Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060718a.jpg" width="353">
The June producer price index for finished goods increased 0.5% and exceeded Consensus expectations for a 0.3% rise. Excluding food &amp; energy, however, prices rose an expected 0.2%.
Despite the relatively tame m/m rise in prices less food &amp; energy, year to date prices have risen at a 3.1% annual rate, the fastest six month rate of increase since early last year. During the last ten years there has been a 47% correlation between the y/y change in core producer prices and the change in the core CPI for goods. Over the last twenty years the correlation has been 78%.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060718b.jpg" width="353">
Prices of all finished consumer goods less food &amp; energy rose 0.2% (1.9% y/y) and rose at a 3.2% annual rate during the last six months. Durable consumer goods prices rose 0.2% (1.0% y/y) and the 2.8% annual rate of advance during the last six months was the fastest since January &#39;05. A tame 0.1% rise in consumer nondurable prices (2.5% y/y) also belied the elevated nature of the rise during the last six months at a 3.4% rate.
Capital equipment prices rose 0.3% (1.8% y/y) for the second consecutive month. Here again, however, the 3.1% annual rate of advance during the last six months is elevated and the fastest since January of last year.
Finished consumer food prices showed strength in June with a 1.4% (0.6% y/y) increase that was the strongest since May 2004. A 15.0% (NSA, 3.3% y/y) jump in fresh fruit &amp; melon prices fueled the increase along with a 38.1% (NSA, 36.6% y/y) rise in egg prices.
Finished energy prices increased 0.7% (19.1% y/y) as gasoline prices surged 6.3% (44.3% y/y) though natural gas prices fell for the fifth month this year (+7.2% y/y) and residential electric power costs fell 2.8% (+5.2% y/y).
Intermediate goods prices rose 0.7% as energy prices increased 0.4% (19.2% y/y) and food prices jumped 1.0% (-0.4% y/y). Core intermediate prices also rose a strong 0.8%. The six month growth in core intermediate goods prices remained elevated at 7.7% versus a 5.5% advance last year.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060718c.jpg" width="353">
Crude goods prices reversed the prior month&#39;s strength with a 1.7% decline due to a 6.8% drop in energy prices (7.7% y/y). The decline reflected lower crude petroleum costs which have since risen to record high levels. In addition, core crude prices rose a strong 1.7%. Iron &amp; steel scrap prices jumped a strong 6.2% (73.3% y/y) though aluminum base scrap prices eased 4.4% (+44.1% y/y). During the last thirty years &quot;core&quot; crude prices have been a fair indicator of industrial sector activity with a 48% correlation between the six month change in core crude prices and the change in factory sector industrial production.
The Relationship between Expected Inflation, Disagreement, and Uncertainty: Evidence from Matched Point and Density Forecasts from the Federal Reserve Bank of New York can be found <a href="http://www.newyorkfed.org/research/staff_reports/sr253.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/USECON/@E8/@E802/@E80201/@E80201.HTM">Producer Price Index</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 class="odd">
<td class="firstcol">Finished Goods</td>
<td>0.5%</td>
<td>0.2%</td>
<td>4.8%</td>
<td>4.9%</td>
<td>3.6%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.2%</td>
<td>0.3%</td>
<td>1.9%</td>
<td>2.4%</td>
<td>1.5%</td>
<td>0.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>0.7%</td>
<td>1.1%</td>
<td>9.3%</td>
<td>8.0%</td>
<td>6.6%</td>
<td>4.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.8%</td>
<td>1.1%</td>
<td>7.2%</td>
<td>5.5%</td>
<td>5.7%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Crude Goods</td>
<td>-1.7%</td>
<td>2.0%</td>
<td>8.7%</td>
<td>14.6%</td>
<td>17.5%</td>
<td>25.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>1.7%</td>
<td>6.2%</td>
<td>33.7%</td>
<td>4.8%</td>
<td>26.5%</td>
<td>12.4%</td>
</tr>
</tbody>
</table>
</body>
</html>

The June producer price index for finished goods increased 0.5% and exceeded Consensus expectations for a 0.3% rise. Excluding food & energy, however, prices rose an expected 0.2%. Despite the relatively tame m/m rise in prices less [...]

