Tom Moeller

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Personal consumption expenditures (PCE) rose 0.8% (4.9% y/y) during February after rising an unrevised 0.2% in January. A 0.5% increase had been expected in the Action Economics Forecast Survey. Adjusted for price changes, PCE rose 0.4% last month (2.4% y/y) after a 0.2% January decline, revised from -0.1%.

Real spending on durable goods rebounded 1.2% last month (1.6% y/y) after falling 2.7% in January. Real spending on motor vehicles surged 3.8% (-4.5% y/y) after a 5.0% decline. Real home furnishings & appliance outlays improved 0.4% (2.2% y/y) after falling 0.9% in January while real spending on recreational goods & vehicles declined 1.1% (+6.5% y/y) after weakening 2.6% in January. Real spending on nondurable goods fell 0.6% last month (+0.8% y/y) after falling 0.5% in January. Real clothing and footwear purchases were off 1.5% (+0.6% y/y) following a 0.6% rise. Real food & beverage buying eased 0.2% (-0.1% y/y), the third consecutive monthly decline. Real spending on services increased 0.6% (3.0% y/y) following two consecutive 0.3% gains. Real spending on transportation services surged 2.6% (5.3% y/y) in February after rising 0.3% in January. Real spending on food services & accommodations improved 0.4% (2.9% y/y) after declining 1.0% in January, but real spending on financial services & insurance rose 1.1% last month (4.6% y/y), about the same as in each of the prior three months. Real spending on housing & utilities held steady (+1.6% y/y) after rising 0.5% in the prior month while real healthcare spending rose 0.3% (4.2% y/y), as it did in January.

Personal income rose 0.3% (4.6% y/y) in February following a 1.0% January surge. A 0.4% increase had been expected. A 0.8% rise (5.8% y/y) in wages & salaries came after a 0.3% January increase. Rental income jumped 1.6% (8.0% y/y) following a 1.4% increase and proprietors’ income rose 0.6% (3.5% y/y) after a 0.1% slip during January. Income from assets fell 2.1% (+2.9% y/y) after a 1.8% rise and current transfer receipts rose 0.6% (3.1% y/y) after surging 2.8% in January. Government social benefits strengthened 1.0% (3.0% y/y) after surging 2.5% in January.

Disposable personal income increased 0.2% (4.1% y/y) in February following a 0.4% January rise. After adjusting for price changes, disposable income eased 0.1% (+1.7% y/y) last month after holding steady in January. It was the weakest m/m reading in five months.

As spending growth outpaced the gain in disposable income, the personal saving rate fell to 3.6% from an upwardly revised 4.1% in January. The rate was down from a May 2023 high of 5.3%. Personal saving declined 11.8% (-19.5% y/y) after rising 5.4% in January.

The PCE chain price index rose 0.3% (2.5% y/y) in February after increasing 0.4% in January, revised from 0.3%. These increases were up from minimal change during the prior three months. The index excluding food and energy rose 0.3% (2.8% y/y) after a 0.5% January increase, revised from 0.4%. Goods prices rose 0.5% last month (-0.2% y/y) following four straight monthly declines. Services prices rose 0.3% (3.8% y/y) following a 0.6% increase. Services prices excluding energy & healthcare increased 0.3% (4.2% y/y) after rising 0.6% in January. Food prices edged 0.1% higher (1.3% y/y) last month after rising 0.5% in January, while energy prices increased 2.3% (-2.3% y/y) after falling in each of the prior four months.

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**.

**There’s Still No Rush** from Fed governor Christopher J. Waller is available [here](https://www.federalreserve.gov/newsevents/speech/waller20240327a.htm).

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- Spending growth rebounds.
- Disposable income increase slows.
- PCE price index gain weakening is broad-based.

U.S. Personal Spending Strengthens; Core Price Gain Moderates

Winnie Tapasanun

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The advance estimate of the U.S. international trade deficit in goods widened to $91.84 billion in February from $90.51 billion in January, according to the U.S. Census Bureau. This was the third consecutive month that the goods deficit had widened. The February deficit was the biggest since April 2023 and larger than a $90.64 billion shortfall in February 2023. A deficit of $89.6 billion for February had been expected by the Action Economics Forecast Survey. The deficit had reached a peak of $121.18 billion in March 2022. In Q4'23, the goods trade deficit widened to $264.19 billion after narrowing to $260.83 billion in Q3'23. The goods trade deficit added 0.31%-point to real GDP growth in Q4'23 after having subtracted 0.09%-point in Q3'23.

Total exports grew 2.8% m/m (3.6% y/y) in February, the third successive monthly increase, after a 0.1% uptick in January. However, exports had fallen 3.1% since a July 2022 high. The increase in exports in February reflected exports m/m rises of 11.9% (1.5% y/y) in foods, feeds & beverages, 6.2% (5.9% y/y) in other goods, 3.8% (3.1% y/y) in industrial supplies & materials, 2.8% (7.9% y/y) in capital goods excluding autos, and 0.8% (-2.6% y/y) in nonfood consumer goods excluding autos. To the downside, exports of automotive vehicles & parts were the only end-use category with a monthly decline in February, falling 8.4% (+1.7% y/y) following a 10.2% January rebound.

