ;>Chained
 2009 $ (%, AR</a>)</th>
 <th scope="col" width="147">Q2'16 (Advance Estimate)</th>
 <th scope="col" width="147">Q1'16 </th>
 <th scope="col" width="147">Q4'15</th>
 <th scope="col" width="147">Q2'16 Y/Y</th>
 <th scope="col" width="148">2015</th>
 <th scope="col" width="148">2014</th>
 <th scope="col" width="148">2013</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" width="746">Gross Domestic Product</td>
 <td align="center" width="147">&nbsp;1.2</td>
 <td align="center" width="147">&nbsp;0.8</td>
 <td align="center" width="147">&nbsp;0.9</td>
 <td align="center" width="147">1.2</td>
 <td align="center" width="148">2.6</td>
 <td align="center" width="148">2.4</td>
 <td align="center" width="148">1.7</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="746">&nbsp; Inventory Effect</td>
 <td align="center" width="147">-1.2</td>
 <td align="center" width="147">-0.4</td>
 <td align="center" width="147">-0.4</td>
 <td align="center" width="147">-0.7</td>
 <td align="center" width="148">0.2</td>
 <td align="center" width="148">0.0</td>
 <td align="center" width="148">0.2</td>
 </tr>
 <tr>
 <td class="firstcol" width="746">Final Sales</td>
 <td align="center" width="147">2.4</td>
 <td align="center" width="147">1.3</td>
 <td align="center" width="147">1.2 </td>
 <td align="center" width="147">1.9</td>
 <td align="center" width="148">2.4</td>
 <td align="center" width="148">2.5</td>
 <td align="center" width="148">1.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="746">&nbsp; Foreign Trade Effect</td>
 <td align="center" width="147">0.2</td>
 <td align="center" width="147">0.0</td>
 <td align="center" width="147">-0.5</td>
 <td align="center" width="147">-0.1 </td>
 <td align="center" width="148">-0.7</td>
 <td align="center" width="148">-0.1</td>
 <td align="center" width="148">0.3</td>
 </tr>
 <tr>
 <td class="firstcol" width="746">Domestic Final Sales</td>
 <td align="center" width="147">2.1</td>
 <td align="center" width="147">1.2</td>
 <td align="center" width="147">1.7</td>
 <td align="center" width="147">2.0</td>
 <td align="center" width="148">3.1</td>
 <td align="center" width="148">2.6</td>
 <td align="center" width="148">1.2</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" colSpan="7" width="1630">Demand Components</td>
 </tr>
 <tr>
 <td class="firstcol" width="746">Personal Consumption Expenditures</td>
 <td align="center" width="147">4.2</td>
 <td align="center" width="147">1.6</td>
 <td align="center" width="147">2.3</td>
 <td align="center" width="147">2.7</td>
 <td align="center" width="148">3.2</td>
 <td align="center" width="148">2.9</td>
 <td align="center" width="148">1.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="746">Business Fixed Investment</td>
 <td align="center" width="147">-2.2</td>
 <td align="center" width="147">-3.4</td>
 <td align="center" width="147">-3.3</td>
 <td align="center" width="147">-1.3</td>
 <td align="center" width="148">2.1</td>
 <td align="center" width="148">6.0</td>
 <td align="center" width="148">3.5</td>
 </tr>
 <tr>
 <td class="firstcol" width="746">Residential Investment</td>
 <td align="center" width="147">-6.1</td>
 <td align="center" width="147">7.8</td>
 <td align="center" width="147">11.5</td>
 <td align="center" width="147">6.2</td>
 <td align="center" width="148">11.7</td>
 <td align="center" width="148">3.5</td>
 <td align="center" width="148">11.9</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="746">Government Spending</td>
 <td align="center" width="147">-0.9</td>
 <td align="center" width="147">&nbsp;1.6</td>
 <td align="center" width="147">0.1</td>
 <td align="center" width="147">0.9s</td>
 <td align="center" width="148">1.8</td>
 <td align="center" width="148">-0.9</td>
 <td align="center" width="148">-2.9</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" colSpan="7" width="1630">Chain-Type Price Index</td>
 </tr>
 <tr>
 <td class="firstcol" width="746">GDP&nbsp;&nbsp; &nbsp;&nbsp;</td>
 <td align="center" width="147">2.2</td>
 <td align="center" width="147">0.5</td>
 <td align="center" width="147">0.8</td>
 <td align="center" width="147">1.2</td>
 <td align="center" width="148">1.1</td>
 <td align="center" width="148">1.8</td>
 <td align="center" width="148">1.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="746">Personal Consumption Expenditures</td>
 <td align="center" width="147">1.9</td>
 <td align="center" width="147">0.3</td>
 <td align="center" width="147">0.4</td>
 <td align="center" width="147">0.9</td>
 <td align="center" width="148">0.3</td>
 <td align="center" width="148">1.5</td>
 <td align="center" width="148">1.3</td>
 </tr>
 <tr>
 <td class="firstcol" width="746">&nbsp;Less Food/Energy</td>
 <td align="center" width="147">1.7</td>
 <td align="center" width="147">2.1</td>
 <td align="center" width="147">1.2</td>
 <td align="center" width="147">1.6</td>
 <td align="center" width="148">1.4</td>
 <td align="center" width="148">1.6</td>
 <td align="center" width="148">1.5</td>
 </tr>
 </tbody>
</table>

