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/050819b.jpg" width="353">
The Russian economy has maintained a firm uptrend through the summer, according to the &quot;Five Basic Indicators&quot;, measures of output in leading goods-related sectors. In June, the combined output gauge was up 6.4% from a year earlier, stronger than May&#39;s 4.1% and last year&#39;s 5.2%. The component items for July, although not the total index, were reported this week, several of them today by the Federal Service of State Statistics, and they suggest that the momentum may have slowed somewhat. These indicators cover agriculture, industrial production, retail trade, construction and transportation. The data, contained in Haver&#39;s EMERGECW database, are not seasonally adjusted and are reported as year-on-year percentage changes. The industrial production segment gained 4.9% in July, compared with 6.9% in June and 4.6% in 2004. Retailing kept up double-digit gains, although these are a bit slower than they were during 2004. Construction and agricultural activity, by contrast, picked up considerably in July after a sluggish pace in the spring. Transportation was quite vigorous in 2002 and 2003, but has had only modest increases since then.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050819c.jpg" width="353">
The volume increases in retail trade are perhaps most impressive. Russian consumers are evidently able to raise their purchasing, despite double-digit increases also in consumer prices. And since retailing is expanding so much more rapidly than industrial activity, we&#39;d surmise that inventories are tight and that imports are continuing to flow in rapidly. Through the second quarter, total imports of goods were up 28.5% from their year earlier pace (before adjustment for inflation).
The rapid inflation makes it difficult to be unabashedly optimistic about a sustained expansion for the Russian economy, but the persisting advances in goods-producing sector output volume are encouraging. Russia&#39;s status as an oil exporter also means that rising energy costs are partially offset by the support energy sales give to incomes and profits for those employed in that sector.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/EMERGECW/@EB/@EB.HTM">Russia:</a> Year/Year % Changes</th>
<th scope="col">July 2005</th>
<th scope="col">June 2005</th>
<th scope="col">May 2005</th>
December/December
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2004</td>
<td>2003</td>
<td>2002</td>
</tr>
<tr>
<td class="firstcol">Output</td>
<td>--</td>
<td>6.4</td>
<td>4.1</td>
<td>5.2</td>
<td>8.9</td>
<td>3.8</td>
</tr>
<tr class="odd">
<td class="firstcol">Industrial Production</td>
<td>4.9</td>
<td>6.9</td>
<td>1.4</td>
<td>4.6</td>
<td>7.9</td>
<td>3.2</td>
</tr>
<tr>
<td class="firstcol">Retail Trade</td>
<td>11.8</td>
<td>12.5</td>
<td>13.3</td>
<td>14.2</td>
<td>8.4</td>
<td>9.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Construction</td>
<td>12.9</td>
<td>7.4</td>
<td>5.3</td>
<td>10.6</td>
<td>16.6</td>
<td>3.8</td>
</tr>
<tr>
<td class="firstcol">Transportation</td>
<td>2.8</td>
<td>2.0</td>
<td>4.1</td>
<td>3.4</td>
<td>9.4</td>
<td>9.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Agriculture</td>
<td>4.5</td>
<td>0.4</td>
<td>0.8</td>
<td>-0.7</td>
<td>0.6</td>
<td>-0.2</td>
</tr>
</tbody>
</table>
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The Russian economy has maintained a firm uptrend through the summer, according to the "Five Basic Indicators", measures of output in leading goods-related sectors. In June, the combined output gauge was up 6.4% from a year earlier, [...]

Growth Continues through July in Russia's "Five Basic Indicators"

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050819a.jpg" width="353">
The National Activity Index (CFNAI) compiled by the Federal Reserve Bank of Chicago has improved since the low this past March and suggests that US economic growth has strengthened. Despite a dip in July to 0.16 from 0.40 in June, the three-month moving average of the CFNAI improved to 0.23 versus the low near zero.
A zero value of the CFNAI indicates that the economy is expanding at its historical trend rate of growth.
The CFNAI is a weighted average of 85 indicators of economic activity. The indicators reflect activity in the following categories: production and income, the labor market, personal consumption and housing, manufacturing and trade sales, and inventories &amp; orders.
During the last twenty years there has been a 74% correlation between the level of the CFNAI and q/q growth in real GDP.
The latest CFNAI report is available <a href="http://www.chicagofed.org/economic_research_and_data/files/cfnai_August2005.pdf">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S503/@S503.HTM">Chicago Fed</a></th>
<th scope="col">July</th>
<th scope="col">June</th>
<th scope="col">July &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">CFNAI</td>
<td>0.16</td>
<td>0.40</td>
<td>0.61</td>
<td>0.39</td>
<td>-0.11</td>
<td>-0.41</td>
</tr>
</tbody>
</table>
</body>
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The National Activity Index (CFNAI) compiled by the Federal Reserve Bank of Chicago has improved since the low this past March and suggests that US economic growth has strengthened. Despite a dip in July to 0.16 from 0.40 in June, the [...]

