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

**The Plumbing Tightens Again**
Euro area manufacturers reported a further lengthening of suppliers’ delivery times in this week’s flash survey, taking the index to its most stretched since the disrupted trading conditions of 2022. Dry bulk freight rates have risen in step, and the coincidence is not accidental. Neither series is signalling strong demand. Vessels diverted away from Bab el-Mandeb and the Gulf are sailing considerably further to deliver the same cargo, which absorbs tonnage, extends voyage times and tightens the freight market without any increase in the volume of goods actually being moved. Manufacturers meet the same phenomenon as delay, and respond by ordering earlier and holding more, which tightens it further. Delivery times of this kind fed producer prices with a lag of two to three quarters after 2021, and there is little reason to expect a different sequence now. The more awkward feature for firms building plans for next year is that the friction is a function of route length rather than of order books, so it will not ease simply because activity slows.

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**A Very Narrow Base**
Consensus forecasts for growth this year have been marked down only modestly since February, which looks surprising set against six months of disrupted energy supply. The aggregate conceals an unusual degree of dispersion. Economies at the centre of the semiconductor supply chain have been upgraded substantially, Taiwan by several percentage points and Korea by more than one, on the strength of an investment boom in artificial intelligence whose physical apparatus they build. Almost everywhere else the revisions run from flat to negative, with Germany, France, Canada and Australia absorbing the energy shock without any equivalent windfall. Strip the chip exporters out and the world number reads considerably worse. That matters for anyone using the global aggregate as an input, because this year it carries less information about the typical economy than usual, and the handful of observations doing most of the work are levered to a single investment cycle.

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Sources: Blue Chip Economic Indicators, WTO and Haver Analytics

**Spending the Buffer**
The world has kept itself supplied with fuel through six months of disruption by drawing on the oil it had already stored, and the scale of that drawdown has no parallel in the available record. The starting position helped, since stocks were built up rapidly through late 2025 and the conflict arrived with storage unusually full. Two things follow. Inventories are a stock rather than a flow, and can be run down only once. And the apparent mildness of the macroeconomic damage so far has been bought with a buffer that is now largely spent, which leaves the system materially less able to absorb whatever arrives next. Some caution is warranted in reading the series, since implied stock change is the residual between estimated world supply and estimated world demand and therefore collects the measurement error in both. Neither the direction nor the magnitude is easily dismissed on those grounds.

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Sources: US Energy Information Administration and Haver Analytics

**Three Disturbances at Once**
Central banks are usually content to look through a commodity shock, and the justification for doing so rests on an assumption that the move will reverse. What has happened since February fits that description less well than usual. Crude and coal have risen because of the Middle East. Cereals, beverages and agricultural raw materials have risen because the World Meteorological Organization put the odds of an El Niño event near ninety per cent at the beginning of June, and West Africa, Southeast Asia and eastern Australia all dry out during the warm phase. Base metals have risen because artificial intelligence and rearmament have made them contested. Three disturbances of broadly comparable size, with different origins and little correlation between them, are therefore running at the same time. That is not a commodity cycle, in which the complex rises and falls together and a policymaker can reasonably wait. It is a queue of supply failures, each arriving before the last has cleared the annual comparison, and a queue is considerably harder to distinguish from a persistent inflation problem — for the policymaker, and for the public whose expectations the policymaker is trying to anchor. Assigning each sub-index to a principal source is a judgement rather than a decomposition, but the point about correlation survives any reasonable redrawing of the categories.

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**Where the Strain Registers**
Labour demand is the clearest evidence so far that the shock has reached the real economy, and it has reached it selectively. Online job postings in the United States drifted lower through last year but have stabilised and turned modestly higher since the spring. In the United Kingdom and Germany they have kept falling, and the British decline has been steep enough to leave postings far below where they began 2025. The official statistics point the same way. German unemployment has been above three million for most of this year, with the Federal Employment Agency describing labour demand as weak even as fiscal policy turns sharply expansionary, while British recruiters have reported falling permanent placements for months. The divergence follows the distributional logic of an energy shock. Economies that import their energy have transferred real income to those that produce it, and firms facing higher input costs and an uncertain demand outlook adjust first by not hiring rather than by dismissing, which is why the deterioration shows up in postings well before it shows up in unemployment. Loosening of this kind would ordinarily argue for easier policy. With the inflation coming from the supply side, it has not.