&nbsp;
Chicago Purchasing Managers Index Recovers Sharply 
by <a href="http://haver.com/comment/Moeller.html">Tom
Moeller</a>&nbsp;&nbsp;July 29, 2016
Chicago purchasing managers reported that their Business Barometer surged to
56.8 this month following a May decline to 49.3. The figure was at the highest
level since January 2015, and exceeded expectations for 50.4 in the Action
Economics Forecast Survey.
Haver Analytics constructs an ISM-Adjusted Index using the Chicago
numbers, comparable to the overall ISM index to be released tomorrow. Our figure
increased to 52.9, the highest level since October. During the last ten years,
there has been a 61% correlation between the adjusted Chicago Purchasing
Managers index and real GDP growth.
Increases in the component series were widespread. Most notable was a 14.4
point gain in the new orders index to 63.2, the highest level since October
2014. The order backlog measure also surged 12.0 points to the highest level
(59.7) since March 2011. The production and inventory indexes increased
moderately to 56.3 and 50.0, respectively.
The employment figure also declined 3.3 points to 45.0, the lowest level
since November 2009. During the last ten years, there has been an 80%
correlation between the employment figure and the m/m change in factory sector
employment. Supplier delivery speeds quickened, prompting a decline in the
index.
The prices paid reading eased to 55.7, leaving the Q2 average of 56.4 above
the Q1 mean of 43.3. An increased 25% (NSA) of respondents reported paying
higher prices while 10% paid less.
The MNI Chicago Report is produced by MNI/Deutsche Borse Group in partnership
with ISM-Chicago. The survey covers a sample of over 200 purchasing
professionals in the Chicago area with a monthly response rate of about 50%. The
ISM-Adjusted headline index is calculated by Haver Analytics using these data to
construct a figure with the ISM methodology. The figures can be found in Haver's
SURVEYS database. The Consensus expectations figure is available in AS1REPNA.
<table width="1782" class="centered" border="0" cellSpacing="0">
 <thead>
 <tr>
 <th class="firstcol" width="984">Chicago Purchasing Managers Index (%, SA)</th>
 <th scope="col" width="113">Jul</th>
 <th scope="col" width="113">Jun</th>
 <th scope="col" width="113">May</th>
 <th scope="col" width="113">Jun '15</th>
 <th scope="col" width="114">2015</th>
 <th scope="col" width="114">2014</th>
 <th scope="col" width="114">2013</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" width="984">General Business Barometer</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">56.8</td>
 <td align="center" width="113">49.3</td>
 <td align="center" width="113">49.2</td>
 <td align="center" width="114">50.3</td>
 <td align="center" width="114">60.7</td>
 <td align="center" width="114">56.0</td>
 </tr>
 <tr>
 <td class="firstcol" width="984">ISM-Adjusted General Business Barometer</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">52.9</td>
 <td align="center" width="113">48.0</td>
 <td align="center" width="113">49.5</td>
 <td align="center" width="114">51.6</td>
 <td align="center" width="114">59.3</td>
 <td align="center" width="114">54.2</td>
 </tr>
 <tr>
 <td class="firstcol" width="984">&nbsp;&nbsp;Production</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">56.3</td>
 <td align="center" width="113">47.4</td>
 <td align="center" width="113">50.4</td>
 <td align="center" width="114">52.5</td>
 <td align="center" width="114">64.5</td>
 <td align="center" width="114">58.2</td>
 </tr>
 <tr>
 <td class="firstcol" width="984">&nbsp;&nbsp;New Orders</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">63.2</td>
 <td align="center" width="113">48.8</td>
 <td align="center" width="113">51.2</td>
 <td align="center" width="114">50.4</td>
 <td align="center" width="114">63.8</td>
 <td align="center" width="114">59.1</td>
 </tr>
 <tr>
 <td class="firstcol" width="984">&nbsp;&nbsp;Order Backlogs</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">59.7</td>
 <td align="center" width="113">47.7</td>
 <td align="center" width="113">42.9</td>
 <td align="center" width="114">44.4</td>
 <td align="center" width="114">54.2</td>
 <td align="center" width="114">48.8</td>
 </tr>
 <tr>
 <td class="firstcol" width="984">&nbsp;&nbsp;Inventories</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">50.0</td>
 <td align="center" width="113">37.9</td>
 <td align="center" width="113">47.9</td>
 <td align="center" width="114">52.1</td>
 <td align="center" width="114">55.9</td>
 <td align="center" width="114">45.6</td>
 </tr>
 <tr>
 <td class="firstcol" width="984">&nbsp;&nbsp;Employment</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">45.0</td>
 <td align="center" width="113">48.3</td>
 <td align="center" width="113">47.2</td>
 <td align="center" width="114">50.3</td>
 <td align="center" width="114">56.0</td>
 <td align="center" width="114">55.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="984">&nbsp;&nbsp;Supplier Deliveries</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">50.0</td>
 <td align="center" width="113">57.8</td>
 <td align="center" width="113">50.7</td>
 <td align="center" width="114">52.5</td>
 <td align="center" width="114">56.5</td>
 <td align="center" width="114">52.5</td>
 </tr>
 <tr>
 <td class="firstcol" width="984">&nbsp;&nbsp;Prices Paid</td>
 <td align="center" width="113"></td>
 <td align="center" width="113">55.7</td>
 <td align="center" width="113">56.5</td>
 <td align="center" width="113">50.4</td>
 <td align="center" width="114">46.8</td>
 <td align="center" width="114">61.0</td>
 <td align="center" width="114">59.8</td>
 </tr>
 </tbody>
</table>