Chicago Fed Nat'l Activity Index Suggests Above Trend Growth

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050627b.jpg" width="353">
The National Activity Index (CFNAI) compiled by the Federal Reserve Bank of Chicago has improved since the low this past March and suggests that US economic growth has strengthened. Despite a dip in July to 0.16 from 0.40 in June, the three-month moving average of the CFNAI improved to 0.23 versus the low near zero.
A zero value of the CFNAI indicates that the economy is expanding at its historical trend rate of growth.
The CFNAI is a weighted average of 85 indicators of economic activity. The indicators reflect activity in the following categories: production and income, the labor market, personal consumption and housing, manufacturing and trade sales, and inventories &amp; orders.
During the last twenty years there has been a 74% correlation between the level of the CFNAI and q/q growth in real GDP.
The latest CFNAI report is available <a href="http://www.chicagofed.org/economic_research_and_data/files/cfnai_August2005.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/SURVEYS/@S5/@S503/@S503.HTM">Chicago Fed</a></th>
<th scope="col">July</th>
<th scope="col">June</th>
<th scope="col">July &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">CFNAI</td>
<td>0.16</td>
<td>0.40</td>
<td>0.61</td>
<td>0.39</td>
<td>-0.11</td>
<td>-0.41</td>
</tr>
</tbody>
</table>
Growth Continues through July in Russia's "Five Basic Indicators" 
by <a href="/comment/Stone.html">Carol Stone</a> August 19, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050819b.jpg" width="353">
The Russian economy has maintained a firm uptrend through the summer, according to the &quot;Five Basic Indicators&quot;, measures of output in leading goods-related sectors. In June, the combined output gauge was up 6.4% from a year earlier, stronger than May&#39;s 4.1% and last year&#39;s 5.2%. The component items for July, although not the total index, were reported this week, several of them today by the Federal Service of State Statistics, and they suggest that the momentum may have slowed somewhat. These indicators cover agriculture, industrial production, retail trade, construction and transportation. The data, contained in Haver&#39;s EMERGECW database, are not seasonally adjusted and are reported as year-on-year percentage changes. The industrial production segment gained 4.9% in July, compared with 6.9% in June and 4.6% in 2004. Retailing kept up double-digit gains, although these are a bit slower than they were during 2004. Construction and agricultural activity, by contrast, picked up considerably in July after a sluggish pace in the spring. Transportation was quite vigorous in 2002 and 2003, but has had only modest increases since then.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050819c.jpg" width="353">
The volume increases in retail trade are perhaps most impressive. Russian consumers are evidently able to raise their purchasing, despite double-digit increases also in consumer prices. And since retailing is expanding so much more rapidly than industrial activity, we&#39;d surmise that inventories are tight and that imports are continuing to flow in rapidly. Through the second quarter, total imports of goods were up 28.5% from their year earlier pace (before adjustment for inflation).
The rapid inflation makes it difficult to be unabashedly optimistic about a sustained expansion for the Russian economy, but the persisting advances in goods-producing sector output volume are encouraging. Russia&#39;s status as an oil exporter also means that rising energy costs are partially offset by the support energy sales give to incomes and profits for those employed in that sector.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/EMERGECW/@EB/@EB.HTM">Russia:</a> Year/Year % Changes</th>
<th scope="col">July 2005</th>
<th scope="col">June 2005</th>
<th scope="col">May 2005</th>
December/December
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2004</td>
<td>2003</td>
<td>2002</td>
</tr>
<tr>
<td class="firstcol">Output</td>
<td>--</td>
<td>6.4</td>
<td>4.1</td>
<td>5.2</td>
<td>8.9</td>
<td>3.8</td>
</tr>
<tr class="odd">
<td class="firstcol">Industrial Production</td>
<td>4.9</td>
<td>6.9</td>
<td>1.4</td>
<td>4.6</td>
<td>7.9</td>
<td>3.2</td>
</tr>
<tr>
<td class="firstcol">Retail Trade</td>
<td>11.8</td>
<td>12.5</td>
<td>13.3</td>
<td>14.2</td>
<td>8.4</td>
<td>9.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Construction</td>
<td>12.9</td>
<td>7.4</td>
<td>5.3</td>
<td>10.6</td>
<td>16.6</td>
<td>3.8</td>
</tr>
<tr>
<td class="firstcol">Transportation</td>
<td>2.8</td>
<td>2.0</td>
<td>4.1</td>
<td>3.4</td>
<td>9.4</td>
<td>9.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Agriculture</td>
<td>4.5</td>
<td>0.4</td>
<td>0.8</td>
<td>-0.7</td>
<td>0.6</td>
<td>-0.2</td>
</tr>
</tbody>
</table>
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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050818d.jpg" width="353">
The current extraordinary developments in the energy sector are teaching all of us new ideas and concepts. One of these recently called to our attention by a client is the refinery crack spread. Besides the surging price of crude oil, refiners are currently also able to increase the spread they receive from breaking the crude into its products, or &quot;cracking&quot; it. The common measure of this process assumes that a barrel of crude is broken two-thirds into gasoline and one-third into fuel oil -- or 3 barrels of crude make 2 barrels of gasoline and 1 barrel of fuel oil. This spread is thus called the &quot;3-2-1 crack spread&quot;. This is such a common measure that there is futures market for it on the NYMEX, alongside crude and gasoline futures. Haver carries data for this in its OILWKLY database, which is supplied by the &quot;Oil &amp; Gas Journal&quot;.
The table below shows 1-month futures information: the estimated value of the gasoline and fuel oil produced by refiners and the resulting crack spread compared with the nearby future for West Texas Intermediate crude oil. We see that through last week, crude oil prices have risen 43.4% from a year ago while the refiners&#39; crack spread has more than doubled from about $6.85/barrel to $14.06. The spread now adds a premium of 21.7% to the crude price compared with 15.1% a year ago. This is wide relative to the most recent past, but historical data show that this margin has been as high as nearly 49% with several periods sustained around 23-24%. So current values are hardly unprecedented, at least on a relative basis.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050818e.jpg" width="353">
The other point clearly evident in both of our charts is the volatility of the crack spread from week to week. Such swings make it easy to see that refiners would want a futures market to hedge the spread, particularly given the substantial fixed costs of a refining plant. As refiners seek to cover these costs, plus labor and supplies, they face not only widely swinging crude oil prices, but also a margin on refining operations that is far from stable. One disclaimer: it is necessary to note also that relationships among these price measures are not exact. Other products come from the refining process -- residual fuel oil, jet fuel and gas oil are three notable ones -- so that the spread measure that includes only gasoline and distillate fuel oil is only a proxy, albeit a handy, easily understood one. Its recent widening indicates that demand for gasoline and fuel oil has been an important force supporting product prices: gasoline users have -- at least up to now -- been willing to pay these prices. With daily increases in gasoline, though, one wonders how long that will continue.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">1-Month Futures, $/Barrel</th>
<th scope="col">Aug 12, 2005</th>
<th scope="col">May 13, 2005</th>
Aug 13, 2004
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">$</td>
<td>Yr/Yr %</td>
</tr>
<tr>
<td class="firstcol">Crude Oil, WTI</td>
<td>64.91</td>
<td>50.35</td>
<td>45.25</td>
<td>43.4%</td>
<td>41.29</td>
<td>30.98</td>
<td>26.04</td>
</tr>
<tr class="odd">
<td class="firstcol">Estimated Product Value</td>
<td>78.974</td>
<td>60.576</td>
<td>52.096</td>
<td>51.6%</td>
<td>48.985</td>
<td>36.755</td>
<td>30.580</td>
</tr>
<tr>
<td class="firstcol">Crack Spread</td>
<td>14.060</td>
<td>10.224</td>
<td>6.848</td>
<td>105.32%</td>
<td>7.690</td>
<td>5.782</td>
<td>4.537</td>
</tr>
<tr class="odd">
<td class="firstcol">Spread as % of Crude Price</td>
<td>21.7%</td>
<td>20.3%</td>
<td>15.1%</td>
<td>+6.6%</td>
<td>19.1%</td>
<td>18.7%</td>
<td>17.6%</td>
</tr>
</tbody>
</table>
</body>
</html>

The current extraordinary developments in the energy sector are teaching all of us new ideas and concepts. One of these recently called to our attention by a client is the refinery crack spread. Besides the surging price of crude oil, [...]

