Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060801c.jpg" width="353">
Challenger, Grey &amp; Christmas reported that announced job cuts in July more than reversed the prior month&#39;s gain and dropped 44.7% to 37,178, the lowest level since June of 2000.
During the last ten years there has been an 83% (inverse) correlation between the three month moving average level of announced job cuts and the three month change payroll employment.
Layoffs fell sharply m/m in the automotive (-57.2% y/y), computer (-85.5% y/y), financial (-85.1% y/y), health care (65.8% y/y), industrial goods (-35.8% y/y) and pharmaceutical (-86.0% y/y) industries.
Job cut announcements differ from layoffs. Many are achieved through attrition, early retirement or just never occur.
A m/m increase in the level of layoffs was reported in the electronics (-91.5% y/y), chemical (-66.1% y/y) and the entertainment &amp; leisure (+24.4% y/y) industries.
Challenger also reported that announced hiring plans more than doubled m/m (27.1% y/y).

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S3/@S301/@S301.HTM">Challenger, Gray &amp; Christmas</a></th>
<th scope="col">July</th>
<th scope="col">June</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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</thead>
<tbody>
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<td class="firstcol">Announced Job Cuts</td>
<td>37,178</td>
<td>67,176</td>
<td>-63.9%</td>
<td>1,072,054</td>
<td>1,039,935</td>
<td>1,236,426</td>
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Challenger, Grey & Christmas reported that announced job cuts in July more than reversed the prior month's gain and dropped 44.7% to 37,178, the lowest level since June of 2000. During the last ten years there has been an 83% [...]

Challenger Layoffs Lowest Since 2000

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<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060801d.jpg" width="353">
The value of construction put in place rose 0.3% in June following a slight May decline that was upwardly revised. Consensus expectations had been for a 0.1% increase.
Another strong gain in nonresidential building, up 2.7%, bolstered the June total. Office construction jumped 1.9% (12.6% y/y) while multi-retail building surged another 3.1% (52.5% y/y) and a 10.5% spike during May was double the initial estimate. Building by the factory sector surged 8.1% (34.7% y/y).
Residential building activity fell for the third straight month. The 1.0% decline was led by 2.1% drop in new single family building (-1.2% y/y). That&#39;s the first y/y decline since late 2000. Spending on multi-family projects ticked up 0.1% (14.7% y/y) while the value of spending on improvements jumped 1.6% (-1.6% y/y) but the prior month&#39;s surge was revised away.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060801e.jpg" width="353">
During the last twenty years there has been an 84% correlation between the q/q change in the value of residential building and its contribution to growth in real GDP. During April and May the value of residential building activity was down 1.3% from the 1Q average.
Public construction spending increased 0.8%. Construction activity on highways &amp; streets, nearly one third of the value of public construction spending, rose just 0.1% (19.7% y/y) but the prior month&#39;s 0.1% gain reported initially was revised to a 4.3% surge.
These more detailed categories represent the Census Bureau&#146;s reclassification of construction activity into end-use groups. Finer detail is available for many of the categories; for instance, commercial construction is shown for Automotive sales and parking facilities, drugstores, building supply stores, and both commercial warehouses and mini-storage facilities. Note that start dates vary for some seasonally adjusted line items in 2000 and 2002 and that constant-dollar data are no longer computed.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E907/@E90701/@E90701.HTM">Construction Put-in-place</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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<td class="firstcol">Total</td>
<td>0.3%</td>
<td>-0.0%</td>
<td>6.8%</td>
<td>10.7%</td>
<td>11.5%</td>
<td>5.6%</td>
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<td class="firstcol">Private</td>
<td>0.1%</td>
<td>-0.5%</td>
<td>6.0%</td>
<td>12.0%</td>
<td>14.3%</td>
<td>6.4%</td>
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<td class="firstcol">&nbsp; Residential</td>
<td>-1.0%</td>
<td>-1.4%</td>
<td>-0.1%</td>
<td>13.9%</td>
<td>18.6%</td>
<td>12.8%</td>
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<td class="firstcol">&nbsp; Nonresidential</td>
<td>2.7%</td>
<td>1.6%</td>
<td>21.6%</td>
<td>7.4%</td>
<td>5.3%</td>
<td>-4.8%</td>
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<td class="firstcol">Public</td>
<td>0.8%</td>
<td>1.6%</td>
<td>9.7%</td>
<td>6.2%</td>
<td>2.8%</td>
<td>2.9%</td>
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The value of construction put in place rose 0.3% in June following a slight May decline that was upwardly revised. Consensus expectations had been for a 0.1% increase. Another strong gain in nonresidential building, up 2.7%, bolstered [...]

