Carol Stone, CBE

The ISM-Chicago Purchasing Managers Business Barometer recovered moderately in December after its fall in November. The overall PMI index was 44.9, up from 37.2 which had marked a drop from October’s 45.2. Haver Analytics has constructed an ISM-adjusted index with methodology similar to the national ISM Composite Index; for December, that measure was 45.0, up from 44.7 in November. These overall indexes, which are below the break-even 50 level, still indicate that activity is decreasing, but by less than in November. The December improvement still leaves the survey results weaker than many months through September. However, the December result is better than had been expected in the Action Economics forecast survey, which called for a reading of 40.0.

The recovery in the overall December index reflects advances in several basic components, especially order backlogs, which registered 53.7, up from 36.1 in November and the highest since last June’s 55.2. The backlog increase was accompanied by increases in new orders from 30.7 to 44.1 and in production from 35.9 to 39.2. So clearly production remains relatively weak, but it didn’t slow as much in December has it had in November. Supply delivery times then lengthened to 52.7 from 49.9.

Three of the sub-indexes did slow in December. Inventories were 48.0, down from 59.8. Employment was 40.8, down from 47.1 and prices paid were 64.1 down from 66.2. This last item obviously still reflects substantial inflationary pressure, just somewhat less than in November and, indeed, markedly less than the recent high of 94.1 in October 2021. So there is still certainly inflationary pressure.

The Chicago Business Barometer is considered to be a leading indicator of the U.S. economy. Readings above 50 indicate expansion while those below 50 suggest contraction. Summary data are contained in Haver’s **USECON** database with detail, including the ISM-style index, in the **SURVEYS** database. The expectation figure from the Action Economics Forecast Survey is in the **AS1REPNA** database.

- Order backlogs move up above 50, to 53.7.

- Production up modestly to 39.2.

- Employment down to 40.8.

U.S. Chicago Business Barometer Shows Some Recovery, but Still Under 50

Kathleen Stephansen, CBE

Initial claims for unemployment insurance rose to 225,000 (6.6% y/y) during the week ended December 24 from the previous week's unrevised level of 216,000. A level of 220,000 had been expected in the Action Economics Forecast Survey.

The 4-week moving average of initial claims was 221,000, a decrease from the previous week's average of 221,250, revised from 221,750. It remained well below an early-August high of 249,500 but also well above an early-April low of 170,500.

In the week ended December 17, continued weeks claimed for unemployment insurance increased to 1.710 million (-4.6% y/y) from 1.669 million in the prior week, revised down from 1.672 million. The 4-week moving average was 1.680 million, a rise of 25,250 from the previous week's 1.654 million, revised from 1.657 million.

The insured unemployment rate in the week ended December 17 was steady at 1.2%. The insured unemployment rate edged up to 1.2% in late November from 1.0% in early that month. It had been as low as 0.9% between May and July.

In the week ended December 10, the total number of continued weeks claimed in all unemployment insurance programs was 1.620 million (-15.7% y/y) up from 1.528 million the week prior. This total includes federal employees, newly discharged veterans, extended benefits and other specialized programs and is not seasonally adjusted. Claims in the Pandemic Unemployment Assistance program and Pandemic Emergency Unemployment Compensation are no longer included in the main Labor Department press release, as both programs have expired.

The insured rates of unemployment in regular programs vary across states. The highest insured unemployment rates in the week ending December 10 were in Alaska (2.28%), California (2.06%), New Jersey (2.11%), Puerto Rico (1.99%), Minnesota (1.83%), Montana (1.78%), Rhode Island (1.67%), Massachusetts (1.62%), New York (1.61%), and Washington (1.57%). The lowest rates were in Alabama (0.24%), Virginia (0.25%), Kansas (0.30%), and New Hampshire (0.35%). Other state insured rates of unemployment in regular programs include Illinois (1.54%), Pennsylvania (1.39%), Texas (0.93%) and Florida (0.47%). These state rates are not seasonally adjusted.

Data on weekly unemployment claims going back to 1967 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 Forecast Survey, carried in the **AS1REPNA** database.

- Claims rose 9,000 in the week ended December 24.

- Continued weeks claimed were up modestly.

- Insured unemployment rate holds steady.

U.S. Initial Claims for Unemployment Insurance Edged Up in Latest Week

Winnie Tapasanun

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The Pending Home Sales Index fell 4.0% m/m (-37.8% y/y) to 73.9 in November after drops of 4.7% in October (-4.6% initially) and 8.7% in September, according to the National Association of Realtors (NAR). The November reading was the sixth consecutive m/m fall to the lowest index level since April 2020’s 71.6. Pending home sales have fallen 42.3% since their August 2020 high of 128.0.

Pending home sales decreased in all the major regions in the country in November. Sales in the Northeast worsened 7.9% (-34.9% y/y), the sixth straight m/m drop, on top of a 4.3% October decline. Sales in the Midwest fell 6.6% (-31.6% y/y), the sixth m/m fall in seven months, following a 3.1% October rebound. Sales in the South slid 2.3% (-38.5% y/y), the sixth successive m/m slide, after a 6.4% October drop. Sales in the West were down 0.9% (-45.7% y/y), the third consecutive m/m decline, after a 11.3% October decrease.

