Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721d.jpg" width="353">
The Federal Reserve Bank of Richmond Mfg. Survey did improve in June, but the low reading of 4 still was down sharply from the highs reached earlier this year. The m/m rise reflected scant improvement in shipments &amp; new orders though the rise in the employment index did raise the 2Q level to its highest since 3Q04.
During the last ten years there has been a 39% correlation between the Richmond survey index level and the one month change in U.S. factory sector industrial production. The latest Richmond Fed Mfg. Survey is available <a href="http://www.richmondfed.org/research/regional_conditions/manufacturing_conditions/index.cfm">here</a>.
The Richmond Fed also publishes indexes of conditions in the service sector and the revenue measure remained firm in June at a reading of 14, much improved from the lows earlier in the year but below last year&#39;s highs. The companion index of service sector employment fell moderately. The latest Richmond Fed Service-Sector Survey is available <a href="http://www.richmondfed.org/research/regional_conditions/service_sector/index.cfm">here</a>.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721e.jpg" width="353">
The Chicago Federal Reserve Bank&#39;s Midwest manufacturing index fell 0.2% during May from April. It was the first m/m decline in over a year though earlier strong gains left the three month growth rate firm at 5.1%. Three month growth in the index peaked late last year at 9.4%. Declines in indexes covering the machinery &amp; resource sectors were the source of the May drop.
During the last ten years there has been a 95% correlation between the y/y change in Chicago&#39;s Midwest Mfg. index and the change in US factory sector industrial production. The May Chicago Fed Midwest Manufacturing Index can be found <a href="http://www.chicagofed.org/economic_research_and_data/files/cfmmi_may2006.pdf"> here</a>.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721f.jpg" width="353">
The Kansas City Fed&#39;s manufacturing survey included a production index which fell in June to 23 from 34 in May but the level remained quite firm versus last year. Though new orders also fell m/m the quarterly average reached its highest level since late 2003. The index covering the change in the number of employees was its strongest in just over two years. The prices received index also hit its highest level on record.
The Kansas City Fed survey dates back to 2001 and the June release covering manufacturing activity in the Tenth Federal Reserve District can be found <a href="http://www.kansascityfed.org/mfgsurv/pdf/2006Jun29mfg.pdf"> here</a>.
The data mentioned here is available in the Haver SURVEYS database.
The Supplier Industry in Transition - The New Geography of Auto Production from the Federal Reserve Bank of Chicago is available <a href="http://www.chicagofed.org/publications/fedletter/cflaugust2006_229b.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S5.htm"> Federal Reserve Surveys</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">Year Ago </th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Richmond Fed Mfg. Survey (Diffusion Index, 1-Mth. Chg.)</td>
<td>4</td>
<td>1</td>
<td>-3</td>
<td>3</td>
<td>10</td>
<td>-3</td>
</tr>
<tr>
<td class="firstcol">Chicago Fed Midwest Mfg. Index (2002 = 100)</td>
<td>n.a.</td>
<td>106.0</td>
<td>101.3</td>
<td>102.1</td>
<td>100.4</td>
<td>97.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Kansas City Fed Production (1-Mth. Diffusion Index, + = Econ Growth)</td>
<td>23</td>
<td>34</td>
<td>14</td>
<td>16</td>
<td>18</td>
<td>13</td>
</tr>
</tbody>
</table>
UK GDP: Unexpected Pick-Up in Q2 Growth 
by <a href="/comment/Stone.html">Carol Stone</a> July 20, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721a.jpg" width="353">
GDP growth in the UK ticked up to 0.8% in Q2 from 0.7% in Q1. The initial report of Q1 in late April was 0.6% so interim revisions were upward, with history also somewhat stronger than was thought at that time.
This &quot;preliminary&quot; estimate is compiled from industry data only. The full array of income and expenditure data will be published August 25. Among the sectors, today&#39;s report shows that, after a surge in Q1, production industries fell back by 0.1%. This was concentrated in the mining sector (including oil and gas extraction), where output was off 3.0% in the quarter and in energy supply, down 2.8%. However, manufacturing advanced 0.5%; although this was less than in Q1, it added enough to put that sector up 0.7% over a year ago, its first year-on-year increase since Q4 2004.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721b.jpg" width="353">
The real source of growth was the services, particularly business and financial services. Total services expanded 1.0%, with business services up 1.2%. This latter industry group is up 4.8% from a year ago. Consumer-oriented services, such as distribution, hotels &amp; restaurants and repairs also gained 1.2% in Q2, yielding 3.3% growth over the past year. Transportation and communications are up 3.0% on the year and government and &quot;other&quot;, 2.5%.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721c.jpg" width="353">
We are slightly surprised at this pick-up in UK growth. Just a little over a week ago, we wrote here about employment patterns that were no better than &quot;stable&quot;, accompanied by rising unemployment. News reports this morning indicated that forecasters in a widely watched survey had projected 0.7%, the same as Q1, suggesting that our qualitative judgment was hardly unique. The flatness in production was evident from previously available production data for April and May. Just yesterday, retail trade data for the quarter showed strength (2.1%), but that, of course, is only one industry. As we mentioned last quarter, growth in Q1 was widespread across industries, giving the benefits of diversity to the economy as a whole. So this period, when production industries and mining tailed off, service businesses kept up the total.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/UK/@U2/@U2.HTM">United Kingdom</a> &nbsp; (Chained, SA, 2002=100)</th>
<th scope="col">Q2 2006</th>
<th scope="col">Q1 2006</th>
<th scope="col">Q4 2005</th>
<th scope="col">Year/ Year</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">GDP*</td>
<td>0.8</td>
<td>0.7</td>
<td>0.7</td>
<td>2.6</td>
<td>1.9</td>
<td>3.3</td>
<td>2.7</td>
</tr>
<tr>
<td class="firstcol">Production Industries</td>
<td>-0.1</td>
<td>0.8</td>
<td>-0.6</td>
<td>-0.8</td>
<td>-1.8</td>
<td>0.7</td>
<td>-0.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Service Industries</td>
<td>1.0</td>
<td>0.7</td>
<td>1.1</td>
<td>3.6</td>
<td>2.8</td>
<td>3.9</td>
<td>3.1</td>
</tr>
</tbody>
</table>
</body>
</html>