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**France Steps Away from the Core**
The French premium over Bunds crossed one hundred basis points last week for the first time since the euro crisis of 2011 and 2012, and it now trades wider than Italy’s. Spain, once the standard measure of peripheral stress, sits at less than half the French spread, and that reordering of the currency union’s credit hierarchy is the more telling development. The proximate cause is domestic. Public debt has reached around 119 per cent of output, the deficit remains close to twice the European ceiling, and the Lecornu government is attempting a consolidation of some fifty-four billion euros through a parliament that has already censured two of its predecessors, with a draft budget due at the end of this month. With a presidential election in 2027 and no obvious centrist majority beyond it, what investors are pricing is not the arithmetic of the deficit but the political capacity to act on it. The German side of the spread is no longer still either. Bunds stand at seventeen-year highs, reflecting a borrowing programme that runs to a five-hundred-billion-euro infrastructure fund and defence spending exempted from the debt brake above one per cent of output, and German politics has itself become much less predictable.

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Financial markets have spent this week weighing whether this year's energy shock has passed its peak, and have changed their minds more than once. Brent slipped below $99 as Hormuz shipments were reported recovering and Gulf leaders gathered in New York, only to recover above $100 within a day. The relief in the energy market has proved neither durable nor shared by the bond market. The Federal Reserve raised rates last week for the first time in three years, the ECB has tightened alongside it and the Bank of Japan has moved again, leaving ten-year Treasury yields at levels last seen in 2007 and Bunds at seventeen-year highs. This week’s flash purchasing managers’ surveys help explain the discomfort, with European supply chains lengthening once more as dry bulk freight rates climb (chart 1). The aggregate global growth picture has nonetheless held up better than the geopolitics would imply, though the latest Blue Chip consensus survey continues to suggest that this resilience is concentrated in only a small group of semiconductor exporters rather than shared across the world economy (chart 2). Part of the explanation for the wider containment lies in the oil balance, where a drawdown in stocks without precedent in the available record has substituted for the spare capacity that once cushioned disruptions of this kind (chart 3), and part lies in the character of the commodity shock itself, which now has at least three unrelated sources (chart 4). Labour markets are where the strain has begun to show, and it is showing very unevenly across the advanced economies (chart 5). In European bond markets, meanwhile, the consequences have turned political, with the premium demanded on French debt over German reaching levels not seen since the euro crisis (chart 6).

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Charts of the Week: Narrow Shoulders

Winnie Tapasanun

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New single-family home sales rose 6.4% m/m (-2.0% y/y) to a seasonally adjusted annual rate of 684,000 units in August, exceeding expectations, following an upwardly revised 4.3% decline to 643,000 in July (initially -10.5%, 607,000) and a downwardly revised 5.7% increase to 672,000 in June (previously +7.6%, 678,000), data from the U.S. Census Bureau showed, indicating that demand for new homes remained relatively resilient despite higher mortgage rates. The Action Economics Forecast Survey had expected August sales of 615,000. August marked the highest level since December 2025, down 9.6% from a high of 757,000 in November 2025 but up 27.9% from a low of 535,000 in July 2022. The August rise occurred alongside an increase in the average 30-year fixed mortgage rate to 6.67%, the highest since July 2025, from 6.54% in July, according to Freddie Mac.

