Even with strong capex, US nonfinancial corporations are generating more cash than they are investing

Investor sentiment worldwide is positive, especially in AI-led Asia

Sectoral shift in US job openings

Meteoric rise in AI-related semiconductor exports fueling South Korea's export boom

Regional Fed surveys showing further manufacturing acceleration in August

Sharp drop in China demand for oil helping to limit impact of Middle East conflict on the price

Decades high real price of copper posing physical challenge to investment boom

Rising US long-term real yields point to strong demand for investment funding

US retail sales accelerate even as consumers remain gloomy

Retail gasoline price still well above pre-conflict level and now rising again

PMIs showing widespread revival of global economy

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

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Andrew Cates

**From easing to tightening**
Market expectations concerning Fed policy have turned completely since January. Contracts covering December 2026 and the first half of 2027 then implied a federal funds rate a little above 3 per cent, comfortably below the rate the Fed was actually running, and an easing cycle was the base case. That gap closed in March and has since inverted, with the move accelerating over the past fortnight. Energy is the immediate cause. The conflict with Iran has kept crude above $100 a barrel, and August’s inflation report showed the pass-through into core prices that policymakers had hoped to avoid. This week’s quarter-point increase was accordingly almost fully priced beforehand and settled little on its own. The framing around it was another matter. Sixteen of the eighteen participants who submitted projections expect at least one further increase this year, four of them two, and the median path is held at around 4.1 per cent through the end of next year with no cuts at all. Chair Warsh’s insistence on a timelier return to target was taken as ruling out an early reversal, and equities gave up their initial gains as he spoke. Futures now sit above the committee’s own path by the middle of 2027, and the long end has followed rather than steadied. A policy rate expected to approach 4.5 per cent alongside a ten-year yield above 5 per cent speaks to term premia as much as to the Fed.

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**Who is paying for the boom**
The tightening is arguably not the product of corporate borrowing. The latest US financial accounts reveal that American non-financial companies ran a financing surplus of around 1 per cent of GDP in Q1, which is to say that internal cash flow more than covered their capital spending. The position has held for most of the past four years, and it stands in contrast to 2000, when the sector was running a deficit of more than 3 per cent of GDP at the peak of the last (internet-led) investment cycle. That distinction matters for how the present boom is read. Aggregates conceal distribution, and a small number of hyperscalers and data-centre developers have turned to bond and private credit markets on a scale that unsettled equity investors in recent weeks. At the level of the aggregate sector, however, the marginal claim on the US saving is coming from the US government rather than from companies.

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**A friendlier mix, for now**
The latest September survey reveals that the Blue Chip panel has made much the same adjustment almost everywhere in recent months: growth for this year has been revised up, inflation for this year revised down. Taiwan and Korea account for the largest growth upgrades, both for the same AI-related reasons, while the United States, the euro area, Japan, the United Kingdom and India all sit in the same quadrant on a more modest scale. China alone (in our sample in the chart below) has seen neither forecast moved. The combination reads well, but it needs qualifying. With a fixed target year this far advanced, most of the 2026 inflation number is already determined by outturns, so marking it down is largely a verdict on the first half of the year rather than on the energy shock now working through.

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**The UK’s quiet labour market**
The UK labour market is no longer adding much to inflation pressure. Private-sector regular pay is growing at around 3 per cent, the slowest rate since 2020 and below its average in the years before the pandemic. Vacancies have fallen to just over 700,000, the lowest outside the pandemic period since 2014, and payrolled employment declined again in August, leaving it around 145,000 lower than a year earlier. Unemployment, at 4.9 per cent, is up on the year. Smaller firms continue to tell the official vacancy survey that they are holding back from recruitment because of labour costs. None of this settles the Bank of England's decision later this week, since the inflation problem is arriving from outside rather than from wages.

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**China is producing strongly but spending weakly**
China's August data extended a familiar divergence. Industrial output accelerated 5.2% y/y in August after 4.5% in July, beating expectations despite four typhoons disrupting activity along the east coast. Retail sales, in contrast, grew by just 0.4%. Fixed investment in the first eight months was more than 7 per cent lower than a year earlier, a deeper contraction than through July, and investment in real estate development fell by close to a fifth. The weakness is no longer confined to property: total fixed investment turned negative last year and the pace of decline has steepened since, with private investment contracting while state-owned enterprises hold the total up. For the rest of the world the arithmetic is straightforward. An economy producing strongly and consuming weakly exports the difference, and potentially exports disinflation with it. That makes China a partial offset to the energy shock elsewhere, and raises the odds of further domestic stimulus in the immediate weeks ahead.

