Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/031021b.jpg" width="353">
The U.S. Government budget deficit deepened to a record $374.2 billion in the fiscal year completed last month. That brought the deficit to 3.5% of GDP versus a peak deficit of 6.0% in FY &#39;83 and surpluses from FY &#39;98 through FY &#39;01.
The Federal government&#39;s deficit fell short of recent projections for a $455B deficit in &#39;03 due to sharp gains in individual and corporate tax receipts in September.
Net receipts for FY03 fell 3.8% versus last year. Individual tax payments fell 7.5% (roughly half the rate of decline in FY &#39;02) and corporate income taxes fell 11.0%. Social insurance contributions rose 2.0% and excise taxes rose 0.8%. 
Federal net expenditures rose 7.2% in FY &#39;03. Defense spending surged 16.0% versus a 14.5% gain in &#39;02. Growth in spending on health programs slipped to 11.6% from 14.3% in &#39;02. Spending on education also slowed to a still-strong 16.4% from 24.1%. Growth in Medicare outlays picked up to 8.0% from 6.2% though growth in Social Security outlays slowed to 4.0% from 5.4%. Interest expense fell 10.6% versus a 17.0% decline in FY &#39;02.
A report from the Federal Reserve Bank of San Francisco titled &quot;The Fiscal Problem of the 21st Century is available <a href="http://www.frbsf.org/publications/economics/letter/2003/el2003-27.html"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E1/@E106/@E10602/@E10602.HTM"> US Government Finance</a></th>
<th scope="col">Sept</th>
<th scope="col">Aug</th>
<th scope="col">Sept &#39;02</th>
<th scope="col">FY2003</th>
<th scope="col">FY2002</th>
<th scope="col">FY2001</th>
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<tbody>
<tr class="odd">
<td class="firstcol">Budget Balance</td>
<td>$26.4B</td>
<td>$-76.6B</td>
<td>$42.4B</td>
<td>$-374.2B</td>
<td>$-157.8B</td>
<td>$127.3B</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Revenues</td>
<td>$191.6B</td>
<td>$114.3B</td>
<td>-0.5%</td>
<td>-3.8%</td>
<td>-6.9%</td>
<td>-1.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Outlays</td>
<td>$165.3B</td>
<td>$190.9B</td>
<td>10.0%</td>
<td>7.2%</td>
<td>7.9%</td>
<td>4.2%</td>
</tr>
</tbody>
</table>
Weekly Chain Store Sales Stable 
by <a href="/comment/Moeller.html">Tom Moeller</a> October 21, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/031021a.jpg" width="353">
Chain store sales were about unchanged last week following the moderate dip during the week prior, according to the BTM-UBSW survey.
So far in October sales were down 0.4% from the September average which fell 0.8% versus August.
During the last five years there has been a 61% correlation between the year-to-year percent change in the BTM-UBSW measure of chain store sales and the change in non-auto retail sales less gasoline.
The BTM-UBSW retail chain-store sales index is constructed using the same-store sales reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.

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<th scope="col" class="firstcol"> <a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">BTM-UBSW (SA, 1977=100)</a></th>
<th scope="col">10/18/03</th>
<th scope="col">10/11/03</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
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<td class="firstcol">Total Weekly Retail Chain Store Sales</td>
<td>422.0</td>
<td>421.9</td>
<td>4.6%</td>
<td>3.6%</td>
<td>2.1%</td>
<td>3.4%</td>
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The U.S. Government budget deficit deepened to a record $374.2 billion in the fiscal year completed last month. That brought the deficit to 3.5% of GDP versus a peak deficit of 6.0% in FY '83 and surpluses from FY '98 through FY '01. [...]

U.S. Budget Deficit a Record in FY 2003

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/031020c.jpg" width="353">
The unemployment rate for September in Hong Kong fell to 8.3% from 8.6% in August. The reduction, however, was due to a decline the labor force. Employment actually declined by 0.25%..Data on the labor force and employment tend to be lagging indicators. This is especially the case in Hong Kong where the data are reported as the average of the three months ending in the quoted month. Thus the figures for September are averages for July, August and September.In July and August, Hong Kong was just beginning to recover from the outbreak of SARS (Severe acute respiratory syndrome). Tourist arrivals, which are a good indicator of the impact of SARS on the economy, were just beginning to increase in July and August from the depressed levels of the second quarter.

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<th scope="col" class="firstcol">&nbsp;</th>
<th scope="col">Sep 2003</th>
<th scope="col">Aug 2003</th>
<th scope="col">Sep 2002&nbsp;</th>
<th scope="col">M/M&nbsp; %</th>
<th scope="col">Y/Y&nbsp; % </th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
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<td class="firstcol">Labor Force (000)</td>
<td>3483.2</td>
<td>3505.7</td>
<td>3507.7</td>
<td>-0.64</td>
<td>-0.70</td>
<td>3487.2</td>
<td>3427.3</td>
<td>3374.3</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Employment</td>
<td>3195.6</td>
<td>3203.5</td>
<td>3248.0</td>
<td>-0.25</td>
<td>-1.61</td>
<td>3231.7</td>
<td>3252.8</td>
<td>3207.4</td>
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<td class="firstcol">&nbsp; Unemployment</td>
<td>287.6</td>
<td>602.2</td>
<td>259.7</td>
<td>-4.83</td>
<td>10.74</td>
<td>255.5</td>
<td>174.6</td>
<td>166.9</td>
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<td class="firstcol">Unemployment Rate (%)</td>
<td>8.3</td>
<td>8.6</td>
<td>7.4</td>
<td>-0.3</td>
<td>0.9</td>
<td>7.3</td>
<td>5.1</td>
<td>5.0</td>
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<td class="firstcol">&nbsp;</td>
<td>Aug 2003</td>
<td>Jul 2003</td>
<td>Aug 2002&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Tourist Arrivals (000)</td>
<td>1550.2</td>
<td>1283.8</td>
<td>1415.1</td>
<td>20.76</td>
<td>9.55</td>
<td>1653.1</td>
<td>1371.8</td>
<td>1305.6</td>
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The unemployment rate for September in Hong Kong fell to 8.3% from 8.6% in August. The reduction, however, was due to a decline the labor force. Employment actually declined by 0.25%..Data on the labor force and employment tend to be [...]

Unemployment Rate in Hong Kong Declines Due Partly to a Fall in the Labor Force

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/031020b.jpg" width="353">
The Conference Board reported that the Composite Index of Leading Economic Indicators fell 0.2% in September following four months of increase. The decline was slightly weaker than Consensus expectations for no change. The 0.4% increase in August was unrevised.
Gains amongst the leaders&#39; component series fell to 40%. The diffusion of the prior month&#39;s gain was revised up to 50% from 45%. The percentage of leading components rising over a six month period rose to 85% but the prior month&#39;s figure was revised to a still-high 70%.
Higher weekly hours and higher stock prices were the only two component series showing meaningful gain. Influences from the other leading series were modest except the money supply which subtracted 0.17%, the first decline since March.
The Leading index is based on eight previously reported economic data series and two that are estimated.
The coincident indicators rose 0.1%. Year to date the coincident indicators are up 0.6% (AR).
The ratio of coincident-to-lagging indicators surged as the lagging index fell due to lower C&amp;I loans and a weak CPI. The ratio is an indicator of excess relative to actual economic performance.
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.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM"> Business Cycle Indicators</a></th>
<th scope="col">Sept</th>
<th scope="col">Aug</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
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<td class="firstcol">Leading</td>
<td>-0.2%</td>
<td>0.4%</td>
<td>2.4%</td>
<td>2.1%</td>
<td>-0.9%</td>
<td>1.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.1%</td>
<td>0.0%</td>
<td>0.4%</td>
<td>-0.2%</td>
<td>-0.4%</td>
<td>3.4%</td>
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<tr class="odd">
<td class="firstcol">Lagging</td>
<td>-0.5%</td>
<td>0.0%</td>
<td>-2.6%</td>
<td>-4.4%</td>
<td>-1.3%</td>
<td>2.8%</td>
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The Conference Board reported that the Composite Index of Leading Economic Indicators fell 0.2% in September following four months of increase. The decline was slightly weaker than Consensus expectations for no change. The 0.4% [...]