The pending home sales index measures sales at the time the contract for the purchase of an existing home is signed, similar to the Census Bureau's new home sales data. In contrast, the National Association of Realtors' existing home sales data are recorded when the sale is closed, which is usually a couple of months after the sales contract has been signed. In developing the pending home sales index, the NAR found that the level of monthly sales contract activity leads the level of closed existing home sales by about two months.

The series dates back to 2001 and are available in Haver's **PREALTOR** database. Weekly mortgage interest rates from the Mortgage Bankers Association can be found in the **SURVEYW** database.

- -4.0% m/m (-37.8% y/y) in Nov. vs. -4.7% m/m (-37.1% y/y) in Oct.
- November PHSI at 73.9, lowest since April 2020.
- Widespread m/m drops in all the major regions, w/ double-digit y/y falling rates.
- With mortgage rates declining, home-buying activity will likely rebound and help GDP growth in the near term.

U.S. Pending Home Sales Fall for the Sixth Straight Month in November

Sandy Batten

U.S. house prices were unchanged in October following an unrevised 0.1% m/m increase in September. Prices appear to have stabilized after falling in both July and August. Compared to a year ago, prices were up 9.8%, well off their peak of 19.3% reached in February. The aggressive rate hikes by the Federal Reserve have been reflected in markedly higher mortgage interest rates, which have taken their toll on the housing market.

For the nine census divisions, seasonally adjusted monthly house price changes from September to October ranged from -0.9% m/m in the Pacific division, the fifth monthly decline in the past six months, to +1.4% in the New England division following a 1.0% monthly drop in September. The 12-month changes were all positive, ranging from +4.5% in the Pacific division to +14.1% in the South Atlantic division. Annual rates of increase in every region are well off their highs that were generally reached early this year. However, for most regions, the annual gains are still considerably faster than they were in the seven years preceding the short 2020 recession induced by the COVID-related lockdown of the economy.

The FHFA house price index is a weighted purchase-only index that measures average price changes in repeat sales of the same property. An associated quarterly index includes refinancings on the same kinds of properties. The indexes are based on transactions involving conforming conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac. Only mortgage transactions on single-family properties are included.

The **FHFA** data are available in Haver’s **USECON** database.

• FHFA HPI was unchanged in October following an unrevised slight +0.1% m/m increase in September after monthly declines in the preceding two months.

• House prices fell in five of the nine census divisions and rose in the other four.

• Largest decline in the Pacific region; largest increase in New England.

U.S. FHFA House Prices Unchanged in October

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The advance estimate of the U.S. international trade deficit in goods narrowed to $83.35 billion in November from $98.80 billion in October, according to the U.S. Census Bureau. This was the first time since August in which the goods deficit had narrowed. The November deficit was smaller than a $97.17 billion shortfall last November and the smallest since December 2020. A $96.5 billion deficit had been expected by the Action Economics Forecast Survey. The deficit had reached a peak of $125.66 billion in March. The goods trade deficit shrank to $268.55 billion in Q3'22, the smallest shortfall since Q2'21, from $309.37 billion in Q2'22. The narrower deficit showed net exports added 2.9%-points to Q3 GDP growth after having added 1.2%-points in Q2.

Total exports fell 3.1% m/m (+8.5% y/y) in November, the third consecutive m/m fall, after a 2.0% decline in October. However, exports have risen 8.2% since January. Total imports slid 7.6% (-0.2% y/y) in November, the first m/m slide since August and the deepest since April 2020, after a 1.0% increase in October. Imports have fallen 4.2% since January.

The decline in exports in November reflected exports m/m drops of 5.8% (+14.2% y/y) in industrial supplies & materials, 5.7% (+16.6% y/y) in other goods, 4.6% (-10.0% y/y) in foods, feeds & beverages, and 2.2% (+9.3% y/y) in capital goods excluding autos. To the upside, exports of consumer goods excluding autos (4.0% m/m; -1.8% y/y) and automotive vehicles & parts (1.0% m/m; 14.6% y/y) registered their monthly gains.

The slide in imports in November reflected imports m/m declines in all the end-use imports categories. These included drops of 13.0% (-10.0% y/y) in consumer goods excluding autos, 8.9% (+13.8% y/y) in automotive vehicles & parts, 6.0% (-2.8% y/y) in industrial supplies & materials, 5.5% (+1.9% y/y) in foods, feeds & beverages, 5.1% (-15.5% y/y) in other goods, and 4.3% (+8.3% y/y) in capital goods excluding autos.

The advance international trade data can be found in Haver's **USECON** database. The expectation figure is from the Action Economics Forecast Survey, which is in **AS1REPNA**.

- $83.35 billion deficit in November, smaller than expected.

- Exports decline 3.1%, down for the third straight month.

- Imports fall 7.6% following two consecutive m/m rises.

U.S. Goods Trade Deficit Narrows in November; Lowest Since Dec. '20

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The Conference Board U.S. Consumer Confidence Index rose 6.8% (-6.0% y/y) to 108.3 in December, the first monthly rise since September to the highest level since April, after a 0.8% decline to 101.4 in November (-2.0%; 100.2 initially). The December reading was down from 115.2 last December and 16.0% below its recent high of 128.9 in June 2021. A reading of 101.0 had been expected in the Action Economics Forecast Survey.