Total imports rose 2.3% m/m (2.8% y/y) in February, the third straight monthly rise and the fifth in six months, on top of a 1.2% increase in January. Nevertheless, imports had fallen 7.8% since a March 2022 high. The rise in imports in February reflected imports m/m increases of 7.6% (7.6% y/y) in foods, feeds & beverages, 3.0% (16.2% y/y) in automotive vehicles & parts, 2.8% (5.9% y/y) in capital goods excluding autos, 2.6% (1.3% y/y) in nonfood consumer goods excluding autos, and 0.7% (-0.6% y/y) in other goods. In contrast, imports of industrial supplies & materials slid 0.4% (-8.2% y/y) in February, the fourth m/m slide in five months, after a 2.3% drop in January.

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**.

- $91.84 billion deficit in Feb., larger than expected.
- Exports gain 2.8%, up for the third straight month.
- Imports increase 2.3%, up for the fifth month in six.

U.S. Goods Trade Deficit Widens in February; Largest Since April ’23

Andrew Cates

**Stocks and broad money growth**
The relationship between broad money growth and equity markets is complex and influenced by various factors, including monetary policy, investor sentiment, and global economic conditions. While the two are interconnected, the impact of money supply changes on equity markets can vary depending on the broader economic context and the policy environment. Bearing these considerations in mind, it is noteworthy that a divergence has emerged between monetary growth rates in some major advanced economies and global equities in recent months (see chart 1). Although the initial post-pandemic surge and the subsequent slowdown in broad money growth mirrored fluctuations in the global equity markets, this correlation has weakened over the last 12 months. For instance, equity markets have shown remarkable strength even as growth in the broad money supply has remained tepid.

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**US capital spending**
This week’s durable goods orders data suggested ongoing – and unexpected – resilience in US capital spending. Core (ex. defence, ex. aircraft) capital goods orders, for example, rose by 0.8% m/m in February to lie 0.6% higher than last year. Their overall level, in the meantime, while admittedly supported by higher capital goods price inflation, has been arguably much stronger than might have been expected in a rising interest rate environment (see chart 2 below). There are several reasons for this including the US government’s stimulus programmes, the Green Energy Transition and broader efforts to reconfigure supply chains.

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**Inflation expectations in the euro area**
This week’s European Commission survey of consumer and business confidence chimed with other regional surveys that have been released in recent days by suggesting that activity in the euro area is perking up a little. The underlying details of the consumer confidence survey were also encouraging on the inflation front. Specifically the 12 month ahead inflation expectations gauge fell back, specifically to a percentage balance of 12.3 in March from a prior 15.4, and the first monthly decline since last November (see chart 3).

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**Supply chain bottlenecks**
The Red Sea shipping disruptions that had threatened to choke off global supply chains appear to be a little less threatening for the global economic outlook. That at least is the message from last week’s flash PMI surveys of the manufacturing sector in the US and Europe. Supplier delivery times in the euro area, shortened further compared with the previous month and lengthened less acutely in the UK. The US survey also exhibited shorter lead times in March, though not as short as in the previous month (chart 4).

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**Asia’s portfolio flows**
Foreign investor inflows into Asian equities took a turn for the better in February, aided by net purchases of assets in Mainland China and South Korea.  This followed a stalling of foreign fund flows in January but represents a return of form relative to the pace of inflows that were chalked up in 2023. With that said, and while recent semiconductor sales and exports figures in the broader Asian region have been encouraging, there remains much to watch regarding China’s economic outlook.

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**India’s catch up potential** 
As that previous exhibit also suggested India has – on the whole - acted as magnate for foreign equity inflows over the past few months. That’s presumably, in part, because of its economic growth potential relative to other, more advanced, economies in the region. Looking at, for instance, the level of internet penetration suggests much scope for India to catch up with the technological progress that’s been achieved by more advanced economies over recent years, for example (see chart 6 below).

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Recent weeks have seen heightened optimism in financial markets that the global economy is on course for a soft landing. This optimism is rooted in a number of factors including stronger-than-expected economic data, dovish communications from several central banks alongside tame inflation outcomes in Europe and Asia. Putting this a little differently, the supply side shocks that drove inflation sharply higher in recent years may now be unwinding more quickly than had been expected. But there could equally – although far more contentiously – be greater optimism among investors that technological innovations (e.g. in Artificial Intelligence) are ramping up productivity growth.

Some of our charts this week offer some fresh perspective on this soft landing narrative. We look, for instance, at the decoupling that’s unfolded between global equity markets and broad measures of the money supply (in chart 1). We then review this week’s data for US durable goods orders and the specific evidence they reveal for still-solid US capital spending activity (chart 2). Additionally, we examine a recent survey from the euro area that indicates a slight decrease in consumer inflation expectations (chart 3). We next investigate evidence from last week's flash PMI surveys, which suggests that supply chain bottlenecks in Europe might be easing. Lastly, and turning to Asia, we assess the renewed interest from overseas investors in the region's equity markets (chart 5) and consider one of the structural factors behind this interest namely the potential for catch-up growth in India's economy (chart 6).

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Charts of the Week: The Soft Landing Narrative (Again)

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Real GDP growth in Q4’23 was revised to 3.4% (SAAR) from 3.2% reported last month and 3.3% reported initially. it followed a 4.9% Q3 increase. A 3.1% rise had been expected in the Action Economics Forecast Survey. Real GDP grew an unrevised 3.1% on a Q4/Q4 basis, after a 0.7% rise in 2022 and 5.4% growth in 2021. Growth averaged 2.5% last year versus 1.9% in 2022.