The Federal Reserve Bank of Richmond Mfg. Survey did improve in June, but the low reading of 4 still was down sharply from the highs reached earlier this year. The m/m rise reflected scant improvement in shipments & new orders though [...]

Regional Fed Bank Surveys Indicate Slower Growth

Carol Stone, CBE

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721a.jpg" width="353">
GDP growth in the UK ticked up to 0.8% in Q2 from 0.7% in Q1. The initial report of Q1 in late April was 0.6% so interim revisions were upward, with history also somewhat stronger than was thought at that time.
This &quot;preliminary&quot; estimate is compiled from industry data only. The full array of income and expenditure data will be published August 25. Among the sectors, today&#39;s report shows that, after a surge in Q1, production industries fell back by 0.1%. This was concentrated in the mining sector (including oil and gas extraction), where output was off 3.0% in the quarter and in energy supply, down 2.8%. However, manufacturing advanced 0.5%; although this was less than in Q1, it added enough to put that sector up 0.7% over a year ago, its first year-on-year increase since Q4 2004.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721b.jpg" width="353">
The real source of growth was the services, particularly business and financial services. Total services expanded 1.0%, with business services up 1.2%. This latter industry group is up 4.8% from a year ago. Consumer-oriented services, such as distribution, hotels &amp; restaurants and repairs also gained 1.2% in Q2, yielding 3.3% growth over the past year. Transportation and communications are up 3.0% on the year and government and &quot;other&quot;, 2.5%.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060721c.jpg" width="353">
We are slightly surprised at this pick-up in UK growth. Just a little over a week ago, we wrote here about employment patterns that were no better than &quot;stable&quot;, accompanied by rising unemployment. News reports this morning indicated that forecasters in a widely watched survey had projected 0.7%, the same as Q1, suggesting that our qualitative judgment was hardly unique. The flatness in production was evident from previously available production data for April and May. Just yesterday, retail trade data for the quarter showed strength (2.1%), but that, of course, is only one industry. As we mentioned last quarter, growth in Q1 was widespread across industries, giving the benefits of diversity to the economy as a whole. So this period, when production industries and mining tailed off, service businesses kept up the total.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/UK/@U2/@U2.HTM">United Kingdom</a> &nbsp; (Chained, SA, 2002=100)</th>
<th scope="col">Q2 2006</th>
<th scope="col">Q1 2006</th>
<th scope="col">Q4 2005</th>
<th scope="col">Year/ Year</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">GDP*</td>
<td>0.8</td>
<td>0.7</td>
<td>0.7</td>
<td>2.6</td>
<td>1.9</td>
<td>3.3</td>
<td>2.7</td>
</tr>
<tr>
<td class="firstcol">Production Industries</td>
<td>-0.1</td>
<td>0.8</td>
<td>-0.6</td>
<td>-0.8</td>
<td>-1.8</td>
<td>0.7</td>
<td>-0.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Service Industries</td>
<td>1.0</td>
<td>0.7</td>
<td>1.1</td>
<td>3.6</td>
<td>2.8</td>
<td>3.9</td>
<td>3.1</td>
</tr>
</tbody>
</table>
</body>
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GDP growth in the UK ticked up to 0.8% in Q2 from 0.7% in Q1. The initial report of Q1 in late April was 0.6% so interim revisions were upward, with history also somewhat stronger than was thought at that time. This "preliminary" [...]

