Robert Brusca

The United Kingdom is facing the same dilemma as other central banks as core inflation remains stubborn and headline inflation has dived sharply. The weakness in headline inflation has to do with its commodity components; we can particularly point to oil. On the other hand, core inflation, which shows some signs of moderating across most highly developed economies, shows a much slower progression, especially in the UK.

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For example, the CPIH headline for the UK is up by 6.4% over 12 months; that pace drops to 5.7% at an annual rate over 6 months and to a skinny 2.3% annual rate over 3 months. If you look at the three-month rate and believe it, then you think the central bank is done! It's gotten inflation where it wants it. However, we know that's not true; we know that headline inflation is volatile; it's mercurial and, even though in the chart below we can see that inflation is declining on all the horizons, the war is not yet won.

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Twelve-month, six-month, and three-month rates of inflation all are turning lower in Chart 2. But when it comes to the core rate of inflation which in this case is the CPIH excluding food, alcohol, energy, & tobacco, the inflation rate over 12 months is 6.4%, the same as the headline. But core inflation accelerates to an 8.1% annual rate over 6 months, then only drops back to a 5.6% annual rate over 3 months. The UK core rate over 3 months at a 5.6% annual rate is below its 12-month pace of 6.4% but not by a whole lot and it is not riding a clear trend either.

However, in the chart below, it's clear that this deceleration process is still in gear for the headline. We can tell that because the 3-month inflation rate continues to run consistently below the 6-month inflation rate and the 6-month inflation rate continues to run consistently below the 12-month inflation rate and all of them are decelerating! So, a decline in the inflation rate remains in progress in the UK.

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Nevertheless, when we produce this same horizon for the core inflation rate, we get a very different result (Chart 3). First, none of the inflation rates not the 3-month, nor the 6-month nor the 12-month inflation rates are showing individual trends toward deceleration. Second, the strongest inflation rate is for 6-months, and it resides above the 12-month inflation rate, which is somewhat flat but with a noticeable uptrend. That tells us that the 6-month inflation rate is tugging the 12-month inflation rate higher. Until the last several months, the 3-month inflation rate had been surging; it was pointing to inflation acceleration, but it has since eased its pace over the last several months; it is now below both the 6-month and the 12-month rates, indicating that it is trying to pull the inflation rate lower. However, here the core inflation rate has been so volatile. We know that we can’t be very sure about what it’s really telling us or what it’s going to continue to do. It could reverse itself and show more inflation and acceleration next month as easily as it could continue its downtrend.

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**The data trends faced by the BOE**
While the UK faces the same challenges in inflation and particularly the paradox between the headline and the core inflation rate that it targets, the situation for the UK is worse because the underlying trends are not uniform or heading lower. They are chaotic. The Bank of England may not know or even have ‘a very good idea’ what to expect next. The diffusion calculations in the table show us that inflation accelerates period-to-period for 63.6% of the categories over 12 months (compared to 12-months ago) and over 6 months (compared to over 12 months). But over 3 months (compared to over 6 months), acceleration is present in less than 20% of the categories. Month-to-month inflation shows that in July with a 0.5% increase in the core rate and with the headline rate falling by 0.1% month-over-month. Inflation diffusion is at 54.5%, indicating slightly more inflation acceleration than deceleration in the month-to-month period. However, that comes after a skinny June diffusion value of only 9.1% and compares to a May diffusion value of 45.5%.

**Unique inflation trends at work**
The UK faces a great deal of chaos in terms of its inflation signals. Sorting out where the trends are headed does not appear to be an easy job. In fact, it appears to be a job with a great deal of judgment in it. As we observe Bank of England policy, what we are going to observe - in my opinion - is the Bank of England pursuing a policy that protects against the outcome it wants to avoid the most. A menu of rate increases would tell us that the Bank of England is making sure that inflation does not accelerate further and that it turns lower. A Bank of England on pause for several meetings would tell us that it is not going to aggressively push inflation back down and make sure that it gets inflation deceleration in the short run. That would be a signal that the BOE is trying to achieve inflation progress while maintaining growth as much as possible… and, that it is willing to roll the dice on inflation in the short run. Central bank policy is going to be set to show us what the Bank is protecting against the most rather than what it really thinks is going to happen because it's almost impossible from these data and trends to have any kind of confidence on what's going to happen next with the inflation rate.