Leading Indicators Fell

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/031017a.jpg" width="353">
Housing starts rebounded in September by 3.4%, almost exactly offsetting their August decline. At a 1.888 million annual rate, they stood just 2,000 off the 17-year high of 1.890 million reached in July. Forecasters underestimated this strength, anticipating that starts would remain close to the relatively lower July figure. Revisions to July and August figures were inconsequential.
Single family starts rose 3.1% m/m. The Midwest and West showed the largest increases and those in the South actually declined somewhat. 
Multi-family starts advanced 4.5%, last month, led by starts of 2-4 unit structures, i.e., townhouses. For all multi-unit structures, starts were up most in the Northeast, with small increases in the Midwest and South and some decline in the West.
Building permits have had the reverse monthly pattern from starts, as they rose an upwardly revised 5.6% in August and edged back down 2.2% in September. The backlog of homes authorized but not started was nearly steady at 178,100 in September (actual monthly amount, not seasonally adjusted or annualized) compared with 179,000 in August. This backlog is down slightly from its peaks in the spring, providing a slight hint that the housing market might be on the verge of slowing down. However, historically housing demand has sometimes firmed briefly after interest rates have begun to rise as home builders and buyers rush to capture low mortgage rate financing. So such a high volume of starts as occurred in September would not be a surprising response to the rise in rates over the summer.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E901/@E90101/@E90101.HTM">Housing Starts (000s, AR)</a></th>
<th scope="col">Sept</th>
<th scope="col">Aug</th>
<th scope="col">July</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
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<td class="firstcol">Total</td>
<td>1,888</td>
<td>1,826</td>
<td>1,890</td>
<td>4.3%</td>
<td>1,711</td>
<td>1,601</td>
<td>1,573</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Single-family</td>
<td>1,520</td>
<td>1,474</td>
<td>1,533</td>
<td>4.9%</td>
<td>1,364</td>
<td>1,272</td>
<td>1,232</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Multi-family</td>
<td>368</td>
<td>352</td>
<td>357</td>
<td>1.9%</td>
<td>347</td>
<td>330</td>
<td>341</td>
</tr>
<tr>
<td class="firstcol">Building Permits</td>
<td>1,860</td>
<td>1,901</td>
<td>1,800</td>
<td>3.2%</td>
<td>1,750</td>
<td>1,637</td>
<td>1,598</td>
</tr>
</tbody>
</table>
Housing Market Index Rose to Four Year High 
by <a href="/comment/Moeller.html">Tom Moeller</a> October 17, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/031017c.jpg" width="353">
The National Association of Home Builders (NAHB) reported that their Composite Housing Market Index rose for October to 72 (+14.3% y/y). That is the highest level since December 1999 and the monthly gain retraced all of a moderate September decline.
During the last fifteen years there has been a 68% correlation between the y/y change in the NAHB index and the change in new home sales.
The index of current market conditions for home sales jumped 8.2% m/m to 79 (14.5% y/y).
The index which measures expected home sales in six months rose 5.1% m/m to 82 (20.6 y/y).
Traffic of prospective buyers picked up and reversed half of a moderate decline in September.
The NAHB index is a diffusion index based on a survey of builders. Readings above 50 signal that more builders view conditions as good than poor.
Visit the National Association of Home Builders using this <a href="http://www.nahb.org">link</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S4/@S4.HTM">Nat&#39;l Association of Home Builders</a></th>
<th scope="col">Oct</th>
<th scope="col">Sept</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
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</thead>
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<td class="firstcol">Composite Housing Market Index</td>
<td>72</td>
<td>68</td>
<td>63</td>
<td>61</td>
<td>56</td>
<td>62</td>
</tr>
</tbody>
</table>
U.S. Consumer Sentiment Recovers Somewhat 
by <a href="/comment/Stone.html">Carol Stone</a> October 17, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/031017b.jpg" width="353">
The University of Michigan&#146;s consumer sentiment index picked up in early October, rising to 89.4 (1966Q1 = 100) from September&#39;s final 87.7. This early October move basically reversed the decline in September.
An improvement in Current Economic Conditions provided the primary support. This may have resulted from the better employment conditions reported for September or the better trend in the stock market or both. As seen in the accompanying graph, there is a fairly well defined relationship between the overall sentiment index and the movement in stock prices, about an 88% correlation over the past five years. Carrying the connection to the next link in the chain, sentiment further has maintained an 82% correlation with the year-on-year growth in real consumer spending over that same time span.
The Index of Consumer Expectations also rose, but much more modestly.
The University of Michigan survey is not seasonally adjusted.It is based on telephone interviews with 250 households nationwide on personal finances and business and buying conditions. The survey is expanded to a total of 500 interviews at month end.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM">University of Michigan</a></th>
<th scope="col">Early Oct</th>
<th scope="col">Sept</th>
<th scope="col">Aug</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
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<td class="firstcol">Consumer Sentiment</td>
<td>89.4</td>
<td>87.7</td>
<td>89.3</td>
<td>10.9%</td>
<td>89.6</td>
<td>89.2</td>
<td>107.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>102.2</td>
<td>98.4</td>
<td>99.7</td>
<td>10.6%</td>
<td>97.5</td>
<td>100.1</td>
<td>115.2</td>
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<td class="firstcol">&nbsp;&nbsp; Index of Consumer Expectations</td>
<td>81.2</td>
<td>80.8</td>
<td>82.5</td>
<td>11.1%</td>
<td>84.6</td>
<td>82.3</td>
<td>102.7</td>
</tr>
</tbody>
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Housing starts rebounded in September by 3.4%, almost exactly offsetting their August decline. At a 1.888 million annual rate, they stood just 2,000 off the 17-year high of 1.890 million reached in July. Forecasters underestimated [...]