"Crack Spread" Widens for Oil Refiners, But Percentage Premium in Gasoline and Oil Values Is Not "High"

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050818f.jpg" width="353">
The Index of General Business Conditions in the manufacturing sector in August from the Philadelphia Fed added to the prior month&#39;s gain and rose to 17.5, the highest level since April. Consensus expectations had been for a lesser improvement to 14.0.
During the last ten years there has been a 68% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 50% correlation with q/q growth in real GDP.
The sub indexes measuring new orders and shipments led with gains to the highest levels since April. The index covering the number of employees also rose. During the last ten years there has been a 64% correlation between the employment index and the three month growth in factory payrolls.
The business conditions index reflects a separate survey question, not the sub indexes.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050818g.jpg" width="353">
The separate index of expected business conditions in six months jumped to its best level this year led by expectations of increased hiring.
The prices paid index slipped and gave back a piece of the moderate improvement in July. During the last ten years there has been a 75% correlation between the prices paid index and the three month growth in the intermediate goods PPI. The correlation with the finished goods PPI has been 50% and with the CPI it&#39;s been 43%.
The Philadelphia Fed index is based on a survey of 250 regional manufacturing firms, but these firms sell nationally and internationally.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos0805.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/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">Aug</th>
<th scope="col">July</th>
<th scope="col">Aug &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>17.5</td>
<td>9.6</td>
<td>29.2</td>
<td>28.1</td>
<td>10.6</td>
<td>7.7</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>25.9</td>
<td>26.5</td>
<td>54.3</td>
<td>51.3</td>
<td>16.8</td>
<td>12.3</td>
</tr>
</tbody>
</table>
</body>
</html>

The Index of General Business Conditions in the manufacturing sector in August from the Philadelphia Fed added to the prior month's gain and rose to 17.5, the highest level since April. Consensus expectations had been for a lesser [...]

Philadelphia Fed Index Improved Further

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050818b.jpg" width="353">
The Composite Index of Leading Economic Indicators reported by the Conference Board rose 0.1% during July following a upwardly revised 1.2% jump in June. Six-month growth in the leaders improved to 2.2%, the best since February.
The breadth of one month gain amongst the 10 components of the leading index slipped to 65% from 85% during June. A wider interest rate spread between the yield on 10 Year Treasuries &amp; Fed Funds, higher stock prices and fewer claims for unemployment insurance made the largest positive contributions to the leader&#39;s July increase.
The method of calculating the contribution to the index from the interest rate yield spread has been revised. A negative contribution will now occur only when the spread inverts rather than when declining as in the past. More details can be found <a href="http://www.conference-board.org/pdf_free/economics/bci/lei0705.pdf">here</a>.
The leading index is based on eight previously reported economic data series. Two series, orders for consumer goods and orders for capital goods, are estimated.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050818c.jpg" width="353">
The coincident indicators rose 0.1% (2.6% y/y) with each of the four components up during the last three months.
The lagging indicators rose 0.3%, the same as during the prior month.
As higher short term interest rates and faster growth in the services CPI have raised the lagging indicators versus earlier declines, the ratio of coincident to lagging indicators has moved sideways this year and is down sharply from the December &#39;04 peak. The ratio measures actual economic performance against economic excess.
Visit the Conference Board&#39;s <a href="http://www.conference-board.org">site</a> for coverage of leading indicator series from around the world.
The July 2005 Senior Loan Officer Opinion Survey on Bank Lending Practices from the Federal Reserve Board can be found <a href="http://www.federalreserve.gov/boarddocs/SnLoanSurvey/200508/default.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM">Business Cycle Indicators</a></th>
<th scope="col">July</th>
<th scope="col">June</th>
<th scope="col">6-Month Chg</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Leading</td>
<td>0.1%</td>
<td>1.2%</td>
<td>2.2%</td>
<td>7.7%</td>
<td>5.1%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.1%</td>
<td>0.3%</td>
<td>2.2%</td>
<td>2.7%</td>
<td>0.4%</td>
<td>-0.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>0.3%</td>
<td>0.3%</td>
<td>3.4%</td>
<td>-0.1%</td>
<td>-0.1%</td>
<td>-0.7%</td>
</tr>
</tbody>
</table>
</body>
</html>

The Composite Index of Leading Economic Indicators reported by the Conference Board rose 0.1% during July following a upwardly revised 1.2% jump in June. Six-month growth in the leaders improved to 2.2%, the best since February. The [...]

Leading Indicators Rose Again in July

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050818a.jpg" width="353">
Initial claims for unemployment insurance increased 6,000 to 316,000 last week and reversed a revised 5,000 decline the week earlier. Consensus expectations had been for 310,000 claims.
Despite the increase, initial claims in August are 1.6% below the July average, however, the latest figure covers the survey week for August nonfarm payrolls and is up 3.6% from the July period.
During the last ten years there has been a (negative) 75% correlation between the level of initial claims for unemployment insurance and the monthly change in payroll employment.
The four week moving average of initial claims rose to 312,750 (-7.2% y/y).
Continuing claims for unemployment insurance rose 28,000 following a deepened 16,000 decline one week earlier.
The insured unemployment rate remained at the four year low of 2.0% for the fifth consecutive week.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">08/13/05</th>
<th scope="col">08/06/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>316</td>
<td>310</td>
<td>-5.1%</td>
<td>343</td>
<td>402</td>
<td>404</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,593</td>
<td>-10.7%</td>
<td>2,926</td>
<td>3,531</td>
<td>3,570</td>
</tr>
</tbody>
</table>
</body>
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Initial claims for unemployment insurance increased 6,000 to 316,000 last week and reversed a revised 5,000 decline the week earlier. Consensus expectations had been for 310,000 claims. Despite the increase, initial claims in August [...]