U.S. Construction Spending Supported By Nonresidential

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<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060801f.jpg" width="353">
In July, the Composite Index of factory sector activity more than recovered the prior month&#39;s decline and rose to 54.7, reported the Institute for Supply Management. Consensus expectations had been for a slight decline to 53.5.
During the last twenty years there has been a 68% correlation between the level of the Composite Index and the three month growth in factory sector industrial production.
The production index rose to 57.5, the highest level since April but new orders gave back half of a June increase. New export orders fell to the lowest level (51.9) since June of last year.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060801g.jpg" width="353">
The employment index recovered half of the prior month&#39;s decline and rose to 50.7. During the last twenty years there has been a 66% correlation between the level of the ISM employment Index and the three month growth in factory sector employment.
The price index surged to the highest level (78.5) since last October. During the last twenty years there has been a 91% correlation between the price index and the three month change in the PPI for intermediate goods less food &amp; energy.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF02/@EF02.HTM">ISM Manufacturing Survey</a></th>
<th scope="col">July</th>
<th scope="col">Jun</th>
<th scope="col">July &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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<td class="firstcol">Composite Index</td>
<td>54.7</td>
<td>53.8</td>
<td>56.4</td>
<td>55.5</td>
<td>60.5</td>
<td>53.3</td>
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In July, the Composite Index of factory sector activity more than recovered the prior month's decline and rose to 54.7, reported the Institute for Supply Management. Consensus expectations had been for a slight decline to 53.5. During [...]

ISM Index Recovered in July

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060801a.jpg" width="353">
Personal income rose an expected 0.6% during June following an unrevised 0.4% increase in May. Earlier data reflected benchmark revision.
Wage &amp; salary disbursements jumped 0.6% (6.9% y/y) in June following an unrevised no change the prior month. Strength was led by a 0.7% (7.9% y/y increase in private service-producing industry wages. Factory sector wages rose 0.3% (5.1% y/y) after an upwardly revised no change during May while earlier figures generally were revised up.
Higher interest rates boosted interest income by 1.7% (10.1% y/y) and dividend income jumped 1.0% (11.2% y/y).
Disposable personal income increased 0.6% (5.3% y/y) after a 0.4% rise in May. Personal taxes rose 1.0% (15.4% y/y).
Adjusted for price inflation, disposable personal income rose 0.4% (1.7% y/y) after an unrevised slight decline in May. Real disposable income per capita rose 0.3% (0.8% y/y).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060801b.jpg" width="353">
Personal consumption again matched Consensus expectations for a 0.4% rise after an upwardly revised 0.6% May rise. Adjusted for price inflation spending rose 0.2% (2.6% y/y) for the third straight month.
The PCE chain price index rose an expected 0.2%. Less food &amp; energy prices rose 0.2% (2.4% y/y). The expected increase was the fifth in the last six months.
The personal savings rate was again negative. Should the Decline in the Personal Saving Rate Be a Cause for Concern? from the Federal Reserve Bank of Kansas City is available <a href="http://www.kansascityfed.org/PUBLICAT/ECONREV/PDF/2Q06garn.pdf">here</a>.
The Anxious Index, a measure of the probability of a recession in the U.S. economy, from the Federal Reserve Bank of Philadelphia is available <a href="http://www.philadelphiafed.org/files/spf/anxind.html"> here</a>. 

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E711/@E71102/@E71102.HTM">Disposition of Personal Income</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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<td class="firstcol">Personal Income</td>
<td>0.6%</td>
<td>0.4%</td>
<td>6.5%</td>
<td>5.2%</td>
<td>6.2%</td>
<td>3.2%</td>
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<td class="firstcol">Personal Consumption</td>
<td>0.4%</td>
<td>0.6%</td>
<td>6.2%</td>
<td>6.5%</td>
<td>6.6%</td>
<td>4.8%</td>
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<td class="firstcol">Savings Rate</td>
<td>-1.5%</td>
<td>-1.6%</td>
<td>-0.5% (June &#39;05)</td>
<td>-0.4%</td>
<td>2.0%</td>
<td>2.1%</td>
</tr>
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<td class="firstcol">PCE Chain Price Index</td>
<td>0.2%</td>
<td>0.4%</td>
<td>3.5%</td>
<td>2.9%</td>
<td>2.6%</td>
<td>2.0%</td>
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<td class="firstcol">&nbsp; Less food &amp; energy</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.4%</td>
<td>2.1%</td>
<td>2.0%</td>
<td>1.4%</td>
</tr>
</tbody>
</table>


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Personal income rose an expected 0.6% during June following an unrevised 0.4% increase in May. Earlier data reflected benchmark revision. Wage & salary disbursements jumped 0.6% (6.9% y/y) in June following an unrevised no change the [...]