Having said that, there's a slight inclination for the unemployment rate in the UK to be heading higher and if the economy slows, quite apart from inflation trends themselves, the Bank of England might be able to reasonably expect that economic slowing will take pressure off prices and it might give the Bank some breathing room on the policy front. But as of now, there's very little that the Bank of England can sink its teeth into. The future is a roll of the dice, so policy must make a choice and take a stand.

United Kingdom

The UK CPI and Its ‘Many Paths’

Andrew Cates

The UK economy is not in great shape. That’s the overriding message from the battery of UK economic data that have been published over the past few days.

Although last week’s data revealed that GDP grew by a stronger-than-expected pace of 0.5% in June, the UK’s post-pandemic recovery has nevertheless remained poor. The level of GDP in Q2 2023, for example, was still some 0.2 percentage points below the level in Q4 2019, just prior to the onset of the pandemic.

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Ordinarily a weak recovery would give way to a bout of stronger economic momentum as excess capacity is re-absorbed. UK forecasters, however, have been marking down their expectations for GDP growth in 2024 according to the latest Blue Chip Survey of economic forecasters. Those downward revisions, moreover, appear relatively acute compared with elsewhere.

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One reason for this relative pessimism concerns inflation. Today’s UK CPI data revealed that core inflation remained uncomfortably high in July, largely thanks to firming price pressures in the service sector. Again, this stands in vivid contrast to the direction and level of core inflation rates in other major economies.

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That news on the UK inflation front came hot off the heels of yesterday’s data revealing strengthening nominal wage pressures and slowing labour market activity. That combination though also offers strong hints of labour market dysfunction. And that was indeed the message from the news about labour market inactivity. This remained high, for example, in large part because long-term sickness numbers rose to a record high.


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 Overall the latest UK data add to the case for another interest rate hike from the Bank of England in the coming months. It seems equally clear, however, that the UK economy’s problems are not necessarily rooted in an overtly loose monetary policy.

The UK economy: Poor health

Tom Moeller

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Retail sales jumped 0.7% (3.2% y/y) during July following a 0.3% June gain, revised from 0.2%. May’s increase was revised to 0.7% from 0.5%. The July gain exceeded expectations for a 0.4% increase in the Action Economics Forecast Survey. Sales excluding motor vehicles & parts jumped 1.0% in July (2.2% y/y), the strongest reading since January. The 0.2% June increase was unrevised but May’s gain was revised to 0.4% from 0.3%. A July increase of 0.4% in nonauto sales had been expected.

Sales in the retail group, which excludes autos, building materials, gasoline & restaurants, rose 1.0% last month (5.0% y/y) after increasing 0.5% in June, revised from 0.6%. May’s increase was doubled to 0.6%.

Last month’s overall sales gain was led by a 1.9% surge (10.3% y/y) in nonstore retail sales which followed a downwardly revised 1.5% May increase. Online sales rose 1.2% in both April & May. Sporting goods, hobby shop, book & music store sales strengthened 1.5% in July (1.0% y/y) on the heels of a 0.5% decline. Apparel store sales jumped 1.0% (2.2% y/y) after easing slightly in June. General merchandise store sales grew 0.8% (2.5% y/y) after holding fairly steady in June. Department store sales grew 0.9% (-3.4% y/y) after declining 2.3% in June. Sales of building materials & garden equipment improved 0.7% (-3.3% y/y) after June’s decline of 1.5%.  Gasoline service station sales rose 0.4% (-20.8% y/y) after falling 1.3% in June.

Working lower, furniture & home furnishing store sales declined 1.8% in July (-6.3% y/y) after they rose 1.4% in June. Also showing weakness were electronics & appliance store sales which fell 1.3% (-3.1% y/y) after a 0.7% June increase. Motor vehicle sales eased 0.3% (+7.6% y/y) in July after a 0.7% June gain. That compared to a 0.6% increase in unit vehicle sales reported earlier.

In the nondiscretionary sales categories, food & beverage store sales rose 0.8% in July (2.5% y/y) after falling 0.4% in June. Health & personal care store sales rose 0.7% (8.1% y/y) last month after edging 0.1% higher in June.

Consumer spending at restaurants & drinking places improved 1.4% last month (11.9% y/y) after rising 0.8% in June.

Retail Sales data can be found in Haver's **USECON** database. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- Sales of core goods are firmest in six months. 
- Online buying surges again.
- Vehicle sales ease after three months of strong gains.

U.S. Retail Sales Advance Strongly in July; Earlier Estimates Raised

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The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo fell 10.7% (+2.0% y/y) during August to 50 after rising 1.8% in July to 56. The index was the lowest since May. A reading of 56 had been expected in the INFORMA Global Markets survey. The seasonally-adjusted index reached a record of 90 in November 2020.