Housing Starts Rebound in September

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/031016e.jpg" width="353">
The US Treasury today published its array of monthly data on foreign investors&#39; purchases and sales of &quot;long-term&quot; US securities (having maturity greater than one year) for August. Known as the &quot;TIC&quot; data for Treasury International Capital&quot;, this extensive collection of information on foreign participation in US capital markets is contained in Haver&#39;s USINT database in the section &quot;US International Investment Tables&quot;, shown by security type and country. In August, net foreign purchases of securities traded in US markets totaled $53 billion, down from July&#39;s $73.4 billion, but well above the $42.2 billion of August 2002.
Indeed, as seen in the graph, the volume of foreign purchases in US markets has climbed fairly persistently over the last 10 years, so that the monthly amounts in 2003 are largely without precedent. The graph also shows that this pattern is somewhat a mirror image of the US current account deficit, which has climbed fairly persistently over the last 10 years. Obviously, these security purchases do not account for all of the financing, but they have grown along with that deficit.
At the same time, these financial transactions are quite varied in both magnitude and mix even from month to month. As the table below shows, the reduction in total net purchases from July to August was largest in Treasury securities, no doubt part of the bond market sell-off that occurred during the summer. By contrast, the recovery in the stock market is apparent in the huge turnaround in foreign purchases of US stocks, from a net liquidation in July to the largest net increase since late 2001. Thus, market forces are interrelated with these capital flows and may be just as important a determinant of their size and direction as the economic reverberations from the current account.

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<th scope="col" class="firstcol">Net Foreign Purchases of Securities in US Markets (bil $)</th>
<th scope="col"> Aug 2003 </th>
<th scope="col">July 2003 </th>
<th scope="col">June 2003 </th>
<th scope="col">Aug 2002</th>
Monthly Average
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">2002</td>
<td>2001</td>
<td>2000</td>
</tr>
</tbody>
</table>
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<th scope="col" class="firstcol">Total</th>
<th scope="col"><center></center></th>
<th scope="col">53.0</th>
<th scope="col">73.3</th>
<th scope="col">90.7</th>
<th scope="col">42.2</th>
<th scope="col">47.9</th>
<th scope="col">41.8</th>
<th scope="col">36.7</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Treasuries</td>
<td><center></center></td>
<td>25.2</td>
<td>44.7</td>
<td>44.0</td>
<td>4.3</td>
<td>10.0</td>
<td>1.5</td>
<td>-4.5</td>
</tr>
<tr>
<td class="firstcol">Federal Agencies (mostly &quot;GSEs&quot;)</td>
<td><center></center></td>
<td>9.8</td>
<td>11.8</td>
<td>7.0</td>
<td>17.4</td>
<td>16.3</td>
<td>13.7</td>
<td>12.7</td>
</tr>
<tr class="odd">
<td class="firstcol">US Corporate Bonds</td>
<td><center></center></td>
<td>18.7</td>
<td>26.4</td>
<td>22.8</td>
<td>14.5</td>
<td>15.2</td>
<td>18.5</td>
<td>15.3</td>
</tr>
<tr>
<td class="firstcol">US Corporate Stocks</td>
<td>11.6</td>
<td>-7.9</td>
<td>10.3</td>
<td>4.6</td>
<td>4.2</td>
<td>9.7</td>
<td>14.6</td>
</tr>
<tr class="odd">
<td class="firstcol">Foreign Bonds</td>
<td>1.0</td>
<td>3.0</td>
<td>11.7</td>
<td>-1.7</td>
<td>2.4</td>
<td>2.5</td>
<td>-0.3</td>
</tr>
<tr>
<td class="firstcol">Foreign Stocks</td>
<td>-13.4</td>
<td>-4.7</td>
<td>-5.2</td>
<td>3.1</td>
<td>-0.1</td>
<td>-4.2</td>
<td>-1.1</td>
</tr>
</tbody>
</table>
</body>
</html>

The US Treasury today published its array of monthly data on foreign investors' purchases and sales of "long-term" US securities (having maturity greater than one year) for August. Known as the "TIC" data for Treasury International [...]

Foreign Purchases of U.S. Securities Smaller in August, but Still Large by Historical Standards

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/031016a.jpg" width="353">
The Consumer Price Index (CPI-U) rose 0.3% (2.3% y/y) in September. Consensus expectations were for a 0.2% gain.
Less food &amp; energy prices were tame, up 0.1% for the second month versus Consensus expectations for a 0.1% rise. The detail showed some incremental weakening in pricing power last month.
Tobacco prices fell 0.7% (-3.5% y/y). The CPI less food, energy &amp; tobacco rose 0.1% (1.3% y/y).
Prices of core consumer goods fell 0.4%, the most for any month since May. This price measure has been deflating since early 2001 and is down 3.7% since the peak. Prices for new vehicles fell 0.4% (-1.6% y/y) and prices for household furnishings &amp; operation also fell 0.4% (-2.3% y/y). Apparel prices rose 0.5% (-2.0%), all due to a rise in menswear prices.
Core services prices rose a modest 0.2% for the second month. Shelter prices ticked 0.1% (2.2% y/y) higher though medical care services prices rose 0.5% (4.4% y/y).Public transportation prices fell for the second month (2.2 y/y).Education &amp; communication prices rose just 0.1% (1.3% y/y) following 0.5% jumps in August and July.
Energy prices surged another 3.0% on the strength of a 6.3% (21.0% y/y) rise in gasoline prices. All of that gain in gasoline prices has been given back with a 6.4% decline so far this month. Fuel oil prices fell 1.9% (+13.3% y/y). Piped gas &amp; electricity prices ticked up 0.3% (9.5% y/y) following two months of decline.
The chained CPI which adjusts for shifts in consumer buying behavior rose 0.3% m/m for the second month. It is similar to the PCE price deflator. The core price measure rose 0.1%.
Analysis from the Federal Reserve Bank of San Francisco titled &quot;Improving the Way We Measure Consumer Prices&quot; can be found <a href="http://www.frbsf.org/publications/economics/letter/2003/el2003-24.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/USECON/@E8/@E801/@E80101/@E80101.HTM"> Consumer Price Index</a></th>
<th scope="col">Sept</th>
<th scope="col">Aug</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total&nbsp;</td>
<td>0.3%</td>
<td>0.3%</td>
<td>2.3%</td>
<td>1.6%</td>
<td>2.8%</td>
<td>3.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.1%</td>
<td>0.1%</td>
<td>1.2%</td>
<td>2.3%</td>
<td>2.7%</td>
<td>2.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Goods less Food &amp; Energy</td>
<td>-0.4%</td>
<td>-0.1%</td>
<td>-2.4%</td>
<td>-1.1%</td>
<td>0.3%</td>
<td>0.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Services less Energy</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.7%</td>
<td>3.8%</td>
<td>3.7%</td>
<td>3.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Energy</td>
<td>3.0%</td>
<td>2.7%</td>
<td>14.9%</td>
<td>-5.8%</td>
<td>3.7%</td>
<td>16.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Food &amp; Beverages</td>
<td>0.2%</td>
<td>0.3%</td>
<td>2.5%</td>
<td>1.8%</td>
<td>3.1%</td>
<td>2.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80113/@E80113.HTM"> Chained CPI: Total (NSA)</a></td>
<td>0.3%</td>
<td>0.3%</td>
<td>1.8%</td>
<td>1.3%</td>
<td>2.3%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.1%</td>
<td>0.0%</td>
<td>0.7%</td>
<td>1.8%</td>
<td>&nbsp;2.0%</td>
<td>1.4%</td>
</tr>
</tbody>
</table>
U.S. Industrial Production Rose As Expected 
by <a href="/comment/Moeller.html">Tom Moeller</a> October 16, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/031016c.jpg" width="353">
Industrial production rose 0.4% last month, as expected by the Consensus of economists. The previously reported 0.1% gain in August was revised to no change.
Output in the manufacturing sector surged 0.7% (-0.6% y/y), however the previously reported 0.2% decline in August was revised to -0.4%.
Output in selected high-technology industries surged another 1.4% (15.1% y/y). Output of computers and peripheral equipment jumped 2.0% (22.8% y/y) and output of semiconductors &amp; related equipment surged 3.1% (24.5% y/y). Output of communications equipment fell 1.7% (-3.6% y/y).
Excluding high-tech, factory output jumped 0.7% (-1.6% y/y) on the strength of a 6.6% pop in output of motor vehicles &amp; parts (5.0% y/y). Output of electrical equipment and appliances fell 0.5% (-2.8% Y/Y) and the previously reported 0.2% rise in August was revised to a 1.0% decline. Output of furniture fell 0.3% (-5.1% y/y) and output of non-durable goods ticked up 0.1% (-2.7% y/y).
Total capacity utilization rose slightly to 74.7% and capacity growth remained slow at 1.1% y/y.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EA/@EA.HTM"> Production &amp; Capacity</a></th>
<th scope="col">Sept</th>
<th scope="col">Aug</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Industrial Production</td>
<td>0.4%</td>
<td>0.0%</td>
<td>-0.5%</td>
<td>-0.8%</td>
<td>-3.5%</td>
<td>4.7%</td>
</tr>
<tr>
<td class="firstcol">Capacity Utilization</td>
<td>74.7%</td>
<td>74.5%</td>
<td>76.0%(9/02)</td>
<td>75.6%</td>
<td>77.3%</td>
<td>82.7%</td>
</tr>
</tbody>
</table>
Jobless Insurance Claims Fell Again 
by <a href="/comment/Moeller.html">Tom Moeller</a> October 16, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/031016b.jpg" width="353">
Initial claims for jobless insurance fell 4,000 to 384,000 last week. The prior week&#39;s decline was lessened slightly. Consensus expectations had been for claims of 385,000. Figures released next week will cover the October survey period for nonfarm payrolls.
The four-week moving average of initial claims fell to 390,750 (-5.4% y/y), the lowest level since early February.
Continuing claims for unemployment insurance rose 58,000 to 3,674,000 but the prior week&#39;s decline was deepened to 30,000.
The insured rate of unemployment held steady at 2.9%. The rate has averaged 2.9% since April.

