Tom Moeller

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Real gross domestic product increased 3.5% (AR, 3.0% y/y)
during Q3'18, unrevised from the advance estimate. It followed a 4.2% rise
during the second quarter. A 3.6% advance had been expected in the Action
Economics Forecast Survey.

Accompanying the report was the initial indication of
after-tax corporate profits, which rose 3.3% (19.4% y/y) including adjustments
for inventory valuation and depreciation. The rise followed 2.1% growth in the
second quarter. Profits without inventory &amp; depreciation allowances rose
0.7% (5.9% y/y) following a 3.3% Q2 increase. Domestic nonfinancial sector
earnings grew 5.1% (15.8% y/y) but financial sector earnings eased 1.7% (-9.0%
y/y). Foreign sector profits increased 3.7% (8.7% y/y).

Growth in domestic final sales of 3.1% (3.3% y/y) was
unrevised. Personal consumption expenditures was lessened to 3.6% (3.0% y/y)
from 4.0%. Spending of durable goods was reduced to 3.9% (5.6% y/y) from 6.9% as
motor vehicle purchases fell 1.5% (+1.6% y/y) instead of rising modestly.
Recreational vehicle purchases growth was reduced to 9.1% (9.4% y/y) and
spending growth on home furnishings of 6.8% (6.5% y/y) was revised slightly
lower. Nondurable goods purchases surged 5.3% (3.3% y/y) which was
little-revised. Clothing purchases strengthened 11.2% (5.3% y/y), the quickest
growth since Q4'05, and food &amp; beverages expenditures rose an improved 3.8%
(3.7% y/y). Gasoline &amp; fuel oil buying declined 1.2% (-0.4% y/y). Spending
on services improved a little-revised 3.1% (2.4% y/y). It remained the quickest
growth since early 2015. Outlays at restaurants surged 7.0% (4.2% y/y) which
followed an 8.1% Q2 rise. Together these growth rates are the strongest in 25
years. Health care outlays increased 4.2% (2.5% y/y) and financial services
insurance rose 1.0% (0.4% y/y). Housing &amp; utilities outlays gained 1.1%
(1.5% y/y) but recreation spending eased 0.2% (+0.9% y/y).

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Government sector spending also was reduced to 2.6% (2.3 y/y)
from 3.3%. Federal government outlays grew a steady 3.5% both q/q and y/y.
National defense spending strengthened 4.9% and the 4.2% y/y increase was the
strongest since 2009. Outlays by state &amp; local governments grew a
strengthened 2.0% (1.5% y/y).

Countering the downward revisions was strengthened 2.5%
growth (6.8% y/y) in business fixed investment, initially estimated at 0.8%.
Structures investment is shown to have eased a lessened 1.7% (+6.8% y/y).
Industrial equipment spending advanced 9.8% (4.6% y/y), while information
processing equipment investment grew a strengthened 7.4% (9.7% y/y).
Transportation equipment expenditures declined 3.9% (+5.2% y/y). Investment in
intellectual products was lessened to 4.3% (7.3% y/y).

The fall in residential investment was lessened to 2.6%
(+0.8% y/y) from -4.0%. It remained the third straight quarter of decline.

The chain type GDP prices index was unrevised at an expected
1.7% (2.3% y/y), following a 3.0% increase. The 1.5% rise in the PCE price index
was the weakest in a year, but the business fixed investment price index
remained firm at 1.5% (1.2% y/y), the quickest growth in roughly four years. The
residential investment price index increased 3.6% (5.7% y/y), roughly half the
growth during the prior two quarters.

The GDP figures can be found in Haver's USECON and USNA
database. USNA contains virtually all of the Bureau of Economic Analysis' detail
in the national accounts. Both databases include tables of the newly published
not seasonally adjusted data. The Action Economics consensus estimates can be
found in AS1REPNA.

The Federal Reserve's Framework for Monitoring Financial Stability is the title of today's speech by Fed Chair Jerome H. Powell.
It can be found <a href="https://www.federalreserve.gov/newsevents/speech/powell20181128a.htm">here</a>.