June PPI Firm & Core Tame M/M, Pricing Trends Elevated

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060718a.jpg" width="353">
The June producer price index for finished goods increased 0.5% and exceeded Consensus expectations for a 0.3% rise. Excluding food &amp; energy, however, prices rose an expected 0.2%.
Despite the relatively tame m/m rise in prices less food &amp; energy, year to date prices have risen at a 3.1% annual rate, the fastest six month rate of increase since early last year. During the last ten years there has been a 47% correlation between the y/y change in core producer prices and the change in the core CPI for goods. Over the last twenty years the correlation has been 78%.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060718b.jpg" width="353">
Prices of all finished consumer goods less food &amp; energy rose 0.2% (1.9% y/y) and rose at a 3.2% annual rate during the last six months. Durable consumer goods prices rose 0.2% (1.0% y/y) and the 2.8% annual rate of advance during the last six months was the fastest since January &#39;05. A tame 0.1% rise in consumer nondurable prices (2.5% y/y) also belied the elevated nature of the rise during the last six months at a 3.4% rate.
Capital equipment prices rose 0.3% (1.8% y/y) for the second consecutive month. Here again, however, the 3.1% annual rate of advance during the last six months is elevated and the fastest since January of last year.
Finished consumer food prices showed strength in June with a 1.4% (0.6% y/y) increase that was the strongest since May 2004. A 15.0% (NSA, 3.3% y/y) jump in fresh fruit &amp; melon prices fueled the increase along with a 38.1% (NSA, 36.6% y/y) rise in egg prices.
Finished energy prices increased 0.7% (19.1% y/y) as gasoline prices surged 6.3% (44.3% y/y) though natural gas prices fell for the fifth month this year (+7.2% y/y) and residential electric power costs fell 2.8% (+5.2% y/y).
Intermediate goods prices rose 0.7% as energy prices increased 0.4% (19.2% y/y) and food prices jumped 1.0% (-0.4% y/y). Core intermediate prices also rose a strong 0.8%. The six month growth in core intermediate goods prices remained elevated at 7.7% versus a 5.5% advance last year.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060718c.jpg" width="353">
Crude goods prices reversed the prior month&#39;s strength with a 1.7% decline due to a 6.8% drop in energy prices (7.7% y/y). The decline reflected lower crude petroleum costs which have since risen to record high levels. In addition, core crude prices rose a strong 1.7%. Iron &amp; steel scrap prices jumped a strong 6.2% (73.3% y/y) though aluminum base scrap prices eased 4.4% (+44.1% y/y). During the last thirty years &quot;core&quot; crude prices have been a fair indicator of industrial sector activity with a 48% correlation between the six month change in core crude prices and the change in factory sector industrial production.
The Relationship between Expected Inflation, Disagreement, and Uncertainty: Evidence from Matched Point and Density Forecasts from the Federal Reserve Bank of New York can be found <a href="http://www.newyorkfed.org/research/staff_reports/sr253.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/USECON/@E8/@E802/@E80201/@E80201.HTM">Producer Price Index</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 class="odd">
<td class="firstcol">Finished Goods</td>
<td>0.5%</td>
<td>0.2%</td>
<td>4.8%</td>
<td>4.9%</td>
<td>3.6%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.2%</td>
<td>0.3%</td>
<td>1.9%</td>
<td>2.4%</td>
<td>1.5%</td>
<td>0.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>0.7%</td>
<td>1.1%</td>
<td>9.3%</td>
<td>8.0%</td>
<td>6.6%</td>
<td>4.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.8%</td>
<td>1.1%</td>
<td>7.2%</td>
<td>5.5%</td>
<td>5.7%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Crude Goods</td>
<td>-1.7%</td>
<td>2.0%</td>
<td>8.7%</td>
<td>14.6%</td>
<td>17.5%</td>
<td>25.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>1.7%</td>
<td>6.2%</td>
<td>33.7%</td>
<td>4.8%</td>
<td>26.5%</td>
<td>12.4%</td>
</tr>
</tbody>
</table>
Gasoline Prices Rose Last Week 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 18, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060718d.jpg" width="353">
Versus the prior week, retail gasoline prices rose two cents last week to $2.99 per gallon (29.0% y/y). During June prices averaged $2.89.
A further increase in retail gas prices may be in store this week as the spot market price for regular unleaded gasoline yesterday at $2.25 was up another nickel from last week&#39;s average.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060718e.jpg" width="353">
The price of West Texas Intermediate crude oil yesterday at $75.31 per barrel was about unchanged with last week&#39;s average but it was up sharply from the $70.96 averaged during June.
The latest Short-Term Energy and Summer Fuels Outlook from the U.S. Energy Information Administration can be found <a href="http://www.eia.doe.gov/emeu/steo/pub/contents.html">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/@W4/@W403/@W40303/@W40303.HTM">US Weekly</a></th>
<th scope="col">07/17/06</th>
<th scope="col">07/10/06</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">U.S. Retail Gasoline, Regular per Gal.</td>
<td>$2.99</td>
<td>$2.97</td>
<td>29.0%</td>
<td>$2.27</td>
<td>$1.85</td>
<td>$1.56</td>
</tr>
</tbody>
</table>
 More German Investors Confident about Current Conditions but Many More Wary of the Future  
by <a href="/comment/Curley.html">Louise Curley</a> July 18, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060718f.jpg" width="353">
The ZEW institute of economic research polls some 300 institutional investors and analysts regarding their views of the current situation and their expectations of activity six months in the future. The excess of optimists over pessimists among the participants appraising the current situation rose to 23.3% from 11.8% in May. A year ago, in July, 2005, there was an excess of pessimists over optimists of 61.8%. There has been a steady improvement in the appraisal of current conditions since mid 2005.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060718g.jpg" width="353">