Consumers' views of present and future economic conditions improved this month following two consecutive monthly drops. The Present Situation Index rose 6.4% (1.7% y/y) to 147.2 in December, the highest level since September, after a 0.3% decline to 138.3 in November. The index was slightly higher than 144.8 last December. The Expectations Index rose 7.4% (-13.6% y/y) to 82.4 this month, the highest level since January, after a 1.5% drop to 76.7 in November. It was below 95.4 last December and down 26.4% from its recent peak of 111.9 in March 2021.

Labor market readings showed more optimism this month. The jobs gap, representing the difference between respondents indicating that jobs are plentiful and those saying jobs are hard to get, rebounded to 35.8% in December, the first monthly rise since September, from 31.5% in November. But it was below a record 47.1% in March and 44.2% last December. Calculated by Haver Analytics, this series has had a 67% correlation with the unemployment rate over the last ten years. The jobs plentiful measure rose this month to a three-month-high 47.8% from 45.2% in November, but it remained below a record 56.7% in March and 55.9% last December. The jobs hard-to-get measure fell to 12.0% of respondents in December from 13.7% in November, but it was up from a 9.6% low in March and 11.7% last December.

Consumers viewed business conditions as more favorable compared to last month. Current business conditions were perceived as good by 19.0% of respondents in December, the highest since September, up from 17.8% in November but down from 19.4% last December and a 25.2% high in June 2021. Expectations that business conditions would improve in six months were 20.4% of respondents, up from 19.8% in November and a 13.7% low in July but down from 25.4% last December and a record 42.5% in May 2020. More jobs were expected in six months by 19.5% of respondents, slightly up from 18.5% in November but down from 24.2% last December and a record 41.2% in April 2020. The percentage expecting rising income declined to 16.7% of respondents in December, the lowest since August, from 17.1% in November and 17.5% last December. But it was slightly up from a 15.3% July low.

Inflation expectations eased this month but remained high. The expected inflation rate in twelve months declined to 6.7% in December, the lowest since September 2021, from 7.1% in November. The December reading was down from a 7.9% high in June and 6.9% last December but noticeably up from a 4.4% low in January 2020. A 64.3% of respondents expected that interest rates would rise over the next twelve months, slightly down from 65.9% in November but up from 61.0% last December.

The share of respondents planning to buy a home within six months fell to a three-month-low 6.2% in December from 6.5% in November. It was down from 6.9% last December and a 7.7% high in July 2020 but up from a 4.5% July low. Those planning to buy a major appliance declined to 43.1% of respondents in December from 44.9% in November. The December reading, while slightly above a 41.1% July low, was below 47.8% last December and a 53.9% high in July 2021.

The Consumer Confidence data are available in Haver's **CBDB** database. The total indexes, which are indexed to 1985=100, appear in **USECON**, and market expectations are in **AS1REPNA**.

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- Up 6.9 pts. to a higher-than-expected 108.3 in Dec.; highest since April.

- Present Situation Index increases to a three-month-high 147.2 after two consecutive m/m declines.

- Expectations Index recovers to 82.4, the highest level since Jan., following two successive m/m decreases, but recession risks persist.

- Consumers more optimistic about the current business conditions and the short-term business conditions outlook; more upbeat about the present labor market and the short-term labor market outlook.

- Inflation expectations retreat to their lowest level since Sept. '21.

U.S. Consumer Confidence Rebounds in December After Two Straight M/M Drops

Manufacturers tallied a 2.1% decline in new orders for durable goods in November (6.2% y/y) according to the latest Census Bureau data, after a 0.7% increase in October. That earlier tally was revised from a 1.0% advance reported initially. The Action Economics survey had projected November's move to be a 1.0% decrease.

The November decline in total new orders reflects a notable mix among industries. The largest decline was in nondefense aircraft, -57.3% (-8.2% y/y) after a 4.5% rise in October; defense aircraft orders were down 8.6% in the month (+9.2% y/y) after an 18.2% advance in October. There were also declines in primary metals orders, down 0.4% (1.9% y/y) following October's 0.7% decrease, and in motor vehicles and parts, down 0.07% (+14.1% y/y) after October's 0.8% increase. But November had gains in orders in several sectors: computers and electronic products, +0.6% (1.7% y/y) following a decrease of 0.2% in October, electrical equipment, 0.2% (+4.5% y/y) after October's 0.1% decrease, fabricated metals, 0.1% +3.0% y/y) after being unchanged in October, and “other durable goods,” 0.2% (+3.0%) following a 0.2% decrease in October. Total capital goods orders fell 5.5% (+5.2% y/y) in November following a 1.4% increase in October.

Even as new orders for nondefense aircraft dropped, that industry's shipments gained in November, rising 5.4% (+40.7% y/y) after increasing 2.2% in October. Total shipments of durable goods rose 0.2% (+8.8% y/y) after 0.4% in October, and total capital goods shipments rose 0.6% (+11.6% y/y) after 1.2% in October. Shipments of nondefense capital goods gained 0.8% (+12.8% y/y) in November following 1.6% the month before.