U.S. Personal Income Up 0.6% As Expected

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060731c.jpg" width="353">
As Carol Stone noted last Friday, economic conditions remain positive in Japan in spite of some easing in the labor market in June. METI (The Ministry of Economics, Trade and Industry) released preliminary data today on industrial production, shipments and inventories--all showing increases in June. Industrial production increased 1.9%. shipments, 0.7% and inventories, 0.5%.
The largest contributors to the rise in industrial production were: Transport Equipment, General Machinery and Electrical Machinery. The largest contributors to the rise in Shipments were: General Machinery, Iron and Steel and Electronic Parts and Devices. Shipments of Transport Equipment, in contrast to production declined 1.06%. Total Industrial production and shipments are shown in the first chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060731d.jpg" width="353">
Even more encouraging than the data for June are the forecasts of the changes in industrial production for the current month and the month following. Currently the forecasts are for a 2.2% increase in July and a 3.7% increase for August. As the second chart illustrates, the forecasts rarely seem to see any declines in the months ahead and generally overstate any increases. Nevertheless, they do well in forecasting direction. The correlation between the two series .78..

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/JAPAN/@J7/@J7.HTM">Japan</a></th>
<th scope="col">Jun&nbsp; 06</th>
<th scope="col">May 06</th>
<th scope="col">Jun 05</th>
<th scope="col">M/M</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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</thead>
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<td class="firstcol">Industrial Production (2000=100)&nbsp;</td>
<td>105.7</td>
<td>103.7</td>
<td>100.8</td>
<td>1.93</td>
<td>4.86</td>
<td>101.6</td>
<td>100.0</td>
<td>95.1</td>
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<tr>
<td class="firstcol">&nbsp; Transport Equipment</td>
<td>126.5</td>
<td>119.4</td>
<td>1230.3</td>
<td>5.95</td>
<td>5.15</td>
<td>121.0</td>
<td>114.8</td>
<td>107.2</td>
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<tr class="odd">
<td class="firstcol">Shipments (2000=100)</td>
<td>108.6</td>
<td>107.8</td>
<td>103.6</td>
<td>0.74</td>
<td>4.83</td>
<td>104.1</td>
<td>102.3</td>
<td>97.3</td>
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<tr>
<td class="firstcol">&nbsp; Transport Equipment</td>
<td>121.9</td>
<td>123.23</td>
<td>118.0</td>
<td>-1.06</td>
<td>3.31</td>
<td>117.3</td>
<td>113.5</td>
<td>108.4</td>
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<tr class="odd">
<td class="firstcol">Inventories (2000=100)</td>
<td>93.9</td>
<td>93.4</td>
<td>92.3</td>
<td>0.54</td>
<td>1.73</td>
<td>92.8</td>
<td>90.0</td>
<td>91.1</td>
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As Carol Stone noted last Friday, economic conditions remain positive in Japan in spite of some easing in the labor market in June. METI (The Ministry of Economics, Trade and Industry) released preliminary data today on industrial [...]