While the participants have become more positive about current economic conditions, they have become less positive about the outlook six months ahead as can be seen in the first chart. The excess of optimists over pessimists dropped 22.7 percentage points from 37,8% in June to 15.1% in July, the biggest drop since August,2002. For the first time, the six month horizon extends to 2007, when the value added tax (VAT) is scheduled to increase from 16% to 19% and health care contributions will be increased. In addition, the latest poll was conducted between June 26 and July 17. Towards the end of this period, the crisis in the mid east erupted leading to a jump in oil prices and a fall in stock market prices. The daily prices of the German Dax stock index and the prices of spot Brent crude oil are shown in the second chart. During the period June 26 to July 17, 2006, the oil price rose from an low of 69.69 on June 26 to just over 8% on July 17th. The stock market fell 5.5% from its high to July 17th.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060718h.jpg" width="353">
The ZEW indicator is sometimes thought to be a good indicator of the broader IFO Institute&#39;s survey, which usually comes out 10 to 15 days later. In fact there is little correlation between the two series as shown in the third chart. The third chart suggests that different temperaments of the participants in the two surveys may account for some of the divergence. The financial community whose opinions color the ZEW results, tend to be more volatile than those of the business community whose opinions are reflected in the IFO survey. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">ZEW Survey</th>
<th scope="col">Jul&nbsp; 06</th>
<th scope="col">Jun 06</th>
<th scope="col">Jul 05</th>
<th scope="col">M/M Dif</th>
<th scope="col">Y/Y Dif</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">Current Conditions % bal&nbsp;</td>
<td>23.3</td>
<td>11.9</td>
<td>-66.9</td>
<td>11.2</td>
<td>90.0</td>
<td>-61.7</td>
<td>-67.7</td>
<td>-92.3</td>
</tr>
<tr>
<td class="firstcol">Expectations 6 Mo Ahead</td>
<td>15.1</td>
<td>37.8</td>
<td>32.0</td>
<td>-22.7</td>
<td>-21.9</td>
<td>34.8</td>
<td>44.6</td>
<td>38.4</td>
</tr>
<tr class="odd">
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Change in Stock Prices and Oil</td>
<td>7/17</td>
<td>High or Low 6/27-7/17</td>
<td>% Change&nbsp;</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">German Stock Price DAX 12/30/87=1000)</td>
<td>5416.96</td>
<td>5729.01H</td>
<td>-5.45</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Spot Price of Oil-Brent&nbsp; $per&nbsp; bbl&nbsp;</td>
<td>75.30</td>
<td>69.69L</td>
<td>8.05</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
</tbody>
</table>
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Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060717e.jpg" width="353">
Several of the economic effects of the Middle East Crisis can be monitored using data found in various Haver Databases. Among the information to be found in the daily and weekly databases are stock prices, exchange rates, spot and future oil prices, and gasoline prices in major U.S. cities.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060717f.jpg" width="353">
One of the most immediate effects of the crisis has been increases in the prices of oil and gasoline. Spot and future prices of oil are found in the DAILY database and are shown in the first chart. The spot price of Louisiana Sweet rose almost 5% in the week ending July 14 and was over 37% above July 14, 2005. The December 2006 contract price reached $80 a barrel on July 14.
The price of unleaded regular, self service gasoline at the pump for the U. S. and major cities is found in the OILWKLY database (Oil and Gas Weekly Journal.) In the second chart we show the average gasoline price for the U. S. and the gasoline price for San Francisco--one of the cities with above average prices. The average price of a gallon of gasoline in San Francisco was $3.438 on July 6 compared with $2.935 for the US as a whole. The OILWKLY database contains a wealth of information in addition to prices, such as supply and demand conditions, imports and exports and inventories.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060717g.jpg" width="353">
Some daily financial and economic data (mainly exchange rates and, in some cases, stock market indexes) are found in the INTDAILY dat base for individual countries in broad geographical regions. In the third chart we show the stock market index for Israel and the exchange rate. In the past week, the stock market declined by more than 8% and the exchange rate fell more than 3%. The MSCID database also gives daily stock market prices for many countries.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"></th>
<th scope="col">July 14&nbsp; 06</th>
<th scope="col">July 7 06</th>
<th scope="col">Jul 14 05</th>
<th scope="col">W/W%</th>
<th scope="col">Y/Y%</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Spot Oil Price LA. Sweet&nbsp;</td>
<td>79.53</td>
<td>75.79</td>
<td>47.91</td>
<td>4.93</td>
<td>37.33</td>
</tr>
<tr>
<td class="firstcol">Dec 2006 Contract Price</td>
<td>80.00</td>
<td>76.83</td>
<td>58.86</td>
<td>4.13</td>
<td>35.92</td>
</tr>
<tr class="odd">
<td class="firstcol">US Pump Price Unleaded, Self Serve Gasoline*</td>
<td>293.5</td>
<td>291.6</td>
<td>222.0</td>
<td>0.65</td>
<td>32.21</td>
</tr>
<tr>
<td class="firstcol">San Francisco Pump Price Unleaded, Self Serve*</td>
<td>343.80</td>
<td>341.70</td>
<td>247.70</td>
<td>0.61</td>
<td>38.80</td>
</tr>
<tr class="odd">
<td class="firstcol">Israel Stock Index Tel Aviv 100( 12/91/=100)</td>
<td>763.31</td>
<td>834.58</td>
<td>686.75</td>
<td>-8.34</td>
<td>11.15</td>
</tr>
<tr>
<td class="firstcol">Israel Exchange Rate&nbsp; New Shequel/US$ &nbsp;</td>
<td>4.5393</td>
<td>4.3579</td>
<td>4.5351</td>
<td>-3.34</td>
<td>-0.09</td>
</tr>
</tbody>
</table>
</body>
</html>