Each of the composite index's three components fell this month. The index of present sales conditions fell 8.1% to 57 this month from 62 July. It was unchanged y/y and at the lowest level in three months. The index of expected sales over the next six months fell 6.8% (+17.0% y/y) to 55 from 59, and it too stood at the lowest level in four months. The index measuring traffic of prospective buyers tumbled 15.0% (+6.3% y/y) to a three-month low of 34, but remained higher than the low of 20 in both November & December 2022.

The regional indexes each fell this month. The index for the Northeast declined 8.3% (+14.6% y/y) following a 15.4% July gain. It was the first decline in four months. The index for the West weakened 14.8% (+9.5% y/y) to the lowest level since April. The index for the South weakened 52% and was unchanged y/y. The index for the Midwest declined	 8.7% and also was unchanged y/y. These regional series begin in December 2004.

The NAHB has compiled the Housing Market Index since 1985. It reflects survey questions which ask builders to rate sales and sales expectations as "good," "fair" or "poor" and traffic as "very high," "average" or "very low." The figures are diffusion indexes with values over 50 indicating a predominance of "good"/"very high" readings. In constructing the composite index, the weights assigned to the individual index components are: 0.5920 for single-family detached sales, present time, 0.1358 for single-family detached sales, next six months, and 0.2722 for traffic of prospective buyers. These data are included in Haver's **SURVEYS** database.

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- Decline reverses two months of increase.
- Buyer traffic plunges.
- Regional declines are broad-based.

U.S. Home Builders Index Falls Sharply in August

Sandy Batten

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Total business inventories were unchanged in June from May (+2.0% y/y). Upon revision, inventories were also unchanged in May (previously +0.2% m/m). The Informa Global Markets Survey had looked for a 0.2% monthly increase in June. The level of business inventories has been relatively stable since December. For all of Q2, inventories were up 0.1% q/q after having declined 0.2% q/q in Q1.

Total business sales edged down 0.1% (-3.1% y/y) in June, reversing a 0.1% monthly increase in May (revised down from 0.2% previously). For all of Q2, sales fell 1.1% q/q, their fourth consecutive quarterly decline. With very similar changes in both sales and inventories, the total inventory-to-sales (I/S) ratio was unchanged at 1.40 in June, remaining at the highest level since June 2020.

In June, the unchanged reading for total inventories reflected unchanged manufacturing inventories (-0.1% y/y), a 0.5% monthly decline in wholesale inventories (+1.3% y/y) and a 0.7% monthly jump in retail inventories (+5.3% y/y). The jump in retail inventories in June was led by a 1.5% m/m increase in motor vehicle inventories and a 0.8% m/m gain in general merchandise store inventories. By contrast, furniture inventories fell 1.2% m/m, clothing inventories declined 0.5% m/m and building materials inventories dropped 0.2% m/m.

The 0.1% monthly decline in total sales in June reflected a 0.1% m/m increase (-2.6% y/y) in factory shipments and a 0.2% m/m gain in retail sales (+0.5% y/y) that was offset by a 0.7% m/m decline (-6.7% y/y) in wholesale sales. Separately, this morning it was reported that retail sales increased a larger-than-expected 0.7% m/m in July with an upward revision to June (+0.3% m/m).

With sales and inventories little changed in June, the total I/S ratio was unchanged at 1.40, remaining at the highest level since June 2020 and up from 1.33 a year ago. The manufacturing I/S ratio was also unchanged at 1.49 in June. The wholesale I/S ratio edged up to 1.41 in June from 1.40 in May. And the retail I/S ratio was unchanged at 1.30, matching its high since May 2020.

The manufacturing and trade data are in Haver’s **USECON** database. The Informa Global Markets forecast is in the **MMSAMER** database.

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- Retail inventories up 0.7% m/m while wholesale inventories fell 0.5% m/m.
- Total sales slipped with a small increase in retail and a bigger decline in wholesale.
- Total I/S ratio unchanged for third consecutive month but remained highest since June 2020.


U.S. Business Sales Edged Down While Inventories Were Unchanged in June

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Import prices increased a larger-than-expected 0.4% m/m (-4.4% y/y) in July after having declined in five of the previous six months, including a 0.1% m/m fall in June (revised up slightly from -0.2% m/m), according to the Bureau of Labor Statistics. Export prices rose 0.7% m/m (-7.9% y/y), their first monthly increase in five months, after a 0.7% m/m decline in June (revised up from -0.9% m/m). The Action Economics Forecast Survey had expected a 0.2% monthly increase in both import and export prices in July.