<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">10/11/03</th>
<th scope="col">10/04/03</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>384.0</td>
<td>388.0</td>
<td>-7.0%</td>
<td>404.3</td>
<td>406.0</td>
<td>299.7</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>3,674</td>
<td>0.0%</td>
<td>3,575</td>
<td>3,022</td>
<td>2,114</td>
</tr>
</tbody>
</table>
U.S. Business Inventories Down 
by <a href="/comment/Moeller.html">Tom Moeller</a> October 16, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/031016d.jpg" width="353">
Total business inventories fell quite a bit more than expected (-0.4%) in August due to a huge decline in motor vehicles. Consensus expectations were for a 0.1% drop.
Retail inventories plummeted 0.8% as inventories of motor vehicles and parts dropped 2.0% (11.2% y/y). That was achieved by a 1.9% cut in vehicle output as reported by the Federal Reserve.
Non-auto inventories fell 0.1%, led lower by a 0.8% (1.3% y/y) decline in inventories at general merchandise stores. Inventories of furniture (5.4% y/y) and building materials (7.8% y/y) continued strong.
Overall business sales fell 0.2% m/m (3.4% y/y) due to a 1.8% decline (+1.6% y/y) in factory shipments.
The inventory-to-sales ratio was stable at the record low level of 1.36. 

<table border="0" cellspacing="0" width="100%">
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<thead>
<tr>
<th scope="col" class="firstcol"> <a href="http://www.haverselect.com/dlx/USECON/@ED/@ED06/@ED0601/@ED0601.HTM"> Business Inventories</a></th>
<th scope="col">Aug</th>
<th scope="col">July</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>-0.4%</td>
<td>-0.2%</td>
<td>1.9%</td>
<td>2.1%</td>
<td>-4.7%</td>
<td>5.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail</td>
<td>-0.8%</td>
<td>-0.1%</td>
<td>5.3%</td>
<td>7.6%</td>
<td>-2.9%</td>
<td>6.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Retail excl. Autos</td>
<td>-0.1%</td>
<td>0.2%</td>
<td>2.5%</td>
<td>2.5%</td>
<td>-1.2%</td>
<td>3.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale</td>
<td>-0.2%</td>
<td>0.0%</td>
<td>0.7%</td>
<td>0.4%</td>
<td>-4.9%</td>
<td>6.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>-0.2%</td>
<td>-0.4%</td>
<td>-0.7%</td>
<td>-1.8%</td>
<td>-6.1%</td>
<td>3.8%</td>
</tr>
</tbody>
</table>
Philadelphia Fed Index Up Big 
by <a href="/comment/Moeller.html">Tom Moeller</a> October 16, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/031016f.jpg" width="353">
The Philadelphia Fed&#146;s index of general business conditions rose strongly in October to 28.0 versus 14.6 in September. Consensus expectations were for a reading of 16.0.
During the last twenty years there has been a 65% correlation between the level of the Philadelphia Fed Business Conditions Index and quarterly growth in real GDP. The correlation with quarterly growth in factory sector industrial production has been 77%.
The business conditions index was at its highest level since July 1996, the improvement directionally consistent with yesterday&#39;s Empire State Manufacturing Survey.
Amongst the sub indexes, new orders jumped nearly 10 points m/m to its highest since 1996. Shipments (28.8) also leaped higher and the employment index (5.5) rose to its highest in over three years.
The business conditions index reflects a separate survey question, not the sub indexes.
A separate survey of expected business conditions in six months backpedaled to 55.5, reversing the improvement in 3Q.
The prices paid index was about stable at 22.3.
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/bos1003.html"> here</a> .

<table border="0" cellspacing="0" width="100%">
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<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">Oct</th>
<th scope="col">Sept</th>
<th scope="col">Oct &#39;02</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>28.0</td>
<td>14.6</td>
<td>-7.5</td>
<td>7.7</td>
<td>-17.2</td>
<td>8.3</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>22.3</td>
<td>22.5</td>
<td>18.6</td>
<td>12.2</td>
<td>-0.9</td>
<td>27.2</td>
</tr>
</tbody>
</table>
</body>
</html>

The Consumer Price Index (CPI-U) rose 0.3% (2.3% y/y) in September. Consensus expectations were for a 0.2% gain. Less food & energy prices were tame, up 0.1% for the second month versus Consensus expectations for a 0.1% rise. The [...]