Several of the economic effects of the Middle East Crisis can be monitored using data found in various Haver Databases. Among the information to be found in the daily and weekly databases are stock prices, exchange rates, spot and [...]

Monitoring the Economic Effects of the Middle East Conflict

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060717c.jpg" width="353">
The Empire State Mfg. Index of General Business Conditions, reported by the Federal Reserve Bank of New York, during July reversed most of the prior month&#39;s surge and fell 13.37 points to 15.64. Consensus expectations had been for a lesser decline to 20.0.
Since the series&#39; inception in 2001 there has been a 75% correlation between the index level and the three month change in U.S. factory sector industrial production.
New orders &amp; shipments both reversed all of the prior month&#39;s improvement with sharp declines to the lowest levels of 2006. However, the index indicating the number of employees rose modestly m/m to a still low level.
Pricing pressure eased slightly. Since 2001 there has been an 88% correlation between the index of prices paid and the three month change in the core intermediate materials PPI.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060717d.jpg" width="353">
Like the Philadelphia Fed Index of General Business Conditions, the Empire State Business Conditions Index reflects answers to an independent survey question; it is not a weighted combination of the components.
The Empire State index of expectations for business conditions in six months for July rose sharply to the highest level since January as expected new orders surged.
The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. Participants from across the state in a variety of industries respond to a questionnaire and report the change in a variety of indicators from the previous month. Respondents also state the likely direction of these same indicators six months ahead. April 2002 is the first report, although survey data date back to July 2001.
For more on the Empire State Manufacturing Survey, including methodologies and the latest report, click <a href="http://www.newyorkfed.org/research/regional_economy/empiresurvey_overview.html">here</a>.
The Predictive Abilities of the New York Fed&#146;s Empire State Manufacturing Survey from the Federal Reserve Bank of New York is available <a href="http://www.newyorkfed.org/research/current_issues/ci11-1/ci11-1.html">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/@S511/@S511.HTM">Empire State Manufacturing Survey</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 Business Conditions (diffusion index)</td>
<td>15.64</td>
<td>29.01</td>
<td>23.61</td>
<td>15.56</td>
<td>28.79</td>
<td>15.98</td>
</tr>
</tbody>
</table>
</body>
</html>