Regionally, August new home sales showed a mixed performance. Sales in the Midwest surged 84.9% (22.5% y/y) to 98,000 in August, the first m/m rise in three months and the highest reading since December 2025, following a 32.1% plunge to 53,000 in July. Sales in the South climbed 6.9% (3.4% y/y) to 451,000, the third m/m gain in four months and the strongest level since November 2025, after a 3.7% July decline to 422,000. In contrast, sales in the Northeast plummeted 36.1% (-20.7% y/y) to 23,000, the first m/m decrease and the lowest level since February, after a 16.1% July advance to 36,000. Sales in the West dropped 15.2% (-26.8% y/y) to 112,000, matching the lowest level since October 2025, following a 5.6% July rebound to 132,000. Notably, the South remained the dominant region, accounting for 65.9% of total U.S. new home sales.

The median sales price of a new home rose 0.4% (-5.8% y/y) to $393,700 in August, the first m/m rise since April, after a 3.5% decline to $392,200 in July. The median sales price was 14.5% below its record high of $460,300 in October 2022 but 9.0% above a low of $361,100 in June 2021. The average sales price fell 9.1% (-8.8% y/y) to $478,700, the lowest since August 2024, following a 6.2% July gain to $526,400. The average price was 0.7% above a low of $475,600 in August 2024 but 11.5% below a peak of $541,200 in July 2022. These sales price data are not seasonally adjusted.

The number of unsold new homes on the market was unchanged (-2.0% y/y) at 483,000 in August and July following a 1.4% decrease to 480,000 in June. The latest figure was 13.9% above a low of 424,000 in May 2023. The seasonally adjusted months' supply of new homes for sale fell to 8.5 months in August, the lowest since December 2025, from 9.0 months in July, still above a low of 6.9 months in May 2023 but below a high of 10.3 months in July 2022.

The median number of months a new home stayed on the market held steady at 3.2 months in August and July after registering at 3.4 months in June, remaining the lowest since January. The latest reading was above its record low of 1.5 months in September and October 2022 but well below a peak of 5.1 months in March 2021. These figures date back to January 1975.

New home sales are recorded when the sales contract is signed. New home sales activity and prices are available in Haver's **USECON** database. The consensus expectation figure from Action Economics is available in the **AS1REPNA** database.

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- Sales +6.4% m/m (-2.0% y/y) to 684,000 in Aug.; up 27.9% from a July ’22 low.
- Sales m/m up in the Midwest (+84.9%) and South (+6.9%); down in the Northeast (-36.1%) and West (-15.2%).
- Median sales price +0.4% m/m to $393,700, first rise since Apr.; avg. price -9.1% m/m to $478,700, a two-year low.
- Unsold inventory unchanged (-2.0% y/y) at 483,000; months' supply down to 8.5 mths., lowest since Dec. ’25.

U.S. New Home Sales Rebound to an Eight-Month High in August

Michael J. Moran

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The US current account, a broad measure of trade and income flows between the US and the rest of the world, deteriorated in the second quarter, with the deficit widening by $33.4 billion to $246.0 billion. The shortfall was among the widest of the past several years, excluding observations in late 2024 and early 2025 when businesses rushed to import goods before the likely imposition of tariffs. The latest shortfall also is larger than the norm seen during the years before the pandemic (chart, upper left).

Measured as a share of GDP, the picture is a bit brighter. The latest shortfall is still in the upper portion of the recent range, but it is not as far out of line with pre-pandemic norms. In fact, it is about equal to observations in 2010 and early 2011. The deficit as a share of GDP was strikingly deep in the mid-2000s, when a general broadening in international trade and strength in the US economy led to sharper growth in imports than exports (chart, upper right).

The trade balance is the largest component of the current account, and in most quarters it is responsible for the lion’s share of the change in the current account. That was the case in Q2, as the trade deficit widened by $41.0 billion to $199.8 billion. The deepening in the trade deficit was sizeable—the second-largest in the history of the series, exceeded only by the tariff-related surge in 2025-Q1. However, the change was not surprising, as monthly figures on trade suggested noticeable deterioration.

Exports performed well during the second quarter, increasing at an annual rate of 14.0%, which followed a jump of 30.1% in Q1. However, imports also were strong, surging 29.1% in Q2 after a jump of 16.8% in Q1 (annual rates). These solid performances provided a lift to already-respectable upward trends (chart, lower left).