CPI Up Moderately

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/031015e.jpg" width="353">
Labor market conditions showed some relative improvement in the UK in the three months centered on July. The unemployment rate held at 5.0%, the same as in the three months centered on April (the customary style of the UK Statistics Office monthly reports on the labor force) and down from 5.1% in the June period. Employment did edge down 25,000 from June, but that latter figure, 27.929 million, was the all- time highest number of people with jobs. Other data hint that employment should remain firm. The number of claims for the &quot;Jobseeker&#39;s Allowance&quot;, the so-called claimant count, fell 1,900 in the September period, extending its decline into a fourth month. Workers&#39; earnings rose 3.4% in the June-August quarter, encompassing a 2.9% rise in private sector earnings and 6.1% in the public sector. The total was 0.1% more than in the three months ended July and suggests a firming after some weakness during the spring. Both private and public sector wages are holding up, although most comes from that sizable increase in the public sector.
Historically, the UK was not particularly known for economic strength, but its current unemployment rate shows that it presently has the most favorable labor market conditions of any of the major economies. The 5.0% unemployment rate for the three months ended August compares with 5.2% in Japan, 6.2% in the US and 9.4% in Germany. The chart above indicates that unemployment in the UK has been less than that in Germany since the beginning of 1996.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">UK: Selected Labor Market Indicators</th>
<th scope="col">&quot;Aug&quot;&nbsp; (3&nbsp; mos ended Sept)</th>
<th scope="col">&quot;Jul&quot; &nbsp;(3&nbsp; mos ended Aug)</th>
<th scope="col">&quot;Jun&quot; &nbsp;(3 mos ended July)</th>
<th scope="col">Year Ago</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Unemployment Rate (%)</td>
<td>N.A.</td>
<td>5.0</td>
<td>5.1</td>
<td>5.2</td>
<td>5.2</td>
<td>5.1</td>
<td>5.4</td>
</tr>
<tr>
<td class="firstcol">Claimant Count (thous.)</td>
<td>933.1</td>
<td>939.1</td>
<td>945.3</td>
<td>945.3</td>
<td>946.8</td>
<td>970.1</td>
<td>1,088.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Labor Force Employment (thous.)</td>
<td>N.A.</td>
<td>27,918</td>
<td>27,921</td>
<td>27,674</td>
<td>27,690</td>
<td>27,499</td>
<td>27,300</td>
</tr>
<tr>
<td class="firstcol">Average Earnings Index: &quot;Headline Rate&quot; (% Change)</td>
<td>N.A.</td>
<td>3.4</td>
<td>3.3</td>
<td>3.7</td>
<td>3.5</td>
<td>4.6</td>
<td>4.6</td>
</tr>
</tbody>
</table>
</body>
</html>

Labor market conditions showed some relative improvement in the UK in the three months centered on July. The unemployment rate held at 5.0%, the same as in the three months centered on April (the customary style of the UK Statistics [...]

UK Unemployment Rate Lowest of Major Economies

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/031015a.jpg" width="353">
Retail sales fell a sight 0.2% last month. That was near Consensus expectations for no change. The surge in August sales was revised down slightly to 1.2% but July&#39;s gain was revised up to 1.4%.
Motor vehicle dealers&#39; sales fell 1.6% m/m in September as unit sales of light vehicles fell 12.0% m/m to 16.7 mil. (AR). Sales at gasoline service stations rose 0.3% (9.3% y/y).
Sales excluding motor vehicles and parts dealers added 0.3% last month to huge 1.2% gains in each of the prior three months, the August increase revised up from 0.7%. Consensus expectations were for a 0.4% rise in September.
Apparel and accessory stores surged 1.4% (8.7% y/y) and the previously reported large decline in August was revised to just -0.3%. Furniture, home furnishing and electronics store sales fell 0.3% (7.2% y/y) following an unrevised 1.0% August gain. Sales at general merchandise stores added 0.3% (7.1% y/y) to huge gains in the prior four months.
Sales of building materials jumped 1.9% (11.4% y/y), the third large m/m gain in the last four months. The initial report of a 0.2% decline in August sales was revised to a 0.5% gain.
Another source for the large upward revision to nonauto retail sales in August was sales at food services &amp; drinking places which now show a 2.0% increase versus 1.4% reported initially. These sales fell 1.4% last month.

<table border="0" cellspacing="0" width="100%">
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<tr>
<th scope="col" class="firstcol">&nbsp;</th>
<th scope="col">Sept</th>
<th scope="col">Aug</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/usecon/@ED/@ED04/@ED0401/@ED0401.HTM"> Retail Sales &amp; Food Services</a></td>
<td>-0.2%</td>
<td>1.2%</td>
<td>7.5%</td>
<td>3.1%</td>
<td>2.9%</td>
<td>6.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Excluding Autos</td>
<td>0.3%</td>
<td>1.2%</td>
<td>7.2%</td>
<td>3.7%</td>
<td>2.9%</td>
<td>7.4%</td>
</tr>
</tbody>
</table>
Empire State Index Surged in October 
by <a href="/comment/Moeller.html">Tom Moeller</a> October 15, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/031015b.jpg" width="353">
The Empire State Index of General Business Conditions for October jumped unexpectedly to the highest level in the index&#39;s brief two year history. The NY Fed&#39;s Manufacturing Survey indicated that the index rose to 33.70 this month versus Consensus expectations for a decline to 14.0.
Both the new orders and shipments indexes rose sharply to record levels in October. Employment also turned sharply higher with the first meaningfully positive reading since June 2002.
The index of prices paid reversed most of the September gain and fell to 6.86 from 15.60.
The survey includes measures of expectations for business conditions six months ahead. The October index rose to its highest level and expectations for capital expenditures also jumped to the highest level since September 2002.
The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. Participants from across the state in a variety of industries respond to a questionnaire and report the change in a variety of indicators from the previous month. Respondents also state the likely direction of these same indicators six months ahead. April 2002 is the first report, although survey data date back to July 2001.
Like the Philadelphia Fed Index of General Business Conditions, the Empire State Business Conditions Index reflects answers to an independent survey question, not the components.
For more on the Empire State Manufacturing Survey, including methodologies and the latest report, click <a href="http://www.newyorkfed.org/research/regional_economy/empiresurvey_overview.html"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S511/@S511.HTM"> Empire State Manufacturing Survey</a></th>
<th scope="col">Oct</th>
<th scope="col">Sept</th>
<th scope="col">Y/Y</th>
<th scope="col">2002</th>
<th scope="col"> 2001</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Business Conditions (diffusion index)</td>
<td>33.70</td>
<td>18.35</td>
<td>-13.75</td>
<td>7.10</td>
<td>-13.02</td>
</tr>
</tbody>
</table>
Mortgage Applications Plummet 
by <a href="/comment/Moeller.html">Tom Moeller</a> October 15, 2003


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/031015c.jpg" width="353">
The index of mortgage applications compiled by the Mortgage Bankers Association plunged 20.5% last week to the lowest level since late August.
Purchase applications fell 18.6% w/w to the lowest level since March. The decline pulled the level in early October down 2.5% versus September.
During the last ten years there has been a 55% correlation between the y/y change in purchase applications and the change in new plus existing home sales.
Applications to refinance fell 22.1% w/w and more than gave back the prior week&#39;s increase. Applications to refinance are down nearly two-thirds y/y.
Interest rates on a conventional 30-Year mortgage held steady w/w at 6.10%. The effective rate on a 15-year mortgage also was steady at 5.47%.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org"> here</a>.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM"> MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">10/10/03</th>
<th scope="col">10/03/03</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>649.6</td>
<td>817.3</td>
<td>799.7</td>
<td>625.6</td>
<td>322.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>359.0</td>
<td>441.1</td>
<td>354.7</td>
<td>304.9</td>
<td>302.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>2,340.1</td>
<td>3,005.5</td>
<td>3,388.0</td>
<td>2,491.0</td>
<td>438.8</td>
</tr>
</tbody>
</table>
</body>
</html>

Retail sales fell a sight 0.2% last month. That was near Consensus expectations for no change. The surge in August sales was revised down slightly to 1.2% but July's gain was revised up to 1.4%. Motor vehicle dealers' sales fell 1.6% [...]