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 <a href="/comment/160728g_big.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/160728g.png"></a>
The Federal Reserve Bank of Kansas City reported that regional manufacturing
sector business activity deteriorated sharply during July, and completely
reversed the improvement during the prior three months. The Composite Index of
10th District factory sector activity fell to -6, the weakest figure since
March. Deterioration in the component readings was broad-based, notably for
shipments, new orders and production. The materials inventories and employment
figures also declined moderately as did export orders. Prices paid for finished
products fell sharply, but raw materials prices eased following increases early
this year.&nbsp; 
The Composite Index reflecting 6-month expectations improved sharply to the
highest reading since January of last year. The strength completely reversed
deterioration through last September. Improvement was notable for new orders,
production and the employee workweek. Expected export orders rose slightly. The
increases in the employment and capital expenditures measures moderated.
Expected prices for finished products jumped to the highest level in 12 months
while raw materials prices also strengthened.
The diffusion indexes are calculated as the percentage of total respondents
reporting increases minus the percentage reporting declines. The survey included
94 responses from plants in Colorado, Kansas, Nebraska, Oklahoma, Wyoming and
northern New Mexico. Data for the Kansas City Fed Survey can be found in Haver's
SURVEYS database.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" 0801 >Kansas City Federal Reserve
 Manufacturing Survey (SA)</th>
 <th 0801 >Jul</th>
 <th 0801 >Jun</th>
 <th 0801 >May</th>
 <th 0801 >Jul '14</th>
 <th 0801 >2015</th>
 <th 0801>2014</th>
 <th 0801>2013</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" 0801 >Conditions Versus One Month Ago (%
 Balance)</td>
 <td 0801 >-6</td>
 <td 0801 >2</td>
 <td 0801 >-5</td>
 <td 0801 >-7</td>
 <td 0801 >-5</td>
 <td 0801 >7</td>
 <td 0801 >0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 >&nbsp;&nbsp; New Orders Volume</td>
 <td 0801 >-5</td>
 <td 0801 >4</td>
 <td 0801 >-3</td>
 <td 0801 >-7</td>
 <td 0801 >-8</td>
 <td 0801 >7</td>
 <td 0801 >1</td>
 </tr>
 <tr>
 <td class="firstcol" 0801 >&nbsp;&nbsp; Number of Employees</td>
 <td 0801 >-5</td>
 <td 0801 >-4</td>
 <td 0801 >-13</td>
 <td 0801 >-17</td>
 <td 0801 >-10</td>
 <td 0801 >5</td>
 <td 0801 >-2</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 >&nbsp;&nbsp; Prices Received for
 Finished Product</td>
 <td 0801 >-11</td>
 <td 0801 >-4</td>
 <td 0801 >-8</td>
 <td 0801 >2</td>
 <td 0801 >-5</td>
 <td 0801 >5</td>
 <td 0801 >4</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 >Expected Conditions in Six Months</td>
 <td 0801 >14</td>
 <td 0801 >7</td>
 <td 0801 >4</td>
 <td 0801 >4</td>
 <td 0801 >4</td>
 <td 0801 >17</td>
 <td 0801 >10</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 >&nbsp;&nbsp; New Orders Volume</td>
 <td 0801 >30</td>
 <td 0801 >12</td>
 <td 0801 >15</td>
 <td 0801 >13</td>
 <td 0801 >11</td>
 <td 0801 >26</td>
 <td 0801 >18</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 >&nbsp;&nbsp; Number of Employees</td>
 <td 0801 >6</td>
 <td 0801 >13</td>
 <td 0801 >-4</td>
 <td 0801 >5</td>
 <td 0801 >6</td>
 <td 0801 >18</td>
 <td 0801 >9</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 >&nbsp;&nbsp; Prices Received for
 Finished Product</td>
 <td 0801 >13</td>
 <td 0801 >5</td>
 <td 0801 >-1</td>
 <td 0801 >13</td>
 <td 0801 >9</td>
 <td 0801 >26</td>
 <td 0801 >24</td>
 </tr>
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The Federal Reserve Bank of Kansas City reported that regional manufacturing sector business activity deteriorated sharply during July, and completely reversed the improvement during the prior three months. The Composite Index of 10th [...]

Kansas City Federal Reserve Factory Sector Index Declines; Expectations Improve

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 <a href="/comment/160728g_big.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/160728g.png"></a>

The Federal Reserve Bank of Kansas City reported that regional manufacturing
sector business activity deteriorated sharply during July, and completely
reversed the improvement during the prior three months. The Composite Index of
10th District factory sector activity fell to -6, the weakest figure since
March. Deterioration in the component readings was broad-based, notably for
shipments, new orders and production. The materials inventories and employment
figures also declined moderately as did export orders. Prices paid for finished
products fell sharply, but raw materials prices eased following increases early
this year.

The Composite Index reflecting 6-month expectations improved sharply to the
highest reading since January of last year. The strength completely reversed
deterioration through last September. Improvement was notable for new orders,
production and the employee workweek. Expected export orders rose slightly. The
increases in the employment and capital expenditures measures moderated.
Expected prices for finished products jumped to the highest level in 12 months
while raw materials prices also strengthened.

The diffusion indexes are calculated as the percentage of total respondents
reporting increases minus the percentage reporting declines. The survey included
94 responses from plants in Colorado, Kansas, Nebraska, Oklahoma, Wyoming and
northern New Mexico. Data for the Kansas City Fed Survey can be found in Haver's
SURVEYS database.

<a href="/comment/160728h_big.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/160728h.png"></a>
 <a href="/comment/160728i_big.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/160728i.png"></a>


<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" 0801 >Kansas City Federal Reserve
 Manufacturing Survey (SA)</th>
 <th 0801 >Jul</th>
 <th 0801 >Jun</th>
 <th 0801 >May</th>
 <th 0801 >Jul '14</th>
 <th 0801 >2015</th>
 <th 0801 >2014</th>
 <th 0801 >2013</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" 0801 >Conditions Versus One Month Ago (%
 Balance)</td>
 <td 0801 >-6</td>
 <td 0801 >2</td>
 <td 0801 >-5</td>
 <td 0801 >-7</td>
 <td 0801 >-5</td>
 <td 0801 >7</td>
 <td 0801 >0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 >&nbsp;&nbsp; New Orders Volume</td>
 <td 0801 >-5</td>
 <td 0801 >4</td>
 <td 0801 >-3</td>
 <td 0801 >-7</td>
 <td 0801 >-8</td>
 <td 0801 >7</td>
 <td 0801 >1</td>
 </tr>
 <tr>
 <td class="firstcol" 0801 >&nbsp;&nbsp; Number of Employees</td>
 <td 0801 >-5</td>
 <td 0801 >-4</td>
 <td 0801 >-13</td>
 <td 0801 >-17</td>
 <td 0801 >-10</td>
 <td 0801 >5</td>
 <td 0801 >-2</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 >&nbsp;&nbsp; Prices Received for
 Finished Product</td>
 <td 0801 >-11</td>
 <td 0801 >-4</td>
 <td 0801 >-8</td>
 <td 0801 >2</td>
 <td 0801 >-5</td>
 <td 0801 >5</td>
 <td 0801 >4</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 >Expected Conditions in Six Months</td>
 <td 0801 >14</td>
 <td 0801 >7</td>
 <td 0801 >4</td>
 <td 0801 >4</td>
 <td 0801 >4</td>
 <td 0801 >17</td>
 <td 0801 >10</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 >&nbsp;&nbsp; New Orders Volume</td>
 <td 0801 >30</td>
 <td 0801 >12</td>
 <td 0801 >15</td>
 <td 0801 >13</td>
 <td 0801 >11</td>
 <td 0801 >26</td>
 <td 0801 >18</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 >&nbsp;&nbsp; Number of Employees</td>
 <td 0801 >6</td>
 <td 0801 >13</td>
 <td 0801 >-4</td>
 <td 0801 >5</td>
 <td 0801 >6</td>
 <td 0801 >18</td>
 <td 0801 >9</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 >&nbsp;&nbsp; Prices Received for
 Finished Product</td>
 <td 0801 >13</td>
 <td 0801 >5</td>
 <td 0801 >-1</td>
 <td 0801 >13</td>
 <td 0801 >9</td>
 <td 0801 >26</td>
 <td 0801 >24</td>
 </tr>
 </tbody>
 </table>
 
</body></html>

Robert Brusca

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The EU region saw its sentiment gauge drop to 104.8 in July from 105.7 in June in the wake of the U.K. Brexit vote. A good deal of this weakness is from the U.K. itself, still an EU member, whose own index fell by 4.1% month-to-month. Interestingly, in EMU sentiment gained 0.2% in July after dropping 0.2% in June.