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**Ten days in September**
Korean customs data offer the earliest and cleanest reading on global technology demand, and the first ten days of September produced some of the largest numbers on record. Semiconductor shipments were worth $16.5 billion in that window, close to three and a half times their value a year earlier, and accounted for 47 per cent of all Korean exports. Total exports rose by more than 80 per cent, with shipments to China doubling and those to the United States more than doubling. This is the phenomenon behind the Taiwanese and Korean forecast upgrades noted above, and it is the physical counterpart of the capital spending recorded in the American accounts. It also concentrates risk. Close to half the export earnings of a major economy now rest on a single investment theme, financed in part by borrowing whose terms are set in the market that has repriced in recent weeks.

260917Z6.jpg

The cost of energy and the cost of money set the tone this week. Brent crude held above $100 a barrel with a major Saudi pipeline still offline, and the Federal Reserve raised the federal funds rate by a quarter point, its first increase since 2023. The projections accompanying the decision mattered more than the decision itself, and futures have since priced a policy rate by the middle of 2027 above anything the committee has pencilled in, with the ten-year Treasury yield through 5 per cent for the first time since 2007 (chart 1). But the source of that tightening is worth dwelling on, because American companies are not competing for credit. The non-financial corporate sector is generating more cash than it spends, and has been for most of the past four years (chart 2). Forecasters have meanwhile spent the summer nudging growth forecasts up and inflation forecasts down for this year, with Taiwan and Korea marked up by some distance the most (chart 3). Britain provided a counterpoint, with pay growth and vacancies both back at or below pre-pandemic norms ahead of the Bank of England’s decision (chart 4). China’s August figures showed industrial output accelerating while investment contracted more deeply (chart 5). And Korean customs data for the first ten days of September gave yet another reading of how much of world trade now runs through a single product (chart 6).

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Charts of the Week: The Price of Money

Michael J. Moran

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Housing activity has been sluggish in the past few years, with private residential construction making negative contributions to GDP growth in seven of the past 10 quarters. The constraints have been small, averaging -0.06 percentage point, but a drag nonetheless (chart, upper left). The third quarter is on track for another negative contribution, as housing starts in July and August trail the average in the prior quarter by 3.9%.

Total housing starts in August were soft, declining 2.6%. The drop occurred from an upward revised reading in July (5.7% firmer than previously believed), but the initial reading was not impressive, and the adjusted level was still in the low portion of the recent range. The drop in August pushed total starts further into the low portion of the range (the fourth lowest since the start of 2023; chart, upper right).

It is tempting to dismiss the decline in August as random volatility, as the change was dominated by a retreat in the volatile multi-family sector (off 21.7%). We have seen similar degrees of multi-family noise in other recent months (-41.4% in May and a rebound of 83.3% in June). As such, there is a good chance that September will show a pickup in multi-family starts. However, a focus on trends still suggests a soft tone in housing.

In seeking to identify housing trends, building permits, because they are less volatile, provide more insight than starts do. Single-family permits trended lower during much of 2024 and early 2025, and they have moved sideways since late last year, signaling little chance of a positive contribution to economic growth (chart, lower left). Multi-family permits drifted upward during 2025, but they have turned a corner so far this year, as shown by the six-month average in the lower right chart. The recent increase in long-term interest rates (up approximately one-half percentage point since June) leads one to worry about a softening in housing trends.

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

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- A drop in multi-family activity in August offset a gain in the single-family sector.
- Q3 shaping up to be another soft quarter for housing.

Housing Starts: Upward Revisions to June & July, but a Drop in August

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance dropped by 10,000 to 196,000 in the week ending September 12 from an unrevised level of 206,000 in the week ending September 5. The four-week average was 203,250 in the September 12 week, down from 206,000 in the September 5 week, also unrevised. Claims have been largely range-bound at historically low levels between 200,000 and 230,000. The Action Economics/Haver Analytics Survey looked for 206,000 claims to have been filed.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”— dropped 39,000 to 1.730 million in the week ending September 5, down from 1.769 million in the week in the week ending August 29, revised from 1.774 million. The four-week moving average was 1.761 million in the September 5 week, down from 1.778 million in the August 29 week. The insured unemployment rate remained edged down to 1.1% in the September 5 week from 1.2% in the week of August 29, and the first drop since the April 25 week.