Retail Sales Fell Slightly, Excl. Autos Firm

PMIs showing widespread revival of global economy

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

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Tian Yong Woon

In this week's Letter, we examine the underbelly of the AI boom, the risks that sit beneath its optimism. Start with the public mood: American concern about AI has grown alongside adoption over the past three to four years (chart 1). Those worries span mass job displacement, misuse of top-end models by bad actors, and fears of being left behind. The first of these is already surfacing: in June, AI was again the most cited reason for announced US layoffs, with year-to-date AI-linked cuts above 100,000 (chart 2). Technology led all sectors in overall cuts, though the data do not isolate how many were AI-driven. Among those hit, the young are arguably the most exposed to these labour effects. They enter a labour pool swollen by displaced professionals, just as AI masters the entry-level tasks where they would start. India and Indonesia illustrate the stakes on youth NEET, the share not in education, employment, or training, both above 20% and among Asia's highest (chart 3). Beyond the labour market, the same optimism reshapes asset prices. The rally has lifted AI-related valuations to historic highs and concentrated a few names in cap-weighted indexes (chart 4). That raises correlation and the risk of a sharper index fall should the rally unravel. The same concentration runs through economies via exports, from Taiwan's advanced chips to South Korea's memory (chart 5). Its footprint is physical too, and cuts both ways: data-centre investment has lifted growth in Johor, Malaysia (chart 6) while straining local power and water. None of this argues against riding the AI wave, which still promises real productivity and welfare gains. Rather, these are caveats that investors and policymakers must keep in view, since the story is not all upside.

**AI-related concerns**
AI adoption has exploded over the past three to four years, and Americans' concerns have risen alongside it (chart 1). That is understandable, given how advanced and broad AI's proven applications have become. They now span everyday tasks and subject-specific work across fields such as finance and production, as well as tech and development, the sector AI was born in. Major concerns run from mass AI-induced job displacement to a more recent fear, that top-end models fall into the wrong hands and are used by bad actors. A further worry is distributional: AI advances are powerful and could deliver leaps in productivity, yet they may also leave many people behind. Those most exposed include workers already displaced from their jobs and people facing scarcer basic resources as AI demand competes for them. Others simply lack equitable access to AI tools or their benefits.

260713T1.jpg

**AI-driven job displacement**
Some of the fears US workers first had about AI-driven job displacement are already playing out. In June, AI was again the most cited reason for announced job cuts in the US (chart 2). That pushed year-to-date job cuts attributed to AI above 100,000, more than half of all AI-tagged cuts since AI became a selectable reason in 2023. The data come from the latest survey by Challenger, Gray & Christmas. This likely reflects AI's disproportionately heavy impact on certain industries such as technology, which again led all sectors in cuts. At the same time, announced hiring plans stayed subdued, leaving laid-off workers with limited opportunities to find new roles. All of this is occurring even as market valuations remain elevated on the broader wave of AI optimism.

260713T2.jpg

**AI and youth unemployment**
Arguably among those bearing the brunt of these labour-related effects are the youth. Many have graduated on a curriculum built largely for a pre-AI era. They now enter a labour pool swollen by experienced professionals whom AI has displaced. At the same time, AI is proving especially capable at the entry-level tasks on which young workers usually start. An elevated youth unemployment rate only intensifies the competition young people face for gainful employment. On the broader NEET measure, which also captures youth who are neither working nor studying, India and Indonesia stand out. On the latest available WDI data, both have youth NEET rates above 20%, among the highest in Asia and above the global average (chart 3). Should employers in these economies adopt AI aggressively across processes and production, including physical AI such as humanoid robots, the problem could worsen. Yet firms that stay purely labour-intensive risk losing out to rivals using more efficient, and perhaps cheaper, AI-driven methods.

260713T3.jpg

**Concentration risk**
The recent wave of AI optimism has pushed the equity valuations of major AI developers and AI-related goods producers to historically high levels. These gains are partly backed by strong earnings and upbeat forward guidance. Most major indexes are weighted by market capitalisation, so a counter's weight tracks its price. As these counters have outperformed their peers (chart 4), their index weight has risen close to mechanically, when holding the number of shares constant. This raises concentration risk, since a small group of counters now carries more of the index and moves it more closely. So, if the rally in these counters were to unravel deeply, it would drag the broader index down more heavily with it.

260713T4.jpg

AI-related concentration risk is not confined to equity indexes; it also shows up in the growth of major economies. In Asia, that risk usually runs through a country's exports. Take Taiwan, the world's largest advanced semiconductor exporter, as an example. As chart 5 shows, its recent export growth has come more than entirely from integrated circuits and from infocomm and audiovisual equipment. Other goods categories have often contributed negatively in recent months. This is good news for the Taiwanese economy, which sits right at the centre of the global AI boom. Yet it is also a source of concentration risk, should AI-related goods demand collapse or substantial alternative supply emerge elsewhere. A similar story applies to South Korea, through its role in supplying high-end memory chips.

260713T5.jpg

**Data centres, energy, and water**
Finally, rapidly advancing AI promises major productivity gains and broad improvements to daily life. Yet AI infrastructure rests on resource-intensive inputs: the energy needed for data centre compute, and the water needed to cool those centres. Both may deprive real people of the very resources they need to survive. One recent hotspot is Malaysia, which has courted a wave of foreign direct investment to expand its data centre footprint in the state of Johor. These capital inflows are welcome, and have lifted state-level growth through the construction sector (chart 6). But they have also raised concerns about straining local grids and water supplies, possibly leaving less for residents. Among estimates, a recent one puts data centres at around 40% of Johor's electricity demand by 2035. That is pressuring the state to expand generation capacity and grid access to match the data centre pipeline already in place. Its neighbour Singapore faced similar strains earlier, and has since repositioned itself as a hub for the most advanced and efficient data centres, partly because of its severe land constraints. 

260713T6.jpg

Asia

Economic Letter from Asia: The AI Underbelly

Robert Brusca

260714E.jpg

Industrial output in Norway fell by 1% in May after rising by 0.6 in April and falling by 1.1% in March. The seesaw act for output continues. Over broader horizons, however, output is falling. It falls by 0.1% over 12 months, falls at a 1.1% annual rate over six months, and falls at a 6.2% annual rate over three months, giving us a clear sequential trend toward falling and decelerating output. Utilities output has chaotic trends, as do mining and quarrying; however, manufacturing shows a clear trend toward output acceleration, with a 2.1% output increase over 12 months, a 2.6% annual rate rise over six months, and a 9% annual rate increase over three months.

Manufacturing sectors show consumer goods output increasing in May, also showing secular acceleration from 12 months to six months to three months. Durable goods, however, are the fly in the ointment, with output up 2.2% over 12 months, accelerating over six months, and then dropping at a 20.4% annual rate over three months. However, consumer nondurables show growth and acceleration, with a 12-month gain of 1.8%, rising to a 3.6% annual rate increase over six months and a 10.9% annual rate increase over three months. Intermediate goods output trends return to more difficult times and show declines over 12 months, six months, and three months, but not a clear path of deceleration. Capital goods output is up 5.4% over 12 months and at an 8.5% annual rate over three months, but there is an intervening soft spot with output up at only a 3.4% annual rate over six months.