Corporate profits after-tax w/o IVA & CCA rose 2.6% (8.6% y/y) last quarter following a 4.0% Q3 increase. Before-tax earnings with IVA & CCA increased 4.1% (5.1% y/y) after a 3.4% rise. Financial sector earnings grew 1.3% (-4.6% y/y) while nonfinancial sector profits rose 5.9% (7.7% y/y). Rest of world earnings declined 1.7% (+2.8% y/y).

Contributions to growth from international trade & the change in inventories were revised. Inventories subtracted 0.47 percentage points from growth last quarter, revised from a 0.27 percentage point subtraction. Net exports added 0.25 percentage points, revised from a 0.32 percentage point contribution reported last month. It followed two straight quarters of minimal add. Exports grew a downwardly revised 5.0% (1.8% y/y) which followed a 5.4% Q3 rise. Imports grew a lessened 2.2% (-0.1% y/y) after rising 4.2% in Q3.

Growth in real final sales to domestic purchasers was increased to 3.5% (3.2% y/y) from 3.1% after rising 3.5% in Q3. Personal consumption expenditures rose a modestly raised 3.3% (2.7% y/y) after a 3.1% increase, adding 2.2 percentage points to Q4 growth. Durable goods spending growth was unrevised at 3.2% (5.8% y/y), following a 6.7% gain. Motor vehicle expenditures fell a lessened 1.7% (+4.0% y/y), slightly more than it did Q3. Furniture & appliance buying rose 1.7% (2.2% y/y), revised from 2.5%, after a 5.5% gain in Q3 while recreational goods & vehicle purchases grew a marginally changed 7.5% (11.2% y/y) after strengthening 16.9% in Q3.

Nondurable goods outlays improved a downwardly revised 2.9% (2.0% y/y), following 3.9% growth in Q3. Apparel outlays rose a lessened 3.4% (0.8% y/y) after a 6.2% increase while food & beverage spending rose a lessened 0.8% (0.1% y/y) following a 1.9% gain. Outlays on gasoline & other energy products rose an unchanged 4.3% (3.8% y/y) after falling 1.0% in Q3.

Spending on services increased 3.4% (2.4% y/y), revised from 2.8%, last quarter following a 2.2% gain in Q3. Health care purchases rose 7.8% (5.7% y/y), revised from 1.5%, following a 2.7% increase. Transportation services outlays growth of 4.2% (1.8% y/y) was increased from 2.8% following a 0.9% rise. Restaurant & hotel accommodations rose a lessened 6.5% (3.8% y/y) after gaining 7.1% in Q3, while growth in recreation outlays improved 0.4% (2.9% y/y), revised from 4.1%, after a 2.3% rise in Q3. Housing & utilities outlays rose a lessened 0.1% (0.6% y/y), after a 3.0% Q3 improvement.

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Business fixed investment increased 3.8% (4.6% y/y), revised from 2.4% last quarter, following a 1.5% Q3 rise as spending on nonresidential structures increased 10.9% (16.9% y/y), revised from 7.6%, after rising 11.2% in Q3. Equipment investment fell 1.1% (-0.6% y/y), revised from -1.7%, after falling 4.4%. Information processing investment surged 11.4% (-0.9% y/y), revised from 9.4% following four consecutive quarterly declines, while industrial equipment outlays held steady (-1.7% y/y), about as estimated last month, after falling 5.4%. Transportation equipment spending weakened a marginally changed 21.6% (+2.8% y/y) after a 1.7% drop in Q3. Investment in intellectual property products rose 4.3% (3.1% y/y), revised from 3.3%) after a 1.8% rise.

Residential structures investment increased a minimally-changed 2.8% (0.4% y/y) after a 6.7% increase.

Government spending increased 4.6% both q/q and y/y, revised from 2.2%, accounting for 0.79 percentage points of GDP growth, after a 5.8% rise. Federal government spending growth of 2.4% (3.9% y/y) was minimally revised and followed a 7.1% jump. State & local government spending grew 6.0% (5.1% y/y), revised from 5.4%, following a 5.0% Q3 rise.

The GDP price index rose an unrevised and expected 1.6% (2.6% y/y) after a 3.3% Q3 gain. The PCE price index increased an unchanged 1.8% (2.8% y/y) after a 2.6% rise. The PCE price index excluding food and energy prices rose a minimally changed 2.0% (3.2% y/y), as it did in Q3. The PCE goods price index fell 1.4% (+0.1% y/y) after rising 0.9% as gasoline prices fell and services prices rose 3.4% (4.1% y/y), about the same as they did in Q3. The services price index less energy & housing rose a minimally changed 2.6% (3.6% y/y) after a 2.9% rise.

The business fixed investment price index rose 2.0% (2.3% y/y), revised from 1.8%, following a 0.9% rise. The residential investment price index increased an unchanged 4.0% (1.3% y/y) after a 4.8% gain. The government spending price index rose a minimally changed 1.9% both m/m and y/y after strengthening 5.1% in the third quarter.

The GDP data can be found in Haver’s **USECON** and **USNA** databases. **USNA** contains virtually all of the Bureau of Economic Analysis detail in the national accounts. The Action Economics consensus estimates can be found in **AS1REPNA**.

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- Growth accelerates as domestic final demand growth is lifted.
- Inventory & foreign trade contributions are lessened.
- Halving of Q3 price gain remains in place.