Manufacturers' orders and shipments of durable goods, as well as nondurable goods, are available in Haver's **USECON** database. Unfilled orders and inventories are also included. The Action Economics forecast data are in the **AS1REPNA** database.

- Sizable gains and declines in orders among industries.

- Nondefense aircraft orders post marked drop, but shipments advance.

- Orders for computers & electronic equipment also rise.

U.S. Durable Goods Orders Register a Notable Decline in November

Personal income rose 0.4% (4.7% y/y) during November versus expectations for a 0.3% rise and following a 0.7% (4.8% y/y) in October. The gain reflected a 0.5% rise (6.2% y/y) in wages & salaries, corresponding to continued employment growth, and following a 0.5% rise in October. Proprietors' income eased 0.2% (3.7% y/y) following a similar retrenchment in October. Rental income eased 0.1% % (7.2% y/y) in November. Receipts on assets rose 0.5% (4.9% y/y) as interest income increased 0.6% (6.6% y/y) and dividend income rose 0.3 % (3.2% y/y). Personal transfer receipts increased 0.3% (1.1% y/y). Disposable income rose 0.4% (2.9% y/y) in November, following a rise of 0.7% (2.9% y/y) in October, while real disposable earnings rose 0.3% (-2.5% y/y) in November following an increase of 0.4% (-3.0% y/y) in October.

The personal saving rate edged up to 2.4% in November after the near record low of 2.2% in October, revised from 2.3%. The level of personal savings bounced back 10% last month from a decline of 5.2% in October and was 64.8% lower y/y.

Personal consumption expenditures (PCE) increased 0.1% (7.7% y/y) in November, after rising 0.9% (8.1% y/y) during October, initially reported as a 0.8% (7.9% y/y) rise. The Action Economics Forecast Survey had expected a 0.1% rise. In November, real PCE increased less than 0.1% (2.0% y/y), reflecting a decrease of 0.6% in spending on goods and an increase of 0.3% in spending on services. Real spending on durable goods declined 1.5% (+0.6% y/y) last month as spending on motor vehicle & parts decreased 4.3% (-1.5% y/y) after surging 5.2% in October. Real spending of furniture & appliances decreased 0.4% (-1.5% y/y) in November, after a 1.2% rise in October. Real spending on recreational goods & vehicles rose 0.5% (5.3% y/y) following a 0.4% increase in October.

Real spending on nondurable goods edged down 0.1% (-1.5% y/y) in November, after rising 0.2% (-1.5% y/y) in October. Outlays on gasoline & other energy products fell 1.5% (-4.2% y/y) following a 0.7% decline in October. Real apparel spending declined 0.6% (0.6% y/y) last month, after a 0.2% rise in October and real outlays on food & beverages gained 0.3% (-4.6% y/y) following a 0.2% rise the prior month.

Real spending on household consumer services improved rose 0.3% (3.3% y/y), after a 0.2% (3.1% y/y) rise in October. Real transportation services outlays dropped 1.0% (+1.7% y/y) after a 0.4% rise the prior month, while real housing & utilities expenditures rose 0.3% (1.2% y/y) after a similar 0.3% in October. Real healthcare spending gained 0.3% in last month (2.3% y/y) after a 0.3% rise in October. Recreation services buying declined 0.1% (3.8% y/y) in November following a 0.2% rise in October, while real food services and accommodations rose 0.8% (7.3% y/y) last month after a 0.4% rise in October. Real spending on financial services and insurance rose 0.3% (1.6% y/y) last month after a 0.2% gain in October.

The personal income and consumption figures are available in Haver's **USECON** database with detail in the **USNA** database. The Action Economics forecasts are in **AS1REPNA**.

- Personal income beat expectations in November.

- Wage increases remain firm.

- Real spending on goods declined while real spending on services increased during November.

U.S. Personal Income Rose in November but Real Spending Was Flat

Positive US economic data surprises leading to upward adjustment of interest rate expectations

Recent aggressive policy easing in China has given a massive boost to equity prices

FOMC expects much more easing now than in June

US is clear world leader in business capital spending on artificial intelligence

Blue Chip forecasters expect US to lead aggressive policy rate cuts over coming year—apart from Japan

Ratio of job openings to the number unemployed in the US now below pre-pandemic level

U.S. layoffs not showing as much cooling in labor markets as unemployment rate

While goods prices have moderated, service price inflation remains elevated and sticky

Since Jan 2023, BCEI US outlook has improved, worsened for Japan and the euro area

Persistent negative US economic surprises leading to big rate-cut expectations

Germany is Euro area weakling

Flash PMIs show good start to Q3 in US; loss of momentum in the euro area

Chinese economy on downtrend could threaten global economy

Working age population labor force participation near all-time high as retirements increase

Blue Chip forecasters look for widespread policy rate cuts just ahead

Flash June PMIs point to a widespread slowdown apart from the US

Announcement of snap French election is causing concern across Europe

The UK economy’s post-pandemic under-performance relative to its pre-pandemic trend

US Beveridge Curve back to near pre-pandemic levels

Negative economic surprises in the US but positive in Europe, especially the UK

Latest PMIs show US losing momentum while RoW is gaining momentum

Sticky services prices behind sticky overall PCE inflation

Flash April PMIs point to slower growth in the US but a pickup in Europe and Japan

Outlook strengthens for US while it weakens for other major economies

Crude petroleum prices are having a big impact on inflation expectations

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Tom Moeller

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The Industrial Materials Price Index from the Foundation for International Business and Economic Research (FIBER) increased 3.2% (3.7% y/y) during the four weeks ended October 11, 2024, the same as it did four weeks earlier.