Unemployment Insurance Claims Suggest Positive Job Growth

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050818f.jpg" width="353">
The Index of General Business Conditions in the manufacturing sector in August from the Philadelphia Fed added to the prior month&#39;s gain and rose to 17.5, the highest level since April. Consensus expectations had been for a lesser improvement to 14.0.
During the last ten years there has been a 68% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 50% correlation with q/q growth in real GDP.
The sub indexes measuring new orders and shipments led with gains to the highest levels since April. The index covering the number of employees also rose. During the last ten years there has been a 64% correlation between the employment index and the three month growth in factory payrolls.
The business conditions index reflects a separate survey question, not the sub indexes.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050818g.jpg" width="353">
The separate index of expected business conditions in six months jumped to its best level this year led by expectations of increased hiring.
The prices paid index slipped and gave back a piece of the moderate improvement in July. During the last ten years there has been a 75% correlation between the prices paid index and the three month growth in the intermediate goods PPI. The correlation with the finished goods PPI has been 50% and with the CPI it&#39;s been 43%.
The Philadelphia Fed index is based on a survey of 250 regional manufacturing firms, but these firms sell nationally and internationally.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos0805.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/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">Aug</th>
<th scope="col">July</th>
<th scope="col">Aug &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>17.5</td>
<td>9.6</td>
<td>29.2</td>
<td>28.1</td>
<td>10.6</td>
<td>7.7</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>25.9</td>
<td>26.5</td>
<td>54.3</td>
<td>51.3</td>
<td>16.8</td>
<td>12.3</td>
</tr>
</tbody>
</table>
Leading Indicators Rose Again in July 
by <a href="/comment/Moeller.html">Tom Moeller</a> August 18, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050818b.jpg" width="353">
The Composite Index of Leading Economic Indicators reported by the Conference Board rose 0.1% during July following a upwardly revised 1.2% jump in June. Six-month growth in the leaders improved to 2.2%, the best since February.
The breadth of one month gain amongst the 10 components of the leading index slipped to 65% from 85% during June. A wider interest rate spread between the yield on 10 Year Treasuries &amp; Fed Funds, higher stock prices and fewer claims for unemployment insurance made the largest positive contributions to the leader&#39;s July increase.
The method of calculating the contribution to the index from the interest rate yield spread has been revised. A negative contribution will now occur only when the spread inverts rather than when declining as in the past. More details can be found <a href="http://www.conference-board.org/pdf_free/economics/bci/lei0705.pdf">here</a>.
The leading index is based on eight previously reported economic data series. Two series, orders for consumer goods and orders for capital goods, are estimated.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050818c.jpg" width="353">
The coincident indicators rose 0.1% (2.6% y/y) with each of the four components up during the last three months.
The lagging indicators rose 0.3%, the same as during the prior month.
As higher short term interest rates and faster growth in the services CPI have raised the lagging indicators versus earlier declines, the ratio of coincident to lagging indicators has moved sideways this year and is down sharply from the December &#39;04 peak. The ratio measures actual economic performance against economic excess.
Visit the Conference Board&#39;s <a href="http://www.conference-board.org">site</a> for coverage of leading indicator series from around the world.
The July 2005 Senior Loan Officer Opinion Survey on Bank Lending Practices from the Federal Reserve Board can be found <a href="http://www.federalreserve.gov/boarddocs/SnLoanSurvey/200508/default.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM">Business Cycle Indicators</a></th>
<th scope="col">July</th>
<th scope="col">June</th>
<th scope="col">6-Month Chg</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Leading</td>
<td>0.1%</td>
<td>1.2%</td>
<td>2.2%</td>
<td>7.7%</td>
<td>5.1%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.1%</td>
<td>0.3%</td>
<td>2.2%</td>
<td>2.7%</td>
<td>0.4%</td>
<td>-0.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>0.3%</td>
<td>0.3%</td>
<td>3.4%</td>
<td>-0.1%</td>
<td>-0.1%</td>
<td>-0.7%</td>
</tr>
</tbody>
</table>
Unemployment Insurance Claims Suggest Positive Job Growth 
by <a href="/comment/Moeller.html">Tom Moeller</a> August 18, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050811b.jpg" width="353">
Initial claims for unemployment insurance increased 6,000 to 316,000 last week and reversed a revised 5,000 decline the week earlier. Consensus expectations had been for 310,000 claims.
Despite the increase, initial claims in August are 1.6% below the July average, however, the latest figure covers the survey week for August nonfarm payrolls and is up 3.6% from the July period.
During the last ten years there has been a (negative) 75% correlation between the level of initial claims for unemployment insurance and the monthly change in payroll employment.
The four week moving average of initial claims rose to 312,750 (-7.2% y/y).
Continuing claims for unemployment insurance rose 28,000 following a deepened 16,000 decline one week earlier.
The insured unemployment rate remained at the four year low of 2.0% for the fifth consecutive week.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">08/13/05</th>
<th scope="col">08/06/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>316</td>
<td>310</td>
<td>-5.1%</td>
<td>343</td>
<td>402</td>
<td>404</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,593</td>
<td>-10.7%</td>
<td>2,926</td>
<td>3,531</td>
<td>3,570</td>
</tr>
</tbody>
</table>
"Crack Spread" Widens for Oil Refiners, But Percentage Premium in Gasoline and Oil Values Is Not "High" 
by <a href="/comment/Stone.html">Carol Stone</a> August 18, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050818d.jpg" width="353">
The current extraordinary developments in the energy sector are teaching all of us new ideas and concepts. One of these recently called to our attention by a client is the refinery crack spread. Besides the surging price of crude oil, refiners are currently also able to increase the spread they receive from breaking the crude into its products, or &quot;cracking&quot; it. The common measure of this process assumes that a barrel of crude is broken two-thirds into gasoline and one-third into fuel oil -- or 3 barrels of crude make 2 barrels of gasoline and 1 barrel of fuel oil. This spread is thus called the &quot;3-2-1 crack spread&quot;. This is such a common measure that there is futures market for it on the NYMEX, alongside crude and gasoline futures. Haver carries data for this in its OILWKLY database, which is supplied by the &quot;Oil &amp; Gas Journal&quot;.
The table below shows 1-month futures information: the estimated value of the gasoline and fuel oil produced by refiners and the resulting crack spread compared with the nearby future for West Texas Intermediate crude oil. We see that through last week, crude oil prices have risen 43.4% from a year ago while the refiners&#39; crack spread has more than doubled from about $6.85/barrel to $14.06. The spread now adds a premium of 21.7% to the crude price compared with 15.1% a year ago. This is wide relative to the most recent past, but historical data show that this margin has been as high as nearly 49% with several periods sustained around 23-24%. So current values are hardly unprecedented, at least on a relative basis.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050818e.jpg" width="353">
The other point clearly evident in both of our charts is the volatility of the crack spread from week to week. Such swings make it easy to see that refiners would want a futures market to hedge the spread, particularly given the substantial fixed costs of a refining plant. As refiners seek to cover these costs, plus labor and supplies, they face not only widely swinging crude oil prices, but also a margin on refining operations that is far from stable. One disclaimer: it is necessary to note also that relationships among these price measures are not exact. Other products come from the refining process -- residual fuel oil, jet fuel and gas oil are three notable ones -- so that the spread measure that includes only gasoline and distillate fuel oil is only a proxy, albeit a handy, easily understood one. Its recent widening indicates that demand for gasoline and fuel oil has been an important force supporting product prices: gasoline users have -- at least up to now -- been willing to pay these prices. With daily increases in gasoline, though, one wonders how long that will continue.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">1-Month Futures, $/Barrel</th>
<th scope="col">Aug 12, 2005</th>
<th scope="col">May 13, 2005</th>
Aug 13, 2004
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">$</td>
<td>Yr/Yr %</td>
</tr>
<tr>
<td class="firstcol">Crude Oil, WTI</td>
<td>64.91</td>
<td>50.35</td>
<td>45.25</td>
<td>43.4%</td>
<td>41.29</td>
<td>30.98</td>
<td>26.04</td>
</tr>
<tr class="odd">
<td class="firstcol">Estimated Product Value</td>
<td>78.974</td>
<td>60.576</td>
<td>52.096</td>
<td>51.6%</td>
<td>48.985</td>
<td>36.755</td>
<td>30.580</td>
</tr>
<tr>
<td class="firstcol">Crack Spread</td>
<td>14.060</td>
<td>10.224</td>
<td>6.848</td>
<td>105.32%</td>
<td>7.690</td>
<td>5.782</td>
<td>4.537</td>
</tr>
<tr class="odd">
<td class="firstcol">Spread as % of Crude Price</td>
<td>21.7%</td>
<td>20.3%</td>
<td>15.1%</td>
<td>+6.6%</td>
<td>19.1%</td>
<td>18.7%</td>
<td>17.6%</td>
</tr>
</tbody>
</table>
</body>
</html>