UK GDP: Unexpected Pick-Up in Q2 Growth

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720h.jpg" width="353">
The Central Bank of Egypt today reported its balance of payments array for Q1 2006. The current account surplus increased to $934 million from $801 million in Q4 2005, although it was a bit smaller than Q1 2005 at $995 billion. For 2005 as a whole, Egypt had a current account surplus of $2.2 billion.
These numbers are small in absolute size. For instance, the balance on services in the US was $66.0 billion last year, nearly 9 times larger than Egypt&#39;s $7.6 billion. But some aspects of these Egyptian figures are quite fascinating and bear examination.
First, the current account itself shows a surplus. One frequently presumes that emerging market countries run perennial deficits and struggle constantly with debt and debt service issues. But presently, that situation is improving for Egypt. Its current account turned a surplus in its fiscal year 2002 (ended June 30, 2002) and has also achieved that every quarter since the quarterly data began in early 2004.
To be sure, the goods accounts are in deficit, which totaled $11.1 billion in calendar 2005 and continued with a $2.2 billion shortfall in Q1 2006. But Egypt has some oil and, as seen in the table below, is benefiting from the high prices with an increasing surplus in petroleum. This, of course, limits the overall deficit in goods.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720i.jpg" width="353">
The services accounts are important for Egypt. It collected nearly $3.5 billion last year in tolls from the Suez Canal, a strategic and lucrative asset for that nation. Egypt is able, too, to benefit from its ancient history as a tourist attraction, bringing a net of more than $5 billion to the country last year in travel accounts.
Lastly among the current accounts, the country receives substantial amounts of transfers. We in the US look at our transfer item as a drain, but sizable amounts of income go to Egypt, apparently from individuals working abroad. Total net transfers were $5.7 billion in 2005, with the portion from private sources amounting to almost exactly $5.0 billion.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720j.jpg" width="353">
On the capital and financial account side, the most outstanding item is the recent huge increase in direct investment in Egypt. As seen below, capital inflows for investment projects more than doubled in 2005 to $5.3 billion from $2.0 billion in 2004. The Q1 amount continues the 2005 pace. Information from news sources indicates that these funds cover a wide variety of activities, including manufacturing and the rapidly growing tourism sector. Recently announced projects include a major expansion of port facilities at Suez, so these flows are likely to remain sizable for a considerable period. At the same time, bank lending patterns indicate a persistent net outflow of capital from that sector.
All told, Egypt&#39;s balance of payments accounts are running a positive overall balance, as services, transfers and some capital accounts more than offset a deficit on goods trade. As a result, Egypt&#39;s reserves are increasing, in Q1 by $713 million, following a substantial $6.3 billion in 2005.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/EMERGEMA/@M1/@M1.htm">Egypt: Mil. US$</a></th>
<th scope="col">Q1 2006</th>
<th scope="col">Q4 2005</th>
<th scope="col">Q3 2005</th>
<th scope="col">Q1 2005</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Current Account</td>
<td>934</td>
<td>801</td>
<td>327</td>
<td>995</td>
<td>2,207</td>
<td>3,236</td>
</tr>
<tr>
<td class="firstcol">Balance on Goods</td>
<td>-2,222</td>
<td>-2,663</td>
<td>-1,028</td>
<td>-2,128</td>
<td>-11,127</td>
<td>-9,312</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Petroleum</td>
<td>1,518</td>
<td>1,188</td>
<td>985</td>
<td>638</td>
<td>2,562</td>
<td>1,730</td>
</tr>
<tr>
<td class="firstcol">Balance on Services</td>
<td>1,780</td>
<td>2,074</td>
<td>2,170</td>
<td>1,530</td>
<td>7,586</td>
<td>7,982</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Suez Canal</td>
<td>862</td>
<td>891</td>
<td>871</td>
<td>847</td>
<td>3,467</td>
<td>3,076</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Travel (Net)</td>
<td>1,257</td>
<td>1,200</td>
<td>1,928</td>
<td>994</td>
<td>5,222</td>
<td>4,868</td>
</tr>
<tr class="odd">
<td class="firstcol">Net Transfers</td>
<td>1,376</td>
<td>1,390</td>
<td>1,355</td>
<td>1,593</td>
<td>5,748</td>
<td>4,567</td>
</tr>
<tr>
<td class="firstcol">Net Direct Investment</td>
<td>1,296</td>
<td>1,320</td>
<td>1,928</td>
<td>1,214</td>
<td>5,284</td>
<td>1,998</td>
</tr>
<tr class="odd">
<td class="firstcol">Change in Reserves</td>
<td>713</td>
<td>740</td>
<td>1,812</td>
<td>2,538</td>
<td>6,316</td>
<td>680</td>
</tr>
</tbody>
</table>
</body>
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The Central Bank of Egypt today reported its balance of payments array for Q1 2006. The current account surplus increased to $934 million from $801 million in Q4 2005, although it was a bit smaller than Q1 2005 at $995 billion. For [...]