Prices in the Metals group led the rise and increased 8.0% (15.8% y/y) over the most recent four weeks. Zinc prices gained 13.4% (25.5% y/y) in four weeks and aluminum prices rose 10.2% (18.2% y/y). Copper scrap prices rose 7.1% in four weeks (21.5% y/y), while tin prices gained 6.7% (35.6% y/y) in four weeks. Also, lead prices firmed 5.8% in four weeks (-4.2% y/y) and steel scrap prices rose 5.9% (6.0% y/y) over four weeks.

Crude Oil & Benzene group prices increased 2.7% (-9.1% y/y) in the latest four weeks. The cost of West Texas Intermediate crude oil rose 10.6	% in four weeks to $74.85 per barrel, but was 11.2% lower y/y. The cost of the petro-chemical benzene, used for making plastics & synthetic fibers, fell 5.6% (-23.1% y/y) in the last four weeks. Excluding crude oil, the industrial commodity price index rose 2.8% (4.6% y/y) in the latest four-week period.

Textile group prices rose 1.3% (-1.3% y/y) over the same four week period. Cotton prices rose 6.3% (-18.0% y/y) in four weeks. The cost of burlap posted a 2.6% rise (18.3% y/y) during the last four weeks.

Prices in the Miscellaneous group improved 0.9% during the last four weeks and were up 4.5% y/y. The cost of natural rubber rose 5.0% in four weeks and jumped 81.0% y/y. Plywood prices improved 3.2% over the last four weeks (5.1% y/y).

The Foundation for International Business and Economic Research (FIBER) develops economic measurement techniques as applied to business cycles and inflation in the U.S. and other market economies. The commodity price data can be found in Haver's **DAILY**, **WEEKLY**, **USECON** and **CMDTY** databases.

**Thoughts on the Economy and Policy Rules at the Federal Open Market Committee** by Fed Governor Christopher J. Waller can be found [here](https://www.federalreserve.gov/newsevents/speech/waller20241014a.htm).

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- Metals prices surge for second consecutive period.	
- Increasing crude oil costs push energy price index higher.
- Textile prices continue to increase.

FIBER: Industrial Commodity Prices Strengthen Broadly in Latest Four Weeks

Tian Yong Woon

In this week’s letter, we examine the reactions of China’s equity markets following the Golden Week holidays, highlighting investors' disappointment over the latest stimulus announcements (see Chart 1). Despite this, forecasters have slightly raised their growth expectations for China (Chart 2), although pessimism lingers regarding the economy's ability to meet its 5% growth target for the year. Turning to monetary policy developments across Asia, several easing cycles have now been initiated across the region. For instance, New Zealand has begun its easing cycle with a 50 bps rate cut, driven by cooling inflation and weak domestic growth (Chart 3). In India, while the central bank kept policy rates unchanged, it made a significant move by officially shifting its stance to neutral, indicating a closer alignment with an easing approach. This comes amid a robust growth outlook, although inflation risks remain (Chart 4). In South Korea, the central bank has also commenced easing with a 25 bps cut, acknowledging cooling inflation and slower household debt growth (Chart 5), while signalling potential for further reductions ahead. Looking to the week ahead, we anticipate more rate decisions across the region, with additional easing moves seen likely (Chart 6).

**Post-Golden Week China**
Chinese equity markets resumed trading last week after the Golden Week holidays, showing a marked repricing of market expectations (Chart 1). Initial optimism over central bank easing measures faced a reality check following government announcements. Specifically, China’s National Development and Reform Commission outlined initiatives for October, including 200 billion yuan ($28.3 billion) in advance budget spending. However, despite the significance of these measures, a larger-scale stimulus package that many had anticipated was not announced. After initial market disappointment, Financial Minister Lan held a press conference last Saturday, pledging to bolster China’s economy. However, some observers were still underwhelmed by the lack of specific numerical commitments. Looking ahead, China will release its Q3 GDP figures on Friday, which are keenly awaited as indicators of the economy's health. This will be accompanied by a range of monthly data, including industrial production, retail sales, fixed asset investment, house prices, and unemployment figures. However, insights from these figures on the impact of the recent easing measures are expected to be limited.

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Against the backdrop of recently unveiled easing measures, Blue Chip panellists have slightly raised their growth projections for 2024 to 4.8%, up from 4.7% in September (Chart 2). Expectations for growth in 2025 have also improved, now at 4.4%, compared to the previous forecast of 4.3%. Meanwhile, inflation expectations remain stable at 0.5% for 2024 and 1.4% for 2025. However, the economic situation in China remains uncertain, with recent data indicating an uneven recovery and the impact of newly announced policy easing initiatives yet to materialize. Amidst a concerning trend of disappointing economic data, doubts persist about the country’s ability to achieve its 5% growth target for the year.