Crude oil price has returned to pre-conflict level but traffic through Hormuz still subpar

Surging orders for computers and electronics propelling durable goods orders

Next year's inflation forecasts are on the rise and above target

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

Elevated energy prices putting intense upward pressure on input prices around the globe

US is big leader in global surge in private AI investment

Larger-than-usual income tax refunds this year are supporting consumer spending

Sharply rising share of AI-related jobs

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

Recent pickup in US defense orders could help support overall growth ahead

Cost of transporting crude oil has soared to series high

Market-based inflation expectations have not yet reflected recent surge in oil prices

Global equity markets are fearing a major economic disruption from soaring oil prices

Is recent drop in sentiment signaling softer growth ahead?

With the Iran conflict, geopolitical risk has soared to alarming levels

Soaring AI-related investment in US underpinning strong contribution of business spending to overall growth

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

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Tian Yong Woon

In this week's Letter, we trace how an energy shock and a resilient AI upcycle shaped Asia through the first half of 2026 and weigh the risks that may define the second. The year opened hopeful on AI, though some feared stretched valuations, before the US-Iran conflict and a closed Strait of Hormuz shook the mood (chart 1). A later MoU eased energy prices and inflation fears, yet valuations largely held on AI optimism, despite bouts of reassessment. The oil surge hit import-reliant emerging Asia hardest, leaving India, Thailand and the Philippines doubly exposed through their Middle East sourcing (chart 2). Pass-through inflation, subsidies that some governments later pared back, and currency pressure followed, though resuming Strait traffic should ease these strains. Rising inflation then boxed in policymakers, straining already-stretched fiscal positions and limiting more pro-growth monetary policy stances in some economies (chart 3). Our latest Blue Chip survey found a slim majority reassessed the risk balance after oil fell, though the shifts stayed mild versus the June survey (chart 4). Most still rank upside inflation risk above downside employment risk, even as a slightly larger share now see the balance as more even. AI remains the region's key offset, with Taiwan and South Korea riding a sharp rise in memory and chip exports (chart 5). Malaysia and Thailand instead draw data centre FDI, so Asia gains from the buildout phase rather than the West's hoped-for productivity gains. We close on an uncertain second half, where a possible Super El Niño could revive food-driven inflation even as energy pressures fade (chart 6). Beyond that, an AI reassessment, fresh geopolitical flashpoints, trade tensions and the US midterms could each reshape the outlook.

**The year thus far**
We began the year on a relatively hopeful note, buoyed by AI optimism and market valuations that reflected it, although some investors worried that valuations had become overstretched. The geopolitical mood shifted quickly in early January, however, when US military forces captured former Venezuelan leader Maduro, though the event did little to move markets (chart 1). A far greater shock came when the US-Iran conflict erupted in late February, closing the Strait of Hormuz and dealing a negative blow to global energy supplies. More recently, the US and Iran have reached a Memorandum of Understanding (MoU) aimed at ceasing hostilities and resuming trade flows through the Strait. This has allowed energy prices to ease, softening policymakers' concerns about energy-driven inflation. Even so, equity valuations have largely remained underpinned by AI optimism, albeit with interim bouts of reassessment and price retracement. This drew on repeated reports of strong growth along the AI supply chain, and on signs that supply could not keep pace with demand. This continued even as AI models with leapfrogging capabilities reached the public. At several points, the US government stepped in to rein in public access to some models, given security concerns about such immense capabilities falling into the wrong hands.

260706T1.jpg

**Oil impact on Asia**
Within emerging Asia, among the hardest hit by the oil surge are India, Thailand and the Philippines. These are relatively heavy net importers of crude oil, and they source most of that crude from the Middle East. That combination left them doubly exposed when the Strait of Hormuz closed (chart 2). The surge in oil prices also carries multiple, wider impacts. First, the higher cost of imported crude passes through to consumer inflation, leaving households with a heavier energy bill. Several governments have stepped in with energy subsidies to ease the consumer burden. That support has not proved indefinitely sustainable, as some governments eventually pared it back given the immense costs. In effect, subsidies shift some of the burden from consumers to the state, straining public finances. There is also a currency effect, since higher crude prices require more domestic currency to buy the same volume, weighing on the exchange rate. That said, other drivers of currency depreciation may also have been at play over the period. Trade flows through the Strait have recently picked up, with traffic gradually resuming. If the current truce and its conditions hold, these effects may ease before long. On the growth front, higher oil prices would not appear in volume-based measures. Their second-order effects on output would still come through, such as demand dampened by higher energy costs.

260706T2.jpg

**Inflation and monetary policy**
Higher crude oil prices drove inflation sharply higher across Asia and much of the world. That greatly complicated policymakers' task on both the fiscal and monetary fronts. On the fiscal side, several Asian governments were already facing pressures before the oil shock. These ranged from grand, fiscally costly policy pushes in Indonesia to calls for greater fiscal sustainability in Japan. Higher oil prices added a need for more support, further complicating their position. On the monetary side, previously pro-growth moves, such as rate cuts in India, looked riskier, as they threatened to stoke already-surging inflation (chart 3). That made further easing, or even holding current pro-growth settings, hard to sustain. The danger is sharper still if inflation expectations become unanchored, raising the risk of runaway inflation. The recent US-Iran de-escalation, and the crude price slump that followed, certainly help to ease the situation. One would expect so material a shift in the geopolitical backdrop to prompt a reassessment among policymakers and investors alike. Yet that was not entirely the case, based on our latest Blue Chip Financial Forecast survey, whose results we discuss in the next section.