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	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 
 <tr>
 <th class="firstcol" scope="col" ><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM" ;>Chained
 2012 $ (%, AR</a>)</th>
 <th scope="col" >Q3'18 (Second Estimate)</th>
 <th scope="col" >Q3'18 (Advance Estimate)</th>
 <th scope="col" >Q2'18</th>
 <th scope="col" >Q1'18</th>
 <th scope="col" >Q3'18 Y/Y</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 <tbody>
 <tr>
 <td class="firstcol" >Gross Domestic Product</td>
 <td >3.5</td>
 <td >3.5</td>
 <td >4.2</td>
 <td >2.2</td>
 <td >3.0</td>
 <td >2.2</td>
 <td >1.6</td>
 <td >2.9</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Inventory Effect</td>
 <td >2.3</td>
 <td >2.1</td>
 <td >-1.2</td>
 <td >0.3</td>
 <td >0.1</td>
 <td >0.0</td>
 <td >-0.5</td>
 <td >0.3</td>
 </tr>
 <tr>
 <td class="firstcol" >Final Sales</td>
 <td >1.2</td>
 <td >1.4</td>
 <td >5.4</td>
 <td >1.9</td>
 <td >2.9</td>
 <td >2.2</td>
 <td >2.1</td>
 <td >2.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Foreign Trade Effect</td>
 <td >-1.9</td>
 <td >-1.8</td>
 <td >1.2</td>
 <td >0.0</td>
 <td >-0.4</td>
 <td >-0.3</td>
 <td >-0.3</td>
 <td >-0.8</td>
 </tr>
 <tr>
 <td class="firstcol" >Domestic Final Sales</td>
 <td >3.1</td>
 <td >3.1</td>
 <td >4.0</td>
 <td >1.9</td>
 <td >3.3</td>
 <td >2.5</td>
 <td >2.3</td>
 <td >3.3</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" colSpan="9" >Demand Components</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Personal Consumption Expenditure</td>
 <td >3.6</td>
 <td >4.0</td>
 <td >3.8</td>
 <td >0.5</td>
 <td >3.0</td>
 <td >2.5</td>
 <td >2.7</td>
 <td >3.7</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Nonresidential Business Fixed
 Investment</td>
 <td >2.5</td>
 <td >0.8</td>
 <td >8.7</td>
 <td >11.5</td>
 <td >6.8</td>
 <td >5.3</td>
 <td >0.5</td>
 <td >1.8</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Residential Investment</td>
 <td >-2.6</td>
 <td >-4.0</td>
 <td >-1.4</td>
 <td >-3.4</td>
 <td >0.8</td>
 <td >3.3</td>
 <td >6.5</td>
 <td >10.1</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Government Spending</td>
 <td >2.6</td>
 <td >3.3</td>
 <td >2.5</td>
 <td >1.5</td>
 <td >2.3</td>
 <td >-0.1</td>
 <td >1.4</td>
 <td >1.9</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" colSpan="9" >Chain-Type Price Index</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp; GDP</td>
 <td >1.7</td>
 <td >1.7</td>
 <td >3.0</td>
 <td >2.0</td>
 <td >2.3</td>
 <td >1.9</td>
 <td >1.1</td>
 <td >1.0</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;&nbsp; Personal Consumption
 Expenditures</td>
 <td >1.5</td>
 <td >1.6</td>
 <td >2.0</td>
 <td >2.5</td>
 <td >2.2</td>
 <td >1.8</td>
 <td >1.1</td>
 <td >0.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;&nbsp; Nonresidential
 Investment</td>
 <td >1.5</td>
 <td >1.5</td>
 <td >2.0</td>
 <td >0.7</td>
 <td >1.2</td>
 <td >0.7</td>
 <td >-0.8</td>
 <td >0.5</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;&nbsp; Residential Investment</td>
 <td >3.6</td>
 <td >4.0</td>
 <td >7.3</td>
 <td >8.8</td>
 <td >5.7</td>
 <td >4.5</td>
 <td >3.6</td>
 <td >2.7</td>
 </tr>
 </tbody>
 
 
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Real gross domestic product increased 3.5% (AR, 3.0% y/y) during Q3'18, unrevised from the advance estimate. It followed a 4.2% rise during the second quarter. A 3.6% advance had been expected in the Action Economics Forecast Survey. [...]

U.S. GDP Growth Is Unrevised; Profits Growth Improves

Robert Brusca

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	 And the Tortured Path that Lies Ahead
 
 
 
 

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Globally, money supplies are decelerating to some extent with nominal M2 growth in the EMU a minor exception. All money growth rates decelerate from three-years to two-years to one-year. Only the U.K. and EMU have stronger growth over three months for money supply than over 12 months, although for neither does that seem very significant. For real money balances, all growth rates decelerate from three-years to two-years to one-year. Again the U.K. and EMU are exceptions for shorter growth rates as the only places where three-month real balance growth is faster than 12-month growth.