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**The week in rate decisions**
The past week revealed some noteworthy rate decisions across the region. In New Zealand, the Reserve Bank (RBNZ) cut its policy rate by 50 bps as widely expected (Chart 3), following the Fed’s lead in September. This substantial easing decision comes as the RBNZ assessed inflation to be within its 1-3% target range and “converging” on the 2% midpoint. The backdrop of soft economic growth in New Zealand also justified the RBNZ’s action, as the economy struggles to avoid a technical recession following a contraction in real GDP in Q2. Furthermore, the RBNZ noted that the New Zealand economy “is now in a state of excess capacity,” which is expected to dampen inflation on the supply side. While consumer sentiment remains weak compared to historical levels, some recent upticks have been observed.

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Monetary policy developments in India were also notable, as the Reserve Bank of India (RBI) opted to maintain its policy rates last week, as expected. However, the central bank shifted its policy stance from one focusing on a withdrawal of accommodation to “neutral.” This change has led observers to speculate that it could signal potential interest rate cuts in the near term. However, there are currently few strong justifications for the RBI to begin a rate cut cycle soon. For one, India’s economic growth remains robust (Chart 4) and is expected to remain robust in the coming quarters. Additionally, while inflation has eased in recent months, the RBI cautions that it may rise significantly in the near future due to base effects and other factors.

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Last Friday, South Korea's central bank (BoK) initiated its easing cycle by cutting the Base Rate by 25 bps to 3.25%, as widely anticipated. The bank justified this decision by citing recent easing inflation trends (Chart 5), as well as slowing growth in household debt and reduced foreign exchange risks. Looking ahead, the BoK appears open to further easing, with Governor Rhee indicating that there is room for additional rate cuts since the policy rate remains above the neutral interest rate. Observers will likely continue to monitor three key factors—inflation, household debt, and financial market stability—as they assess South Korea's future monetary policy trajectory.

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**The week ahead in rate decisions**
The week ahead will see several important rate decisions in Southeast Asia. Central banks in Indonesia, Thailand, and the Philippines are scheduled to announce their policy rate decisions on Wednesday. In Indonesia, while multi-year lows for CPI inflation could support further rate cuts, recent currency fluctuations—particularly the weakness of the rupiah—may prompt the central bank to hesitate, as maintaining currency stability is part of its mandate. In Thailand, the central bank has not signaled an intention to cut rates following its October meeting, but it continues to face pressure from the government and business groups. Meanwhile, in the Philippines, the possibility of additional rate cuts remains open, aligning with the Fed's adjustments.

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Asia

Economic Letter From Asia: Reality Check

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The Producer Price Index for final demand was unchanged (1.8% y/y) during September after rising 0.2% in August and holding steady in July, according to the Bureau of Labor Statistics. The reading compared to expectations for a 0.1% rise in the Action Economics Forecast Survey. Producer prices excluding food, energy & trade services edged 0.1% higher (3.2% y/y) in September after rising 0.2% in August, revised from 0.3%. The PPI excluding food & energy rose an expected 0.2% (2.8% (y/y) after increasing an unrevised 0.3% in August.

Final demand goods prices excluding food & energy rose 0.2% (2.0% y/y) for the third straight month. Core finished consumer goods prices increased 0.2% (2.2% y/y) after rising 0.4%. The increase in core nondurable goods prices moderated to 0.3% in last month (3.0% y/y), half the August increase. Durable consumer goods prices improved 0.1% (1.1% y/y) after rising 0.2% in August. Capital equipment prices rose 0.2% in September (2.6% y/y), the same as in August, after four straight months of 0.1% increase. Government-purchased goods prices increased	 0.3% (2.1% y/y) following a 0.1% uptick.

Final demand services prices rose 0.2% (3.1% y/y) in September, after increasing 0.4% in August. Trade services prices rose 0.2% (1.5% y/y) after strengthening 0.7%. Trade of finished goods prices improved 0.3% (0.9% y/y) following a 0.7% increase. Prices for final demand transportation and warehousing services gained 0.3% last month (0.4% y/y) after a 0.9% decline. Services prices less these costs edged 0.1% higher in September (4.1% y/y) following a 0.4% August rise.

Food prices strengthened 1.0% (3.2% y/y) during September after moving up 0.2% in August. Fruit & melon prices rose 8.3% (4.6% y/y) following a 2.9% decline. Grain prices rose 4.8% (-18.4% y/y) and processed fruit & vegetable costs improved 0.6% (2.3% y/y). Beef & veal prices rose 1.5% (-0.1% y/y) after falling 7.6% in August. Fresh egg prices fell 6.2% (+121.3% y/y) following a 55.1% jump. Fresh vegetable costs declined by 2.5% (+7.7% y/y) and reversed the August increase.

Final demand energy prices declined 2.7% last month (-13.8% y/y) after falling 1.0% in August. Gasoline prices weakened 5.6% (-25.7% y/y) after a 0.5% rise in August. Home heating oil prices fell 11.1% (-35.1% y/y) following a 3.0% decline. Electric power prices rose 2.0% (2.5% y/y) in September after falling 1.2% in August. Natural gas prices rose 1.6% (1.3% y/y) and reversed a 1.4% August decline.