260706T3.jpg

**The latest Blue Chip survey results**
The recent US-Iran MoU has largely held, despite occasional flare-ups. Against that backdrop, and the sharp fall in oil prices that followed, we asked panellists to assess the balance of risks between employment and inflation. A slim majority (59%) said their assessment had shifted, while a non-trivial minority said it had not. Looking specifically at how US risk expectations moved, we find the shifts have been quite mild. That is relative to the June survey, which was conducted before the MoU. Even so, most panellists (65%) still see upside risks to inflation as the key risk, rather than downside risks to employment. Meanwhile, a slightly larger share than in June (23%) now see the risks as more balanced.

260706T4.jpg

**The AI upcycle and Asia**
We turn next to a key offset to the growth dampeners facing much of Asia. It stems from parts of the region being well positioned to capture the current AI upcycle. Advanced economies such as Taiwan and South Korea have benefited from strong demand for AI and related memory chips. This has driven a sharp rise in exports of such goods (chart 5). Those exports have propelled growth in these economies this year, at a pace faster than in previous years. Other economies, such as Malaysia and Thailand, are going through a data centre boom. They benefit through an additional channel beyond AI-related goods exports: robust FDI inflows. Foreign firms are driving these inflows as they expand their data centre footprint in the region. Other economies, including those in the West, hope to reap large productivity gains from the current jump in AI capabilities. By contrast, much of Asia's benefit comes from the ongoing buildout of the parts and infrastructure that the upcycle requires.

260706T5.jpg

**Watching H2 2026**
Bringing it all together, the first half of the year has been shaped by two main drivers: the US-Iran conflict and the ongoing AI upcycle. What the overarching themes for Asia will be in the second half remains anyone's guess. For one, the threat of an imminent "Super El Niño" event (chart 6) could trigger a crop supply shock. That may reintroduce inflationary pressure, albeit through the food channel. On another front, market optimism around AI-related companies' revenues and spending still persists. Yet disruptions or new discoveries could emerge down the line, including some that sharply reduce the compute needed for a given output. Such developments may in time prompt investors to reassess their views. In addition, pockets of geopolitical pressure are still brimming in parts of the world, including the Middle East. These threaten to upend supply flows of oil, and of other crucial goods too. The trade front, though faded from focus in recent months, could become another flashpoint. It bears on growth and on bilateral relationships, especially those with the US. Finally, other events, such as the US midterm elections later this year, may also skew the global backdrop.

260706T6.jpg

Asia

Economic Letter from Asia: Woah, We’re Halfway There

Andrew Cates

**Tightening Bias Intact, but Unevenly Distributed**
The July Blue Chip Financial Forecasts survey's expectations for policy rate changes over the next twelve months reveal a striking divergence across the major advanced economies, as chart 1 below makes clear. Across the board, the rate outlook is higher than it was in late February, before the US-Iran conflict escalated: the energy price shock and its inflationary consequences have left an imprint on the panel's thinking, even as oil prices have since retreated. Japan tops the list with an expected increase of around 40 basis points, reflecting the building pressure on the Bank of Japan to respond to yen weakness and still-elevated domestic inflation. Canada and the euro area also sit firmly in positive territory, with expected increases of around 30 and 20 basis points respectively. The US and the UK, by contrast, are in negative territory — the US barely so, the UK more distinctly, with the panel pencilling in modest rate reductions over the coming year. This pattern is not simply a reflection of where each economy sits in the inflation cycle. It also encodes a judgement about the current stance of monetary policy: in Japan, the euro area and Canada, policy is likely seen as insufficiently tight relative to the inflation challenge, and the conflict has reinforced that view. In the US and UK, by contrast, policy is judged to be closer to or already beyond neutral, meaning the next move is more likely to be an easing than a further tightening — even if, in the US case, that easing has been pushed well into 2027.

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**When Will the Next Move Come?**
Chart 2 below adds a timing dimension to the rate outlook, showing where the BCFF panel currently places the next policy move for the Fed, ECB, Bank of England and Bank of Japan. For the BoJ, the distribution is concentrated around the near term, with a significant share of respondents expecting action in September or October — consistent with the building pressure illustrated in chart 1 and with the BoJ’s next scheduled decision on 31 July. For the ECB, September or later than November emerge as the most likely timing for the next step. The Bank of England panel is more spread, with a meaningful share expecting action to come later. For the Fed, the dominant view places the next move firmly in the ‘later’ category, consistent with the BCFF consensus that the Fed funds rate will hold through the rest of 2026, with a first cut not expected until Q2 2027. Under chair Kevin Warsh, the June FOMC meeting delivered a hawkish dot plot that shifted some participants toward a hike before year-end, but the panel as a whole has not moved that far.

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**Headline Up, Core Contained: The Inflation Picture Across Advanced Economies**
One of the more reassuring features of the current inflation episode has been the limited pass-through from energy prices to underlying price dynamics. Across the advanced economies, headline CPI inflation has risen materially since the conflict escalated in March, driven overwhelmingly by consumer energy costs. Core inflation — stripping out food and energy — has edged higher, but only modestly, suggesting that second-round effects remain contained for now. In the United States, the pressures are arguably more alarming, with core PCE rising sharply between February and May to its highest level since October 2023. In the euro area, the focus this week has been firmly on Eurostat's June flash CPI estimate, published yesterday. Headline inflation fell back to 2.8% from a peak of 3.2% in May, as energy costs — the main driver of the surge since the conflict began — eased meaningfully. Crucially, core inflation also ticked down, and services inflation retreated as well. The June data therefore tell a broadly reassuring story: the energy shock is unwinding without leaving a lasting imprint on underlying price dynamics — precisely what the ECB will have been hoping for.

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**Consumer Price Expectations: Are Households Convinced?**
The aggregate inflation picture looks relatively contained at the macro level, but whether households are similarly reassured is a separate question. Chart 4 below draws on the European Commission's consumer survey data on price expectations — one of the more timely and widely watched indicators of inflation psychology in the euro area. The survey captures whether consumers expect prices to rise, stay the same or fall over the coming twelve months, and its relationship with actual inflation outturns has historically been close. A sustained elevation in consumer price expectations risks becoming self-fulfilling, feeding into wage demands and pricing behaviour in ways that complicate the ECB's task considerably. The June survey, however, brought an encouraging development: expectations fell steeply, suggesting that households have begun to register the reversal in energy prices and the broader easing of the inflationary impulse. That said, the absolute level of expectations remains elevated relative to the pre-conflict period, and one month's decline does not constitute a trend. Whether the June reading marks the beginning of a sustained normalisation — or proves a temporary dip before expectations re-anchor at a higher level — will be one of the key variables shaping the ECB's decision calculus in the months ahead.