The Empire State Mfg. Index of General Business Conditions, reported by the Federal Reserve Bank of New York, during July reversed most of the prior month's surge and fell 13.37 points to 15.64. Consensus expectations had been for a [...]

Empire State Index Slipped During July

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060717a.jpg" width="353">
Total U.S. industrial output rebounded 0.8% during June after a negligible 0.1% May gain that was upwardly revised. The rise outpaced Consensus expectations for a 0.5% increase.
Factory sector output increased 0.8% (5.7% y/y) after a 0.1% May up tick. During the second quarter manufacturing sector output rose 5.4% (AR), the same as during 1Q.
Production of durable consumer goods surged 2.2% (3.3% y/y) as output of motor vehicles &amp; parts 3.3% (3.1%) and computers &amp; video equipment jumped 1.1% (10.5% y/y). These gains, however, were offset by a 1.8% (-1.7% y/y) decline in appliance &amp; furniture production. A second 0.4% (1.1% y/y) gain in nondurable consumer goods output reflected a 0.8% (8.7% y/y) rise in clothing output.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060717b.jpg" width="353">
Business equipment production rose 0.7% (12.3% y/y) and more than recovered a 0.2% May decline. Production of information processing &amp; equipment jumped another 1.3% (21.3% y/y).
Factory output less the hi-tech industries increased 0.7% (4.6% y/y). During 2Q this output measure rose 4.5% (AR) after a 4.8% gain during 1Q.
Overall capacity utilization rose to 82.4% in June, its highest level in six years. Factory sector utilization at 80.8% also is at its highest since 2000.
Diverging Measures of Capacity Utilization: An Explanation from the Federal Reserve Board can be found <a href="http://www.federalreserve.gov/pubs/feds/2004/200458/200458pap.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/output.htm">Production &amp; Capacity</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 class="odd">
<td class="firstcol">Industrial Production</td>
<td>0.8%</td>
<td>0.1%</td>
<td>4.5%</td>
<td>3.2%</td>
<td>4.1%</td>
<td>0.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Manufacturing</td>
<td>0.8%</td>
<td>0.1%</td>
<td>5.7%</td>
<td>3.9%</td>
<td>4.8%</td>
<td>0.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Consumer Goods</td>
<td>0.8%</td>
<td>0.1%</td>
<td>1.7%</td>
<td>2.1%</td>
<td>2.1%</td>
<td>1.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Business Equipment</td>
<td>0.7%</td>
<td>-0.2%</td>
<td>12.3%</td>
<td>9.1%</td>
<td>9.3%</td>
<td>0.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Capacity Utilization</td>
<td>82.4%</td>
<td>81.8%</td>
<td>80.3% (6/05)</td>
<td>80.1%</td>
<td>78.6%</td>
<td>75.7%</td>
</tr>
</tbody>
</table>
</body>
</html>

Total U.S. industrial output rebounded 0.8% during June after a negligible 0.1% May gain that was upwardly revised. The rise outpaced Consensus expectations for a 0.5% increase. Factory sector output increased 0.8% (5.7% y/y) after a [...]