The income component of the current account consists of primary income and secondary income. Primary income consists of net investment income (receipts from abroad less payments abroad) and net employee compensation (remuneration received by US residents from foreign businesses while working temporarily in foreign countries, less remuneration received by foreign residents from US businesses while working temporarily in the United States). The compensation component of primary income is small; movements in total primary income are dominated by the investment component.

Historically, net investment income for the United States was strong, as US investors and businesses favored equity-related instruments and generally earned attractive returns. Foreign investors in the US, in contrast, leaned more toward fixed-income instruments, which typically yield less than equity. The US advantage in investment income began to fade in 2018, and net investment income shifted into negative territory in 2023-Q4. The deterioration was primarily the result of expanding volumes of foreign investment in the US (required to balance the trade deficit), which overwhelmed the rate-of-return disadvantage seen in years past. In addition, the strong US stock market in recent years most likely improved the returns earned by foreigners in the US.

Secondary income consists of net transfer payments between US residents and nonresidents. (Transfer payments are monetary flows that are not matched by a good or service or asset in return. Examples include pensions, personal insurance settlements, personal remittances, charitable donations, fines and penalties.) Secondary income for the US is nearly always negative (only one positive quarter in the history of the series). The softness deepened in late 2023, but it has recovered in the past year or so. The reasons for recent shifts are not clear, but a logical explanation would involve personal remittances. The strong performance of the US economy in 2023-24 may have led to strong personal remittances (foreign workers sending money home). The immigration policies of President Trump could be leading to a drop in remittances and an improvement recently in secondary income.

Balance of Payments data are in Haver’s **USINT** database, with summaries available in **USECON**. The expectations figure is in the **AS1REPNA** database.

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- A widening in the trade deficit deepened the current account shortfall.
- Both primary and secondary income improved slightly (i.e. became less negative).


US Current Account in Q2: Additional Slippage

Robert Brusca

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**BOE Decision to Hold Rates in the Face of Inflation Seems Prescient**
While inflation continued to be a problem as the Bank of England had its last policy meeting, the BOE decided to hold the line on the policy rate despite a slightly worse inflation report than expected just prior to the meeting of the central bank committee. One reason was that inflation, which was flaring because of pressure on oil prices, had not been spreading in the economy. The BOE didn't see a reason to raise interest rates to stop a spread that wasn't occurring, and the MPC knew there was no reason to raise interest rates to roll back oil prices because interest rates would have no effect on oil prices, which were rising globally for completely different reasons.

The decision to hold off on interest rates is certainly further justified as the CBI retail sales report for September shows a worsening in sales compared to a year ago, a worsening in orders, a worsening of sales for time of year, and a small pickup in the level of stocks that is arguably involuntary.

The changes on the month are in fact severe, and not technical, with sales compared to a year ago falling to -55 in September from -48 in August, while orders compared to a year ago posted a net reading of -62, down from -29, more than doubling their previous negative value. Sales for the time of year also fell severely to a net reading of -40 in September from -26 in August. These are massive changes in already negative numbers on a monthly basis.

The percentile standings for these values are also extremely low. Orders compared to a year ago are at the lowest value seen in data since December 2001. Sales compared to a year ago have been weaker only 1% of the time. Sales compared to what they normally do this time of year have a 4.4 percentile standing; they are weaker, less than 5% of the time. While the inventory number crawled higher, it has a 21.1 percentile standing. None of these figures inspire any confidence as to the shape of the consumer. And the outlook doesn’t get better either.

A survey of expectations also shows severe deterioration, not just deterioration, for October compared to September. Sales, compared to a year ago, dropped to a net value of -37 in October from -22 in September, carving out a 6.4 percentile standing, another extremely weak standing, this time for expected sales. Orders compared to a year ago logged a reading of -63 in October compared to -40 in September; this is another very sharp deterioration in view of severe weakness the month before. It’s another all-time low for the reading on data since December 2001. Sales for the time of year weakened to a reading of -39 in October from -29 in September, creating a 4.3 percentile standing, yet another bottom 5% standing, this time for expected sales for the time of year.