The rebound in import prices was due entirely to a 3.6% m/m jump in fuel prices, reflecting increase in prices of petroleum and natural gas. Excluding fuel, other import prices were unchanged in July (-0.9% y/y) versus a 0.3% monthly decline in June. Also, imported food prices rebounded sharply in July, rising 2.5% m/m (+2.7% y/y) for their first monthly increase in five months. Falling food and energy prices have been key factors behind the previous declines in import prices. Changes in import prices across other end-use categories were comparatively modest. Imported capital goods prices edged up 0.1% m/m; auto import prices rose 0.3% m/m while prices of imported consumer goods ex autos fell 0.1% m/m.

The rise in export prices reflected increases in the prices of both agricultural products (+0.9% m/m) and nonagricultural products (+0.6% m/m). Exported food prices increased 1.0% m/m, their first increase in three months. Prices of exported industrial supplies rose 1.4%m/m, their first increase in five months, boosted by a 6.7% monthly gain in exported fuel prices. Prices of capital goods exports edged up 0.1% m/m and prices of auto exports rose 0.2% m/m. By contrast, prices of exported consumer goods ex autos fell 0.2% m/m, their first month decline since November 2022.

The import and export price series can be found in Haver’s **USECON** database. Detailed figures are available in the **USINT** database. The expectations figure from the Action Economics Forecast Survey is in the **AS1REPNA** database.

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- Import prices rebound led by rise in fuel prices.
- Excluding fuels, import prices were unchanged.
- Export price increases widely spread across agricultural and nonagricultural products.

U.S. Import and Export Prices Rose More than Expected in July

Kathleen Stephansen, CBE

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The Federal Reserve Bank of New York reported that its index of factory sector activity fell to -19.0 in August from 1.1 during July. The most recent survey was taken between August 2 & August 9. A reading of -0.5 had been expected in the Action Economics Forecast Survey.

Haver Analytics constructs an ISM-adjusted series, which is comparable to the ISM manufacturing index. This calculated index fell to 45.9 in August from 50.4 in July, though remaining above the low of 43.5 in May. A level of 50 is the break-even point between rising and falling activity.

A lessened 16.1% of survey respondents reported improved overall business conditions in August, while an increased 35.0% reported deterioration. This headline index reflects the answer to only one question concerning general business conditions and is not calculated from the components listed below.

Individual series were weak this month. The new orders reading fell 23 points to -19.9 from 3.3 in July. A lessened 19.5% of respondents reported higher new orders, while an increased 39.4% reported fewer. The shipments index dropped 26 points to -12.3 in August from 13 .4 in July. The unfilled orders index remained negative at -6.8 from -8.8 last month. The inventories index also remained negative at -9.7 from -10.8 last month, suggesting an on-going drawdown of inventories. The delivery time index was 1.9 this month, up from -6.9 in July and suggesting relatively steady delivery times. The employment index fell to -1.4 this month from 4.7 in July.

Pricing power improved modestly this month. The prices paid index rose to 25.2 from 16.7 in July. It had reached a high of 86.4 in April 2022. An increased 32.0% of respondents reported paying higher prices for inputs, while a lessened 6.8% paid less. The prices received index rose to 12.6 this month from a multi-month low of 3.9 in July. An increased 20.4% of respondents reported receiving higher prices, while a lessened 7.8% reported receiving lower prices.

The index of expected general business conditions in six months rose to 19.9 in August, its highest level in more than a year, and suggesting that firms expect improvement in overall business conditions. New orders rose to 28.1, shipments to 29.6 and employment to 24.9, all pointing to expectations of solid growth. Input prices paid are expected to rise but to remain sharply below their January 2022 highs. Expected prices received softened moderately. The expected capital expenditures reading rose 11 points to 13.6, pointing to improved capital spending plans.

The N.Y. Fed survey data are contained in Haver’s **SURVEYS** database. The expectations series is in Haver’s **AS1REPNA** database.

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- New York business activity fell sharply in August.
- Components were weak.
- Expectations six months ahead improved.

Empire State Factory Index Fell Sharply in August

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Retail gasoline prices rose last week to an average $3.96 per gallon (-2.2% y/y) for all grades from $3.94 the week before. It was the highest price since the third week of October. Prices have ranged between $3.20 and $5.11 for the last year. The retail price for on-highway diesel fuel strengthened to $4.25 per gallon (-16.5% y/y) last week, up from 4.13 the previous week. Prices have ranged this past year between $3.79 per gallon and $5.81 per gallon.