June Industrial Production Rebounded

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060717a.jpg" width="353">
Total U.S. industrial output rebounded 0.8% during June after a negligible 0.1% May gain that was upwardly revised. The rise outpaced Consensus expectations for a 0.5% increase.
Factory sector output increased 0.8% (5.7% y/y) after a 0.1% May up tick. During the second quarter manufacturing sector output rose 5.4% (AR), the same as during 1Q.
Production of durable consumer goods surged 2.2% (3.3% y/y) as output of motor vehicles &amp; parts 3.3% (3.1%) and computers &amp; video equipment jumped 1.1% (10.5% y/y). These gains, however, were offset by a 1.8% (-1.7% y/y) decline in appliance &amp; furniture production. A second 0.4% (1.1% y/y) gain in nondurable consumer goods output reflected a 0.8% (8.7% y/y) rise in clothing output.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060717b.jpg" width="353">
Business equipment production rose 0.7% (12.3% y/y) and more than recovered a 0.2% May decline. Production of information processing &amp; equipment jumped another 1.3% (21.3% y/y).
Factory output less the hi-tech industries increased 0.7% (4.6% y/y). During 2Q this output measure rose 4.5% (AR) after a 4.8% gain during 1Q.
Overall capacity utilization rose to 82.4% in June, its highest level in six years. Factory sector utilization at 80.8% also is at its highest since 2000.
Diverging Measures of Capacity Utilization: An Explanation from the Federal Reserve Board can be found <a href="http://www.federalreserve.gov/pubs/feds/2004/200458/200458pap.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/output.htm">Production &amp; Capacity</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 class="odd">
<td class="firstcol">Industrial Production</td>
<td>0.8%</td>
<td>0.1%</td>
<td>4.5%</td>
<td>3.2%</td>
<td>4.1%</td>
<td>0.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Manufacturing</td>
<td>0.8%</td>
<td>0.1%</td>
<td>5.7%</td>
<td>3.9%</td>
<td>4.8%</td>
<td>0.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Consumer Goods</td>
<td>0.8%</td>
<td>0.1%</td>
<td>1.7%</td>
<td>2.1%</td>
<td>2.1%</td>
<td>1.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Business Equipment</td>
<td>0.7%</td>
<td>-0.2%</td>
<td>12.3%</td>
<td>9.1%</td>
<td>9.3%</td>
<td>0.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Capacity Utilization</td>
<td>82.4%</td>
<td>81.8%</td>
<td>80.3% (6/05)</td>
<td>80.1%</td>
<td>78.6%</td>
<td>75.7%</td>
</tr>
</tbody>
</table>
Empire State Index Slipped During July 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 17, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060717c.jpg" width="353">
The Empire State Mfg. Index of General Business Conditions, reported by the Federal Reserve Bank of New York, during July reversed most of the prior month&#39;s surge and fell 13.37 points to 15.64. Consensus expectations had been for a lesser decline to 20.0.
Since the series&#39; inception in 2001 there has been a 75% correlation between the index level and the three month change in U.S. factory sector industrial production.
New orders &amp; shipments both reversed all of the prior month&#39;s improvement with sharp declines to the lowest levels of 2006. However, the index indicating the number of employees rose modestly m/m to a still low level.
Pricing pressure eased slightly. Since 2001 there has been an 88% correlation between the index of prices paid and the three month change in the core intermediate materials PPI.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060717d.jpg" width="353">
Like the Philadelphia Fed Index of General Business Conditions, the Empire State Business Conditions Index reflects answers to an independent survey question; it is not a weighted combination of the components.
The Empire State index of expectations for business conditions in six months for July rose sharply to the highest level since January as expected new orders surged.
The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. Participants from across the state in a variety of industries respond to a questionnaire and report the change in a variety of indicators from the previous month. Respondents also state the likely direction of these same indicators six months ahead. April 2002 is the first report, although survey data date back to July 2001.
For more on the Empire State Manufacturing Survey, including methodologies and the latest report, click <a href="http://www.newyorkfed.org/research/regional_economy/empiresurvey_overview.html">here</a>.
The Predictive Abilities of the New York Fed&#146;s Empire State Manufacturing Survey from the Federal Reserve Bank of New York is available <a href="http://www.newyorkfed.org/research/current_issues/ci11-1/ci11-1.html">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/@S511/@S511.HTM">Empire State Manufacturing Survey</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 Business Conditions (diffusion index)</td>
<td>15.64</td>
<td>29.01</td>
<td>23.61</td>
<td>15.56</td>
<td>28.79</td>
<td>15.98</td>
</tr>
</tbody>
</table>
Monitoring the Economic Effects of the Middle East Conflict  
by <a href="/comment/Curley.html">Louise Curley</a> July 17, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060717e.jpg" width="353">
Several of the economic effects of the Middle East Crisis can be monitored using data found in various Haver Databases. Among the information to be found in the daily and weekly databases are stock prices, exchange rates, spot and future oil prices, and gasoline prices in major U.S. cities.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060717f.jpg" width="353">
One of the most immediate effects of the crisis has been increases in the prices of oil and gasoline. Spot and future prices of oil are found in the DAILY database and are shown in the first chart. The spot price of Louisiana Sweet rose almost 5% in the week ending July 14 and was over 37% above July 14, 2005. The December 2006 contract price reached $80 a barrel on July 14.