More Positive Indicators for Japan: Production, Shipments and Inventories

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060731a.jpg" width="353">
An acceleration in the &quot;core&quot; PCE chain price index within the 2Q GDP report rankled markets on Friday. At 2.9%, the q/q increase was a marked acceleration from the 2.0% average of the prior four quarters
Indeed, the price index for durable personal consumption indicated deflation at a slower rate and the y/y gain in service prices accelerated to 3.6% from a low of 3.1% late last year. That acceleration reflected a 5.0% surge during 4Q05.
The price index for clothing &amp; shoes was, however, the main bugger as it posted a 3.5% gain (AR) last quarter after several years of price deflation.
Several price indexes showed slower rates of growth including most business investment categories, residential investment and federal government.
Also moving moderately to the upside were the gains in the price indexes for state &amp; local government as well as exports. Continuing strong were the gains in the nonresidential investment chain price index for structures, up 10.7% (AR) last quarter and 13.3% y/y after an 11.3% surge last year.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM">Chain Price Indexes</a></th>
<th scope="col">2Q &#39;06</th>
<th scope="col">1Q &#39;06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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</thead>
<tbody>
<tr class="odd">
<td class="firstcol">GDP</td>
<td>3.3%</td>
<td>3.3%</td>
<td>3.3%</td>
<td>3.0%</td>
<td>2.8%</td>
<td>2.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Personal Consumption</td>
<td>4.1%</td>
<td>2.0%</td>
<td>3.3%</td>
<td>2.9%</td>
<td>2.6%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Less Food &amp; Energy</td>
<td>2.9%</td>
<td>2.1%</td>
<td>2.3%</td>
<td>2.1%</td>
<td>2.0%</td>
<td>1.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp;&nbsp; Durables</td>
<td>-0.8%</td>
<td>-1.0%</td>
<td>-1.5%</td>
<td>-0.7%</td>
<td>-1.6%</td>
<td>-3.6%</td>
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<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp;&nbsp; Nondurables</td>
<td>3.3%</td>
<td>3.3%</td>
<td>3.3%</td>
<td>3.0%</td>
<td>2.8%</td>
<td>2.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Clothing &amp; Shoes</td>
<td>3.5%</td>
<td>-1.0%</td>
<td>-0.4%</td>
<td>-1.0%</td>
<td>-0.4%</td>
<td>-2.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp;&nbsp; Services</td>
<td>3.1%</td>
<td>3.1%</td>
<td>3.6%</td>
<td>3.2%</td>
<td>3.2%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Investment: Equipment &amp; Software</td>
<td>0.0%</td>
<td>0.6%</td>
<td>-0.5%</td>
<td>-0.4%</td>
<td>-0.4%</td>
<td>-1.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Investment: Residential</td>
<td>2.0%</td>
<td>3.8%</td>
<td>4.8%</td>
<td>5.1%</td>
<td>7.3%</td>
<td>4.8%</td>
</tr>
</tbody>
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An acceleration in the "core" PCE chain price index within the 2Q GDP report rankled markets on Friday. At 2.9%, the q/q increase was a marked acceleration from the 2.0% average of the prior four quarters Indeed, the price index for [...]

Chicago Surveys of Factory Activity Mixed

Accelerating positive economic surprises in the G10 are boosting the global economy

Considerably more monetary ease expected from US and UK as Japan tightens

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

AI boosting US investment in data centers

US productivity growth has been significantly faster than in other major economies

Consumers' short-term US inflation expectations still elevated while longer-term expectations of financial markets are steady

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

Job openings less than the number unemployed in July for first time since 2021

Reaccelerating goods price inflation along with sticky services inflation clouds the outlook

Falling oil prices aren't pulling down inflation expectations, pointing to a boost from increased tariffs

Equity market exuberance outpacing macroeconomic data

Apart from Japan, Blue Chip forecasters expect further sizable monetary easing

US production rebounded in Q2, but demand continued to slow

US leader, Germany trailer for real GDP growth over past 3 years

Negative US inflation surprises leading G10 down

Deflation continues in China

Incoming data surprising on downside in US; positive surprises elsewhere

FOMC expects more inflation and less growth than in March

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Tian Yong Woon

This week, we assess Asia through a risk lens, given the recent flare-ups across the region. Japan–China tensions, following Japanese Prime Minister Takaichi’s recent remarks on Taiwan, have prompted some retaliatory measures from China, including travel advisories against visiting Japan. This raises the risk of a dent to Japan’s tourism income this year, given the significance of aggregate Chinese tourism expenditure (chart 1), although any such impact would come at a time when Japan is already grappling with the effects of overtourism. Beyond Japan–China relations, investors are also bracing for the Bank of Japan’s (BoJ) final scheduled policy decision of the year, where a rate hike is expected despite Takaichi’s pro-growth fiscal stance. This expectation reflects ongoing yen weakness (chart 2), alongside encouraging results from Japan’s Q3 Tankan survey, among other factors. While the anticipated hike is not, in itself, a risk, the associated increase in financing costs—coupled with the likelihood of higher government bond issuance to support growth objectives—adds to investor concerns.

Risks are also evident in China, particularly after the November data docket showed a continued deterioration in growth across multiple sectors (chart 3). While China’s 5% growth target for the year remains within reach, achieving it appears to hinge on a narrow set of growth drivers, notably trade. On this front, China has defied earlier investor concerns to record a substantial widening of its trade surplus this year, despite a worsening bilateral trade balance with the US (chart 4). However, while supportive of growth, this development risks drawing increased pushback from non-US trading partners that have been absorbing China’s excess capacity.

Elevated risks are also present elsewhere in Asia, particularly in Southeast Asia, where renewed military clashes between Thailand and Cambodia have once again pushed bilateral tensions to the fore (chart 5). Thailand additionally faces political uncertainty ahead of early elections, following Prime Minister Anutin’s dissolution of parliament last week. Lastly, we turn to semiconductor- and AI-related risks, which are especially pertinent to Asia given the dominance—and reliance—of Taiwan and South Korea in the sector. A key risk lies in the current extent of market optimism surrounding future AI-related earnings (chart 6), suggesting greater scope for disappointment than for further upside surprises.