The price of West Texas Intermediate crude oil averaged $83.06 per barrel (-12.2% y/y) in the week ended August 11 versus $81.39 per barrel in the prior week. The latest price was the highest since the third week of November, up from the late-June low of $69.37. It remained below the high of $120.46 in the week of June 10, 2022. On Monday, the price was $82.51 per barrel. Brent crude prices rose to $87.83 per barrel last week (-16.1% y/y) from $85.63. The recent low for Brent was $73.89 in the week of June 2, and the recent high was $127.40 in the week of June 10, 2022. Yesterday’s price was $87.40 per barrel.

Natural gas prices averaged $2.76/mmbtu (-66.1% y/y) in the week of August 11 versus $2.49 in the prior week. It was the highest price since the last week of January. The price has ranged between a low of $1.93 in the first week of June to $9.17 in the first week of September 2022. Yesterday, the price was $2.74/mmbtu.

In the four weeks ended August 4, gasoline demand rose 1.4% from a year earlier after increasing 3.0% y/y in the prior four-week period. Demand for all petroleum products increased 2.9% y/y versus 1.4% y/y in the prior week. Crude oil input to refineries rose 2.1% in the latest four weeks from a year ago.

Gasoline inventories fell 1.8% y/y in the August 4 week after a 2.8% y/y decline in the prior week and residual fuel oil inventories fell 1.2% y/y after a 2.4% y/y fall in the prior week. Crude oil inventories including the Strategic Petroleum Reserve fell 11.5% from a year ago after a 12.3% y/y decrease in the prior week.

Measured in days’ supply, gasoline inventories in the week of August 4 were 24.1 days, down from 24.8 days in the prior week. The recent high was 29.7 days in the third week of January and the recent low was 23.4 days in the last week of June. The supply of crude oil was 26.9 days, up from 26.6 days in the prior week. The recent high was 31.9 days at the beginning of March.

These data are reported by the Energy Information Administration of the U.S. Department of Energy. The price and supply/demand data can be found in Haver’s **WEEKLY** database.

- Gasoline prices edge higher.
- Crude oil prices remain on upward trend.
- Natural gas prices continue to rise.

U.S. Energy Prices Continue to Strengthen

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

With escalation of Israel/Iran conflict, geopolitical risk has recently surged while US trade policy uncertainty has ebbed

Renewed supply chain pressures point to a rebound in global inflation ahead

Apart from Japan, Blue Chip forecasters look for further significant monetary policy easing

Apart from the US, productivity is moribund

Financial market concerns ebb even though policy uncertainty continues to soar

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The NFIB Small Business Optimism Index eased 0.6% (+4.8%) to 98.2 in October after falling 2.0% to a 98.8 in September and rising 0.5% to 100.8 in August, according to the Small Business Economic Trends survey conducted by the National Federation of Independent Business. Four of the ten index components increased last month while five fell and one was unchanged. The NFIB Small Business Uncertainty Index fell 12.0% (-20.0% y/y) last month to 88 after rising 7.5% in September.

The outlook for business conditions was mixed in the latest survey. The net balance of respondents planning to add to inventories declined to a six-month low of -2% from +1% in September. The net percent expecting the economy to improve fell to 20% last month after weakening to 23% in September. A lessened 6% expected higher real sales in six months, compared to 8% in September. A lessened 15% of respondents indicated that now was a good time to increase employment compared to 16% in September. Earnings trends deteriorated sharply.

Offsetting these declines, plans to make capital outlays rose to a ten-month high of 23% of firms after steadying at 21%. The index of expected credit conditions jumped to -3% from -7%. It remained up from a low of -11 in November 2023. A modestly increased 13% of respondents felt that now was a good time to expand. Inventories were assessed as being too low by a lessened 4% of respondents after 7% in September.

On the labor front, 49% of businesses reported few or no qualified workers to fill job openings in October, down slightly from 50% in September. That remained up, however, from a low of 43% in August. These readings remained below a high of 56% in August of 2024.

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The net percent raising their average selling prices fell to 21% last month compared to 24% in September. It had grown to 32% in February. The percentage planning to raise prices eased to 30% in October, down from a 32% high in June. Worker compensation deteriorated as a net 26% of respondents lifted compensation during the last three months versus 31% in the last survey. Compensation gains peaked at 50% of firms in January 2022. A steady net 19% of firms are making plans to raise worker compensation in the next three months, below the November 2024 high of 28%.