U.S. GDP Growth Is Revised Upward in Q4; Corporate Profits Strengthen

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The Pending Home Sales Index from the National Association of Realtors increased in February by 1.6% (-7.0% y/y) to 75.6 after declining 4.7% in January to 74.4, revised from a 4.9% decline. The weakening followed a 5.7% December increase. Sales were 40.9% below the peak in August 2020. The index reflects sales contract signings.

The rise in February sales occurred as the average rate on a 30-year mortgage increased to an average 6.78% from 6.64% in January. This rate was well above a low of 2.68% averaged in December 2020.

Pending home sales were regionally mixed last month. Sales in the Midwest rose 10.6% (-2.6% y/y) after falling 7.5% in January. Sales in the South increased 1.1% (-8.5% y/y) following a 7.3% January decline. Sales in the Northeast eased 0.3% (-9.0% y/y) following a 0.8% January rise. Sales in the West declined 6.5% (-7.9% y/y) in February after a 0.5% January improvement.

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 **WEEKLY** database.

- Modest increase follows sharp decline.
- Regional changes are mixed.

U.S. Pending Home Sales Improve Moderately in February

Sandy Batten

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The MNI Chicago Business Barometer fell 2.6 points in March to 41.4, its lowest reading since May 2023 and well below the critical 50 level that separates expansion from contraction. The Action Economics Forecast Survey had looked for the index to inch up to 46.0 in March.

Haver Analytics calculates an ISM-adjusted version of this index that gives equal weights to each of the five key component subindexes. The headline index includes the same subindexes but with varying weights. This ISM-adjusted index also fell in March to 44.0 from 44.5 in February. This index has been pointing to anemic activity for quite a while, having been above the critical 50 level in only one month since August 2022.

All the subindexes remained below the critical 50 level in March with four of the five declining from February. Only the employment subindex increased, rising 6.4 points to 47.1, but remained in contraction territory. Fifteen percent of respondents reported an increase in employment in March, up markedly from 3% in February, while 19% reported a decline vs. 27% in February. The production subindex slipped to 42.4 from 42.9 with 17% of respondents reporting an increase and 29% reporting a decrease. The new orders subindex fell 3.4 points to 43.0, its lowest reading since last September. The inventories subindex declined to 39.5 in March from 43.0 in February. And the supplier deliveries subindex slipped 1.6 points to 48.1 in March, its second consecutive month below 50, indicating that delivery times are shortening.

Input prices continued to rise in March though at a slower pace with the index slipping 2.1 points to 62.6. Thirty-five percent of respondents reported paying higher prices in March vs. 39% in February while only 4% reported paying lower prices, down from 10% in February.

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

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- Index falls to the lowest level since May 2023 and moved deeper into contraction territory.
- All component indexes remained below 50.
- The prices paid index declined but remained elevated.

Chicago Business Barometer Continues to Decline in March

Carol Stone, CBE

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The Federal Reserve Bank of Kansas City reported that its index of manufacturing activity fell to -7 in its March survey from -4 in February. This seasonally adjusted index has been below at or zero every month since October 2022. Not seasonally adjusted, the index is +1 in March, up from 0 in February. Haver Analytics calculates an ISM-type index from the not-seasonally adjusted data; in March, this ISM-type index was 50.5, up from 49.8 in February.

This survey was conducted from March 20 to 25, 2024, and includes 96 responses from plants in Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico, and western Missouri.

Most components of this manufacturing survey weakened in the March data. Production moved back into negative territory, -9 from +3 in February; the volume of shipments is -5 in March after +6 in February, and the volume of new orders is -17 this month after -2 in February. The number of employees rose, with a +6 tally, but that was less than in February, +8.  And the average employee workweek dropped to -11 from +2.

Prices were stronger in the March survey, as prices received for finished goods were at +5 after a -2 tally in February. Prices paid for raw materials were firmer in March as they had a +17 reading after +15 in February.

Expectations for six months ahead were little changed overall, easing to +1 in the March survey from +2 in February, seasonally adjusted. The components were mixed, with production expected to be steady in this month’s survey at +18, the same as the February reading. The volume of shipment is seen with a +15 reading for March, a bit less than last month’s +18, but a modest improvement is expected for new orders, to +4 in this month’s survey from just +1 last month. Respondents look for order backlogs to weaken over the next six months to -19 this month from -4 in the February survey. They do expect widely expect prices to rise, with a +26 March reading for prices received, up from +21 last month. Prices paid for raw materials look to be even more vigorous, with a +34 reading this month from +26 in the February survey.

These survey data date back to July 2001. The diffusion indexes are calculated as the percentage of total respondents reporting increases minus the percentage reporting declines. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. Data for the Kansas City Fed Survey can be found in Haver’s **SURVEYS** database.

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- Contractions in Kansas City Fed survey extends to 18th month.
- Production, new orders and other individual components had negative moves in March.
- Prices did strengthen, for both finished goods sold and raw materials bought.

Manufacturing Activity Weakens Further in the Midwest in March Survey

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance eased 2,000 to 210,000 (-9.5% y/y) in the week ended March 23, from 212,000 in the prior week, revised from 210,000. The Action Economics Forecast Survey expected 212,000 initial claims for the week. The four-week moving average of initial claims eased to 211,000 in the March 23 week from a revised 211,750 in the March 16 week.