The price of unleaded regular, self service gasoline at the pump for the U. S. and major cities is found in the OILWKLY database (Oil and Gas Weekly Journal.) In the second chart we show the average gasoline price for the U. S. and the gasoline price for San Francisco--one of the cities with above average prices. The average price of a gallon of gasoline in San Francisco was $3.438 on July 6 compared with $2.935 for the US as a whole. The OILWKLY database contains a wealth of information in addition to prices, such as supply and demand conditions, imports and exports and inventories.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060717g.jpg" width="353">
Some daily financial and economic data (mainly exchange rates and, in some cases, stock market indexes) are found in the INTDAILY dat base for individual countries in broad geographical regions. In the third chart we show the stock market index for Israel and the exchange rate. In the past week, the stock market declined by more than 8% and the exchange rate fell more than 3%. The MSCID database also gives daily stock market prices for many countries.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"></th>
<th scope="col">July 14&nbsp; 06</th>
<th scope="col">July 7 06</th>
<th scope="col">Jul 14 05</th>
<th scope="col">W/W%</th>
<th scope="col">Y/Y%</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Spot Oil Price LA. Sweet&nbsp;</td>
<td>79.53</td>
<td>75.79</td>
<td>47.91</td>
<td>4.93</td>
<td>37.33</td>
</tr>
<tr>
<td class="firstcol">Dec 2006 Contract Price</td>
<td>80.00</td>
<td>76.83</td>
<td>58.86</td>
<td>4.13</td>
<td>35.92</td>
</tr>
<tr class="odd">
<td class="firstcol">US Pump Price Unleaded, Self Serve Gasoline*</td>
<td>293.5</td>
<td>291.6</td>
<td>222.0</td>
<td>0.65</td>
<td>32.21</td>
</tr>
<tr>
<td class="firstcol">San Francisco Pump Price Unleaded, Self Serve*</td>
<td>343.80</td>
<td>341.70</td>
<td>247.70</td>
<td>0.61</td>
<td>38.80</td>
</tr>
<tr class="odd">
<td class="firstcol">Israel Stock Index Tel Aviv 100( 12/91/=100)</td>
<td>763.31</td>
<td>834.58</td>
<td>686.75</td>
<td>-8.34</td>
<td>11.15</td>
</tr>
<tr>
<td class="firstcol">Israel Exchange Rate&nbsp; New Shequel/US$ &nbsp;</td>
<td>4.5393</td>
<td>4.3579</td>
<td>4.5351</td>
<td>-3.34</td>
<td>-0.09</td>
</tr>
</tbody>
</table>
</body>
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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/060714e.jpg" width="353">
The Bank of Japan announced a policy change today (Friday). The best way to describe it is to quote the Bank&#39;s own text:&quot;At the Monetary Policy Meeting held today, the Bank of Japan decided, by a unanimous vote, to change the guideline for money market operations for the intermeeting period, effective immediately from the announcement of the decision. &quot;The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.25 percent.&quot; This reflects basically a 25-basis-point increase in that key money market interest rate. The Bank also raised its discount rate from 0.1% to 0.4%. This rate covers bank borrowing directly from the Bank of Japan under its lending facility; at the same time, waivers of extra fees -- &quot;add-on rates&quot; -- will continue for frequent users of the facility, so the Bank is not trying to discourage its use. The Bank will also continue buying long-term Japanese government bonds in an attempt to restrain any general rise in long-term interest rates.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060714f.jpg" width="353">
This is the first increase in the BoJ&#39;s basic rate structure since July 2000, when the call rate was also raised from near zero to 0.25%. The strength of the Japanese economy was fairly tenuous then, though, and this hike was reversed in March 2001. Now, in contrast, the BoJ believes that &quot;Japan&#39;s economy continues to expand moderately, with domestic and external demand and also the corporate and household sectors well in balance. The economy is likely to expand for a sustained period.&quot; Moreover, &quot;the year-on-year rate of change in consumer prices is projected to continue to follow a positive trend.&quot;
The Bank remains somewhat skeptical, however, and concludes its announcement with the assessment that it expects to &quot;adjust the level of the policy interest rate gradually . . . In this process, an accommodative monetary environment ensuing from very low interest rates will probably be maintained for some time.&quot;
The moderate language of the statement and the implication that further rate increases would come only slowly was milder than some market participants were anticipating, apparently, and they actually traded the yen downward on the day. The stock market fell as well, but this may be related to declines in other world markets that are in response to the violence in the Middle East and the accompanying pressure on oil prices.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060714g.jpg" width="353">
We&#39;d probably agree with the BoJ, though, in their cautious attitude. Just on Tuesday, Louise Curley discussed &quot;wavering&quot; consumer sentiment in the country and on June 30, we expressed some discomfort of our own with evident hesitation in labor markets. These caveats notwithstanding, the Japanese economy is in the best condition it has seen in a good many years. The second graph here illustrates this with the Cabinet Office&#39;s index of coincident indicators and the unemployment rate. Two other conditions have changed over the past several months. Bank lending has begun to grow again. In the third graph, we see the nice uptrend developing in loans at domestic banks. At the time of the last BoJ rate hike in 2000, the banks were still under pressure from distressed loans and their loan portfolios were contracting, a process that continued until June of last year. Additionally, prices are rising, with positive year-on-year changes in the CPI now for five consecutive months. As Louise noted in her discussion Tuesday, people are now concerned that there might be more inflation than they want!