The quality of labor was reported by 27% of member firms as the single most important issue facing small businesses. That was increased from 18% in September, and the highest in five years. Moving lower, the cost of labor was ranked by 8% of respondents as the largest problem, compared to 11% in September, while financial & interest rates worries dropped to 2%, the lowest in two years. A lessened 12% cited inflation as the most important problem. Other major concerns were taxes (16%) and poor sales (10%). 

According to the Small Business Administration, there are 33 million small businesses in the United States, which employ 62 million workers. The NFIB surveys anywhere from 500 to 2000 respondents each month and the typical firm employs 10 people and reports gross sales of about $500,000 a year. The NFIB figures can be found in Haver’s **SURVEYS** database.

- Inventory, economy & employment concerns weigh on optimism.
- Percentage of respondents raising prices moves down; price expectations ease.
- Concerns about quality of labor surge but labor cost worries recede.

U.S. NFIB Small Business Optimism Index Slips in October

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Macroeconomic expectations in the ZEW survey backtracked slightly in Germany while improving slightly in the United States in November. The economic situation improved slightly in the euro area and Germany while backtracking in the United States. That's the assessments of the current economic situation and expectations for Germany or the EMU that are moving in different directions in the U.S. and in Germany or in the U.S. vs. the European Monetary Union in November.

Inflation expectations backed off across the board easing slightly in the euro area, Germany, and also in the United States. While that happened, expectations for short-term interest rates became less focused on rate cuts in the euro area and slightly less tilted toward the expectation for rate cuts in the U.S. as well. Long-term rate expectations receded somewhat in both Germany and in the U.S. in November by small amounts. Stock market expectations picked up in the euro area, Germany, and the U.S., and in most cases, somewhat significantly.

**The queue standings**
The queue standings are ranked standings of these various metrics, and they tell a clear story of how the ZEW experts see current conditions and policy tradeoffs. The euro area has an economic situation where the queue standing is at its 51st percentile, slightly above its historic median (on data since the early 1990s). However, Germany and the U.S. have very weak percentile standings with Germany in its 14.5 percentile and the U.S. in its 35th percentile. Macroeconomic expectations, however, find Germany at a solid 63.6 percentile while the U.S. is at a 23.3 percentile. ZEW experts are far more upbeat on prospects for German recovery right now than in the United States – and that seems odd to me with a lot of fiscal stimulus in train in the U.S. and tons of ‘AI’ investment.

Inflation expectations are high in the U.S. at an 85.5 percentile standing, well above the historic median, and clearly showing threatening conditions. This compares to a 30% queue standing for the euro area and Germany.

Short-term rate expectations are significantly below the median for both the euro area and the U.S. with the euro area at a 26.8 percentile and the U.S. at a 9.3 percentile standing. Long-term rate expectations have Germany at a 43-percentile and the U.S. at a more similar 35-percentile. Stock market expectations are fairly similar across the lot with the euro area at a 38-percentile standing, Germany at a 35-percentile standing and the U.S. at a 38-percentile standing.

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**Summing up**
These metrics remind us that ZEW experts see different inflation circumstances in the U.S. compared to Europe as well as very different current economic situations, especially between the U.S. and the euro area and very different macroeconomic expectations between the U.S. and Germany. The U.S. is seen more as a place that's percolating inflation despite the fact that the Federal Reserve continues to say inflation is under control and inflation expectations are well anchored. Apparently, they are not well-anchored among the ZEW financial experts. We might add, nor are they well-anchored among participants in the University of Michigan survey, or for respondents to the NFIB survey that was just released. Maybe it's the Fed that is not very well anchored to reality when it comes to inflation expectations assessments?

ZEW Expectations Weaken Mildly

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Initial claims for unemployment insurance rose 9,379 during the week ended November 1 to 228,899 (3.4% y/y) and mostly reversed the prior week’s 12,643 decline to 219,520. The four-week moving average of initial claims eased to 225,213 from 226,766. The four-week average hit a low of 200,323 in January 2024.

Federal government employees filed 7,482 initial jobless insurance claims last week after 9,435 in the prior week. These figures are increased from 588 at the end of September.

Continuing claims for unemployment insurance rose to 1.964 million (4.4% y/y) in the week ended October 25 from 1.957 million in the prior week. The four-week moving average rose to 1.949 million from 1.940 million. It was the highest level since the last week of August.

Federal government employees continuing benefits rose to 30,649 in the week ended October 25 from 23,188 in the prior week. These figures are increased from 8,676 at the end of September.