Month-to-month erosion is the rule

The EU-wide industrial sector that had improved in June held most of that gain, giving back just a tick in July. The sector has been posting more or less the same ratings since late-2013. Consumer confidence in EU fell sharply, dropping to a -7.6 reading, its worst since December 2014. Retail stepped back to a 1.1 reading after posting a 1.6 reading in June. Retailing has been sliding since it reached its cycle peak in October of last year. Construction improved to a -14 reading from -15 in June, extending its long slow and relatively isolated improving glide to better readings. The services sector which peaked in December 2015 at 15.3 continues its erosion, dropping to 9.0 in July from 9.4 in June. 

The Brexit slow-motion exit

The trends in EU are not simply the product of Brexit this past month, but part of an ongoing process of erosion. Maybe that is why the Brexit vote was not such a jolt to Europe. It was not a 180-degree turn. It was not a slam on of the brakes. It was an exit from a freeway that was backed up and hardly even moving. No surprise, really, despite the fact that it was not well anticipated.

EMU is a very middling group

Six of 17 reporting EMU nations saw their overall economic sentiment indexes fall in July while 11 saw improvement month-to-month. Only Greece has a sentiment standing that ranks below its historic 20th percentile. Apart from Greece, France, Austria and Finland have the lowest relative readings with sentiment standings in the 40th percentile range for all of them. Tiny Malta and Cyprus have the highest percentile standings in their low 80th percentiles. Among the four largest economies, Germany has the highest percentile standing at a 71st percentile queue reading. The EMU region as a whole has a 61.6 percentile standing that is now ahead of the 58.9 percentile standing for all of EU. The standing for the U.K. has dropped to its 52nd percentile, its weakest reading since June 2013. 

A very mediocre EU and EMU are left behind

The extremes of good and bad country level performance are now mostly gone and much of EMU now sees its EU index resides in the middle range. Eleven of 17 members have queue percentile standings for overall sentiment in their 50th to 79th percentile range; the Goldilocks zone where conditions are neither too hot nor too cold. Still, the overall EMU standing in its 61st percentile represents a very mediocre standing. The EU region sustained only 11 EU Index rankings in its 70th percentile in the recovery period with the highest reading of a 78th percentile standing coming in December 2015 flanked by standings in the 73rd and 72nd percentile. The EU as a region has had a hard time posting and keeping anything like an elevated reading compared to its pre-financial crisis days. The EMU region has had only three 70th percentile range readings in the post-recession period. 

Is it a legacy of Brexit or a legacy Brexit leaving behind?

Brexit (so far) does not seem to be a catalyst for a worsening of conditions (or of perceived conditions) in the EU and EMU except perhaps for the U.K., itself. Instead, the U.K. Brexit vote looks more like something that was spun out of an outgoing process of worsening conditions. This will be the trend to keep an eye. Will the EU and EMU continue to worsen in the period ahead or to be mired in this same morass of mediocrity? And if so, is mediocrity good enough; is it sustainable? Or will the U.K. Brexit be the kick in the rump that the EU/EMU needed to make some of the needed changes, bang (!) to kick things up a notch? 


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The EU region saw its sentiment gauge drop to 104.8 in July from 105.7 in June in the wake of the U.K. Brexit vote. A good deal of this weakness is from the U.K. itself, still an EU member, whose own index fell by 4.1% month-to-month. [...]

Euro Area Sentiment Wanes as EMU Firms

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 <a href="/comment/160728b_big.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/160728b.png"></a>

Initial unemployment insurance claims increased to 266,000 (-1.1% y/y) during
the week ended July 23 from 252,000 in the prior week, revised from 253,000.
Claims remained near the lowest level since 1973. The four-week moving average
eased to 256,500. The Action Economics Forecast Survey expected 260,000 claims
in the latest week. During the last ten years, there has been a 75% correlation
between the level of claims and the m/m change in nonfarm payrolls.

Continuing claims for jobless nudged higher to 2.139 million (-5.8% y/y) from
2.132 million. The four-week moving average declined to 2.135 million, also near
a four-decade low.

The insured rate of unemployment ticked up to 1.6% from 1.5%.

Insured rates of unemployment continued to vary across states. Near the low
end of the range were South Dakota (0.42%), Nebraska (0.58%), Florida (0.69%),
North Carolina (0.69%), Indiana (0.77%) and Virginia (0.85%). At the high end of
the scale were Texas (1.68%), Nevada (1.92%), Illinois (1.97%), Massachusetts
(1.99%), Pennsylvania (2.49%) and New Jersey (2.78%). The state data are not
seasonally adjusted.

Data on weekly unemployment insurance are contained in Haver's WEEKLY
database and they are summarized monthly in USECON. Data for individual
states are in REGIONW. The expectations figure is from the Action
Economics survey, carried in the AS1REPNA database.

