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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Winnie Tapasanun

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The Chicago Fed National Activity Index (CFNAI) fell to -0.04 in August from an upwardly revised +0.08 in July (-0.08 initially) and a downwardly revised -0.01 in June (+0.06 previously), today’s report from the Federal Reserve Bank of Chicago showed, indicating that economic activity was below its historical trend for the third time in four months in August after slightly above the historical trend in July. The latest CFNAI was above a low of -0.50 in October 2025 and a reading of -0.36 in August 2025 but below a high of +0.39 in February 2025.

The index's three-month moving average (CFNAI-MA3), which smooths out the m/m volatility in the index, increased to +0.01 in August from an upwardly revised -0.01 in July (-0.04 initially), registering the second positive reading in three months. It was above a low of -0.39 in October 2025 and -0.14 in August 2025 but below a recent high of +0.08 in April. The CFNAI-MA3 is expressed in standard deviation units from zero (with a value of zero defined as trend real GDP growth). Research at the Chicago Fed indicates that an average reading of -0.70 or below is consistent with the economy being in a recession. Thus, the August reading suggested that the U.S. economy is not currently in a recession.

The August reading reflected m/m declines in two of the four CFNAI key components and one negative contribution. The contribution of the Production & Income index to the CFNAI decreased to -0.07 in August, the lowest reading since January, from a neutral value (0.00) in July and June; it was below a high of +0.37 in February 2025 but above -0.13 in August 2025 and a low of -0.61 in January 2024. The contribution of the Sales, Orders & Inventories index fell to a neutral 0.00 in August, matching the lowest level since May, from +0.15 in July; it was below a high of +0.16 in March 2025 but above -0.08 in August 2025 and a low of -0.20 in April 2025. The Employment, Unemployment & Hours index contributed +0.01 in August, the highest reading since April, up from -0.01 in July; it was above a low of -0.13 in February 2026 and -0.12 in August 2025 but below a high of +0.05 in January 2026. The contribution of the Personal Consumption & Housing index rose to +0.01 in August, the second positive reading in three months, from -0.06 in July; it was above -0.03 in August 2025 and a low of -0.14 in January 2025 but below a high of +0.10 in March 2025.

The CFNAI Diffusion Index—which measures the breadth of change in the component series and is also a three-month moving average—slipped to +0.02 in August, the sixth consecutive positive reading, from a downwardly revised +0.04 in July (+0.05 initially). A string of negative readings was posted during the March 2023 to February 2026 period. A reading of zero indicates that all of the indicators are growing at their long-term average. The August reading was above a low of -0.56 in October 2025 and -0.18 in August 2025 but below a high of +0.15 in September 2022.

The CFNAI is a weighted average of 85 indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

These figures are available in Haver's **SURVEYS** database.

- CFNAI down to -0.04 in Aug., negative for the third time in four mths.
- Two of four CFNAI components down m/m; one makes a negative contribution.
- CFNAI-MA3 up to +0.01, second positive reading in three mths.; above -0.70 (recession signal).
- CFNAI Diffusion Index down to +0.02, still positive for the sixth straight mth.

Chicago Fed National Activity Index Negative in August After July’s Upwardly Revised Positive Level

Robert Brusca

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The exhibits in this report feature a graph based on the RICS survey showing U.K. sales expectations for the next three months versus the last three months, while tabular data show Nationwide housing prices and how they are moving month-to-month as well as year-over-year. In addition, the table provides the recent GfK survey results on consumer confidence in the U.K. and presents rankings of housing prices and consumer confidence.

These statistics paint a somewhat mixed picture of the U.K. economy although clearly they paint a picture of an economy that is not firing on all cylinders. The ranking on year-over-year house price changes in the Nationwide survey and the ranking for the GfK consumer confidence index give highly similar relative signals, with both of them around the 30th to 40th percentiles in their historic queues of data extending back to 1992.