Insured unemployment, also known as continued weeks claimed, totaled 1.819 million (7.2% y/y) in the week of March 16 versus 1.795 million (6.8% y/y) the prior week, revised from 1.807 million. The four-week moving average in the March 16 week rose slightly to 1.802 million compared to 1.799 million in the prior week. The recent low of 1.766 million was reached in the second week of January.

The insured rate of unemployment held steady at 1.2% in the week of March 16, where it has been continuously since March 11, 2023. The insured unemployment rate represents the number of insured unemployment as a percent of covered employment.

Insured rates of unemployment vary by state and territory. In the week ended March 9, the highest rates were in New Jersey (2.83%), Rhode Island (2.58%), California (2.37%), Minnesota (2.35%) and Massachusetts (2.32%). The lowest rates were in Florida (0.38%), Kansas (0.41%), Virginia (0.42%), North Carolina (0.43%) and Alabama (0.44%). Rates in other major states include Illinois (2.12%), Texas (1.02%), New York (1.97%), Pennsylvania (1.92%), and Ohio (0.98).

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They go back to 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986. The expectations figure is from the Action Economics Forecast Survey in the **AS1REPNA** database.

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- Initial claims are range bound.
- Continuing claims rise to a narrow range eight-week high.
- Insured unemployment rate remains steady.

U.S. Initial Unemployment Insurance Claims Stay Low

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

Inflation surprising to upside in the US; by contrast to the downside in the euro area

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Nonfarm payrolls increased 254,000 (1.5% y/y) in September after rising 159,000 in August, revised from 142,000, and 144,000 in July, revised from 89,000. Expectations had been for a 150,000 rise in the Action Economics Forecast Survey. The three-month average change of 186,000 is the strongest since May.

Average hourly earnings increased 0.4% last month following a gain of 0.5% in August, revised from 0.4%. The y/y earnings gain edged up to 4.0% from 3.9% in August and 3.6% in July, but remained below the 5.9% high in March 2022. A 0.3% September increase had been expected.

The unemployment rate, measured in the household survey, edged down to 4.1% in September from 4.2% in August. It reached a low of 3.4% in April of last year. An unchanged 4.2% had been expected. Household employment rose 430,000 after increasing 168,000 in July. The labor force increased 150,000 after a 120,000 July gain. The overall unemployment rate, including workers who were marginally attached & working part-time for economic reasons declined to 7.7% from 7.9%.

In the **payroll survey**, private-sector employment increased 223,000 (1.4% y/y) in September after rising 114,000 in August. Construction sector employment increased 25,000 (2.8% y/y) last month after rising 31,000 in August. Factory sector payrolls eased 7,000 (-0.2% y/y) after falling 27,000. Mining & logging sector jobs rose 3,000 (-0.6% y/y) during September after rising 1,000 in each of the prior two months.

Private service-producing employment strengthened 202,000 in September (1.5% y/y) after a 109,000 August rise. Increases varied greatly amongst service sector categories. Private education & health service jobs rose 81,000 (3.8% y/y) after rising 60,000 in August while leisure & hospitality employment rose 78,000 (2.0% y/y) after a 53,000 gain. Professional & business service jobs rose 17,000 (0.4% y/y) after easing 4,000 in both August and July. Within that category, the number of temporary jobs fell 13,800 (-6.0% y/y) and have fallen consistently since a March 2022 high. Trade, transportation & utilities employment gained 13,000 (0.6% y/y) after falling 5,000 while financial activities jobs rose 5,000 in September (0.4% y/y) after improving 10,000 in August. Information sector employment increased 4,000 in last month (-0.2% y/y) after falling 7,000 in August.

Government sector payrolls improved 31,000 in September (2.1% y/y) after increasing 45,000 in August. Local government jobs improved 16,000 (2.0% y/y) after rising 33,000 in August while state government employment rose 13,000 (2.5% y/y) after an 11,000 gain. The number of federal government jobs increased 2,000 (1.7% y/y) following a 1,000 rise.

The 0.4% September rise in private-sector average hourly earnings reflected a 0.5% gain (4.9% y/y) in the goods-producing sector which followed a 0.4% improvement in August. Earnings in construction improved 0.4% (4.6% y/y) while factory sector earnings rose 0.5% (5.1% y/y), following a 0.4% gain. In the private services-sector, earnings rose 0.3% last month (3.7% y/y) after a 0.5% gain. Professional & business service sector earnings strengthened 0.8% (5.0% y/y) after a 0.6% rise. Leisure & hospitality earnings improved 0.2% (4.3% y/y) after rising 0.3%. Financial sector earnings increased 0.2% (4.2% y/y) after a 0.5% gain. Private education & health services earnings improved 0.3% (3.1% y/y) for the fourth straight month. Trade, transportation and utilities pay edged 0.1% higher (2.8% y/y) in September after a 0.4% rise. Information sector earnings declined 0.4% (+3.6% y/y) after strengthening 1.1% in July.

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The length of the average workweek in the private sector eased to 34.2 hours in September after rising in August to 34.3 hours. The workweek in the goods-producing sector of 39.9 hours compared to 39.8 hours in August. The construction sector average workweek lengthened to 39.2 hours from 39.0. The factory sector workweek held steady at 40.0 hours while the average workweek in the private service sector slipped to 33.1 hours. The aggregate weekly hours index in the private sector, a key indicator of production and income, slipped 0.1% in September (+0.9% y/y) after rising 0.3%. The Q3 average increased 0.2% (AR) from Q2’24.