<a href="/comment/160728c_big.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/160728c.png"></a>
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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol">Unemployment Insurance (000s)</th>
 <th>07/23/16</th>
 <th>07/16/16</th>
 <th>07/09/16</th>
 <th>Y/Y</th>
 <th>2015</th>
 <th>2014</th>
 <th>2013</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol">Initial Claims</td>
 <td>266</td>
 <td>252</td>
 <td>254</td>
 <td>-1.1%</td>
 <td>277</td>
 <td>307</td>
 <td>342</td>
 </tr>
 <tr class="odd">
 <td class="firstcol">Continuing Claims</td>
 <td>--</td>
 <td>2,139</td>
 <td>2,132</td>
 <td>-5.8</td>
 <td>2,268</td>
 <td>2,607</td>
 <td>2,978</td>
 </tr>
 <tr>
 <td class="firstcol">Insured Unemployment Rate (%)</td>
 <td>--</td>
 <td>1.6</td>
 <td>1.5</td>
 <td>
 1.7 
 (July 2015)
 </td>
 <td>1.7</td>
 <td>2.0</td>
 <td>2.3</td>
 </tr>
 </tbody>
 </table>
 
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Initial unemployment insurance claims increased to 266,000 (-1.1% y/y) during the week ended July 23 from 252,000 in the prior week, revised from 253,000. Claims remained near the lowest level since 1973. The four-week moving average [...]

U.S. Initial Claims for Unemployment Insurance Rise

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At today's meeting of the Federal Open Market Committee, the fed funds rate
was left unchanged in the range of 0.25%-0.50%, as expected. Policy was viewed
as &quot;accommodative&quot; in the report.

The commentary in today's release was much the same as after the last
meeting. Improvement in the labor market was highlighted early, indicating
&quot;some increase in labor market utilization in recent months.&quot;

Consumer spending was viewed as strong but business investment was soft.
Price inflation was seen as running below the longer-term 2 percent objective,
due to lower energy prices and lower prices for non-energy imports.

Looking ahead, moderate economic growth was expected to continue, but
inflation should rise to 2 percent.

The press release for today's FOMC meeting can be found <a href="https://www.federalreserve.gov/newsevents/press/monetary/20160727a.htm">here</a>.
Over the last year, growth in M2, a proxy for economic liquidity, has
increased to 6.9% from 5.4%.

Haver's SURVEYS database contains the economic projections from the
Federal Reserve Board.

<a href="/comment/160727n_big.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/160727n.png"></a>
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 <table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" ></th>
 <th scope="col" >Current</th>
 <th scope="col" >Last</th>
 <th scope="col" >2015</th>
 <th scope="col" >2014</th>
 <th scope="col" >2013</th>
 <th scope="col" >2012</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd">
 <td class="firstcol" >Federal Funds Rate, % (Target)</td>
 <td >0.25-0.50</td>
 <td >0.25-0.50</td>
 <td >0.13</td>
 <td >0.09</td>
 <td >0.11</td>
 <td >0.14</td>
 </tr>
 </tbody>
 </table>
 
</body></html>

At today's meeting of the Federal Open Market Committee, the fed funds rate was left unchanged in the range of 0.25%-0.50%, as expected. Policy was viewed as "accommodative" in the report. The commentary in today's release was much [...]

FOMC Leaves Rate Unchanged

Crude oil price has returned to pre-conflict level but traffic through Hormuz still subpar

Surging orders for computers and electronics propelling durable goods orders

Next year's inflation forecasts are on the rise and above target

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

Elevated energy prices putting intense upward pressure on input prices around the globe

US is big leader in global surge in private AI investment

Larger-than-usual income tax refunds this year are supporting consumer spending

Sharply rising share of AI-related jobs

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

Recent pickup in US defense orders could help support overall growth ahead

Cost of transporting crude oil has soared to series high

Market-based inflation expectations have not yet reflected recent surge in oil prices

Global equity markets are fearing a major economic disruption from soaring oil prices

Is recent drop in sentiment signaling softer growth ahead?

With the Iran conflict, geopolitical risk has soared to alarming levels

Soaring AI-related investment in US underpinning strong contribution of business spending to overall growth

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

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Sandy Batten

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The U.S. trade deficit in goods and services (BOP basis) widened markedly to $77.6 billion in May from a downwardly revised $54.6 billion in April (previously -$55.9 billion), according to the U.S. Census Bureau. The Action Economics Forecast Survey looked for a deficit of $78.6 billion. The goods deficit widened to $106.5 billion in May, the largest monthly shortfall since March 2025 when imports flooded in ahead of expected tariff increases, from a downwardly revised $82.9 billion in April (previously -$83.7 billion) while the services surplus widened to $28.9 billion in May from an upwardly revised $28.3 billion in April (previously +$27.8 billion).

The real (inflation-adjusted) trade deficit in goods widened to $100.0 billion (2017$) in May from an unrevised $84.3 billion in April. The April/May average is considerably higher than the Q1 average although some of this reflects a decline in exports of nonmonetary gold and other precious metals that are not included in the calculation of GDP. Still, the May report implies that net exports will once again subtract from overall GDP growth in Q2. They subtracted 0.37%-point in Q1.

Exports of goods and services fell 3.2% m/m (+12.6% y/y) in May following an upwardly revised 3.0% monthly increase in April (previously +2.6% m/m). This was the first monthly decline in exports since last December. Goods exports (Census basis) slumped 5.3% m/m (+15.1% y/y) led by outsized declines in exports of nonmonetary gold and other precious metals. In dollar terms, goods exports declined $11.6 billion in May. A $7.5 billion decline in exports of nonmonetary gold and other precious metals accounted for 65% of that decline. However, exports of capital goods ex autos (-4.9% m/m) and nonfood consumer goods ex autos exports (-9.1% m/m) were also very weak. Service exports edged up 0.7% m/m (6.6% y/y) in May following a 0.1% monthly rise in April. Travel service exports rebounded 2.4% m/m in May after having declined in both March and April. Transport exports rose 1.1% m/m in May, their third consecutive monthly gain. Over the past three months, transport exports have increased 6.7%.

Imports of goods and services increased 3.3% m/m (13.3% y/y) in May for their fourth consecutive monthly gain. Over the four months to May, imports rose 11.7%. Goods imports (Census basis) jumped 4.0% m/m (15.3% y/y) in May after a 1.9% monthly gain in April. Imports rose in every major end-use category in May, led by a 10.3% m/m jump in “other” imports, a 6.3% m/m rise in auto imports, a 6.2% m/m increase in nonfood consumer goods imports ex autos, and a 5.8% m/m rise in industrial supplies imports. Service imports increased 0.3% m/m (5.1% y/y) in May, slowing from a 1.6% monthly gain in April. Performance varied meaningfully across end-use categories. Imports of insurance services rose 1.4% m/m, their sixth consecutive monthly rise. Imports of personal and recreational services increased 1.1% m/m in May. Imports of financial services rose 0.6% m/m. By contrast, imported maintenance and repairs services slumped 3.9% m/m, their second monthly decline in the past three months. Imported intellectual property fell 0.3% m/m, their fourth monthly decline in the past five months. Imports of transport services declined 0.4% m/m, their fourth monthly decrease in the past five months.