EMU Credit Growth 
In the EMU, credit growth has been essentially stable with some technical claim to minor accelerations or short and longer terms horizons. But there is nothing stirring beyond ‘an acceleration’ of several tenths of a percentage point on annualized rates of growth. There is technical acceleration but nothing fundamental that you can build growth on.

The Oil Pulse 
The impulse from rising oil prices is now turning to a negative one as oil prices decelerate from 12-months to six-months to three-months as growth rates drop from 34.7% to -1.3% and more of that is in train.


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Nominal Global Money Growth 
Nominal global money supply growth shows a growth rates of 1.8% over 12 months in the U.K. compared to 2.7% in Japan, 3.7% in the U.S., and 4.4% in the EMU. But as noted above, money growth rates have generally been slipping and generally are decelerating from 12-months to three-months. Three-month growth rates range from 5.1% in the EMU, to 3.5% in the U.S., to 3.2% in the U.K. and to 2.7% in Japan.

More on EMU Credit 
In the EMU, credit to residents creeps higher from a pace of 1.6% over 12 months to 1.7% over six months to 1.9% over three months. However, discounted for inflation and recalibrated as growth rates in real money balances and these rates of growth show net declines in credit over 12 months and six months with flat performance over three months. Private credit is only slightly better off, showing an annualized net gain over the recent three months at a 0.5% pace.


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Policy Moves and Economic Trends 
Money and credit stimulus clearly does not amount to much. But globally, growth has been slipping and trade flows have been slowing. The OECD has issued a warning and its collection of leading indicators has been reinforcing the outlook for weaker conditions. In the U.S., the President is complaining about the rapidity of Fed rate increases. In Europe, Mario Draghi has repeated that the policy of QE will come to an end at yearend.

In the U.S. as the Fed stays on its rate hike path, rates are getting higher as the effect of fiscal stimulus is wearing off. Interest sensitive sectors already are showing the strain much to the Fed’s surprise. To compensate, there is less of a drain on consumers and businesses from oil prices. But since the U.S. is also an oil producer, that may have a way of coming out in the wash as the benefit to consumers is a transfer from producers whose importance has grown in the U.S. and whose investment plans could well be curtailed if oil prices fall by enough.

U.S. Policy: As the Global Keystone...or Headstone? 
U.S. policy is at the center of the global policy storm as the Trump pressures over trade have dominated trade talk and are largely responsible for trade flow slowing. The Trump rhetoric continues to ratchet higher. Meanwhile, it is wholly speculative whether or not the U.S. and China will cut a trade deal on the sidelines of the summit being held in Argentina. While global conditions that feature plunging oil prices and weakening stock prices would seem to send a clear message about growth prospects and the state of global demand, central bankers are not making cyclical policy. They are making structural policy. The ECB is going ahead with its plans to terminate QE. And in the U.S., there is no sign that that the central bank has chosen a more moderate rate profile in view of unfolding economic events. All eyes are on the Fed and all are curious as to whether the Fed will hike rates in December and about what its rate guidance will look like at its next meeting.

Brexit...Godot 
Europe and the U.K. await the vote by the U.K. parliament on the pending Brexit plan. Anything goes there and we know that we cannot be reliably guided by opinion polls. So we wait and wait…

Firmness in Pursuit of Fairness – The end of Sugar-Daddy 
Globally, growth ramps down as the U.S. has been demanding more fairness in trade. The rest of the world mostly opposes changes apparently as though the U.S. is expected to remain sugar-daddy to the world. We see plenty of examples of the old post-war alliances dealing with policy rifts. That is to be expected as wartime relationships shift and as national identities are reestablished. And while Germany has been reunited, it has not been reestablished as a military power. Still, it is dominating Europe as an economic power and one whose ‘growth’ model has been oppressive for fellow EMU members. Germany continues to impose its will on Europe while everyone else is screaming about ‘America First’ policies. It is curious how in the Post War period the U.S. could be so generous. But as this process of repair from the war has evolved, everyone thinks it is business as usual to run their own selfish policies but see the U.S. as tyrannical when it begins to put its own interests first or simply to demand equal treatment or that allies pay their own way especially for defense services provided. We are 70 years on…except for the Koreas, of course. When do you stop nursing the baby?