**Japan-China tensions**
Geopolitics will likely remain front and centre in Asia heading into the new year,  with several flashpoints carrying the risk of broader regional spillovers. One such case is the recent flare-up in tensions between China and Japan, following new Japanese Prime Minister Takaichi’s parliamentary remarks on Taiwan. Since then, Chinese authorities have rolled out a series of measures — urging Chinese citizens to avoid travelling to or studying in Japan, reinstating an import ban on Japanese seafood, among others. While none of these steps are particularly substantial on their own, they underscore a rapidly deteriorating bilateral dynamic. The economic implications are not trivial. As shown in chart 1, spending by Chinese tourists has historically made up a significant share of Japan’s total inbound tourism receipts — roughly a quarter in recent quarters — with especially strong concentrations in certain regions such as Osaka. Although the absence of Mainland Chinese tourists has been keenly felt since tensions escalated, early indications suggest that increased arrivals from other countries have helped offset some of the shortfall. More recently, a series of close military encounters between China and Japan has further heightened concerns. The risk of miscalculation has grown, raising the possibility of an inadvertent escalation at a time when geopolitical sensitivities in the region are already elevated.


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**Japan**
Japan–China tensions aside, investors will also be focused on the Bank of Japan’s upcoming monetary policy meeting this week, the last of the year. After Governor Ueda’s recent remarks, markets are now expecting a 25 bps rate hike. This has been especially evident in the bond market, where yields have risen sharply in recent weeks (chart 2). The move partly reflects expectations of tighter policy, but also concerns Prime Minister Takaichi’s more expansionary fiscal stance. The recently submitted supplementary budget points to increased government bond issuance, adding supply pressure, weighing on bond prices, and pushing yields higher. The rise in yields also poses a risk when combined with increased bond issuance, as this implies higher financing costs for the government. A hike this month is still expected despite the government’s loose fiscal tilt, given yen weakness and recent readings of softer inflation. However, the outlook for any additional tightening beyond December remains uncertain. With the new year approaching and annual spring wage negotiations on the horizon, the BoJ will need further confirmation on wages and inflation before moving again. Meanwhile, the ongoing Japan–China frictions, while not yet generating major economic spillovers, remain a meaningful downside risk. Any material escalation could weigh on Japan’s outlook and complicate the case for further policy tightening.

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**China**
Moving to China, the latest monthly data point to a broad-based slowdown in growth in November. Year-on-year retail sales growth slowed to its weakest pace since 2022, while year-to-date year-on-year fixed asset investment growth fell to its lowest level since the outbreak of the COVID-19 pandemic in 2020 (chart 3). Industrial production growth also eased, albeit to a lesser extent. In addition, house price declines accelerated, reversing the easing trend seen in previous months. Overall, the latest data extend the pattern of deteriorating growth observed in recent months. That said, it remains to be seen whether the November readings will ultimately cause China to miss its 5% growth target for the year, given the substantial head start accumulated over the first three quarters. Moreover, China has enjoyed a bumper year in trade, which we discuss in the next section.

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Looking more closely at China’s trade performance, it has become clear that earlier fears of a trade-driven collapse in China’s growth have not materialised. Instead, China’s overall trade surplus has continued to widen, having topped $1 trillion this year, even as its bilateral surplus with the US has fallen sharply (chart 4). This suggests that China’s surplus expansion has been driven by other trading partners, which have effectively been absorbing China’s excess capacity. The stronger-than-expected trade outturn has also been a key factor behind the upward revisions to China’s GDP outlook for the year, with growth still on track to meet the 5% target barring any major setbacks. While this dynamic is not a direct risk in itself, surging exports to these partner economies could become problematic if domestic industries in the receiving countries are unable to absorb the inflow or begin to feel crowded out. Such pressures may eventually provoke a policy response. Still, it remains uncertain whether these countries — many of them smaller economies — would adopt measures similar to those taken by the US, given the asymmetric nature of their economic relationships with China.

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**Thailand-Cambodia tensions**
Moving beyond Japan and China, region-specific tensions elsewhere in Asia also warrant attention, though their broader impact remains limited. Notably, renewed military clashes between Thailand and Cambodia have resurfaced despite an earlier peace deal brokered by Malaysia and the US. While the likelihood of these clashes escalating into a wider regional conflict is low — given their primarily border-specific nature — external pressures on both countries remain a latent risk. The previous ceasefire appeared to have been secured only after US President Trump threatened to withhold trade deals unless fighting ceased, suggesting that a similar “carrot-and-stick” approach may be used again to encourage another ceasefire, although nothing is certain. Domestically, Thailand faces additional near-term uncertainties. Prime Minister Anutin must contend with a range of issues, including preparations for early elections following his dissolution of parliament just last week, adding another layer of unpredictability (chart 5). The Thai government’s popularity has also dipped recently, partly due to criticism over its handling of floods in southern Thailand.