By country, the goods trade deficit with China widened to $14.5 billion in May from $12.0 billion in April. The trade deficit with the European Union widened to $9.3 billion in May from $7.2 billion in April. The trade deficit with Japan declined to $2.0 billion in May from $2.8 billion in April.

The international trade data can be found in Haver’s **USECON** database. Detailed figures on international trade are available in the **USINT** and **USTRADE** databases. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- The deficit in goods and services widened to $77.6 billion in May from $54.6 billion in April.
- Exports slumped 3.2% m/m, led by an outsized fall in exports of nonmonetary gold and other precious metals.
- Imports increased by 3.3% m/m with increases in each major end-use category.
- The goods deficit widened to $106.5 billion, while the services surplus widened to $28.9 billion.

U.S. Trade Deficit Widened Markedly in May

260707E.jpg

German industrial production in May rose by 0.9% after rising by 0.2% in April. Top-line growth for industrial production shows an increase of 0.1% over 12 months, a decline of 0.2% over six months, but a revival with growth at a 4% annual rate over three months. The revival was led by consumer goods output, which gained 1.2% in May after rising 2.2% in April. Consumer goods output is lower by 0.1% over 12 months, rises at a 2.6% annual rate over six months, and again at an 8.6% annual rate over three months, marking an acceleration over this three-period sequence. Capital goods, however, an important sector in the German economy, continued to be erratic in May. Capital goods output rose by 1.3% in May after falling by more than 1% in each of the two previous months. Capital goods output is lower by 2.8% over 12 months, falling at an 8.6% annual rate over six months, and that drop is trimmed to a 4.4% contraction over three months.

The output of consumer goods is pushing industry production higher, but the output of capital goods is pulling industrial production back lower. Intermediate goods, however, are showing growth and acceleration, despite falling by 0.4% in May after increases in each of the two previous months. Nevertheless, intermediate goods output is up by 1.1% over 12 months; it accelerates from a 1.9% annual rate over six months to a 6.4% annual rate over three months.

Focusing on manufacturing output alone, there was a gain in output of 0.8% in May and a gain of 0.3% in April. However, manufacturing output is still lower by 0.6% over 12 months and falls at a 2.3% annual rate over six months before recovering a 2.2% annual rate gain over three months; nothing in this sequence is an impressive performance.

Real manufacturing orders have been oscillating back and forth, rising by 1.9% in May after falling 3.2% in April. However, over 12 months, real orders for manufactured goods are up 6.3%; yet that same series falls at a 4% annual rate over six months and then rebounds to surge ahead at a 12.8% annual rate over three months. That's an erratic performance, but with a good ending trend. Real sales in manufacturing show gains in each of the last three months, including a 1.8% month-over-month increase in May. Real sales in manufacturing rise to a 4.2% annual rate over six months and 12 months and then accelerate to a 12.4% annual rate over three months. The performance of sales is encouraging and fits well at least with the three-month spurt in real manufacturing orders.

Indicators for the German economy show that the ZEW current index weakened to -77.8 in May from -73.7 in April. The IFO manufacturing index moved higher, with the May reading of 86.7 compared to 86.3 in April. Manufacturing expectations in the IFO framework, however, weakened to 87.7 in May from 88.2 in April. The EU Commission industrial index registered -15.6 in May after -14.5 in April, another sign of weakening. Two of these four indexes weakened sequentially, looking at the values from 12 months to six months to three months; the exceptions are an improvement in the ZEW current index and the EU Commission index on this timeline.

Looking at manufacturing IP output data from select other European countries, France and Spain showed slippage in May compared to April, while Portugal posted a gain in May after a decline in April. Over 12 months, six months, and three months, France shows period-to-period positive growth, but growth is not gaining momentum. Spain shows an increase of 0.4% in output over 12 months, with slippage over six months and a solid gain over three months. In Portugal, output acceleration is in gear, with a 2.2% decline over 12 months shifting to a 6.7% annual rate gain over six months and a 10.6% annual rate gain over three months.

On a quarter-to-date (QTD) basis, German industrial production is rising for all the major sectors except for capital goods. Manufacturing output is rising QTD, along with real manufacturing orders and real sales in manufacturing. The industrial surveys for Germany all weaken QTD. Industrial production shows QTD declines for France and Spain, while Portugal posts a gain.

The ranking of year-over-year growth rates, or, for indicators, the ranking of the level compared to the past back to 2006, shows mostly weak performance for German output. There is a stronger assessment for the intermediate goods with a year-over-year growth rate ranking above the 50% rank, putting it above its historic median. Demand indicators, however, as reflected in real manufacturing orders and real sales for manufactured goods, have rankings in the 70th percentile, showing some better life for demand—that could bode well for output in the future. The industrial indicators, however, are all weak and substantially weak compared to their historic levels back to 2006.

On balance, the manufacturing and industrial data as well as surveys as of May for Germany and Europe show mixed results. There are a few pockets of strength; one of the bright spots is demand, but supply has not consistently responded to it yet. The industrial surveys are uniformly weak and definitely not a bright spot. Overall, the results are not reassuring.

260707.jpg

Germany

German IP Marks Large Gain

Winnie Tapasanun

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The U.S. ISM Services PMI edged down to 54.0 in June, the third m/m decline in four months, following a 0.9-point increase to 54.5 in May, according to data from the Institute for Supply Management, indicating expansion in the services sector for the 24th straight month, albeit at a slightly slower pace. The June index, while above 50.8 in June 2025 and a low of 49.4 in June 2024, remained below its recent high of 56.1 in February and a record-high 67.5 in November 2021. The 12-month average was 53.1, pointing to continued growth in the U.S. services sector. The Action Economics Forecast Survey had also expected 54.0 for June.