Egypt's Current Account Surplus Boosted by Large Canal Tolls, Tourism and Petroleum; Direct Investment Gains

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720f.jpg" width="353">
The Philadelphia Federal Reserve Bank&#39;s July Index of General Business Conditions in the manufacturing sector dropped to 6.0 from an unrevised 13.1 during June. The decline exceeded Consensus expectation for a drop to 12.4.
The July decline was to the lowest level since this past January.
During the last ten years there has been a 65% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 49% correlation with q/q growth in real GDP.
The lower index reflected declines in the sub indexes of new orders, shipments, unfilled orders and delivery times. Moving in the other direction, the employment index advanced to its highest level in three months. During the last ten years there has been a 75% correlation between the employment index and the three month growth in factory payrolls.
The business conditions index reflects a separate survey question, not the sub indexes.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720g.jpg" width="353">
The prices paid index rose moderately. During the last ten years there has been a 76% correlation between the prices paid index and the three month growth in the intermediate goods PPI. There has been an 85% correlation with the change in core intermediate goods prices.
The separate index of expected business conditions in six months about doubled m/m in July but at 15.4 remained below the 2Q average. Expectations for employment fell m/m and the index also was below the 2Q average.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos0706.html">here</a>.
The minutes to the latest Federal Open Market Committee meeting can be found <a href="http://www.federalreserve.gov/FOMC/MINUTES/20060629.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">July</th>
<th scope="col">June</th>
<th scope="col">July &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>6.0</td>
<td>13.1</td>
<td>9.6</td>
<td>12.4</td>
<td>28.0</td>
<td>10.5</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>50.3</td>
<td>48.7</td>
<td>31.8</td>
<td>43.5</td>
<td>51.2</td>
<td>16.8</td>
</tr>
</tbody>
</table>
</body>
</html>

The Philadelphia Federal Reserve Bank's July Index of General Business Conditions in the manufacturing sector dropped to 6.0 from an unrevised 13.1 during June. The decline exceeded Consensus expectation for a drop to 12.4. The July [...]

Philadelphia Fed Business Activity Index Lowest Since January

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720c.jpg" width="353">
The number of mass layoff events rose 2.1% during June. Though the number remained down sharply from last year, for all of 2Q the number of events rose 1.6% from 1Q 2006, the first q/q increase in nearly two years.
During the last ten years there has been a (negative) 85% correlation between the three month average level of layoff announcements and the y/y change in payroll employment.
The number of persons affected in June by mass layoffs jumped 8.9% and rose 2.8% during 2Q. Layoffs in the transportation equipment sector (+29.0% y/y) dominated the rise in June and more than doubled m/m. Less transportation, the number of affected persons rose 1.6% (-10.6% y/y).
Increased layoffs in the apparel (69.8% y/y), machinery (35.1% y/y), furniture (153.0% y/y), textile mill, computer, metals and chemicals industries were damped by declines in electrical equipment (-76.0% y/y) and wholesale trade (-55.9% y/y).
The Mass Layoff Statistics (MLS) program collects reports on mass layoff actions that result in workers being separated from their jobs. Monthly mass layoff numbers are from establishments which have at least 50 initial claims for unemployment insurance (UI) filed against them during a 5-week period.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Mass Layoffs</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>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">All US Industries (# Events, SA)</td>
<td>1,097</td>
<td>1,074</td>
<td>-7.3%</td>
<td>15,699</td>
<td>15,926</td>
<td>19,220</td>
</tr>
<tr>
<td class="firstcol">Total (# Persons, SA)</td>
<td>119,662</td>
<td>109,858</td>
<td>-6.8%</td>
<td>1,722,452</td>
<td>1,591,081</td>
<td>1,946,548</td>
</tr>
</tbody>
</table>
</body>
</html>

The number of mass layoff events rose 2.1% during June. Though the number remained down sharply from last year, for all of 2Q the number of events rose 1.6% from 1Q 2006, the first q/q increase in nearly two years. During the last ten [...]