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**Semiconductors and AI**
Lastly, we turn to semiconductor and AI-related risks in Asia. As in markets outside the region, this year’s tech rallies are increasingly seen as overextended (chart 6), with some arguing they have entered bubble territory. Many now believe that much of the upside in future earnings has already been priced in, leaving more room for disappointment than for positive surprises. Geopolitical and competitive considerations remain important too, as highlighted by the recent US approval to sell Nvidia’s high-end (though not top-tier) H200 chips to China. However, this approval may not generate the expected enthusiasm among Chinese consumers. If the reaction mirrors that seen after the earlier approval of Nvidia’s lower-end H20 chips, China may use these openings to promote domestic chipmakers such as Huawei. This could help local firms catch up to US peers and gradually reduce reliance on imported semiconductors. Also, if US chipmaker earnings disappoint due to a lukewarm reception of the H200 chips, while local Chinese chipmakers see increased upside potential, this could translate into a divergence in equity price trajectories between the sector’s stocks in the respective markets.

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Asia

Economic Letter from Asia: Balancing Risks

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The National Association of Realtors' Fixed Rate Mortgage Housing Affordability Index (HAI) improved 0.9% (3.6% y/y) to 106.2 in October after rising 4.7% in September, revised from 3.9%, following a 2.8% increase in August. The index level was the highest since February 2023. The level of home affordability was 18.1% higher than its low of 89.9 in October 2023, but 40.7% below the peak of 179.0 in April 2020.

The rise in October affordability occurred as the average mortgage rate fell to 6.33% from 6.43% in September. The fall in mortgage rates left them above their low of 6.26% in September of last year, though below a 7.70% high in October of 2023. They remained well above a December 2020 low of 2.73%. The median price of an existing single-family home rose 0.7% (2.2% y/y) to $420,600. That price compared to the record $438,600 in June 2025. In October, the principal plus interest payment eased 0.3% (+0.2% y/y) to $2,089 per month, down 9.6% from June’s record high of $2,311, but still well above the most recent low of $984 in February 2020. Monthly mortgage payments averaged a slightly lessened 23.5% of income during October, but remained well above a low of 14.0% of income in April 2020.

The change in housing costs in October was accompanied by a 0.5% rise (3.8% y/y) in median family income to $106,478 after falling 0.3% in September. Qualifying income declined 0.3% (+0.2% y/y) to $100,272, after falling for three straight months.

Housing affordability improved m/m in most of the country in October. The index in the Midwest, the country’s most affordable region, rose 1.5% (0.9% y/y) to 134.4. In the South, the index increased 0.7% (5.4% y/y) to 112.1, while the affordability index in the Northeast strengthened 1.1% (-1.4% y/y) to 93.7. Declining, however, was the affordability index in the West, where homes are the least affordable. The index eased 0.3% (+5.3% y/y) to 75.2 in October.

The Housing Affordability Index (HAI) equals 100 when a median-income borrower qualifies for an 80% mortgage on a median-priced existing single-family home. The HAI had exceeded 100 in each month since July 1990. It reached an all-time high of 213.3 in January 2013.

Data on Housing Affordability can be found in Haver’s **REALTOR** database. Median home sales prices are also available in **USECON**. Higher frequency interest rate data are found in **SURVEYS**, **WEEKLY**, and **DAILY**.

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- Mortgage rates continue to decline.
- Median income strengthens.
- Affordability improves in most of country.

U.S. Housing Affordability Edges Higher in October

Andrew Cates

**The Blue Chip Consensus**
Before turning to the risks that could unsettle the global outlook in 2026, it’s worth noting the backdrop against which those risks are emerging. The first chart shows that forecasters have, if anything, become more optimistic in recent months, raising their 2026 GDP projections across many major economies. The upgrades are most visible in Asia’s tech-focused economies, where the semiconductor and AI upturn is lifting expectations, but the US has also benefited from stronger-than-expected momentum and fading concerns that tariffs would deliver a major growth hit. In short, the starting point for the global outlook has improved—making the downside scenarios explored in the next few charts all the more important to test.