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.

- Increase in initial claims reverses most of earlier decline.
- Continuing claims continue to increase.

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

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Industrial production for the European Monetary Union (EMU) is not yet available for the union as a whole; however, a number of European countries have reported production, and they give us a good sense of what's happening. In September, among the 13 European countries that reported in the table, all but four of them showed increases in industrial production. Declines were posted in Ireland where production fell by 9.4% in one month, Luxembourg where it fell by 6.1%, Malta where it fell by 1.7%, and in Finland where it fell by 0.4%. In the remaining nine countries, production increased. The median increase for monetary union members in the table was a rise of 0.8% month-to-month. 45.5% of the reporters in the monetary union showed production acceleration.

In August, there were 5 European members with production decreasing. Among European Monetary Union members, the median was a decline of 0.5% with 46.2% of the reporters showing output accelerating on the month. July had been a much worse month with 8 reporting European countries showing declines and with the monetary union median showing a decline of 0.3% and only 38.5% of the reporting EMU members showing output accelerating month-to-month.

There has been gradual moderate improvement in these monthly statistics both in terms of improvement in the median and improvement in the breadth as output has accelerated, with a step back in August.

Looking at the sequential data that compare three-month results to six-month results to 12-month results, we see a median annualized increase of 2.9% for output across monetary union members over three months; that's up from 0.8% over six months and compares to a 2.1% increase for monetary union members over twelve months. The breadth of increase over the period is above 50% on all the horizons and it's fairly steady over three months and six months at about a 54-percentile standing.

September data conclude the results for the third quarter. In this quarter-to-date calculation, 6 of the 13 reporters in the table shows output declining in the third quarter. Monetary Union members generate a median increase of 0.3% in terms of annualized quarter-to-quarter industrial output changes. The pattern and the monthly data seem to be slightly stronger than what we see in the quarter-to-date.

The final column of the table presents the queue standings that calculate the positioning of the year-over-year growth rates across country-reporters among growth rates back to late-2007. Ranked among this cluster of growth rates, only five of the current year-over-year rates stand at levels that are below their median growth rate for the period. Countries with below median growth rates (below a standing of 50%) for industrial production growth are Austria, Germany, Finland, Luxembourg, and Malta. Among these, only one belongs to the four largest economies in the monetary union—Germany, which is also the largest of them. Germany has the standing only its 39th percentile. The unweighted median ranking for the group of monetary union economies is at 57.3%, above the 50% mark and therefore above the historic median.

The industrial production data for the monetary union in September is somewhat encouraging but certainly not crystal clear. There continues to be a lot of weaknesses displayed in the data. While the aggregate ranking is above its historic median, it's not above it by very much and clearly the growth rates are still relatively weak. There still is not a clear trend of acceleration in the group. However, what's lacking in the data is any sign of real deterioration. There clearly is weakness across countries but not a sense of deterioration. The best news in the report may be that there's not any really bad news.

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Europe

Production in a Gradual Recovery in Europe Despite Recent Setbacks

Tian Yong Woon

This week, we review key developments across several Asian economies as the year nears its close. On balance, many of investors’ and policymakers’ worst fears did not materialize. Despite US tariffs, regional exports have shown resilience (chart 1), partly supported by stronger intra-Asia trade, even as exports to the US declined in some cases.

In China, factors including importer front-loading, stronger exports to non-US markets, and government efforts to boost consumption—albeit with potentially one-off effects—have kept the economy on track to meet its 5% growth target this year (chart 2), barring a substantial slowdown in Q4. In Japan, political uncertainty has eased following Prime Minister Takaichi’s rise, though her pro-growth, pro-loose monetary stance has contributed to further yen weakness (chart 3). India, while still likely Asia’s fastest-growing major economy this year, has seen trade setbacks (chart 4) as US–India discussions continue, though recent progress suggests a deal may be near.

However, not all developments in Asia have avoided worst-case outcomes. For example, the Philippines, which has already been hit by a string of storms this year, continues to reel from the effects of Typhoons Fung-wong and Kalmaegi. These storms have highlighted corruption in the Philippines’ flood control systems, rattling investors and pressuring the peso (chart 5), in a manner reminiscent of the rupiah’s decline during Indonesia’s political turmoil earlier this year. In Thailand, political uncertainty continues ahead of general elections eyed at next March, while the expected full return of Chinese tourists has yet to materialize (chart 6).