Housing prices are still advancing more slowly than they did in previous years. While consumer confidence is still low, it has shown improvement in recent months, and the last two readings showed year-over-year improvement in the monthly data. The RICS chart on the pace of sales shows some improvement, if not yet outright gains. Still, housing conditions are weak, and the question of whether they are limping back into the black, whether prices are holding on for small gains, or whether there is a more solid recovery taking place remain unanswered. So far, at least, it does not look like backsliding.

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The Bank of England just met last week. Although the inflation background was poor and the inflation numbers before the BOE meeting were worse than expected, the bank did not move to hike interest rates. In part, the realization is that an interest-rate hike is not going to solve the international problem of high and rising energy prices, but they are still a reality that the central bank has to deal with. The central bank will want to take steps to head off knock-on effects even if it can't push back on the reason that prices are rising. One reason for hesitancy among Bank of England Monetary Policy Committee members is that, so far, they have not seen evidence that oil price effects are broadly being spread through the system, and there's concern about the fragility of the economy. The BOE is being wary about taking steps to stop the spread of inflation that isn't occurring. However, at some point, it may be forced to deal with spreading inflation even if the economy is not on solid footing.

These are the risks that the central bank is dealing with and the sorts of conditions, perceptions, and subtleties that are the bread and butter of monetary policy. Monetary policy is not simply a matter of asking: What's growth? What's inflation? What's the unemployment rate? And here's the solution. Many judgments need to be drawn about these variables and more. It's a central bank’s job to make the best decisions that it possibly can to generate the best of economic environments so that the economy can deliver its top level of performance. The decision made by the Bank of England this week, which you can understand by looking at the 200-word essays made by MPC members after the bank’s meeting, gives you real insight into the conditions that policymakers are dealing with and the difference among monetary policy committee members about how to handle these complexities. Whether the bank needs to deal with the inflation problem now or whether it can kick the can down the road and deal with it later or hope it will not have to deal with it at all, these are the options for action and inaction.

United Kingdom

U.K. Housing Surveys and Consumer Sentiment Support the View of Weak Growth

Tian Yong Woon

This week, we assess whether Asia is really moving away from the dollar by examining its US asset holdings, reserves, gold purchases and trade settlement. We then turn to Japan’s monetary normalisation. Asia’s presence in US portfolio markets has declined since the early 2010s (chart 1). Japan's share of foreign holdings of US long-term securities has halved, and mainland China's has fallen further still. The euro area and the UK have absorbed most of that ground. Even so, Japan is still the largest foreign holder of Treasuries, and a reshuffling among creditors need not mean an exit from dollar assets. Official reserves tell a similar story (chart 2). The dollar's share is down close to 6 percentage points over eight years, to 57.1%, yet no single currency has picked up all of it. The residual group of other currencies gained most, which points to diversification rather than substitution. Gold fits that reading (chart 3), with Singapore, India, Thailand and China all adding heavily in volume terms. Reserve growth alone may explain part of the rise. Trade settlement has moved least of all (chart 4). South Korea still settles about 84% of exports and 79% of imports in dollars, and broader studies point the same way. Moving to Japan, the central bank raised its policy rate to 1.25% last week, with Governor Ueda striking a hawkish note (chart 5). The spread to Fed, ECB and Bank of England policy rates has narrowed to about 2 percentage points. The yen, meanwhile, has rebounded from a record low after coordinated intervention, while the 10-year JGB yield has touched 3% (chart 6).

**Gold, the US, and the US dollar**
Asia's footprint in US portfolio markets has thinned considerably since the early 2010s (chart 1). Japan's share of overall foreign holdings of US long-term securities has roughly halved, from a peak near 14.5% in 2012 to about 8% in July 2026. Mainland China's slide is starker, from 13.4% at the start of 2012 to roughly 3%. The euro area has absorbed most of that ground, rising from about 19% to around 26%, while the UK sits at a record 10.6%. Japan nonetheless remains the largest foreign holder of Treasuries at USD 1.1tn, while China's holdings have slipped to USD 618bn, the lowest since September 2008. A reshuffling among creditors is not always the same as an exit from dollar assets. Japan also remains Asia's largest holder on both sides of the ledger, accounting for about 8.6% of US holdings of foreign securities.