The insured unemployment rate varies greatly across individual states and territories. In the week ending August 29, the highest unemployment rates were in Massachusetts (2.03%), Puerto Rico (2.57%), and New Jersey (2.58%). The lowest rates were in South Dakota (0.21%), Florida (0.34%), Louisiana (0.34%), Alabama (0.35%), Kentucky (0.36%), North Carolina (0.37%), Arkansas (0.42%), Nebraska (0.43%), Iowa and North Dakota (both 0.44%), Tennessee (0.45%), Kansas (0.46%), Idaho (0.47%), and Wyoming (0.48%). Rates in other notable states include Texas (1.01%), Pennsylvania (1.39%), Illinois (1.41%), New York (1.72%) and California (1.78%). These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986.

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- New claims declined by 10,000 to 196,000 in the week of September 12.
- Continuing claims dropped by 39,000 to 1.730 million in the week ending September 5.
- The insured unemployment rate inched down to 1.1% in the week of September 5, the first drop since April 25.

U.S. Initial Unemployment Claims Dropped in the Week of September 12

Robert Brusca

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Inflation in the euro area rose by 0.4% in August after gaining 0.5% in July on the heels of a 0.1% decline in June. Sequentially, euro area inflation is up by 3.3% over 12 months, accelerates to a 4.5% annual rate over six months, and then settles back to a 3.4% pace over three months. Inflation is more excessive and stubborn than it is threatening.

Inflation excluding energy and unprocessed food rose a skinny 0.1% in August after a 0.3% gain in July and a 0.1% increase in June. This version of core inflation is up by 2.4% over 12 months and six months and then settles down to a 2.3% annual rate over three months. The ex-food, alcohol & tobacco core measure, similarly posted restrained monthly gains, with a sequential profile matching the ex-energy & ex-unprocessed food progression.

**A cautious ECB**
On balance, headline inflation is too high largely because of energy, and this is not a surprise. However, core inflation is much closer to being in target. Still, it is excessive over 12 months, six months, and three months, but it's not even 1/2 of one percentage point too high at an annualized rate. Still, it is consistently higher by 0.3% to 0.4% on an annual rate. With energy prices flaring, the ECB is being careful.

**Inflation pressure is not growing in breadth**
The details of inflation for the ECB 20-member inflation measure are similar to those headlines in the core inflation progressions. The details on inflation show that inflation is not broadly accelerating. Diffusion measures, which chronicle the proportion of categories with inflation accelerating, showed very restrained sub-50% readings for August and June, even though July’s relatively hotter increase showed inflation accelerating in nearly 85% of the categories. However, that bad-news month was sandwiched in between two good-news months. Looking at inflation over 12 months, six months, and three months, the diffusion progressions step down from 69.2% over 12 months to 53.8% over six months and to 30.8% over three months.  Inflation's breadth has been pulling back progressively.

Inflation is consistently accelerating for furnishings, household equipment & maintenance, healthcare, and communications. However, those are the only three categories that show inflation consistently higher over 12 months, six months, and three months. Inflation is consistently lower over those three periods for alcoholic beverages & tobacco and for recreation & culture.

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**Summing up**
On balance, the ECB seems to be in a pretty good place with inflation growth in the monetary union, while economic growth has been somewhat irregular, with the recent industrial production report slightly disappointing. Globally, oil prices are still high and possibly even firmer. There isn’t much evidence in the monetary union that inflation pressures have spread to other prices. But one reason that's true is that the central bank is being vigilant. Interest rate hikes will never roll back oil prices, but interest rate hikes are a way to remind businesses that the central bank is watching and trying to limit the impact of oil prices when they rise and stop them from mushrooming across industries. The ECB is doing a good job of that.

Europe

EMU Inflation Pressure Remain over the Top but Not Intensifying

Winnie Tapasanun

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Total retail sales rose a larger-than-expected 1.2% m/m to $773.9 billion in August, the sixth monthly gain in seven months, after a 0.5% decline in July (-0.6% initially) and a 0.3% increase in June (+0.2% previously), data from the U.S. Census Bureau showed, pointing to resilient consumer spending and solid domestic demand in Q3 2026. A 0.8% m/m August rise had been expected in the Action Economics Forecast Survey. The year-on-year growth rate accelerated to 6.0% in August from 5.0% in July (4.7% in August 2025), while remaining well below a high of 17.1% in February 2022 and a record high of 51.8% in April 2021.