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**Japan: A Weak Yen at the Worst Possible Time**
Japan occupies a particularly uncomfortable position in the current global conjuncture. The yen has depreciated to levels not seen since December 1986, with USD/JPY touching 162 this week. The move reflects the persistence of a large interest rate differential: even as the Bank of Japan has continued its gradual tightening, the Fed’s hawkish pivot under chair Kevin Warsh — with the mid-June FOMC dot plot signalling a possible hike before year-end — has reinforced the carry trade dynamics weighing on the currency. For Japan, which imports virtually all of its energy, yen weakness at a time of still-elevated global oil prices is a double burden, amplifying domestic inflation and squeezing real incomes. Verbal warnings from Japan’s Finance Ministry have had only a modest and short-lived effect on the exchange rate. The Bank of Japan’s next policy decision is on 31 July, and the pressure to act more decisively is building. The BCFF panel’s July survey revised upward its expectation for a stronger US dollar against the yen over the coming year — consistent with the fundamental picture that chart 5 below describes.

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**AI: Optimism on the Technology, Scepticism on the Price**
Returning to the BCFF survey, its special questions reveal a panel that continues to look beyond the current cyclical turbulence toward a longer-horizon structural narrative. On artificial intelligence, respondents are broadly optimistic: 45% expect a noticeable impact on US productivity and growth within one to three years, with a further 45% believing those effects are already becoming evident. That is a striking degree of conviction about a technology whose macro-level productivity impact remains, by most empirical measures, still to fully materialise. Yet the same panellists are considerably more cautious about financial markets than about the technology itself. Nearly all respondents believe that expected AI gains are already fully reflected — or even over-reflected — in current asset prices. Chart 6 below captures this tension. It is a combination — high conviction on transformative potential, high scepticism on current valuations — that has historically been associated with stretched risk premia and vulnerability to disappointment, even where the underlying technology story ultimately proves correct.

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Global financial markets have had a more settled feel this week, reflecting the continued unwinding of the geopolitical risk premium that had built up during the worst of the US-Iran conflict. Oil prices have fallen further, equity markets have been broadly supported, and incoming inflation data — notably the euro area’s June flash CPI estimate — have come in below expectations. The US holiday-shortened week ahead, with Independence Day on Friday, is likely to keep volumes thin and activity subdued. The bigger picture, however, remains one of tension between a more benign near-term inflation trajectory and central banks that may not yet be ready to stand down. In the charts below we look first at what the latest Blue Chip Financial Forecasts (BCFF) survey reveals about the expected change in and timing of policy rates across the major economies (charts 1 and 2), then at the divergence between headline and core inflation across the advanced economies (chart 3), and at what euro area consumers are more specifically expecting about inflation in the period ahead (chart 4). We turn next to Japan and the yen’s slide this week to 40-year lows (chart 5), and finally to the BCFF survey’s special questions on artificial intelligence and asset valuations (chart 6).

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Charts of the Week: Forecasters Hold Firm

Sandy Batten

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The luster fell a bit off the employment rose in June with nonfarm payrolls rising 57,000 against expectations of a 115,000 increase, according to today’s report from the Bureau of Labor Statistics. Moreover, the increases previously reported for April and May were revised down by a total of 74,000. Upon revision, payrolls increased 148,000 in April versus 179,000 previously reported and rose 129,000 in May versus 172,000 previously reported. The average increase over the past three months fell to 111,000 from 164,000 in May while the average increase over the past six months rose to 92,000 in June, its highest reading since February 2025, from 80,000 in May. Both remain on a modest uptrend and much stronger than payroll gains last year. In 2025, monthly payroll gains averaged only 10,000.

The weaker-than-expected payroll report was reinforced by a weak report from the **household survey**. While the number of unemployed fell 213,000 and the unemployment rate edged down to 4.2% from 4.3% in May, the number of employed slumped 507,000 in June, the largest monthly decline since May 2025 (with population adjustment to January 2026). The labor force plunged 720,000 with the labor force participation rate falling to 61.5%, its lowest level since March 2021.

Growth of average hourly earnings (AHE), a key variable for the Federal Reserve, was relatively well behaved in June. AHE increased 0.3% m/m, the same monthly gain as in May, in line with expectations. The y/y rate of advance edged up to 3.5% in June from 3.4% in May. Wage growth in private services-producing firms picked up in June, rising 0.4% m/m (3.4% y/y) versus 0.2% m/m (3.2% y/y) in May. Goods-producing wages increased 0.2% m/m in June after 0.3% monthly gains in both April and May with the y/y rate holding at 4.1%.

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In the **establishment survey**, private-sector employment was also weaker than expected in June, increasing only 49,000 against an expected 115,000 increase. Moreover, April and May figures were also revised down by a total of 50,000. Government employment rose 8,000 following a 32,000 increase in May. Private goods-producing employment increased 10,000, its largest monthly gain in three months with an 11,000 gain in construction and a 3,000 rise in manufacturing jobs, the first increase in three months. In contrast, services-producing employment increased only 39,000 in June, its weakest monthly performance in four months. Private education and health services jobs posted another solid gain of 69,000, up from 45,000 in May. However, retail jobs fell 7,500, their first monthly decline in four months, and leisure and hospitality jobs slumped 61,000, their largest monthly decline since December 2020, after increasing 40,000 in May. There had been speculation in the market that the World Cup would generate additional leisure and hospitality jobs, but this obviously failed to pan out. On a brighter note, although the one-month payroll diffusion index, a measure of the breadth of job gains, slipped to 54.4 in June from 56.0 in May, it remained well above the key 50 level that indicates that more industries were adding jobs than losing them.

The length of the workweek was unchanged at 34.3 hours in June with the aggregate weekly hours index edging up 0.1% m/m, the same monthly gain as in May. The aggregate hours index rose 1.3% q/q saar in Q2, the fastest quarterly gain in four quarters, providing a solid base for Q2 real GDP growth. The goods-producing workweek was unchanged at 40.1 hours, the highest since January 2023, while the private service-producing workweek edged down to 33.2 hours from 33.3 hours in May.

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

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- U.S. nonfarm payrolls increased 57,000 in June with meaningful downward revisions to both April and May.
- The market consensus looked for a 115,000 increase.
- The unemployment rate edged down to 4.2% from 4.3%, due mostly to a large decrease in the labor force.
- Average hourly earnings rose 0.3% m/m (3.5% y/y), in line with expectations.

U.S. Payroll Employment Gains Smaller than Expected in June

Robert Brusca

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Unemployment rates in the European Monetary Union (EMU) were steady in May at 6.2%, the same level as in April, after April had fallen to 6.2% from 6.3%. The 6.2% reading is the lowest for the community since it was formed. Meanwhile, for the larger community, the EU, the unemployment rate has stabilized at 5.9%, the same as in April, again, a tick lower than it was in March. This 5.9% reading is a tick above the historic low for the European Union (EU). In both cases, the performance of these two economic conglomerations is quite excellent.