In the **household survey**, the jobless rate fell to 4.1% as employment rose 0.3% and the size of the labor force edged 0.1% higher. The labor force participation rate was 62.7% for the third straight month. The rate for teenagers rebounded to 37.2%, while for individuals aged 20-24, it was little-change at 70.6%. For rate for workers aged 25-54, the rate fell to 83.8% but for workers 55 and over, it held steady at 38.6 hours.

The employment/population ratio for all workers rose to 60.2% in September and has been moving sideways since early last year. It remained below its high of 61.1% in February 2020, just prior to the pandemic.

The employment and earnings data are collected from surveys taken each month during the week containing the 12th day of the month. The labor market data are contained in Haver's **USECON** database. Detailed figures are in the **EMPL** and **LABOR** databases. The expectations figures are in the **AS1REPNA** database.

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- Surprising job strength is narrowly based.
- Earnings increase is better-than-expected; August pay growth lifted.
- Jobless rate slips to three-month low.

U.S. Payroll Employment Accelerates in September and Wage Growth Firms; Jobless Rate Edges Lower

Robert Brusca

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French industrial output rose sharply in August, a gain of 1.6% after declining by 0.2% in July. Output in August was led by consumer goods; nondurable goods output increased 4.2% month-to-month in August while consumer durable goods output increased by 3% month-to-month. Output of capital goods was also strong during the month, with a 1.6% gain, although intermediate goods output continued to be weak, falling by 0.4% in August and dropping for the second month in a row.

Sequentially French output explodes over three months although it's relatively mild mannered over 12 months and over six months. The strength in French output is relatively recent. Manufacturing output gains 0.3% over 12 months; over six months it is falling at a 0.5% annual rate but that transforms into a 31.1% annual rate over three months as output sharply recovered in June and in August.

**Sequential growth for MFG components**
Components find consumer durable goods output falling by 6.3% over 12 months, gaining at a 4% annual rate over six months then rising at a strong 14.9% annual rate over three months showing steady acceleration. Consumer nondurable goods output rises by 5.9% over 12 months; output slows to gain at a 4.3% annual rate over six months then it expands sharply to grow at a 19% annual rate over three months. French capital goods output is up only 0.3% over 12 months, but it then expands at a 1.5% annual rate over six months and gains at a 14.2% annual rate over three months showing steadily accelerating growth on this time sequence. Intermediate goods output falls by 3.4% over 12 months, falls more sharply, at a 6.6% annual rate over six months, then cuts that weakness to only a 0.2% annual rate drop over three months.

**Quarter-to-date**
With two months into the third quarter, manufacturing output is rising at 1.6% annual rate, with consumer nondurable output up at a 7% annual rate and consumer durable goods output up at a 3.8% annual rate. Capital goods output is up at a 4.3% annual rate; intermediate goods output is falling at a 5% annual rate in the quarter-to-date.

During this period when output has been experiencing some mild increases, they have transformed into strong increases over three months. Yet, motor vehicle registrations have been consistently weak. That important big ticket consumer item has not taken off.

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**Manufacturing: IP vs. PMI**
The chart shows that manufacturing output as measured by the IP index has been relatively flat. But output as signaled by the S&P PMI survey has showed building weakness in French manufacturing. The PMI trend to weakness was being arrested early in 2024 but then the incipient rebound turned into more weakness. Just this month there has been some small rebound and stabilization in the MFG PMI.

It's here from the PMI, that data give much more of a sense of French output being weak than we get from looking at the industrial output report itself. French industrial output has been fairly flat, but with a small uptrend in place.

Smoothed year-on-year gains show that French output generally saw year-on-year expansion from early-2022 to May 2024. Since then, output has been more erratic with a deep decline logged in May IP. The sector has subsequently been digging itself back out. This month’s surge in output is continuing evidence of that recovery in progress. We do not get the same sense of weakness from looking at French IP data that we form looking at French PMI data.

France

French IP Ignites for a Month

**Policy rate expectations**
Blue Chip panellists continue to forecast that policy rates in most major economies will decline sharply in coming months. The ECB, for example, is expected to lower its key policy rates by around 105 basis points over the next 12 months while the BoE is expected to lower its Bank rate by 125 bps over the same time frame. These forecasts contrast with the US where policy rates are expected to be lowered by 125 basis point between now and this time next year. The BoJ in the meantime continues to remain an outlier in this generic global trend with Japan’s policy rate specifically expected to climb by 45bps over the next 12 months.

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**The US labour market**
Ahead of the payrolls data for September that are due later this week there have been some mixed messages on the state of the US labour market in recent days. September’s ADP report concerning private sector employment, for example, was a little stronger than expected. On the weaker side, the latest Job Openings and Labour Turnover (JOLTS) survey revealed a steep decline in the number of people in the US workforce that have been quitting their jobs, a strong signal that the labour market is loosening. As chart 2 below suggests, that ought to additionally imply weaker wages pressures in the period ahead as well.

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**Geopolitical risks and oil prices**
Soft landing narratives have been aided by evidence suggesting that labour markets are cooling, that wage pressures are ebbing and that broader inflationary pressures are fading. But, as noted above, the escalation of geopolitical turbulence in the Middle East is now challenging these views. A widely watched gauge of geopolitical risks has bolted sharply higher in recent days off the heels of this turbulence, as evidenced in chart 3 below. And energy markets – oil prices in particular – appear to now be responding to this instability as well.