Free Trade or License to Exploit? 
Under free trade, the global economy could have become a perpetual motion machine. But when that machine is jimmied and when countries put up selective barriers or control their exchange rate to determine an outcome and when some countries turn into perpetual surplus countries and others transform into deficit countries, the sustainability of that configuration has been destroyed. RIP Free Trade. Currencies must move and must be able to rebalance current accounts. Trade is a crucial feature of this system and it cannot be hijacked by national objectives. China and other Asian countries have done this to expedite and assure development. At first it was a post-war strategy, but it has become codified and many believe that running a trade surplus is now their right! But it’s wrong. That in fact is a free-trade killer. No country can run deficits forever as part of trade system.

Too Much Too Fast 
The shift of resources from West to East (from deficit to surplus countries) has been too fast and has threatened the economic prosperity and social stability in the West. Too much wealth has been transferred and too many jobs have been lost in too short a period of time. That is largely because China, a massive country, has waited so long to develop then has sought to catch up in a virtual instant. Can China deal with slower growth? Can it deal with more balanced growth? Its ‘Belt and Road’ project is not geared for that. It is a program of old-fashioned trade dominance. China like Germany seems to seek economic dominance more than fairness.

New Watchword: FAIRNESS 
I would say that the U.S. push for trade fairness has come just in time if not too late. But as always, time will tell. I think it is time to rethink who are the bad guys in this international trading system and to put all players on fair and equal footing. Unfortunately, it may be too late to do that with China because of its socioeconomic policies that now preclude a market-determined exchange rate, Chinese political repression and information control have left it with a more affluent population willing and eager to get financial assets - if not themselves- out of the country. And China is so large that such migrations of money or people would burden the economic system and dominate the exchange market. Capital controls in China are probably here to stay and that will be the ultimate roadblock to true free trade. So make no mistake about it. We blew it. We had a chance for free trade, but instead countries co-opted it and used trade to fulfill nationalistic objectives. And now free trade will no longer be an option. We are headed into a new realm of bargained trade. Get ready, ‘cause here it comes… and it is not just Donald Trump. It is the new reality.
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Globally, money supplies are decelerating to some extent with nominal M2 growth in the EMU a minor exception. All money growth rates decelerate from three-years to two-years to one-year. Only the U.K. and EMU have stronger growth over [...]

Little Changed in Paths of EMU Money or Credit

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	 U.K. Retailing Shows Resilience But in the End Not Enough
 
 
 
 

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With the U.K.'s Brexit process in its final deal-or-no-deal stages, the Confederation of British Industry survey turned up some retail optimism. However, despite the bump up in the surveyed components in November, the levels of the readings are still not very inspiring as retailers head into the all-important Christmas selling season. It's sort of like Department Store Santa but without enough stuffing in his belly and a really bad fake beard. No one really is fooled one bit by the costume, but we all go along with the gag.

In the distributive sales survey in November, sales compared to a year ago jumped to a 19 reading from 5 in October. Orders evaluated relative to the time of year also surged to a 15 reading from -10, breaking a four month string of declines. However, sales for this time of year were still assessed with a net negative of -10; nonetheless, that's an improvement from the October reading of -22. The stock-to-sales ratio moved higher, with a 22 net reading in November, up from 9 in October.

Wholesaling also made improvements from one month ago as its November metrics exceeded their October counterparts in all survey categories except for the stock-to-sales ratio.

Expectations in retailing show improvement in most areas. The exception is for orders for this time of year as the reading falls to 15 for December from 23 in November. Still, the last two months both are positive readings and represent a turnaround from a three-month string of negative assessments. Expectations in wholesaling show improvements in all categories for December compared to November.


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These comparisons show that there has been an improvement in the month-to-month assessment of retailers with data ordered up in several ways to account for 'seasonality.' We can also assess the absolute response levels instead of just asking if they improved or deteriorated month-to-month. Table 1 presents assessments for that purpose in the far right hand column as rank queue percentile standings. These metrics rank the most recent month's observation against its own historic time series of responses placing this month's observation in a queue designating its relative position as a percentile standing in that queue. A 100% standing is at the head of the line (the strongest reading) while a 0% standing is at the end of the line (the weakest reading). For this assessment, each series' median occurs at its 50th percentile. Data are ranked on observations back to 1995. For convenience in comparison, I have transcribed this data into the table below (Table 2).