**Trade in Asia**
For Asia, the year has ultimately not played out as bleakly as investors once feared, particularly on the trade front. Despite US President Trump’s tariffs and a persistent backdrop of uncertainty, export performance in several Asian economies has proven more resilient than expected. This is most clearly reflected in export growth readings for China and key Southeast Asian economies (chart 1), which have remained firm—and at times exceeded expectations—even as China’s shipments to the US fell sharply. Much of this resilience reflects a redirection of exports toward other markets, often within the region. India, however, has seen more limited gains, with exports in US dollar terms struggling to materially surpass last year’s levels.

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**China**
Among the main investor concerns earlier this year was China, which once again came under close scrutiny as President Trump sought to address issues ranging from the large US–China trade imbalance to intensifying AI competition and perceived overcapacity. Yet China’s growth—particularly on the export front—has proven more resilient than expected, with increased shipments to other markets more than offsetting reduced trade with the US. Earlier front-loading by importers ahead of anticipated tariff hikes also temporarily supported export figures. Domestically, government initiatives to stimulate consumption led to a brief lift in retail spending, though signs suggest these effects may be fading, indicating their largely one-off nature. Even so, China has maintained year-to-date growth above its 5% annual target (chart 2), keeping that goal within reach provided momentum does not weaken significantly in Q4. Meanwhile, the more conciliatory tone in recent US–China discussions, including the halving of US fentanyl-related tariffs, offers a modest further relief. That said, longer-term structural issues still loom, including the difficult shift toward a more consumption-led economy, demographic pressures, and questions around sustained overcapacity in key industries.

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**Japan**
In Japan, the political uncertainty that followed the Liberal Democratic Party’s weak election performances earlier in the year has largely eased with Takaichi’s appointment as the country’s first female Prime Minister. Attention now turns to her supplementary budget—reported to be around $65 billion—which aims to address the rising cost of living while also bolstering defence and diplomatic capabilities. Investors, however, are already contemplating the policy implications. In particular, expectations that Takaichi’s agenda could make it harder for the Bank of Japan to pursue further significant tightening have added renewed pressure on the yen, pushing it to multi-year lows (chart 3). And while a weaker yen could, in theory, support tourism, forthcoming measures to curb overtourism—such as Kyoto’s planned 900% increase in accommodation taxes—may act as offsetting factors.

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**India**
Turning to India, the economy remains on track to be the region’s fastest-growing major economy. Growth forecasts were downgraded earlier in the year by the IMF and Blue Chip survey panellists, but these revisions were later reversed. These early-year downgrades reflected India’s heavy exposure to US trade, a concern that materialized when the US raised its reciprocal tariff rate on India from 25% to 50%. This contrasts with the situation of many other Asian economies, who successfully negotiated lower rates below the “Liberation Day” baseline. Although India managed to expand exports to other trading partners, this gain resulted in only a muted net impact on overall exports and, in turn, GDP growth. That said, US–India discussions have made some progress over the year, particularly on previously contentious issues such as India’s purchases of Russian crude. While these developments bring India closer to a potential trade deal, the benefits are likely to materialize beyond this year, meaning current growth readings still largely reflect the impact of the steep US tariffs in place today.

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**The Philippines**
Moving to the Philippines, the country is grappling with the impact of Typhoon Fung-wong, which struck the northern regions on Sunday, forcing over a million people to evacuate and causing widespread landslides and damaged roads. Fung-wong follows a string of storms this year, including Typhoon Kalmaegi, which also inflicted substantial damage just a few days ago. The disasters have reignited concerns over longstanding corruption in the country’s flood control systems, spooking investors and prompting capital outflows, which have weighed on the Philippine peso (chart 5). The currency’s weakness has been compounded by the central bank’s ongoing easing, which has cut the policy rate from last year’s peak of 6.5% to 4.75%—nearly 200 basis points—and with markets still pricing in further cuts.

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**Thailand**
Lastly, Thailand’s economy continues to struggle to regain the footing it had before the pandemic, weighed down by both domestic and external factors. Politically, the country remains in a transitional phase, with new Prime Minister Anutin under scrutiny to deliver on his pledge to hold general elections soon. Deputy Prime Minister indications suggest March 29, 2026 as a likely date, leaving a period of uncertainty in the meantime, as the durability of policies enacted during this interim phase remains unclear. Externally, tourism—which should have been a key growth driver—has underperformed, as the return of Chinese visitors to pre-pandemic levels did not materialize, partly due to tourism-related scares. In contrast, Vietnam appears to have captured a larger share of Chinese tourists this year (chart 6).