Construction costs edged 0.1% higher in September (1.3% y/y) after holding steady in August.

Prices for intermediate demand of processed goods eased 0.8% (-2.7% y/y) in September after slipping 0.2% in August. Processed energy goods prices fell 4.7% following a 0.9% fall, while food prices rose 0.9% after a 0.2% decline.

The PPI data are published by the Bureau of Labor Statistics and can be found in Haver’s **USECON** database. Further detail is contained in **PPI** and **PPIR**. The expectations figures are available in the **AS1REPNA** database.

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- Core goods prices increase moderately for third straight month.
- Gain in services prices slows.
- Food prices surge while energy costs continue to decline.

U.S. Producer Price Index Holds Steady in September; Core Prices Edge Higher

Robert Brusca

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Money growth has turned positive and the main money center areas show net money growth. Money growth is at 1.9% year-over-year in the European Monetary Union, up by 2% in the U.S., up by 1.8% in the U.K., and by 1.3% in Japan. Comparing the 12-month growth rate to the three- and six-month growth rates in all these countries, we see a progression with money growth becoming stronger. The exception to this observation is Japan, where the M2 plus CDs measure grows 1.3% over 12 months and then reduces its pace over three and six months to 0.3% and 0.4% annualized.

In the European Monetary Union, credit growth is consistently positive and accelerating.

The monetary financial side of the ledger is starting to look very positive from the standpoint of creating growth, however, to the extent that it does that it is also being much less of a factor in terms of restraining inflation.

**Real money balances**
Real money balances over 12 months are still declining in the EMU, in the U.S., in the U.K., and in Japan. However, the situation is in flux; over three months, real money balances are growing in the monetary union- and growing fairly strongly in the U.S.; it is advancing in the U.K. Over three months only Japan shows declines in real money balances.

**EMU credit growth**
The European Monetary Union shows real credit growth contracting over 12 months but at growth rates of 1% or less. These negative growth rates are diminishing over three months. Credit to residents and private credit growth are declining at growth rates less than one-half of 1% as real credit in the monetary union begins to head for inflation-adjusted positive growth.

**A tailwind for growth—at last?**
With these changes in the provision of liquidity and the impact on credit growth, nominal and real GDP growth are going to find more of a tailwind… and so will inflation… 


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**The inflation worm is turning**
The overview for some of the key economic variables in these countries is in the table below. It shows inflation above target and all these major money centers to a greater or lesser extent. The table provides the headline inflation figures, although in most cases core inflation looks much higher than these since oil prices have been weak and falling. The bottom panel of the inflation chart shows changes in the year-over-year inflation rates over six months. There you can see the tendency for inflation to decline is diminishing. Japan is already looking at inflation increasing on balance in each of the last three months when we compare current year-over-year growth and inflation to its result six months ago.

**Industry remains weak but that weakness may be transitioning**
Our statistics are such that we are inundated with data on the industrial side of the economy. The table presents data for industrial production growth year-over-year and on that we have a sea of red figures indicating declines across all these countries and areas for at least the last six months. However, the rate of decline in industrial production has been diminishing.

**Changes in activity broadly**
The second lower panel looks at changes in composite PMI levels year-over-year. There, the story changes significantly, with year-over-year gains reported in the composite activity surveys. The EMU, the U.K., and Japan show increases. The U.S. is the outlier with weaker PMI values compared to a year ago-and in each of the last three months. However, these indicators aren't always the final word. All these countries and areas are continuing to show GDP growth. In the U.S., a popular statistic for tracking GDP known as GDP-Now updated by the Atlanta Fed has been consistently looking for a third quarter growth in the U.S. to be between 2.5% and 3%. That's not too shabby despite the U.S. PMI signals.

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**Are the easing campaigns still in force?**
Meanwhile, central banks have been on easing campaigns but have backed off or slowed the progress of these campaigns as the progress on inflation has slowed as the table above suggests. In the U.S., at least, job growth has come back strongly after a period of some weakness and some downward revisions to past growth rates. In Europe, unemployment rates are still broadly low and for the EMU as a unit, the rate is at an all-time low. Right now, central bankers in the U.S. aren't quite sure what to do with the most recent strong U.S. job growth report and the recent inflation report that has shown more strength than what the Fed had been expecting. Globally the move to less inflation progress is clear in this table and the notion that progress may stay slow, or stop is embedded in the trends for money growth and credit growth in the monetary union.

**Is the inflation turn decisive; will central bank policy change soon?**
All of this raises questions about what happens next and whether this period of inflation deceleration has been brought to an end as money growth turns positive, accelerates, and as real money balances and real credit balances begin to advance. A simple tracking of the inflation data is enough to give inflation-fearing central banker pause. Policy needs are rarely clear cut with unanimous support. U.S. leadership in monetary policy could become more important going forward since the Federal Reserve has just embarked on an easing campaign and launched it with a large rate reduction and - not exactly promises - but with very strong hints of many more cuts to come soon. However, economic data seem to be painting a different picture of the future than the one the Fed expected. Could the Fed easing program start and finish at the same time? That is unlikely but the exuberant expectation for rate cuts will be trimmed. One thing to be aware of is the massive increase in expectations for 5-year ahead and the rise in the expectations for one-year ahead inflation in the U. of Michigan inflation survey. The median rate in that survey (that the Fed prefers) is steady at 3% but the survey mean has shot up over 7% for five-year ahead inflation in the wake of the large Fed rate cut- something I do not think the Fed can continue to ignore.