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**The real consumer price of energy versus US productivity growth**
It goes without saying that energy prices exert a powerful influence over the world economy. Aside from headline inflation linkages, high real energy prices have arguably been a key factor that’s kept productivity growth in many major economies muted over the past few years. As chart 4 below indicates, longer-term upswings in US productivity growth have tended to be preceded by weaker real energy prices. Equally, longer-term downswings in productivity have typically followed periods when real energy prices have been rising.

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**Globalisation versus de-globalisation** 
A further disruption of supply chains is also a looming threat to the world economy if the instability in the Middle East were to intensify. In the background to this, and thanks to several additional factors that have undermined world trade in recent years, a de-globalisation of the world economy has been unfolding. That said, latest data from the World Bank suggest we should not get too carried with that de-globalisation narrative. The level of world trade in services, for example, reached a record high in 2023.

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**Indebtedness and interest rates**
There is no doubt that ongoing geopolitical instability, combined with other factors such as heightened protectionism, could accelerate a broader trend toward de-globalization in the coming period. This, along with other structural challenges such as high energy prices and ageing demographics, may be hindering long-term productivity growth. Offsetting factors do exist, most notably the productivity potential of Artificial Intelligence. However, until those offsets fully materialize, many policymakers are likely to again rely on monetary policy tools and other re-leveraging initiatives to boost economic growth to politically acceptable levels. The strong negative correlation between long-term US real interest rates and global indebtedness in chart 6 below highlights how these policy efforts have become central to maintaining economic stability, often at the expense of increasing financial vulnerabilities.

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In recent weeks, financial markets have generally aligned with expectations of a soft landing for the global economy, facilitated by more accommodative policies from central banks (see chart 1). This week’s dataflow have largely reinforced these views (see chart 2) as have the communications from many policymakers. However, the escalation of geopolitical turbulence in the Middle East in recent days is now challenging this narrative. By potentially choking supply chains and raising risk premiums in energy markets, there could be growth and inflation-related consequences for the world economy in the coming weeks (see charts 3). This also serves as a reminder that there are longer-term headwinds that are placing a brake on global growth at present, including high real energy prices (chart 4), de-globalization pressures (chart 5) and lingering debt-related imbalances (see chart 6). And many of these issues could be exacerbated if the turmoil in the Middle East were to intensify.

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Charts of the Week: Geopolitical Scarring

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The U.S. ISM Services PMI rose to 54.9 in September, the highest level since February 2023, after a 0.1-point uptick to 51.5 in August, according to today’s report by the Institute for Supply Management, indicating expansion in the services sector for the third straight month, in seven of nine months in 2024, and for the 49th time in 52 months. The September index was up from a four-year-low 48.8 in June, 53.4 in September 2023, and a low of 49.0 in December 2022; however, having remained down from a record-high 67.1 in November 2021. The 12-month average was 51.8, reflecting strong growth in the U.S. services sector. The Action Economics Forecast Survey had expected 51.7 for September.

Haver Analytics constructs a composite index combining the services index and the manufacturing reading. This index rose to 53.9 in September after a 0.2-point increase to 51.0 in August, showing expansion for fourth time in five months. The latest figure was higher than a four-year-low 48.8 in June, 52.8 in September 2023, and a low of 48.9 in December 2022; nevertheless, having remained well below a record-high 66.3 in November 2021. These series date back to July 1997.

In the latest services survey, the business activity index rebounded to 59.9 in September from 53.3 in August, indicating business activity expanded for the 51st time in 52 months and at the highest level since May. The index was up from its recent low of 49.6 in June and a low of 52.7 in December 2022 but below a record-high 69.5 in November 2021. An increased 30.1% of respondents (NSA) reported higher activity in September while a lessened 8.2% reported an activity decline. The new orders index advanced to 59.4 in September from 53.0 in August, indicating expansion in new orders for the 50th time in 52 months and at the fastest pace since February 2023. The index was up from its recent low of 47.3 in June and a low of 45.0 in December 2022 but down from a record-high 69.5 in October 2021. An increased 30.9% of respondents (NSA) reported higher orders in September while a lessened 10.4% reported a decline. Meanwhile, the supplier deliveries index (NSA) rose to 52.1 in September from 49.6 in August, indicating slower supplier delivery performance after two months in faster territory.

On the labor front, the employment index decreased to 48.1 in September on top of a 0.9-point decline to 50.2 in August, showing employment activity in the services sector contracted after two months of expansion. The latest reading, while above a low of 43.8 in December 2023, was below a high of 54.1 in August 2023 and a high of 58.3 in April 2021. A lessened 13.0% of respondents (NSA) indicated higher employment in September while 14.4% reported a decline.

On the inflation front, the prices index rose to 59.4 in September after a 0.3-point increase to 57.3 in August, indicating prices paid by services organizations for materials and services had risen (i.e., above 50) since June 2017 and at the fastest rate since January’s high of 64.0. The index was up versus its recent low of 53.4 in March and a low of 54.8 in June 2023; however, having remained significantly below a record-high 83.8 in March 2022. An increased 22.7% of respondents (NSA) reported price rises in September while a lessened 6.0% reported price declines.