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The de-dollarisation debate has a second front in the currency composition of official reserves (chart 2). The dollar's share has fallen by close to 6 percentage points over the past eight years, to 57.1% in the first quarter of 2026. The more revealing question is where that share went. No single currency has picked up all of it. The yen gained less than 1 percentage point, the Canadian dollar and the renminbi around half a point each, while the euro barely moved. The largest beneficiary was the residual group of other currencies, up some 3.7 points. That looks like diversification rather than a search for one alternative, and the renminbi's 2.0% share underlines the point.

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The same message shows up in gold, where volumes rather than values are the cleaner measure (chart 3). In volume terms, Singapore has added more than 60% to its holdings over the past eight years. India and Thailand are up by more than half, and China by close to 30%. Japan, Indonesia and Malaysia have made smaller additions, while the Philippines has cut its stock by about a third over two major bouts. Exceptions aside, and given the seemingly concerted accumulation of gold among Asian central banks, diversification is one reading. A simpler explanation, which may hold at the same time, is that reserves have grown overall, and gold holdings have had to rise in proportion.

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**South Korea and trade settlement**
Holdings are only part of the picture. Trade settlement, dollar funding and hedging practice matter just as much, and they shift far more slowly. South Korea, one of Asia's most important trade nodes, still settles about 84% of its exports and 79% of its imports in dollars (chart 4). The export share has barely budged in a decade. The import share has drifted down from a 2022 peak near 83%, but the decline is muted and remains within its ten-year range. South Korea is only one case, though broader work, including recent IMF studies, points the same way. The dollar's continued dominance in trade settlement does not chime with the de-dollarisation narrative.

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**Japan**
Turning to Japan, the central bank (BoJ) lifted its policy rate by 25 basis points to 1.25% last week (chart 5). Two details stand out. The vote was split 7 to 2, with Asada and Sato, both appointed this year, preferring to hold at 1%. Governor Ueda also struck a hawkish note. He said the BoJ should act pre-emptively rather than be forced into rapid hikes later. He added that the price trend is close to the bank's 2% target, and that authorities must ensure inflation does not overshoot. Even so, Japan remains the outlier among major central banks, though less of one than before. The gap to the average policy rate of the Fed, the ECB and the Bank of England is about 2 percentage points. That gap stood near 5 points in early 2024. The average is rising again, with the Fed and the ECB both tightening this month.

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Turning to the yen, the currency's recent rebound has been abrupt (chart 6). On a trade-weighted basis, it weakened at the end of July to a record low, based Haver’s proprietary calculations. It has since regained about 4% to 5% and now sits closer to its end-2025 level. The trigger was rare coordinated intervention by Tokyo and Washington, with Treasury Secretary Scott Bessent backing the effort to correct what he termed a substantial undervaluation. Japanese authorities reportedly spent a record JPY 15.4tn across July and August. Yields have carried part of the load. The 10-year JGB yield touched 3% at the start of September, a level last seen in 1996, having begun the year near 2.1%. The climb is part of a global repricing driven by energy-led inflation and fiscal supply, with Takaichi's spending plans adding a domestic premium. The yen slipped again after the BoJ decision, a reminder that intervention buys time rather than a trend.

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Asia

Economic Letter from Asia: Held in Reserve

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Industrial production (IP) was virtually unchanged m/m in August after rises of 0.2% in July (unrevised) and 0.2% in June (+0.3% previously), data from the Federal Reserve Board showed, indicating industrial activity remained on an upward trend despite little change in the latest month. A 0.3% m/m August increase had been expected in the Action Economics Forecast Survey. The year-on-year growth rate accelerated to 1.4% in August, the highest since May, from 1.1% in July (0.8% in August 2025). The August IP index at 103.1 was 3.8% above a low of 99.3 in November 2024 and 3.9% above a low of 99.2 in January 2024.