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**Policy divergence**
The second chart highlights one of the central risks to the 2026 outlook: monetary-policy calibration. Even as growth expectations have firmed, forecasters remain convinced that the major central banks still have a little further to go in their easing cycles. For both the Fed and the Bank of England, respondents expect additional rate cuts in early 2026, albeit with growing uncertainty about the exact timing and pace. The broader message is that the heavy lifting on disinflation is now largely done, and what remains are finer calibration risks—where cutting too slowly risks choking momentum, while cutting too aggressively risks undoing progress on inflation. The ECB outlook is far more fragmented. A large share of forecasters sees the next step as a cut—though not necessarily soon—but a meaningful minority lean toward a possible hike. At the opposite pole is the Bank of Japan. Unlike its peers, the BoJ is still expected to tighten policy, reflecting Japan’s firmer growth foundation and a more durable inflation process. This creates a notable US–Japan policy divergence, which has already influenced currency and bond-market behaviour and could become a larger global shock-transmission channel in 2026.

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**Financial market stress**
The third chart highlights another source of downside risk: the widening gap between financial-market calm and real-economy anxiety. The US VIX has spent most of the past year hovering near multi-decade lows, consistent with rich valuations, abundant liquidity and a broadly optimistic macro narrative. Yet measured global economic policy uncertainty remains unusually elevated, reflecting geopolitical fragmentation, shifting trade regimes, and highly uncertain fiscal trajectories. This disconnect matters. Periods in which markets price near-perfection while the policy environment deteriorates have often been precursors to sharp repricing episodes. With valuations stretched and volatility compressed, it would not take much—a policy misstep, a geopolitical shock, or a rapid shift in rate expectations—to trigger a correction big enough to destabilise confidence in 2026.

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**AI expectations**
Against that backdrop, our next chart highlights a more subtle but no less important vulnerability: expectations around AI-driven growth. While AI has undoubtedly been a powerful tailwind for market sentiment—and arguably a key reason why forecasters have nudged up 2026 growth projections—our survey suggests that most respondents believe financial markets are overestimating the likely economic gains. Only around a third think current expectations are broadly accurate; almost nobody believes markets are underestimating AI’s impact. This imbalance matters. When valuations are rich and optimism is heavily front-loaded, any disappointment in AI adoption, productivity gains or investment payoffs could unwind a meaningful chunk of the recent market strength. In other words, the same force lifting the outlook today could become a meaningful downside catalyst in 2026 if reality fails to keep pace with expectation.

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**Trade disruption** 
A further downside risk comes from the latent fragilities in global trade and logistics. The Baltic Dry Index has climbed sharply in recent months, hinting at firmer shipping demand and rising transport costs, even as the Global Supply Chain Pressure Index has edged lower. That combination is telling: headline congestion may not yet be building, but underlying pressures—tight vessel availability, shifting trade routes, selective port bottlenecks and stronger goods flows—are quietly re-accumulating beneath the surface. None of this resembles the acute disruptions of 2021–22, but the risk is that a seemingly contained system can tighten very quickly. For a global economy that remains vulnerable to cost shocks and production delays, any renewed squeeze in trade logistics would add another meaningful downside risk as we look toward 2026.

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**Geopolitical shocks** 
Geopolitical risk has eased from the extremes seen during the early stages of the Israel–Gaza conflict, but the broader backdrop remains far from settled. The global Geopolitical Risk Index is still running well above its pre-pandemic norm, and volatility is now being driven less by any single flashpoint and more by a crowded field of simmering risks. These range from an unstable Russia–Ukraine stalemate and intensifying U.S.–China strategic rivalry to ongoing tensions across the Taiwan Strait, a fragile security environment in the South China Sea, periodic flare-ups in the Caucasus and Sahel, and rising political strain ahead of multiple major elections in 2026. Venezuela’s increasing instability—both domestically and in relation to its border dispute with Guyana—adds another potential source of disruption, particularly for energy markets. While none of these risks is dominating headlines at present, history shows that geopolitical shocks rarely give advance warning. A sudden escalation in any of these theatres could easily unsettle trade flows, energy prices or investor sentiment—another meaningful downside risk as we approach 2026.

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As 2025 draws to a close, the global economy enters 2026 with a surprisingly resilient backdrop: equity markets are still trading near cycle highs, volatility is subdued, and consensus forecasts have been drifting upward in recent months—helped by a robust US economy, firmer momentum across Asia, and optimism that AI-related investment will continue to lift the medium-term outlook (chart 1). Against this relatively constructive starting point, we focus this week on the key downside risks that could challenge the consensus narrative next year: the possibility of monetary-policy miscalibration (chart 2); the gap between elevated policy uncertainty and unusually calm financial markets (chart 3); the risk that financial markets may be overestimating the gains from AI (chart 4); renewed strain in global trade (chart 5); and geopolitical tensions (chart 6). These risks do not dominate the baseline outlook, but they help frame the vulnerabilities that could matter if global conditions deteriorate. Next week, we will turn to the upside risks—the forces that could allow the world economy to outperform again in 2026.