Haver Analytics constructs a composite index combining the services index and the manufacturing reading. This index slipped to 53.9 in June after a 0.9-point increase to 54.4 in May, signaling expansion for the 13th consecutive month but at a slightly slower rate. The latest reading was above 50.6 in June 2025 and a low of 49.3 in June 2024, while remaining below 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 55.4 in June following a 1.8-point rise to 57.7 in May, indicating continued expansion in business activity for 24 months in a row, though at the slowest pace since March. The index was above a low of 50.0 in June 2024 but below a peak of 70.9 in November 2021. In June, 24.3% of respondents (NSA) reported higher activity while 14.5% reported an activity decline. The new orders index decreased to 55.1 in June after a 3.8-point gain to 57.3 in May, reflecting expansion in new orders for the 13th successive month but at a slower pace. 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 June, 25.9% of respondents (NSA) reported higher new orders while 17.1% reported declines. Meanwhile, the supplier deliveries index (NSA) fell to 54.4 in June from 55.2 in May, indicating slower supplier delivery performance for the 19th straight month after one month in faster territory in November 2024.

On the labor front, the employment index recovered to 51.2 in June from 47.9 in May, showing employment activity in the services sector expanded for the first time since February. 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. An increased 16.0% of respondents (NSA) indicated higher employment in June while 10.9% reported declines.

On the inflation front, the prices index fell to a still-elevated 67.7 in June from 71.3 in May, indicating prices paid by services organizations for materials and services had risen (i.e., above 50) since June 2017 but at the slowest rising pace in four months. The index was above a low of 53.9 in March 2024 but significantly below a peak of 83.7 in March 2022. In June, 40.7% of respondents (NSA) reported higher prices while only 3.8% reported price declines.

Additionally, the new export orders index edged up to 50.4 in June from a neutral 50.0 in May, showing new export orders expanded for the fourth time in five months, while the imports index fell to 49.4 from 51.1, marking the first contraction since January. The inventories index dropped to 51.2 in June from 62.5 in May (the highest level since May 2010), indicating inventories expanded for the fifth successive month. The inventory sentiment index fell to 52.6 in June from 55.2 in May, showing continued expansion since May 2023. The backlog of orders index rebounded to 54.9 in June from 51.3 in May, registering the fifth consecutive month of expansion following 11 straight months of contraction. 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 to 54.0 in June, remaining above the 12-month avg. of 53.1.
- Business Activity (55.4) expands for the 24th consecutive mth.; New Orders (55.1) for the 13th straight mth.; Employment (51.2, first expansion since Feb.); Supplier Deliveries (54.4 vs. 55.2).
- Prices Index (67.7) at a four-month low, still indicating prices rising since June ’17.

U.S. ISM Services PMI Eases in June, Still Indicating Expansion for the 24th Straight Month

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The global PMI data for a select group of 24 countries and their composites, provided on the graph, indicate a slight overall improvement for the total PMIs in June, with the service sector getting slightly stronger as the manufacturing sector is slightly weaker.

Conditions, however, remain uneven. The overall average for the PMI composite in June moved up to 51.4 from 50.7 in May, but the May reading had fallen from 51 in April. The median rose to 50.8 in June from 50.2 in May, but it had been at 51.2 in April. There continues to be a great deal of weakness and irregularity in the progression of the global economy—not surprisingly with the recent data coming during the period when oil prices had surged in the Strait of Hormuz had been closed. We now are seeing different conditions in force, and we'll see how much improvement occurs in July if the current global situation remains improved.

In June, nine of twenty-four reporters had PMI readings below 50, indicating contraction in economic activity. In May, there had been ten such reporters, while in April there had been nine. These readings, of course, are less than half of the reporters; however, it's still a very large proportion of the reporters where the total PMI gauges are indicating economic contraction. Over three months, there are nine reporters with average readings below 50; over six months, there are only seven; and over 12 months, there are six. This progression tells us that the situation has been getting worse rather than better.

Based on monthly data, the European Monetary Union, Germany, France, Russia, Egypt, and Qatar each recorded three consecutive months of readings below 50, indicating contraction in each of those months. Sequentially, over 12 months, six months, and three months, only France, Russia, Ghana, Egypt, and Qatar show consistent readings that average below 50 (based on raw data).

The queue standings of the levels reported by countries in June show only seven with standings above the 50th percentile; this means there are only seven countries whose PMIs in June are higher than their average back to January 2022. Not surprisingly with the recent events really focused on oil prices and the situation in the Middle East and the closure of the Strait of Hormuz, some of the weakest ranking readings are coming from oil producers in the Middle East such as Qatar (6.1%), the UAE (1.5%), Saudi Arabia (6.1%), and Egypt (18.2%). Clearly, the interruption of the oil flow and war damage has had an outsized impact on these data.

However, quite apart from the current situation and the closure of the Strait, if we calculate the average PMI standing rather than the ranking just the average of the PMI total sector ranking, there are four countries that have averaged readings below 50 based on monthly data back to January 2022. Those countries are France, Zambia, Egypt, and Kenya. The average readings across all countries back to January 2022 is a reading of 52.3. The highest ranking during this previous period is from India; its ranking is at 58.1. Ironically, some of the strongest readings in the earlier period come from oil producers whose current rankings are so low such as Saudi Arabia at 56.6, the UAE at 54.6, and Qatar at 53.4.

There has been upward momentum this month, particularly in services, while manufacturing backtracked. However, the trend to improve conditions is no longer so clear. What is clear is that the outlook is going to depend upon whatever peace agreement proves durable involving Iran and traffic through the Strait of Hormuz. This conclusion is not rocket-science; it is obvious. And it's going to take close-watching because there have been so many missteps around alleged ceasefires and treaty discussions that we can't be very sure about what's going to play out in the future and what will last.