Additionally, the new export orders index increased to 56.7 in September following a 7.6-point drop to 50.9 in August, indicating new export orders expanded for the 10th time in 11 months at a faster rate. The imports index rebounded to 52.7 in September from 50.3 in August, registering the third consecutive month of expansion after contracting in June and May. The inventories index advanced to 58.1 in September from 52.9 in August, indicating inventories expanded for the second successive month and at the fastest pace since May 2023. The inventory sentiment index fell to 54.0 in September after declining to 54.9 in August, showing continued expansion since May 2023 but at the slowest rising rate since June 2023. The backlog of orders index increased to 48.3 in September after dropping to 43.7 in August, posting the third contraction in four months. These series are not seasonally adjusted and not included in the ISM Services PMI total.

The ISM Services PMI is a composite index consisting of four equally weighted diffusion indexes (25% each): Business Activity, New Orders, Employment, and Supplier Deliveries. A reading above 50 indicates expansion in the services sector; below 50 suggests contraction. Supplier Deliveries is the only ISM index that is inversed; a reading above 50 indicates slower deliveries. The ISM figures are available in Haver's **USECON** database, with additional detail in the **SURVEYS** database. The expectations figure from Action Economics is in the **AS1REPNA** database.

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- 54.9 in September vs. 51.5 in August, higher than expected; 3.1 pts. above the 12-month avg. of 51.8.
- Business Activity (59.9, a four-month high), New Orders (59.4, the highest since Feb. ’23), Employment (48.1, the first contraction since June), and Supplier Deliveries (52.1 vs. 49.6).
- Prices Index rises 2.1 pts. to 59.4, the highest since January.

U.S. ISM Services PMI Jumps in September; Highest Level Since February ’23

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New orders for manufactured goods eased 0.2% (+0.9% y/y) during August, after strengthening 4.9% in July, revised from 5.0%, according to the Census Bureau. Orders declined 3.3% in June. The Action Economics Forecast Survey expected a 0.2% increase in total factory orders. Excluding the transportation sector, orders eased 0.1% (+0.5% y/y) after rising 0.3% in July.

New orders for durable goods were unchanged during August (+1.5% y/y), unrevised from the advance release, and followed a 9.8% July gain. The weakness in durable goods orders reflected a 0.8% easing (+2.5% y/y) in transportation sector orders. This followed a 34.6% jump in July, which was buoyed by higher civilian aircraft orders. Motor vehicle & parts orders eased 0.7% (-1.8% y/y) after a 1.0% decline. Orders for all factory products outside the transportation sector slipped 0.1% (+0.5% y/y) in August following a 0.3% July increase. Elsewhere, primary metals orders rose 0.2%, up 0.1% y/y. Machinery orders gained 0.4% (0.1% y/y), while computer & electronics rose 0.4% (2.8% y/y). Electrical equipment orders rose 2.4% (2.8% y/y), following a 0.8% decline.

Shipments by all manufacturing industries eased 0.5% in August (+1.0% y/y) after rising 0.8% in July. Durable goods shipments fell 0.6% (+1.7% y/y) after two months of roughly 1.1% gain. Transportation product shipments fell 2.0% (+5.0% y/y) after a 3.4% rise. Shipments excluding the transportation sector eased 0.2% (+0.2% y/y) after rising 0.3% in July. Machinery shipments rose 0.3% in August (-0.9% y/y) while computer & equipment shipments eased 0.2% (-0.1% y/y). Electrical equipment & appliance shipments rose 0.4% (+0.7% y/y). Nondurable goods shipments, which equal orders, fell 0.5% (+0.3% y/y) after increasing 0.6% in July. Food product shipments eased 0.1% (+1.3% y/y) while apparel shipments rose 0.4% (-2.4% y/y) after two months of decline. Textile product shipments weakened 1.7% both m/m and y/y after falling 0.3% in July. Paper product shipments rose 0.3% (2.1% y/y), following a 0.8% increase. Petroleum & coal product shipments declined 2.3% (-10.9% y/y) in August, after rising 0.5%. Basic chemical shipments rose 0.3% (5.8% y/y) after a 0.8% July increase.

There are no unfilled orders figures for nondurable goods industries. Unfilled orders for durable goods rose 0.4% (4.1% y/y) in August after a 0.2% rise. Transportation unfilled orders rose 0.5% (6.8% y/y) after increasing 0.3% in July. Excluding transportation, unfilled orders rose 0.2% (-0.4% y/y) after holding steady in July. Unfilled orders for durable goods less transportation have been trending sideways since 2022. Unfilled orders for machinery eased 0.1% (-3.7% y/y) while electrical equipment & appliance backlogs rose 0.4% (-0.0%) after a 0.2% decline.

Inventories of all manufactured products rose 0.1% in August (0.6% y/y) after holding steady in July. Durable goods inventories edged 0.1% higher (1.3% y/y) after holding steady in July. Transportation equipment inventories edged 0.1% higher (4.7% y/y) and inventories less transportation rose 0.2% (-0.4% y/y) after holding steady for five straight months. Nondurable goods inventories rose 0.2% (-0.5% y/y) after remaining unchanged for two months, though petroleum inventories rose 0.8% (-1.9% y/y) in August after easing 0.1% in July.

Manufacturers’ orders and shipments of durable and nondurable goods, along with unfilled orders and inventories, are compiled by the U.S. Census Bureau. They are available in Haver’s **USECON** database. The Action Economics forecast data are in the **AS1REPNA** database.

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- Improved y/y in orders momentum remains in place.
- Shipments weighed down by a decline in nondefense aircraft sales.
- Unfilled orders and inventories rise modestly.

Economy in Brief: March 2024

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