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The Bank of Japan announced a policy change today (Friday). The best way to describe it is to quote the Bank's own text:"At the Monetary Policy Meeting held today, the Bank of Japan decided, by a unanimous vote, to change the [...]

Bank of Japan Raises Key Interest Rates

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060714j.jpg" width="353">
Total business inventories increased 0.8% during May, about matched the prior month&#39;s strong gain and easily surpassed Consensus expectations for a 0.4% rise.
Retail inventories jumped 1.6% after a slight slip during April. Motor vehicle inventories surged 3.2% (4.1% y/y) while less autos, retail inventories rose a strong 0.8% led by a 1.1% (6.3% y/y) jump in apparel. General merchandise inventories firmed 0.7% (-0.7% y/y) but furniture inventories rose just 0.2% (5.2% y/y).
Wholesale inventories jumped 0.8% as petroleum inventories surged 7.1% (35.9% y/y). Durables rose 0.8% (8.7% y/y). During the last ten years there has been a 67% correlation between the y/y change in wholesale inventories and the change in imports of nonpetroleum goods.
Factory sector inventories slipped modestly after a 1.0% April spike.
The inventory to sales ratio for total business slipped back to its low 1.25 as business sales jumped 1.4% (8.8% y/y).

<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/USECON/@ED/@ED06/@ED0601/@ED0601.HTM">Business Inventories</a></th>
<th scope="col">May</th>
<th scope="col">April</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 class="odd">
<td class="firstcol">Total</td>
<td>0.8%</td>
<td>0.7%</td>
<td>5.1%</td>
<td>4.4%</td>
<td>7.6%</td>
<td>-1.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail</td>
<td>1.6%</td>
<td>-0.1%</td>
<td>4.1%</td>
<td>2.7%</td>
<td>6.7%</td>
<td>3.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Retail excl. Autos</td>
<td>0.8%</td>
<td>0.2%</td>
<td>4.2%</td>
<td>4.5%</td>
<td>7.1%</td>
<td>1.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale</td>
<td>0.8%</td>
<td>1.3%</td>
<td>7.8%</td>
<td>7.1%</td>
<td>9.8%</td>
<td>1.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>-0.0%</td>
<td>1.0%</td>
<td>3.9%</td>
<td>4.0%</td>
<td>6.9%</td>
<td>-7.4%</td>
</tr>
</tbody>
</table>
</body>
</html>

Total business inventories increased 0.8% during May, about matched the prior month's strong gain and easily surpassed Consensus expectations for a 0.4% rise. Retail inventories jumped 1.6% after a slight slip during April. Motor [...]

U.S. Business Inventories Gain

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%.

Economy in Brief

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