Against this background, inflation in Norway showed solid increases in May, rising by 0.2% overall and by 0.3% for the core HICP. However, sequentially inflation gains 3% over 12 months, rises at a 3.8% annual rate over six months, and then backs down to a 1.2% annual rate over three months. The core HICP is steadier, with a 3.4% gain over 12 months, rising to a 3.8% annual rate over six months, and then backing down to 3.2% at an annual rate over three months. That's a set of growth rates that are more stable than either accelerating or decelerating.

In the quarter-to-date (QTD) basis, industrial production is falling 4.6%; this is two months into the second quarter. On the other hand, manufacturing output is rising QTD at a 4.9% annual rate, with consumer nondurables showing strong positive growth along with intermediate goods output. There is a solid gain of 3.1% at an annual rate from capital goods. The QTD inflation trends remain somewhat mixed, with a weak headline showing a 1.6% annual rate, against a core HICP at a 3.4% annual rate rise, the latter gain being well in step with its sequential results.

The far right-hand column compares industrial production over the broad period from just before COVID (in January 2020) looking at the ratio of the level of output in May 2026 to its index value in January 2020. Remember that IP data are inflation-adjusted, so these are real data. Over this span, industrial production excluding construction is up by approximately 10%, with utilities output up at about 21%, mining and quarrying up about 5%, and manufacturing up a little more than 7%. This is a 5½-year period. Consumer goods output is up by 2.7%, led by consumer nondurables which rise 4.1% on the period and against durable goods output where there is a decline of about 13% on that timeline. Intermediate goods output drops slightly on the timeline by less than half a percentage point, while capital goods output is up at a solid and strong 23% gain. Looking at prices over the same period, the headline HICP is higher by 27% while the core is higher by 24%.

The weakened output shows the stresses and strains of the period, with weak gains in place over the last 5½ years and with the consumer showing considerable wear and tear, leaving consumer goods output lower on balance over this 5½-year span. It hasn't been such a bad time for capital goods, where output rose by 23% over the period. Inflation got out-of-the-box and grew quite strongly. The headline HICP grew by 27% at a time when sticking to its target would have implied a gain in the price level of only 11.5%.

**Ongoing overshooting**
Even now central banks are trying to decide how to come to grips with the inflation pressures from that. Pressures continue to linger and threaten the economies. Of course, there are some new factors in place, but that's the nature of inflation: if it's not one thing, it's something else. And failing to respond to the one thing means that you're going to get hit even worse when it becomes something else. This is the lesson the central banks haven't learned during this period. 

**Have central banks learned their lesson?**
Noting that inflation is over target and then forecasting that it's going to come back down to target over some period ahead puts the inflation performance at risk to whatever happens between now and the end of that period ‘ahead.’ If that forecast isn't perfectly right and if there's something else that disturbs the path of prices, what will happen is that an inflation that is already over the top of the target will push even farther over the top of the target and the dilemma faced by the central bank will become even worse. This is why kicking the can down the road generally is not a very good strategy, but it's one that virtually all the central banks pursued in the wake of COVID. So, will central bankers come to see inflation that is here and now as a here-and-now problem to be addressed here and now, or as a candidate for tomorrow land? The ECB seems to be changing, and the Fed has formed task forces. What about Norway and the rest of the world? Norway did push its target rate up as the ECB hiked. But what is its plan?

260713.jpg

Norway

Norwegian IP Struggles, but Manufacturing Shows Some Strength

260710E.jpg

Manufacturing output in the countries of the European Monetary Union continues to underperform. The median change for the 11 countries reporting on the table is a 0.5% decline in May following a 0.3% increase in April. However, only 41.7% of the reporters are accelerating in May, compared to 25% in April, although in March over half of the reporters had showed some acceleration, with output at 61.5%.

In May, of these eleven early reporters, seven showed month-to-month declines in output. This compares to four showing declines in April and four showing declines in March.

**Sequential trends**
Over 12 months, output is declining in four of these eleven countries: Germany, Luxembourg, Ireland, and Portugal. Over six months, output declines in five of the eleven countries. Over three months, output declines in four of the eleven countries. Over these broader sequential periods, output is increasing in most cases; only one country, Ireland, shows consistent declines in output over three months, six months, and 12 months. However, among EMU countries, only Italy shows output expanding on all three timelines, although Sweden, an EU member country, also shows output increasing in all three periods.

Amid the output weakness in May, the quarter-to-date calculation for industrial production growth is also broadly weak. In May, seven of the eleven quarter-to-date changes in industrial production are negative. Positive results, increases in the quarter-to-date, are registered by Germany, Luxembourg, Greece, and Portugal.

The ranking of the year-over-year growth rates shows seven countries with output growth rate rankings below 50%, marking them as below their respective medians. The comparisons for output growth are taken back to 2006, a period of about 20 years.

Four EMU countries rank above their twenty-year medians: France, Italy, Luxembourg, and Greece.

The snapshot of industry in the monetary union is consistent, showing little momentum, little strength, and relatively low rankings for current growth rates; only a minority of reporters show an acceleration in growth in May compared to April. With the situation in the Strait of Hormuz deteriorating again, the outlook for industrial production has to remain guarded.

260710.jpg

Europe

Industrial Sector Remains Under Pressure in EMU

Andrew Cates

**Growth Surprises Continue to Underpin Equity Resilience**
Global equity markets have proved remarkably resilient in recent weeks, shrugging off intermittent bouts of geopolitical and policy uncertainty to grind higher. Chart 1 below helps explain why: it tracks the relationship between global growth-versus-inflation surprises and world equity markets, and on that measure the recent run of global growth data has continued to surprise on the upside relative to inflation outturns — a combination that has historically been supportive for risk assets. Whether that resilience persists will depend on whether the growth-surprise advantage evident in the chart below can be sustained in the face of the inflationary pressures explored below.

260709Z1.jpg

**PMIs Confirm a Broadly Solid Global Expansion**
This week's final composite PMI readings for June reinforced the broader impression of resilient global growth. As chart 2 below shows, most major economies posted readings comfortably in expansionary territory, with India continuing to lead the pack and the US not far behind. Even the laggards in the sample are hovering close to the expansion threshold rather than falling decisively below it, suggesting stabilisation rather than outright contraction (and with the UK a notable exception).

260709Z2.jpg

**Inflation Surprises Are Creeping Back, and Bond Yields Are Taking Notice**
The US growth picture painted by Haver's surprise indices broadly echoes the message from the global PMI data. Chart 3 below shows the combined growth-and-inflation surprise index drifting higher this week, and closer inspection suggests growth is doing most of that work, with activity data continuing to outperform expectations. That is, on the face of it, good news. But it has not stopped bond markets from taking notice: short-dated Treasury yields have remained elevated in recent weeks, as stronger growth keeps alive the possibility that the Federal Reserve holds rates higher for longer or even lifts them in coming weeks.

260709Z3.jpg

**Supply Chains Are Tightening** 
Latest data show that global supply chain pressures tightened by less in June than they had the month before, likely reflecting the easing of Middle East tensions through much of the period. Chart 4 below shows that pressures troughed in the middle of last year and have been building gradually since, though June's slower pace of tightening suggests that easing had started to feed through. Still, today's flare-up threatens to undo that improvement, particularly if it affects shipping routes or energy flows through the region once again.