In Table 2, several facts jump out immediately. One is that wholesaling this month has the strongest readings of any of the four columns of assessments and consistently so. The next is that retailing has weaker expectations for December sales (on either sales measure) than the reality it is reporting in November. Of course, wholesaling has weaker results for December expectations than for November reality. Also note that despite November differences for retailing and wholesaling for both of them, sales metrics expectations in December are very similar in both retailing and wholesaling.

Having made those points and even in the presence of such strong wholesaling results in November, this report grades out poorly. Orders have a below median position for retailing in November and that weakness even worsens in its December expectation. Expected wholesale orders even fall below their median with a 45.4 percentile standing for December. Sales for this time of year are barely above their median in retailing in November (55.3%) then slip below their median to a 43.3 percentile standing along with wholesaling for December where expectations at 49.6% fall just shy of its own median as well. The next metric that we care about is sales compared to a year ago. For retailing in November that reading is at its 64.2 percentile, a modestly firm reading, that slips to its 57.8 percentile in December expectations alongside a similar 56.7 percentile reading for wholesaling expectations in December. Both retailers and wholesalers are expecting stock-to-sales ratios to be relatively elevated, which could become a problem.


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On the whole, the high November standings for wholesaling give the overall report a feeling of lift. But when we look more closely at retailing and at the sales and orders categories we care about the most, we find some of the weakest results and with weakness creeping into the wholesale sector on its December expectations as well. Aggregating all of the readings, wholesaling averages a rank of 85.2% in November, but that drops to a 55.9% for all expectations in December. The average standing in retailing for the three sales and orders categories in November is 51.3% and that falls to 39.7% for retail expectations in December; for wholesaling the same combination falls to a 50.6 percentile standing. Compare that to wholesale's 83.3 percentile standing for all sales and orders in November.

The problem with this report is the peaking of activity in wholesaling in November and the fall off of metrics in their December expectations as well as the overall low percentile standings with the exception of wholesaling in November.

While the headline changes in the CBI offer some hope, the level that these indicators have actually attained and what they aspire to in December are still markers well short of what we would need to call them solid. So in the end, I guess the U.K. will have itself a very Brexit Christmas.

And so what exactly is a Brexit Christmas? According to the National Institute of Economic and Social Research it amounts to the celebration of this:

"If the government's proposed Brexit deal is implemented, then GDP in the longer term will be around 4 percent lower than it would have been had the UK stayed in the EU" <a href="https://www.niesr.ac.uk/sites/default/files/publications/NIESR%20Report%20Brexit%20-%202018-11-26.pdf">(Source here).</a>


The leavers won their Brexit vote. The U.K. voted for a return of the control of its borders and it has paid a steep price for it. What NIESR does not assess is the impact or value of any new trade deals that the U.K. might strike. But it will need to do a lot just to get back lost potential growth let along to make claims that it is better off with the EU-tether to Europe cut.

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With the U.K.'s Brexit process in its final deal-or-no-deal stages, the Confederation of British Industry survey turned up some retail optimism. However, despite the bump up in the surveyed components in November, the levels of the [...]

For the U.K.: A Brexit Christmas

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The Conference Board Consumer Confidence Index declined 1.6%
(+5.5% y/y) during November to 135.7 and reversed its unrevised 1.9% October
increase. The November level compared to expectations for 136.0 in the Action
Economics Forecast Survey. The indexes in the report are based on 1985=100.
During the past 10 years, there has been a 68% correlation between the level of
consumer confidence and the y/y change in real PCE.

Weakness was led this month by a 3.6% decline in the
expectations component, which was unchanged y/y at 111.0. It was the lowest
level in three months. The present situations component improved 0.5% (11.5%
y/y) to 172.7.

Business conditions were viewed as &quot;good&quot; by an
increased 41.2% of respondents and viewed as &quot;bad&quot; by 10.9%. Jobs were
viewed as &quot;plentiful&quot; by an increased 46.6% of respondents, the most
since January 2001. Jobs were viewed as &quot;hard to get&quot; by 12.2% of
respondents, roughly the fewest since November 2000. The net jobs assessment
reading, the difference between plentiful and hard to get, increased to 34.4, a
17-year high. The differential has a 95% correlation with the unemployment rate.