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Charts of the Week: The Downside Risks

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The U.S. trade deficit in goods and services (BOP basis) narrowed to $52.8 billion in September from $59.3 billion in August, revised from $59.6 billion, according to the U.S. Census Bureau. The Action Economics Forecast Survey expected a deficit of $64.6 billion. The goods deficit fell to $79.0 billion in September from $86.1 billion in August, while the services surplus slipped to $26.2 billion from $26.8 billion in August. The real (inflation-adjusted) trade deficit in goods narrowed to $79.0 (2017$) in September from $83.7 billion in August. For all of Q3’25, the real deficit averaged $87.4 billion versus $87.7 billion in Q2, and thus it should be a modest addition to Q3 economic growth after a 4.8 percentage point addition in Q2.

Exports of goods & services rose 3.0% (5.7% y/y) in September following a 0.2% August slip. Goods exports (Census basis) strengthened 4.9% after a 0.8% slip. Nonauto consumer goods exports surged 19.1%. Industrial supplies & materials exports increased 12.1% while foods, feeds & beverage exports rose 3.4%. “Other” goods exports rose 7.6%. To the downside, capital goods exports excluding autos declined 5.3% while auto & parts exports fell 2.2%. Services exports eased 0.4%. Exports of financial services rose 1.4% while exports of maintenance & service repairs rose 0.8%. Exports of government goods and services rose 1.7%.

Imports of goods & services in September increased 0.6% (-3.7% y/y) after a 5.2% decline. Goods imports rose 0.7% (-5.9% y/y) in September after a 6.6% August decline. Nonauto consumer goods jumped 18.4% while industrial supplies & materials imports were little-changed. Elsewhere, imports fell. Capital goods excluding auto imports slumped 6.0%, auto imports fell 4.1% and food imports declined 1.6%. Total services imports rose 0.3% in September after a 0.3% decline. Maintenance & repair services increased 3.1%, construction service imports rose 1.1%, transport rose 1.5% but travel weakened 1.2%. Imports of government goods & services held steady.

By country, the goods trade deficit with China narrowed to $11.4 billion (SA) in September from $15.4 billion in August. Exports to China rose 1.8% while imports from China weakened 16.1%. The trade deficit with the European Union doubled m/m to $17.8 billion in September. Exports rose 13.2% but imports surged by one-third. The deficit with Japan declined sharply to $3.6 billion in September. Exports increased 7.9% while imports declined 12.7%.

The international trade data can be found in Haver’s **USECON** database. Detailed figures on international trade are available in the **USINT** and **USTRADE** databases. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- Foreign trade deficit shrinks to lowest since June 2020.
- Surge in exports is driven by foods, industrial supplies & nonauto consumer goods.
- Minimal import increase is held down by fewer capital goods, autos & foods.
- Services surplus eases.

U.S. Trade Deficit Narrows to Five-Year Low in September

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance rose 44,000 to 236,000 during the week of December 6, after declining to 192,000 during the week of November 29, revised from 191,000. The four-week moving average of initial claims was 216,750, an increase of 2,000 from the previous week unrevised average of 214,750, which was the lowest level since January 2025.

Federal government employees initially filed 643 (NSA) jobless insurance claims in the week ended November 29, after 1,126 filed in the week ended November 22, revised from 1,125.

Continuing claims for unemployment insurance posted a sharp decline of 99,000 to 1,838,000 in the week ending November 29, from 1,937,000 the prior week, revised from 1.939 million. The four-week moving average decreased by 27,000 to 1,918,000 in the week ended November 29, from 1945,250 the prior week, revised from 1.945 million. The insured unemployment rate stood at 1.2% in the week of November 29, a decrease from 1.3% in the prior week.

Federal government employees continuing benefits fell to 12,732 (NSA) in the week ended November 22, from 17,862 in the week ended November 15, revised from 17,851.

The insured unemployment rate varied greatly across individual states and territories. In the week ended November 22, the highest unemployment rates were in New Jersey (2.18%), Washington (2.23%), Massachusetts (1.95%), Connecticut (1.83%) and Rhode Island (1.82%). The lowest rates were in Florida (0.27%), South Dakota (0.34%), North Carolina (0.39%), Louisiana (0.42%), Alabama (0.44%), Virginia and Tennessee (both 0.46%), and Arkansas and Nebraska (both 0.48%). Rates in other notable states include California (1.74%), New York (1.63%), Pennsylvania (1.46%), Illinois (1.45%), and Texas (1.07%). These state data are not seasonally adjusted.

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

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