Mass Layoffs Rose in June and During 2Q

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720d.jpg" width="353">
The Conference Board reported that the composite index of leading economic indicators ticked up 0.1% in June, the first increase in three months, and followed an unrevised 0.6% decline the prior month. Consensus expectations had been for a 0.2% increase.
Six month growth in the leaders fell to -0.6%, its weakest since early 2001. During the last ten years there has been a 43% correlation between the six-month change in the leading indicators and quarterly growth in real GDP.
The breadth of one month gain amongst the 10 components of the leading index improved sharply to 65% in June but over a six month span only 50% of the index components rose, the weakest breadth of six month gain since early 2005. In June, positive contributions from the money supply, consumer expectations, hours worked &amp; jobless claims were offset by lower stock prices, vendor performance and building permits .<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720e.jpg" width="353">
The method of calculating the contribution to the leading index from the spread between 10 year Treasury securities and the Fed funds rate has been revised. A negative contribution will now occur only when the spread inverts rather than when declining as in the past. More details can be found <a href="http://www.conference-board.org/pdf_free/economics/bci/lei0705.pdf">here</a>.
The leading index is based on eight previously reported economic data series. Two series, orders for consumer goods and orders for capital goods, are estimated.
The coincident indicators rose 0.2% and during the last one &amp; six months all of the coincident series rose. Over the last ten years there has been a 69% correlation between the change in the coincident indicators and real GDP growth.
The lagging indicators jumped 0.6%. During June nearly all of the series&#39; components rose but during the last six months 42.9% rose. The ratio of coincident to lagging indicators, a measure of actual economic performance versus excess, fell for the third consecutive month.
Visit the Conference Board&#39;s <a href="http://www.conference-board.org">site</a> for coverage of leading indicator series from around the world.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM">Business Cycle Indicators</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">6 Month Chg., AR</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Leading</td>
<td>0.1%</td>
<td>-0.6%</td>
<td>-0.6%</td>
<td>2.3%</td>
<td>7.4%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.2%</td>
<td>0.1%</td>
<td>2.1%</td>
<td>2.2%</td>
<td>2.5%</td>
<td>0.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>0.6%</td>
<td>0.2%</td>
<td>3.1%</td>
<td>3.5%</td>
<td>0.0%</td>
<td>-0.0%</td>
</tr>
</tbody>
</table>
</body>
</html>

The Conference Board reported that the composite index of leading economic indicators ticked up 0.1% in June, the first increase in three months, and followed an unrevised 0.6% decline the prior month. Consensus expectations had been [...]

Leading Economic Indicators Nudged Higher

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720a.jpg" width="353">
Initial claims for unemployment insurance fell 30,000 to 304,000 last week after an upwardly revised 20,000 increase during the prior week. Consensus expectations had been for a lesser decline to 320,000 claims.
The figure covers the survey period for July nonfarm payrolls and initial claims were down 5,000 (-1.6%) from the June period. During the last ten years there has been a (negative) 78% correlation between the level of initial claims and the m/m change in nonfarm payroll employment. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720b.jpg" width="353">
The w/w decline reversed all of the increases during the prior four weeks and dropped claims to the lowest level in one month. The four-week moving average of initial claims fell to 316,750 (-1.6% y/y).
Continuing claims for unemployment insurance jumped 85,000 following a deepened 28,000 decline the previous week. Claims were at the highest level since February.
The insured rate of unemployment held steady at 1.9% where it has been since February.
Robust estimation and monetary policy with unobserved structural change from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/publications/economics/review/2006/er1-16.pdf"> here</a>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">07/15/06</th>
<th scope="col">07/08/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>304</td>
<td>334</td>
<td>-3.5%</td>
<td>332</td>
<td>343</td>
<td>403</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Continuing Claims</td>
<td>--</td>
<td>2,505</td>
<td>-3.5%</td>
<td>2,663</td>
<td>2,923</td>
<td>3,530</td>
</tr>
</tbody>
</table>
</body>
</html>

Initial claims for unemployment insurance fell 30,000 to 304,000 last week after an upwardly revised 20,000 increase during the prior week. Consensus expectations had been for a lesser decline to 320,000 claims. The figure covers the [...]