Expectations for business conditions deteriorated m/m as a
lessened 22.5% of respondents thought that conditions would improve. The figure
is below the March 2017 high of 26.9%. Income was expected to increase in six
months by a fewer 21.5% of respondents, down from 25.4% three months ago.
Expectations that there would be more jobs in six months continued to improve to
22.8% of respondents, up from the recent low of 12.2% in February 2016. A fewer
11.1% of respondents thought that there would be lessened employment in six months.

The expected inflation rate in twelve months edged higher m/m
to 4.9%, up from the 4.5% low twelve months ago. The percentage expecting higher
interest rates over the next twelve months rose to 74.4%, the most since
mid-2006. Those looking to buy a home in the next six months held steady m/m at
6.4%, and that was down from the 7.4% high late in 2017.

Confidence amongst respondents under age 35-years-old
improved modestly but remained below the 18-year high reached in September. For
those aged 35-54, confidence backed away from the18-year high reached last
month. For those over 55 years of age, confidence strengthened to the highest
level since February 2000.

The Consumer Confidence data is available in Haver's CBDB
database. The total indexes appear in USECON, and the market expectations
are in AS1REPNA.

Data Dependence and U.S. Monetary Policy is the title
of today's speech by Fed Vice Chairman Richard H. Clarida and it can be found
<a href="https://www.federalreserve.gov/newsevents/speech/clarida20181127a.htm">here</a>

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >Conference Board (SA,
 1985=100)</th>
 <th scope="col" >Nov</th>
 <th scope="col" >Oct</th>
 <th scope="col" >Sep</th>
 <th scope="col" >Nov Y/Y</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Consumer Confidence Index</td>
 <td >135.7</td>
 <td >137.9</td>
 <td >135.3</td>
 <td >5.5%</td>
 <td >120.5</td>
 <td >99.8</td>
 <td >98.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Present Situation</td>
 <td >172.7</td>
 <td >171.9</td>
 <td >169.4</td>
 <td >11.5</td>
 <td >144.8</td>
 <td >120.3</td>
 <td >111.7</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Expectations</td>
 <td >111.0</td>
 <td >115.1</td>
 <td >112.5</td>
 <td >0.0</td>
 <td >104.3</td>
 <td >86.1</td>
 <td >88.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Consumer Confidence By Age Group</td>
 <td ></td>
 <td ></td>
 <td ></td>
 <td ></td>
 <td ></td>
 <td ></td>
 <td ></td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Under 35 Years</td>
 <td >138.6</td>
 <td >133.7</td>
 <td >140.7</td>
 <td >3.4</td>
 <td >130.2</td>
 <td >122.4</td>
 <td >116.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Aged 35-54 Years</td>
 <td >132.0</td>
 <td >143.2</td>
 <td >135.5</td>
 <td >4.1</td>
 <td >123.5</td>
 <td >106.2</td>
 <td >103.9</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Over 55 Years</td>
 <td >137.0</td>
 <td >134.9</td>
 <td >131.2</td>
 <td >7.0</td>
 <td >112.9</td>
 <td >84.6</td>
 <td >84.1</td>
 </tr>
 </tbody>
 </table>
 
</body></html>

The Conference Board Consumer Confidence Index declined 1.6% (+5.5% y/y) during November to 135.7 and reversed its unrevised 1.9% October increase. The November level compared to expectations for 136.0 in the Action Economics Forecast [...]

U.S. Consumer Confidence Weakens

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The Federal Housing Finance Agency (FHFA) Price Index for
house purchases rose 0.2% (6.0% y/y) during September following a 0.4% August
rise, revised from 0.3%. Over the last three months, the index rose at a
lessened 4.1% annual rate, down from a 7.8% rate of increase six months earlier.

Prices in the Mountain region strengthened 1.3% (9.5% y/y).
The East North Central region posted a firm 0.6% increase (6.2% y/y) while home
prices in the South Atlantic region rose 0.4% (7.1% y/y). In New England, home
prices also gained 0.4% (5.2% y/y).

A lesser 0.2% increase (4.1% y/y) in home prices was logged
in the Middle Atlantic region. The home price index for the West South Central
region improved 0.1% (4.4% y/y) and prices also ticked 0.1% higher (4.4% y/y) in
the West South Central region.

Weakening by 1.1% (+5.5% y/y) were house prices in the
Pacific region. In the West North Central region prices eased 0.1% (+5.1% y/y).