**Monthly**
The table looks at 12 of the most senior members of the monetary union, including an observation for the United Kingdom based on its claimant-count unemployment rate, presented at the bottom of the table. In May, the monetary union saw 4 of 12 members in the table with lower unemployment rates than they had in April. In April, five members had lower unemployment rates than in March. In March, seven members had lower unemployment rates than they posted in February. The progression to lower unemployment rates has slowed based on monthly data.

**Sequentially**
Looking at changes in the unemployment rates over broader sequential periods—three months, six months, and 12 months—6 out of 12 reporters have lower unemployment rates over three months; 7 have lower unemployment rates over six months; only 4 report unemployment rates that are lower over 12 months. The broader periods for comparison show changes in the unemployment rates that report more declines over the shorter and more recent periods compared to the longer/older periods. This is not the same trend leaning that we get from the last three months of data. It'll be good to watch these developments in the coming months to see if the tendency to lower unemployment rates is slowing or whether dropping unemployment is continuing in force.

**Rankings**
The ranking of unemployment rates since 1990 finds only three of these 12 monetary union members with unemployment rates above their medians. Those are Luxembourg, with a 98.2 percentile standing, Finland with an 81.9 percentile standing, and Austria with a 76.6 percentile standing. Italy, on the other hand, is reporting the lowest unemployment rate that it has seen during this period. The Greek unemployment rate has been this low or lower only about 3% of the time, while in Spain the unemployment rate has been this low or lower 11% of the time. For Portugal, the unemployment ranking figure has been weaker 13% of the time. The monetary union continues to report excellent labor market results even though economic growth has been relatively disappointing.

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**Summing up and central bankers**
In the wake of the monetary conference in the Sintra this past week, central banks featuring contributions from the European Central Bank, the Bank of England, the Federal Reserve, and the Bank of Canada, saw central bank heads talking about getting back to basics and stopping the use of some of the newer tools that had been pressed into service after the great financial crisis and during COVID. Bankers are getting back to basics to focus on short-term interest rates and say they will stop fiddling with the size of the balance sheet and to largely set aside the use of forward guidance. It will take time to determine what these changes are going to mean in terms of how policy performs and how markets will react. While there was a lot of discussion, and in some places concerns about the loss of forward guidance, what is clear is that, with forward guidance gone, there will be more volatility; however, the markets will be freer to price economic events themselves and will not be so stuck to the outlook of the central bank.  That could turn out to be a gigantic win for both markets and central bankers.

Europe

Unemployment Remains Quite Low in Europe

Winnie Tapasanun

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The ISM U.S. manufacturing PMI fell to a lower-than-expected 53.3 in June, the first m/m fall since February, following a 1.3-point increase to 54.0 in May, according to data from the Institute for Supply Management. The June reading, above the 50 expansion-contraction threshold, indicated the U.S. manufacturing sector expanded for the sixth straight month, albeit at a slightly slower pace. A reading of 53.8 for June had been expected in the Action Economics Forecast Survey. The June manufacturing PMI, while above a contraction-level 49.0 in June 2025 and a low of 47.0 in October 2024, remained below a peak of 63.8 in March 2021.

The production index declined to 52.2 in June from 54.3 in May, indicating production expanded for the eighth consecutive month but at the slowest pace since December. The index was above a low of 44.8 in April 2025 but below a peak of 66.5 in March 2021. In June, 19.0% (NSA) of respondents reported higher production while 13.0% reported lower production. The new orders index slipped to 56.0 in June from 56.8 in May, signaling new orders grew for the sixth straight month following four successive months of contraction. The index remained well above a low of 41.8 in January 2023 but below a high of 67.0 in May 2021. In June, 22.3% (NSA) of respondents reported higher new orders while 13.4% reported declines. The inventories index climbed to 51.4 in June from 49.9 in May, marking the first expansion since April 2025. The index was slightly below a high of 52.7 in March 2025 but above a low of 43.8 in October 2024. Meanwhile, the supplier deliveries index fell to 57.4 in June from 60.6 in May and April, indicating slowing delivery performance for the seventh consecutive month after faster deliveries in November. In June, 18.1% (NSA) of respondents reported slower delivery speeds while 3.4% reported faster speeds.

On the labor front, the employment index improved to 49.7 in June from 48.6 in May, showing employment contracted for the 33rd straight month but at the slowest contraction pace since January 2025. The index was above a low of 44.1 in November 2025 but below a high of 56.5 in March 2022. In June, 16.2% (NSA) of respondents reported higher employment while 13.8% reported lower hiring.

On the pricing front, the prices paid index fell to a still-high 73.0 (NSA) in June, a 9.1-point drop—the largest decline since July 2022—from 82.1 in May, indicating raw materials prices rose for the 21st straight month but at the slowest rising pace since February. The index remained well above a low of 39.4 in December 2022 but below a high of 87.1 in March 2022 and a peak of 92.1 in June 2021. In June, 55.1% (NSA) of respondents reported higher prices while 9.2% reported price declines.

In other ISM series not included in the composite index, the new export orders index fell to 48.5 in June from 50.6 in May, indicating new export orders contracted for the third time in four months. The index was up from a low of 40.1 in May 2025 but down from a high of 52.4 in January 2025 and a peak of 57.1 in February 2022. The imports index edged down to 52.9 in June from 53.0 in May, suggesting imports expanded for the fifth successive month. The index was below its recent high of 54.9 in February but above a low of 39.9 in May 2025. The order backlog index decreased to 50.5 (NSA) in June from 52.2 in May, showing backlog levels grew at the slowest pace in six months. The index was below a high of 56.6 in February and a peak of 70.6 in May 2021 but well above a low of 37.5 in May 2023.

The ISM figures are based on responses from over 400 purchasing and supply executives from 18 industries, which are weighted according to each industry’s contribution to GDP. These data are diffusion indexes where a reading above 50 indicates expansion; below 50 indicates contraction. The ISM Manufacturing PMI is a composite index based on the diffusion indexes of five of the indexes (seasonally adjusted) with equal weights: New Orders, Production, Employment, Supplier Deliveries, and Inventories. The figures from the Institute for Supply Management can be found in Haver’s **USECON** database; further detail is found in the **SURVEYS** database. The expectations number is available in Haver’s **AS1REPNA** database.

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- ISM Mfg. PMI down slightly to 53.3 in June; sixth straight month above 50.
- Production (52.2) expands for the eighth consecutive mth.; new orders (56.0) for the sixth successive mth.
- Employment (49.7) contracts for the 33rd straight mth.; at the slowest contraction pace since Jan. ’25.
- Prices Index (73.0) at a four-month low, still indicating prices rising for the 21st consecutive mth.
- Exports (48.5) contract for the third time in four mths.; imports (52.9) continue to grow.

Economy in Brief

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