Initial Claims for Unemployment Insurance At One Month Low

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720f.jpg" width="353">
The Philadelphia Federal Reserve Bank&#39;s July Index of General Business Conditions in the manufacturing sector dropped to 6.0 from an unrevised 13.1 during June. The decline exceeded Consensus expectation for a drop to 12.4.
The July decline was to the lowest level since this past January.
During the last ten years there has been a 65% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 49% correlation with q/q growth in real GDP.
The lower index reflected declines in the sub indexes of new orders, shipments, unfilled orders and delivery times. Moving in the other direction, the employment index advanced to its highest level in three months. During the last ten years there has been a 75% correlation between the employment index and the three month growth in factory payrolls.
The business conditions index reflects a separate survey question, not the sub indexes.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720g.jpg" width="353">
The prices paid index rose moderately. During the last ten years there has been a 76% correlation between the prices paid index and the three month growth in the intermediate goods PPI. There has been an 85% correlation with the change in core intermediate goods prices.
The separate index of expected business conditions in six months about doubled m/m in July but at 15.4 remained below the 2Q average. Expectations for employment fell m/m and the index also was below the 2Q average.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos0706.html">here</a>.
The minutes to the latest Federal Open Market Committee meeting can be found <a href="http://www.federalreserve.gov/FOMC/MINUTES/20060629.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">July</th>
<th scope="col">June</th>
<th scope="col">July &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>6.0</td>
<td>13.1</td>
<td>9.6</td>
<td>12.4</td>
<td>28.0</td>
<td>10.5</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>50.3</td>
<td>48.7</td>
<td>31.8</td>
<td>43.5</td>
<td>51.2</td>
<td>16.8</td>
</tr>
</tbody>
</table>
Leading Economic Indicators Nudged Higher 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 20, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720d.jpg" width="353">
The Conference Board reported that the composite index of leading economic indicators ticked up 0.1% in June, the first increase in three months, and followed an unrevised 0.6% decline the prior month. Consensus expectations had been for a 0.2% increase.
Six month growth in the leaders fell to -0.6%, its weakest since early 2001. During the last ten years there has been a 43% correlation between the six-month change in the leading indicators and quarterly growth in real GDP.
The breadth of one month gain amongst the 10 components of the leading index improved sharply to 65% in June but over a six month span only 50% of the index components rose, the weakest breadth of six month gain since early 2005. In June, positive contributions from the money supply, consumer expectations, hours worked &amp; jobless claims were offset by lower stock prices, vendor performance and building permits .<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720e.jpg" width="353">
The method of calculating the contribution to the leading index from the spread between 10 year Treasury securities and the Fed funds rate has been revised. A negative contribution will now occur only when the spread inverts rather than when declining as in the past. More details can be found <a href="http://www.conference-board.org/pdf_free/economics/bci/lei0705.pdf">here</a>.
The leading index is based on eight previously reported economic data series. Two series, orders for consumer goods and orders for capital goods, are estimated.
The coincident indicators rose 0.2% and during the last one &amp; six months all of the coincident series rose. Over the last ten years there has been a 69% correlation between the change in the coincident indicators and real GDP growth.
The lagging indicators jumped 0.6%. During June nearly all of the series&#39; components rose but during the last six months 42.9% rose. The ratio of coincident to lagging indicators, a measure of actual economic performance versus excess, fell for the third consecutive month.
Visit the Conference Board&#39;s <a href="http://www.conference-board.org">site</a> for coverage of leading indicator series from around the world.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM">Business Cycle Indicators</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">6 Month Chg., AR</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Leading</td>
<td>0.1%</td>
<td>-0.6%</td>
<td>-0.6%</td>
<td>2.3%</td>
<td>7.4%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.2%</td>
<td>0.1%</td>
<td>2.1%</td>
<td>2.2%</td>
<td>2.5%</td>
<td>0.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>0.6%</td>
<td>0.2%</td>
<td>3.1%</td>
<td>3.5%</td>
<td>0.0%</td>
<td>-0.0%</td>
</tr>
</tbody>
</table>
Mass Layoffs Rose in June and During 2Q 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 20, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720c.jpg" width="353">
The number of mass layoff events rose 2.1% during June. Though the number remained down sharply from last year, for all of 2Q the number of events rose 1.6% from 1Q 2006, the first q/q increase in nearly two years.
During the last ten years there has been a (negative) 85% correlation between the three month average level of layoff announcements and the y/y change in payroll employment.
The number of persons affected in June by mass layoffs jumped 8.9% and rose 2.8% during 2Q. Layoffs in the transportation equipment sector (+29.0% y/y) dominated the rise in June and more than doubled m/m. Less transportation, the number of affected persons rose 1.6% (-10.6% y/y).
Increased layoffs in the apparel (69.8% y/y), machinery (35.1% y/y), furniture (153.0% y/y), textile mill, computer, metals and chemicals industries were damped by declines in electrical equipment (-76.0% y/y) and wholesale trade (-55.9% y/y).
The Mass Layoff Statistics (MLS) program collects reports on mass layoff actions that result in workers being separated from their jobs. Monthly mass layoff numbers are from establishments which have at least 50 initial claims for unemployment insurance (UI) filed against them during a 5-week period.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Mass Layoffs</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>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">All US Industries (# Events, SA)</td>
<td>1,097</td>
<td>1,074</td>
<td>-7.3%</td>
<td>15,699</td>
<td>15,926</td>
<td>19,220</td>
</tr>
<tr>
<td class="firstcol">Total (# Persons, SA)</td>
<td>119,662</td>
<td>109,858</td>