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Globally S&P PMIs Gain a Modicum of Traction

Tian Yong Woon

In this week's Letter, we trace how an energy shock and a resilient AI upcycle shaped Asia through the first half of 2026 and weigh the risks that may define the second. The year opened hopeful on AI, though some feared stretched valuations, before the US-Iran conflict and a closed Strait of Hormuz shook the mood (chart 1). A later MoU eased energy prices and inflation fears, yet valuations largely held on AI optimism, despite bouts of reassessment. The oil surge hit import-reliant emerging Asia hardest, leaving India, Thailand and the Philippines doubly exposed through their Middle East sourcing (chart 2). Pass-through inflation, subsidies that some governments later pared back, and currency pressure followed, though resuming Strait traffic should ease these strains. Rising inflation then boxed in policymakers, straining already-stretched fiscal positions and limiting more pro-growth monetary policy stances in some economies (chart 3). Our latest Blue Chip survey found a slim majority reassessed the risk balance after oil fell, though the shifts stayed mild versus the June survey (chart 4). Most still rank upside inflation risk above downside employment risk, even as a slightly larger share now see the balance as more even. AI remains the region's key offset, with Taiwan and South Korea riding a sharp rise in memory and chip exports (chart 5). Malaysia and Thailand instead draw data centre FDI, so Asia gains from the buildout phase rather than the West's hoped-for productivity gains. We close on an uncertain second half, where a possible Super El Niño could revive food-driven inflation even as energy pressures fade (chart 6). Beyond that, an AI reassessment, fresh geopolitical flashpoints, trade tensions and the US midterms could each reshape the outlook.

**The year thus far**
We began the year on a relatively hopeful note, buoyed by AI optimism and market valuations that reflected it, although some investors worried that valuations had become overstretched. The geopolitical mood shifted quickly in early January, however, when US military forces captured former Venezuelan leader Maduro, though the event did little to move markets (chart 1). A far greater shock came when the US-Iran conflict erupted in late February, closing the Strait of Hormuz and dealing a negative blow to global energy supplies. More recently, the US and Iran have reached a Memorandum of Understanding (MoU) aimed at ceasing hostilities and resuming trade flows through the Strait. This has allowed energy prices to ease, softening policymakers' concerns about energy-driven inflation. Even so, equity valuations have largely remained underpinned by AI optimism, albeit with interim bouts of reassessment and price retracement. This drew on repeated reports of strong growth along the AI supply chain, and on signs that supply could not keep pace with demand. This continued even as AI models with leapfrogging capabilities reached the public. At several points, the US government stepped in to rein in public access to some models, given security concerns about such immense capabilities falling into the wrong hands.

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**Oil impact on Asia**
Within emerging Asia, among the hardest hit by the oil surge are India, Thailand and the Philippines. These are relatively heavy net importers of crude oil, and they source most of that crude from the Middle East. That combination left them doubly exposed when the Strait of Hormuz closed (chart 2). The surge in oil prices also carries multiple, wider impacts. First, the higher cost of imported crude passes through to consumer inflation, leaving households with a heavier energy bill. Several governments have stepped in with energy subsidies to ease the consumer burden. That support has not proved indefinitely sustainable, as some governments eventually pared it back given the immense costs. In effect, subsidies shift some of the burden from consumers to the state, straining public finances. There is also a currency effect, since higher crude prices require more domestic currency to buy the same volume, weighing on the exchange rate. That said, other drivers of currency depreciation may also have been at play over the period. Trade flows through the Strait have recently picked up, with traffic gradually resuming. If the current truce and its conditions hold, these effects may ease before long. On the growth front, higher oil prices would not appear in volume-based measures. Their second-order effects on output would still come through, such as demand dampened by higher energy costs.

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**Inflation and monetary policy**
Higher crude oil prices drove inflation sharply higher across Asia and much of the world. That greatly complicated policymakers' task on both the fiscal and monetary fronts. On the fiscal side, several Asian governments were already facing pressures before the oil shock. These ranged from grand, fiscally costly policy pushes in Indonesia to calls for greater fiscal sustainability in Japan. Higher oil prices added a need for more support, further complicating their position. On the monetary side, previously pro-growth moves, such as rate cuts in India, looked riskier, as they threatened to stoke already-surging inflation (chart 3). That made further easing, or even holding current pro-growth settings, hard to sustain. The danger is sharper still if inflation expectations become unanchored, raising the risk of runaway inflation. The recent US-Iran de-escalation, and the crude price slump that followed, certainly help to ease the situation. One would expect so material a shift in the geopolitical backdrop to prompt a reassessment among policymakers and investors alike. Yet that was not entirely the case, based on our latest Blue Chip Financial Forecast survey, whose results we discuss in the next section.

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**The latest Blue Chip survey results**
The recent US-Iran MoU has largely held, despite occasional flare-ups. Against that backdrop, and the sharp fall in oil prices that followed, we asked panellists to assess the balance of risks between employment and inflation. A slim majority (59%) said their assessment had shifted, while a non-trivial minority said it had not. Looking specifically at how US risk expectations moved, we find the shifts have been quite mild. That is relative to the June survey, which was conducted before the MoU. Even so, most panellists (65%) still see upside risks to inflation as the key risk, rather than downside risks to employment. Meanwhile, a slightly larger share than in June (23%) now see the risks as more balanced.

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**The AI upcycle and Asia**
We turn next to a key offset to the growth dampeners facing much of Asia. It stems from parts of the region being well positioned to capture the current AI upcycle. Advanced economies such as Taiwan and South Korea have benefited from strong demand for AI and related memory chips. This has driven a sharp rise in exports of such goods (chart 5). Those exports have propelled growth in these economies this year, at a pace faster than in previous years. Other economies, such as Malaysia and Thailand, are going through a data centre boom. They benefit through an additional channel beyond AI-related goods exports: robust FDI inflows. Foreign firms are driving these inflows as they expand their data centre footprint in the region. Other economies, including those in the West, hope to reap large productivity gains from the current jump in AI capabilities. By contrast, much of Asia's benefit comes from the ongoing buildout of the parts and infrastructure that the upcycle requires.

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**Watching H2 2026**
Bringing it all together, the first half of the year has been shaped by two main drivers: the US-Iran conflict and the ongoing AI upcycle. What the overarching themes for Asia will be in the second half remains anyone's guess. For one, the threat of an imminent "Super El Niño" event (chart 6) could trigger a crop supply shock. That may reintroduce inflationary pressure, albeit through the food channel. On another front, market optimism around AI-related companies' revenues and spending still persists. Yet disruptions or new discoveries could emerge down the line, including some that sharply reduce the compute needed for a given output. Such developments may in time prompt investors to reassess their views. In addition, pockets of geopolitical pressure are still brimming in parts of the world, including the Middle East. These threaten to upend supply flows of oil, and of other crucial goods too. The trade front, though faded from focus in recent months, could become another flashpoint. It bears on growth and on bilateral relationships, especially those with the US. Finally, other events, such as the US midterm elections later this year, may also skew the global backdrop.

Economy in Brief

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