Excluding motor vehicles & parts, retail sales grew a greater-than-expected 1.4% (6.9% y/y) in August, the first m/m rise since May, following a 0.2% decline in July (-0.3% initially). A 0.5% m/m August increase had been expected. Sales of motor vehicles & parts rose 0.6% (2.1% y/y), up for the third time in four months, after a 1.8% July drop; this compared to a 2.0% gain (1.3% y/y) in unit light vehicle sales following a 1.0% July decrease.

Sales in the retail control group, which excludes autos, building materials, gasoline stations, and food services, rebounded 1.4% (5.6% y/y) in August, the seventh m/m gain in eight months, following a 0.4% decline in July, pointing to solid underlying consumer demand in Q3 2026. These sales are used in the construction of personal consumption expenditures in NIPA accounts. Nonauto sales excluding gasoline & building materials climbed 1.3% (5.7% y/y), up for the seventh time in eight months, after a 0.2% July decline.

Sales by category mostly increased in August. Posting the largest m/m gain among major categories, gasoline station sales jumped 3.1% (21.0% y/y) in August, the first m/m increase since May, after a 0.2% decrease in July. Nonstore retail sales recovered 2.6% (9.9% y/y), the seventh rise in eight months, following a 1.7% July drop. Miscellaneous store sales rebounded 1.9% (14.0% y/y), the third m/m gain in four months, after a 0.6% July slide. Electronics & appliance store sales rose 1.6% (7.8% y/y), the second m/m increase in three months, following a 0.1% July slip. Sporting goods, hobby, book & music store sales advanced 1.2% (10.7% y/y), the seventh consecutive m/m gain, on top of a 0.2% July increase. Furniture & home furnishing store sales grew 0.9% (1.9% y/y), the first m/m rise in three months, after a 0.2% July decline. Clothing & accessory store sales rose 0.7% (4.3% y/y), up for the third time in four months, following a 1.3% July gain. Meanwhile, general merchandise store sales climbed 0.7% (4.5% y/y) in August after a 0.5% increase in July; within this category, department store sales fell 0.8% (+1.9% y/y) following a flat July reading. Building materials & garden equipment store sales decreased 0.2% (+5.1% y/y) following a downwardly revised 0.1% decline in July (+0.3% initially) and eight straight m/m gains.

In the nondiscretionary sales categories, health & personal care store sales rose 0.9% (+1.9% y/y) in August, the third m/m rise in four months, after a 0.3% increase in July. Food & beverage store sales recovered 0.4% (0.5% y/y) after declining 0.2% in July and June.

Consumers appeared to dine out more frequently in August despite still-elevated inflation (August CPI +0.4% m/m, +3.4% y/y; core CPI +0.3% m/m, +2.4% y/y). Restaurant & drinking place sales advanced 1.2% (+5.8% y/y) in August, the fifth successive m/m gain, after a 0.5% increase in July.

**Note**: The Federal Reserve unanimously voted to raise its benchmark interest rate by 25 basis points to a target range of 3.75% to 4.00%. The statement issued following today's FOMC meeting is available [here](https://www.federalreserve.gov/newsevents/pressreleases/monetary20260916a.htm).

Retail Sales data can be found in Haver's **USECON** database. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- Total retail sales +1.2% (+6.0% y/y) in August; sixth m/m increase in seven mths.
- Ex-auto sales +1.4% (+6.9% y/y), first m/m rise since May; auto sales +0.6% (+2.1% y/y), third rise in four mths.
- Ex-gas sales +1.1% (+4.9% y/y) and ex-auto & gas sales +1.2% (+5.6% y/y); both up m/m from Jan. through Aug. except July.
- Retail control group +1.4% (+5.6% y/y), seventh m/m gain in eight mths., pointing to solid underlying consumer demand in Q3 ’26.
- Gains m/m: gasoline stations (+3.1%), nonstore sales (+2.6%), misc. stores (+1.9%), electronics stores (+1.6%).
- Declines m/m: department stores (-0.8%), building materials & garden equipt. stores (-0.2%).

U.S. Retail Sales Rebound in August, Exceeding Forecasts

Economy in Brief: January 2009

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