By **industry groups**, manufacturing production decreased 0.3% (+0.9% y/y) in August, the first m/m decline since December, after increases of 0.2% in July (unrevised) and 0.1% in June (+0.3% previously). Durable goods production fell 0.5% (+3.3% y/y) in August, down for the first time since November 2025, following a 0.6% rise in July. Within durables, almost all categories fell m/m in August, led by drops of 1.4% (-2.8% y/y) in furniture & related products and 1.4% (+0.7% y/y) in miscellaneous durable goods, followed by declines of 1.2% (+4.2% y/y) in aerospace & miscellaneous transportation equipment, 1.2% (-1.0% y/y) in motor vehicles & parts, 1.1% (+2.8% y/y) in nonmetallic mineral products, 0.5% (+8.7% y/y) in computer & electronic products, 0.3% (+0.5% y/y) in primary metals, and 0.1% (+3.6% y/y) in fabricated metal products. Notably, aircraft & parts production slid 1.4% (+7.7% y/y), the first m/m slide since January, after a 1.7% July gain. To the upside, durable goods categories for machinery (+0.5%; +6.3% y/y) and wood products (+0.2%; -0.7% y/y) posted m/m output gains in August. Durable goods for electrical equipment, appliances & components held steady m/m (+5.5% y/y) following a 0.4% July rebound.

Nondurable goods production was essentially unchanged m/m (-1.5% y/y) in August following a 0.4% decrease in July and a 0.4% rebound in June. The August flat reading reflected m/m falls of 1.0% (-4.8% y/y) in printing & related support activities, 0.9% (+0.8% y/y) in plastics & rubber products, 0.7% (+0.8% y/y) in petroleum & coal products, and 0.2% (-2.9% y/y) in paper. Meanwhile, nondurable goods categories for apparel & leather goods (+2.1%; +3.6% y/y), textiles & product mills (+1.3%; -0.1% y/y), and food, beverages & tobacco (+0.3%; -1.2% y/y) registered m/m output gains in August; output for chemicals held steady m/m (-2.6% y/y) following a 0.3% July decline.

Utilities output advanced 1.8% (6.2% y/y) in August on top of a 0.5% increase in July (unrevised), reflecting a 2.1% rise (7.0% y/y) in electric utilities output and a 0.5% decrease (+0.8% y/y) in natural gas utilities output. Mining activity edged up 0.1% (0.3% y/y) after a 0.1% July uptick (+0.2% initially). The utilities and mining series posted the third consecutive m/m gain and the fourth in five months, while recording May flat readings.

By **market groups**, materials production grew 0.2% (1.5% y/y) in August, the fourth m/m gain in five months, adding to a 0.3% rise in July. Consumer goods output ticked up 0.1% (-1.1% y/y) following a 0.3% July decrease, reflecting a 0.5% decline (-3.7% y/y) in durable consumer goods and a 0.3% increase (-0.4% y/y) in nondurable consumer goods. In contrast, construction supplies production fell 0.7% (+1.3% y/y), the first m/m fall since April, after a 0.5% July gain. Business equipment output slid 0.5% (+7.1% y/y) in August, the first m/m drop since October 2025, following a 1.0% July rise. 

In **special classifications**, factory output of selected high-tech industries was virtually unchanged m/m (+12.5% y/y) in August after four straight m/m gains, including a 1.3% increase in July. Manufacturing production excluding selected high-tech industries fell 0.3% (+0.5% y/y) in August, the first m/m decline since January, after a 0.1% increase in July. Manufacturing production excluding selected high-tech and motor vehicles & parts slipped 0.2% (+0.7% y/y), down for the first time since May, reversing a 0.2% July gain.