**A very muddled outlook**
It may be that some of the weaknesses that the Fed thought it saw in economic and job growth was created by hurricane Beryl that hit Houston, Texas. This is significant because the U.S. is currently being blasted by or is cleaning up after two hurricanes: Hurricane Helene and Hurricane Milton. Helene, swept through North Carolina and has done terrible damage and raised a significant death toll. Milton is currently sweeping through Florida; it ripped the roof off the football stadium in Tampa, Florida and it is creating havoc on its own. These hurricanes are going to affect economic data; they're going to affect jobless claims data (already have), job growth data, and they may affect wage and price data as well. This will leave the Federal Reserve with some quandary about what to do with policy. I think it's fair to say in this environment where the Fed has had a bias to cut rates, it gives the Fed a freer hand to ignore economic data that might be strong or on the other hand to embrace weak economic data that are weak even if the reports come out of the distortion of a hurricane. U.S. data may be stepping into a data Twilight Zone; be on guard!

Europe

World Money Growth Is Back on Track...Is Inflation Too?

Andrew Cates

**US growth surprises and Fed policy**
Expectations of upcoming Fed rate cuts have been scaled back markedly over the past two weeks. On September 27, for example, the fed funds futures market looked for US policy rates to fall to 4.275% by the end of this year (the current target is 4.875%). That is, it expected another 60bps of FFR cuts at the remaining two FOMC meetings this year. Now, this market is anticipating only 38 bps of rate cuts at these two meetings. That repricing has been triggered by a bout of stronger-than-expected US dataflow and last week’s employment report for September in particular (see chart 1 below).

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**Supply chain pressures**
Global equity markets have, on the whole, tended to respond favourably to these positive US surprises largely because inflation has remained in check and most central banks are still on course to ease monetary policy in the coming months. There are several risks to this narrative, however, one of which concerns geopolitical tensions in the Middle East and their impact on global supply chains. An index calculated by the New York Fed suggests that global supply chain pressures have lately risen and are now above historical averages. As chart 3 below also suggests, that index has served as a useful leading indicator of upstream price pressures in recent years and certainly points to more elevated rates of producer price inflation in coming months, albeit from relatively depressed levels at present.

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**The consensus for China’s economic outlook**
Against the backdrop of recently announced policy easing measures, the latest Blue Chip survey of economic forecasters reveals some heightened optimism about China’s economic outlook. That survey, for example, yielded a small increase to the consensus growth projection for 2024, to 4.8% in October, up from 4.7% in September. Expectations for growth in 2025 also improved, and now stand at 4.4%, compared to the previous forecast of 4.3%. All that said, the economic situation in China remains uncertain, with recent data indicating an uneven recovery and the impact of newly announced policy easing initiatives yet to materialize. There are certainly many doubts, at present, about the country’s ability to achieve its 5% growth target for this year.

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**Electricity prices in the US versus Germany**
A sluggish Chinese economy tends to generate ripple effects for other economies that have high underlying trade and/or financial exposures. Germany is a good example because China is a major export market. But Germany’s economy has been struggling for other reasons as well, including its high dependence on Russian energy. It is certainly of note that Germany’s electricity prices remain highly elevated at present compared with most major European economies as well as compared with the US (see chart 4 below). Given Germany's large manufacturing sector, which is highly energy-intensive, this has led to substantial cost pressures, reduced profitability, and a broader impact on economic activity.

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**The global economic cycle**
On a brighter note this week’s sentix surveys revealed greater confidence from investors about the global economic outlook. Both the current situation balance and the more forward looking expectations balance improved in October to four month highs (chart 5). This improvement can likely be attributed to the easing cycles that have been initiated by several central banks, and most notably the US Fed, in recent weeks.

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**The Blue Chip growth consensus for 2025**
That aforementioned Blue Chip survey for October also reveals high confidence among economic forecasters that the world economy will experience a soft landing in the months ahead. Although GDP forecasts for 2025 for the euro area were downgraded by a fraction, the outlook for other big economies, was either left unchanged or, in the case of the US, improved. As noted above, moreover, the consensus GDP forecast for China was also increased a little. While the anticipated levels of GDP growth are subdued in many cases, they remain respectable, and are inconsistent with a hard landing scenario for the global economy.

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Last week’s stronger-than-expected US employment report have combined with some comments from FOMC members suggesting the Fed may be in no great hurry to reduce interest rates next year to generate a big repricing in financial markets over the past few days (see chart 1). Geopolitical uncertainty in the Middle East and its impact on supply chains have additionally been a key focus for many investors (chart 2). The outlook for China is also being more actively debated in light of recent policy initiatives designed to shore up the economy (chart 3). The plight of the euro area, and Germany in particular, is equally causing some concern (chart 4). All that said, the incoming survey data this week have offered some reassurance to those that are anticipating a soft landing for the world economy in the coming months (chart 5). That message was implicit too from the latest Blue Chip Survey of Economic Forecasters (chart 6).

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Economy in Brief: December 2022

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