260709Z4.jpg

**Extreme Weather: An Old Supply-Side Risk Returns**
Geopolitics is not the only source of supply-side risk currently in play. Large parts of Europe have been gripped this week by another intense and prolonged heatwave, with temperatures in several major cities running well above seasonal norms. Extreme heat of this kind carries real economic costs: it depresses labour productivity, particularly in outdoor and manufacturing-adjacent sectors, strains electricity grids as air-conditioning demand spikes, and can disrupt agricultural output and river-based transport when water levels fall. Episodes like this have become more frequent in recent years, and while any single heatwave rarely shifts the macro picture on its own, the cumulative effect of more frequent and more severe weather events could start showing up in productivity and inflation data across the advanced economies. It is a reminder that the supply side of the global economy faces structural as well as cyclical challenges, and that climate-related disruption deserves a permanent place alongside geopolitics and demographics in any assessment of medium-term inflation risk.

260709Z5.jpg

**AI Investment: The Other Side of the Supply Equation**
Set against these supply-side headwinds is a genuinely positive structural development: the extraordinary scale of private investment now flowing into artificial intelligence. Chart 6 below shows just how sharply that investment has grown in recent years, reaching a fresh high last year. If even a fraction of that investment translates into genuine productivity gains, it could provide a meaningful long-run offset to the energy, climate and geopolitical constraints highlighted elsewhere in this week's charts. The scale of the bet now being placed on AI is large enough that it is beginning to show up in aggregate investment and capital expenditure data across the advanced economies, and it is likely to remain one of the defining structural themes shaping the global growth outlook over the remainder of this decade.

260709Z6.jpg

Global markets head into this week’s closing stages digesting a mixed set of signals. Last week's US non-farm payrolls report undershot expectations, adding to questions about the durability of the US labour market even as broader activity data have continued to hold up well. Compounding that picture, news broke today of renewed instability in the Middle East, reintroducing a geopolitical risk premium into markets just as investors had begun to look past it. Global equity markets have nonetheless remained resilient, continuing to track the broadly encouraging tone of incoming activity data (chart 1). That resilience was reinforced by a solid set of global PMIs across most major economies over the past few days (chart 2). Haver's surprise indices tell a similar story of positive growth momentum in the US, but with an important caveat: incoming inflation data have also been surprising to the upside, driven largely by higher oil prices (chart 3). These inflation risks could persist moreover, as global supply chain pressures have picked up in recent months and today's flare-up in the Middle East threatens to add further strain (chart 4). The world economy remains vulnerable to other supply-side shocks too, such as the extreme heat gripping much of Europe this week (chart 5). Still, on the other side of the ledger the enormous scale of investment now flowing into artificial intelligence could be a genuine source of supply-side potential (chart 6).

<iframe data-testid="embed-iframe" style="border-radius:12px" src="https://open.spotify.com/embed/episode/0dl4LKZaL1oTC5UPIaqrA9?utm_source=generator&si=7aa69345dbfd4ac4" width="100%" height="152" frameBorder="0" allowfullscreen="" allow="autoplay; clipboard-write; encrypted-media; fullscreen; picture-in-picture" loading="lazy"></iframe>

Charts of the Week: Growth Holds Firm

Winnie Tapasanun

260709F57.jpg

260709G57.jpg

Existing home sales unexpectedly fell 2.4% m/m (+2.8% y/y) to 4.09 million units (SAAR) in June, the first monthly decline since March, following an upwardly revised 3.7% increase to 4.19 million in May (previously +3.2%; 4.17 mil.), according to the National Association of Realtors (NAR). The Action Economics Forecast Survey had expected June sales of 4.20 million units. Sales remained 36.4% below a high of 6.43 million in January 2022 and 38.0% below a peak of 6.60 million in January 2021. The June decline coincided with a rise in the average 30-year fixed mortgage rate to 6.49% in June, the highest since August 2025, after increasing to 6.44% in May, according to Freddie Mac. The sales figures are based on closings of sales contracts signed over the past couple of months.

Existing single-family home sales fell 2.4% (+3.3% y/y) to 3.73 million units in June, the first m/m fall in three months, following a 4.1% gain to 3.82 million in May, remaining 34.6% below a high of 5.70 million in January 2022. Sales of condos and co-ops decreased 2.7% (-2.7% y/y) to 360,000 in June, the lowest level since May 2025, after being unchanged m/m for the third successive month at 370,000, remaining 50.7% below a high of 730,000 in January 2022.

Regionally, June existing home sales declined m/m in all regions except the Northeast. Sales in the South dropped 3.6% (+3.8% y/y) to 1.89 million in June, a three-month low, after a 3.2% rise in May, and sales in the Midwest slid 3.0% (+2.1% y/y) to 980,000 following a 7.4% May advance; both posted the first m/m decrease in three months. Sales in the West fell 1.3% (+2.8% y/y) to 740,000, the lowest level since January, after being flat m/m at 750,000 in May. In contrast, sales in the Northeast increased 2.1% (0.0% y/y) to 480,000 after a 4.4% May gain. Notably, the South remained the dominant region, accounting for 46.2% of total U.S. existing home sales.

The median price of all existing homes (NSA) rose 2.2% (1.8% y/y) to $440,600 in June, the fifth consecutive m/m rise, on top of an upwardly revised 3.3% increase to $431,200 in May ($429,300 previously). Prices were 22.1% above a low of $360,800 in January 2023. The median price of an existing single-family home climbed 2.3% (1.8% y/y) to $446,400 in June, the fifth straight m/m increase, after a 3.4% advance to $436,400 in May. The median price of condos and co-ops, up for the sixth time in seven months, grew 0.6% (1.6% y/y) to $380,000 following a 1.0% May gain to $377,800. Regionally, overall prices rose m/m and y/y in June in the Northeast (+5.6%; +3.9% y/y), Midwest (+2.1%; +2.7% y/y), South (+1.0%; +0.9% y/y), and West (+0.8%; +0.9% y/y). All these price series were at their record highs.

Inventories of homes for sale fell m/m in June for the first time since December. The number of existing homes for sale (NSA) declined 0.6% (+1.3% y/y) to 1.56 million units following an upwardly revised 4.7% May rise to 1.57 million (the highest level since November 2019). The supply of homes on the market at the current selling rate (NSA) increased to 4.6 months in June from 4.5 months in May and April, matching the highest level since August 2025. A record low in supply of 1.6 months was in January 2022.

The data on existing home sales, prices and affordability are compiled by the National Association of Realtors. The data on single-family home sales extend back to February 1968. Total sales and price data and regional sales can be found in Haver's **USECON** database. Regional price and affordability data and national inventory data are available in the **REALTOR** database. Mortgage interest rates can be found in the **WEEKLY** database. The expectations figure is from the Action Economics Forecast Survey, reported in the **AS1REPNA** database.

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- June sales -2.4% m/m to 4.09 mil., first drop in three mths.; +2.8% y/y, third straight y/y rise.
- Sales m/m down in the South (-3.6%), Midwest (-3.0%), and West (-1.3%); up in the Northeast (+2.1%).
- Sales y/y up in all regions except the Northeast w/ a flat reading.
- Median sales price +2.2% (+1.8% y/y) to $440,600, a record high.
- Unsold inventory -0.6% (+1.3% y/y) to 1.56 mil. units, first m/m decline since Dec.; 4.6 months' supply, highest since Aug. ’25.