Capacity utilization was at 76.3% in August, the highest since July 2025, unchanged from July (unrevised). The Action Economics Forecast Survey forecasted 76.4%. The August reading was 3.1 percentage points below its long-run (1972–2025) average. Manufacturing capacity utilization fell to 75.7% in August, the lowest since March, from 76.0% in July (unrevised). The August rate was 2.5 percentage points below its long-run average.

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

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- August IP 0.0% (+1.4% y/y) after four consecutive m/m increases, remaining on an upward trend.
- Manufacturing -0.3% (+0.9% y/y), first m/m decline since Dec., w/ durables -0.5% and nondurables 0.0%.
- Selected high-tech 0.0% after four straight m/m rises; motor vehicles -1.2%, second successive m/m drop.
- Utilities +1.8% (+6.2% y/y), fourth rise in five mths., led by a 2.1% gain in electric utilities output.
- Mining +0.1% (+0.3% y/y), up for the fourth time in five mths.
- Key categories in market groups post mixed results.
- Capacity utilization steady at 76.3%, highest since July ’25; mfg. capacity utilization down to 75.7%, lowest since March.

U.S. Industrial Production Flat in August; Manufacturing IP Down

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German inflation in August saw the headline pop while core remained copacetic. The difference between the two trends is like night and day.

**Headline PPI**
Germany’s PPI spurted for the second consecutive month, rising by 1.2% in both July and August. These jumps followed a drop of 0.3% in June. The German headline PPI is up by 4.6% over 12 months, up by 12.5% at an annual rate over six months, and up at an 8.3% annual rate over three months. Those gains are largely driven by energy trends.

**The core is a different story**
The PPI excluding energy in August gained by 0.2%, the same as in July, after a 0.3% rise in June. Sequentially, the ex-energy PPI rose 3.1% (SAAR) over 12 months, at a 5.0% annual rate over six months, and at a 3.3% annual rate over three months. That’s still excessive, but much less worrisome.

**Sector stories**
The sectors, using unfortunately NSA data, show consumer prices moving lower over three months, with very mild, near-target overshooting for investment goods, while intermediate goods bear the burden of pressure. These observations are for the three-month annualized growth rates but apply equally to the 12-month growth rates.

**The CPI for reference**
German CPI inflation, included in the table as a reference, shows roughly the same patterns as the PPI, with the headline growing in excess of the ECB’s EMU-wide target pace, overshooting by about a percentage point, while the CPI ex-energy skims along at a nearly acceptable pace of overshoot that ranges from 2.2% to 2.5% over three months, six months, and 12 months.

**Inflation forces present but surprisingly contained**
Clearly, inflationary pressures are present in Germany and just as clearly, they are not spreading but have done their damage by the weight of energy in each sector. This does not mean there will not be progression or knock-on effects, just that, so far, they have not appeared. And part of this is because of ongoing economic weakness in Germany.

**QTD**
Quarter to date (QTD), the German headline two months into Q3 has risen at an 8.3% annual rate as the ex-energy PPI runs at a pace of 4%. Both are too hot. Sector inflation rates on NSA data are acceptable except for intermediate goods where the pace rises to 5.3% in the quarter (energy, again). The CPI on a quarterly basis also generates a 3.2% headline gain against a core pace of just 2.2%.

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**The rocky road ahead**
Brent oil prices have been somewhat wild recently, with action in the Strait of Hormuz on a volatile path. The Saudis just announced that they would be shipping no oil to Europe over the next few months as they have refinery repairs to conduct. The Houthis and the Saudis are going at it again. It’s hard to establish an outlook with this much geopolitical chaos. Best to just go day by day. My reading of the war is that the U.S. blockade has become more effective and is putting Iran under strain. Stories report that Iranian oil shipments to China have been mostly stopped. Maybe the U.S. approach finally has teeth. Will it work, or will it cause a counterattack by a trapped and pressured regime? Is a real truce between these enemies who can’t trust one another even possible? With that admitted, it is hard to see a stable end-game.

Germany

German PPI Shows Pressure, But It’s Limited

Economy in Brief: October 2010

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