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There was nothing redeeming in this survey. There was nothing that put these data in a different context or that made them look better. These are simply extremely weak readings, with two readings that are the weakest we've seen over the comparative timeline.

The U.K. economy is undergoing a number of different stresses. Inflation is one of them; a severely constrained budget is another because the deficit is already large. The debt-to-GDP ratio is high; that’s another one of them. So, the options for stimulating the economy are few. In this environment and particularly with the economic area around the U.K. also weak, there is little to fire up the economy, and the data now strongly suggest that the reason we are not getting knock-on effects from the increase in energy prices is because the economy is simply too weak to generate knock-on effects.

This is certainly one of the issues that the Bank of England has been considering as it met and looked at economic conditions. Three of the Monetary Policy Committee members had wanted to raise rates because they were concerned about the fact that inflation was too high and not falling. But the committee opted to hold its fire because there had been no spread of oil inflation, and certainly the report today shows retail sales volumes are weak and are expected to remain very weak. That observation suggests that this was the right judgment to make, at least for now, because the consumer appears to be quite weakened and on the ropes.

United Kingdom

U.K. Retail Sales Come Up Lame in September

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Japan, a usual early reporter, has not reported early this month. But among the seven reporters, five show improved monthly performance in September compared to August. The United Kingdom and Australia are weaker on the month. The euro area, Germany, France, India, and the United States are better on the month. Four of seven reporters show queue standings for monthly readings that are above their averages of the past 4½ years. The U.S. composite queue standing is exceptionally strong, with an 89.7 percentile standing for its composite index in September.

Ironically, India, which has the lowest queue-ranking index, has the second highest diffusion reading among the September reporters, at 56.5. It is second only to the U.S. at 58.4. That result for India simply underscores how well India’s economy has done over the past 4½ years compared to everyone else. To flesh that out, over the past 4½ years India’s composite average has been 58.1; the U.S., 53.6; the U.K., 52.4; the euro area, 51.3; Australia, 51.1; Germany, 50.9; and France, 49.9. France is the only reporter in the table to have averaged a composite index that shows a net decline over the whole period.

These average rankings give you some idea of how weak the past 4½ year period has been. Both Germany and France also log manufacturing readings below 50, indicating manufacturing sector contraction on average. In the euro area, the average reading was 50.9—above breakeven of 50 but by less than one diffusion point—obviously weighed down by France and Germany. Australia is the only country that has an average services reading weaker than its manufacturing reading for the full period.

Sequentially, the manufacturing data are improving from 12 months to six months to three months. Services are close to that same phenomenon but on relatively flat numbers. Over the past three months, the composite index, manufacturing, and services are all steadily progressing higher when a simple average of the seven responses is collected. There are three sectors and seven countries sketching out 21 comparisons each month. August and September each have eight weaker responses out of 21, while July had only three responses of ‘weaker’ out of 21.

The queue standings, which rank the current index levels across sectors for the last 4½ years, show 14 of 21 readings above their respective means, that is, with a standing of over 50%. India’s standing is the weakest with all readings below 50%, but that is much more a statement about past strength than about current weakness. The U.K. and Australia each have two sectors below 50% in standing. For Australia, it is the composite and manufacturing; for the U.K., it is the composite and services. However, for all countries, manufacturing performance in September is worse than it was in January 2021.

As of September, there is still a good deal of manufacturing weakness in play, with four of seven early reporters showing manufacturing weaker monthly in September. Only the U.K. and Australia have weaker service sectors month-to-month.

On balance, the S&P PMI readings show that the global economy is still getting stronger despite inflation, rate hikes, and challenges posed by war and geopolitical tensions. However, we should not assume that progress will continue apace. To some extent growth has been maintained by running down stocks of scarce goods, and some stocks of needed items may now be low. Winter is coming, and with it will come the demand for a winter energy source. It is no time to get complacent.

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S&P PMIs Five of Seven Early Reporters Show Stronger Output in September

Economy in Brief: September 2016

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