<td>-6.8%</td>
<td>1,722,452</td>
<td>1,591,081</td>
<td>1,946,548</td>
</tr>
</tbody>
</table>
Initial Claims for Unemployment Insurance At One Month Low 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 20, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720a.jpg" width="353">
Initial claims for unemployment insurance fell 30,000 to 304,000 last week after an upwardly revised 20,000 increase during the prior week. Consensus expectations had been for a lesser decline to 320,000 claims.
The figure covers the survey period for July nonfarm payrolls and initial claims were down 5,000 (-1.6%) from the June period. During the last ten years there has been a (negative) 78% correlation between the level of initial claims and the m/m change in nonfarm payroll employment. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720b.jpg" width="353">
The w/w decline reversed all of the increases during the prior four weeks and dropped claims to the lowest level in one month. The four-week moving average of initial claims fell to 316,750 (-1.6% y/y).
Continuing claims for unemployment insurance jumped 85,000 following a deepened 28,000 decline the previous week. Claims were at the highest level since February.
The insured rate of unemployment held steady at 1.9% where it has been since February.
Robust estimation and monetary policy with unobserved structural change from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/publications/economics/review/2006/er1-16.pdf"> here</a>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">07/15/06</th>
<th scope="col">07/08/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>304</td>
<td>334</td>
<td>-3.5%</td>
<td>332</td>
<td>343</td>
<td>403</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Continuing Claims</td>
<td>--</td>
<td>2,505</td>
<td>-3.5%</td>
<td>2,663</td>
<td>2,923</td>
<td>3,530</td>
</tr>
</tbody>
</table>
Egypt's Current Account Surplus Boosted by Large Canal Tolls, Tourism and Petroleum; Direct Investment Gains 
by <a href="/comment/Stone.html">Carol Stone</a> July 20, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720h.jpg" width="353">
The Central Bank of Egypt today reported its balance of payments array for Q1 2006. The current account surplus increased to $934 million from $801 million in Q4 2005, although it was a bit smaller than Q1 2005 at $995 billion. For 2005 as a whole, Egypt had a current account surplus of $2.2 billion.
These numbers are small in absolute size. For instance, the balance on services in the US was $66.0 billion last year, nearly 9 times larger than Egypt&#39;s $7.6 billion. But some aspects of these Egyptian figures are quite fascinating and bear examination.
First, the current account itself shows a surplus. One frequently presumes that emerging market countries run perennial deficits and struggle constantly with debt and debt service issues. But presently, that situation is improving for Egypt. Its current account turned a surplus in its fiscal year 2002 (ended June 30, 2002) and has also achieved that every quarter since the quarterly data began in early 2004.
To be sure, the goods accounts are in deficit, which totaled $11.1 billion in calendar 2005 and continued with a $2.2 billion shortfall in Q1 2006. But Egypt has some oil and, as seen in the table below, is benefiting from the high prices with an increasing surplus in petroleum. This, of course, limits the overall deficit in goods.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720i.jpg" width="353">
The services accounts are important for Egypt. It collected nearly $3.5 billion last year in tolls from the Suez Canal, a strategic and lucrative asset for that nation. Egypt is able, too, to benefit from its ancient history as a tourist attraction, bringing a net of more than $5 billion to the country last year in travel accounts.
Lastly among the current accounts, the country receives substantial amounts of transfers. We in the US look at our transfer item as a drain, but sizable amounts of income go to Egypt, apparently from individuals working abroad. Total net transfers were $5.7 billion in 2005, with the portion from private sources amounting to almost exactly $5.0 billion.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060720j.jpg" width="353">
On the capital and financial account side, the most outstanding item is the recent huge increase in direct investment in Egypt. As seen below, capital inflows for investment projects more than doubled in 2005 to $5.3 billion from $2.0 billion in 2004. The Q1 amount continues the 2005 pace. Information from news sources indicates that these funds cover a wide variety of activities, including manufacturing and the rapidly growing tourism sector. Recently announced projects include a major expansion of port facilities at Suez, so these flows are likely to remain sizable for a considerable period. At the same time, bank lending patterns indicate a persistent net outflow of capital from that sector.
All told, Egypt&#39;s balance of payments accounts are running a positive overall balance, as services, transfers and some capital accounts more than offset a deficit on goods trade. As a result, Egypt&#39;s reserves are increasing, in Q1 by $713 million, following a substantial $6.3 billion in 2005.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/EMERGEMA/@M1/@M1.htm">Egypt: Mil. US$</a></th>
<th scope="col">Q1 2006</th>
<th scope="col">Q4 2005</th>
<th scope="col">Q3 2005</th>
<th scope="col">Q1 2005</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Current Account</td>
<td>934</td>
<td>801</td>
<td>327</td>
<td>995</td>
<td>2,207</td>
<td>3,236</td>
</tr>
<tr>
<td class="firstcol">Balance on Goods</td>
<td>-2,222</td>
<td>-2,663</td>
<td>-1,028</td>
<td>-2,128</td>
<td>-11,127</td>
<td>-9,312</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Petroleum</td>
<td>1,518</td>
<td>1,188</td>
<td>985</td>
<td>638</td>
<td>2,562</td>
<td>1,730</td>
</tr>
<tr>
<td class="firstcol">Balance on Services</td>
<td>1,780</td>
<td>2,074</td>
<td>2,170</td>
<td>1,530</td>
<td>7,586</td>
<td>7,982</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Suez Canal</td>
<td>862</td>
<td>891</td>
<td>871</td>
<td>847</td>
<td>3,467</td>
<td>3,076</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Travel (Net)</td>
<td>1,257</td>
<td>1,200</td>
<td>1,928</td>
<td>994</td>
<td>5,222</td>
<td>4,868</td>
</tr>
<tr class="odd">
<td class="firstcol">Net Transfers</td>
<td>1,376</td>
<td>1,390</td>
<td>1,355</td>
<td>1,593</td>
<td>5,748</td>
<td>4,567</td>
</tr>
<tr>
<td class="firstcol">Net Direct Investment</td>
<td>1,296</td>
<td>1,320</td>
<td>1,928</td>
<td>1,214</td>
<td>5,284</td>
<td>1,998</td>
</tr>
<tr class="odd">
<td class="firstcol">Change in Reserves</td>
<td>713</td>
<td>740</td>
<td>1,812</td>
<td>2,538</td>
<td>6,316</td>
<td>680</td>
</tr>
</tbody>
</table>
</body>
</html>

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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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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U.S. Initial Claims for Unemployment Insurance Rose in Latest Week

Robert Brusca

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Sweden’s inflation rate has developed into a very interesting oddity as headline inflation as measured by the harmonized index of consumer prices (HICP), that is used in Europe, has come to diverge sharply from the Swedish national rate of inflation measured by its national CPI. The HICP inflation rate is 2.2% over the last 12 months; Sweden’s national rate is up by only 0.2%. If we rank each of these two inflation rates on data back to 2001, the rank of the HICP is in its 72.2 percentile while the rank of the national CPI is in only its 19.4 percentile, the lower one-fifth of its historic range of national inflation rates. These two rankings occur over the same periods and so there's nothing about the periodicity that's responsible for this; there's simply very different performance over the recent span.

**About measuring inflation**
The HICP was adopted in Europe once the monetary union was formed and the countries of Europe were not able to get together to decide how to treat housing costs, which are important element in the CPI. They had entered into CPIs in different countries in different ways at that point. In the United States, inflation statistics are often criticized because of the way the housing component fits into them. Housing has such a large weight in the U.S. inflation measure. U.S. housing costs consider the cost of running the house in terms of taxes and utility costs; they look at the rental equivalent values, and they also have an owner imputed rent for people who live in their own homes. Of course, owner equivalent rent is a made-up number; it's completely imputed. Because a lot of European mortgages are short-term and they reprice when the central bank changes its rate, it’s very important to be careful how interest rates are treated in the housing cost indexes in Europe. The central bank did not want to be in a position where it would be raising interest rates to fight inflation and causing inflation to be higher because they were raising the mortgage interest rates on homes and causing the cost of housing to go up. For this reason, the HICP measures do not include housing costs. As we can see in the Swedish details for this month, housing and fuel costs are down 3.1% year-over-year. If we look at the ranking of housing costs for year-over-year growth, we see that they rank in the lower 6.4 percentile and are one of the most important factors in driving the national CPI lower and, of course, that metric is absent from the HICP.

**Inflation is always rife with controversy**: All of this is simply just another way to point out that inflation, while we measure it and talk about it, it's a controversial subject. How we measure it does matter. However, for monetary policy purposes, if we construct a measure that is reasonable and if we follow it consistently over the years, it should give us good signals and a good way to measure inflation and engage monetary policy. Yet, very clearly, if there are two competing gauges, it could become a real problem to jump from one to the other because they track different circumstances.

**The current state of Swedish inflation**: Swedish inflation in November fell by 0.3% month-to-month after rising by 0.5% in October and falling by 0.1% in September. The diffusion, or breadth, of inflation acceleration was only 33.3% in November. It jumped up to 55.6% in October, but it had been lower in September at 33%. Looking at Swedish inflation over 12-month, 6-month, and 3-month periods, the HICP goes from 2.2% over 12 months to an annualized pace of 5.7% over 6 months and then back down to 0.5% over 3 months. The national CPI has the same sort of topography but different growth rates with the CPI up by only 0.2% over 12 months, accelerating to 1.5% over 6 months and then declining at a -0.9% annual rate over 3 months. Inflation diffusion over 3 months in the national index is only 11.1%, over 6 months it jumps up to 66.7%, and over 12 months it's at 44.4% which is below 50% marking inflation as having more deceleration than acceleration.

**Controlled inflation**: On balance, Swedish inflation appears to be under control using either method. The ranking for inflation by category shows high inflation for food & nonalcoholic beverages, education, other goods & services, and medical care. However, inflation is below its median pace and bears low rankings for clothing & footwear, housing, fuel & lighting, recreation & culture, and transportation. Inflation is always somewhat mixed across sectors. That’s another thing that makes it hard to pin down exactly what inflation is, because people who consume different baskets of goods are going to experience different inflation rates. However, Sweden appears to have its inflation situation under control whichever metric you look at. The chart makes it clear that after its spike during COVID, inflation has come back down to a reasonable long-term pace that appears to be close to something that the central bank would find acceptable. The recent rise in HICP inflation seems to be unwinding and year-over-pace is down to a moderate 2.2%.

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