The FHFA house price index is a weighted purchase-only index
that measures average price changes in repeat sales of the same property. An
associated quarterly index includes refinancings on the same kinds of
properties. The indexes are based on transactions involving conforming,
conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac.
Only mortgage transactions on single-family properties are included. The FHFA
data are available in Haver's USECON database.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" >FHFA U.S. House Price Index, 
 Purchase Only (SA %)</th>
 <th scope="col" >Sep</th>
 <th scope="col" >Aug</th>
 <th scope="col" >Jul</th>
 <th scope="col" >Sep Y/Y</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Total</td>
 <td >0.2</td>
 <td >0.4</td>
 <td >0.4</td>
 <td >6.0</td>
 <td >6.7</td>
 <td >6.1</td>
 <td >5.4</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; New England</td>
 <td >0.4</td>
 <td >0.7</td>
 <td >-0.0</td>
 <td >5.2</td>
 <td >5.9</td>
 <td >4.1</td>
 <td >3.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Middle Atlantic</td>
 <td >0.2</td>
 <td >-0.4</td>
 <td >0.3</td>
 <td >4.1</td>
 <td >4.9</td>
 <td >3.7</td>
 <td >2.6</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; East North Central</td>
 <td >0.6</td>
 <td >0.3</td>
 <td >0.5</td>
 <td >6.2</td>
 <td >6.1</td>
 <td >5.4</td>
 <td >4.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; West North Central</td>
 <td >-0.1</td>
 <td >0.2</td>
 <td >0.4</td>
 <td >5.1</td>
 <td >5.4</td>
 <td >5.6</td>
 <td >4.0</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; South Atlantic</td>
 <td >0.4</td>
 <td >0.6</td>
 <td >1.1</td>
 <td >7.1</td>
 <td >7.0</td>
 <td >7.0</td>
 <td >6.2</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; East South Central</td>
 <td >0.1</td>
 <td >0.6</td>
 <td >-0.2</td>
 <td >6.3</td>
 <td >5.9</td>
 <td >5.1</td>
 <td >4.6</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; West South Central</td>
 <td >0.1</td>
 <td >0.4</td>
 <td >0.1</td>
 <td >4.4</td>
 <td >6.5</td>
 <td >5.8</td>
 <td >6.2</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Mountain</td>
 <td >1.3</td>
 <td >0.6</td>
 <td >-0.0</td>
 <td >9.5</td>
 <td >8.8</td>
 <td >7.9</td>
 <td >7.6</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Pacific</td>
 <td >-1.1</td>
 <td >0.8</td>
 <td >0.4</td>
 <td >5.5</td>
 <td >8.7</td>
 <td >8.0</td>
 <td >7.7</td>
 </tr>
 </tbody>
</table>
&nbsp;

 
 
 
 
 New England: Maine, New Hampshire, Vermont,
 Massachusetts, Rhode Island and Connecticut. 
 Middle Atlantic: New York, New Jersey and Pennsylvania. 
 East North Central: Michigan, Wisconsin, Illinois, Indiana and Ohio. 
 West North Central: North Dakota, South Dakota, Minnesota, Nebraska,
 Iowa, Kansas and Missouri. 
 South Atlantic: Delaware, Maryland, D.C., Virginia, West Virginia,
 North Carolina, South Carolina, Georgia and Florida. 
 East South Central: Kentucky, Tennessee, Mississippi and Alabama. 
 West South Central: Oklahoma, Arkansas, Texas and Louisiana. 
 Mountain: Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona and
 New Mexico. 
 Pacific: Alaska, California, Hawaii, Oregon, Washington.
 
 
 
 
</html>

The Federal Housing Finance Agency (FHFA) Price Index for house purchases rose 0.2% (6.0% y/y) during September following a 0.4% August rise, revised from 0.3%. Over the last three months, the index rose at a lessened 4.1% annual [...]

U.S. FHFA House Price Increase Eases

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West Texas Intermediate crude oil prices fell to an
average of $53.90 per barrel last week (-6.2% y/y) from $56.94 in the prior
week. It was the seventh consecutive weekly decline from the peak of $75.11 in
early-October and the lowest price since October 2017. Yesterday, prices were
$51.63 per barrel. Brent crude oil prices declined to $62.85 per barrel (-0.3%
y/y) last week from $66.89 during the prior week. Yesterday, prices were $60.49 per barrel.

Natural gas prices continued to strengthen last week
to $4.70/mmbtu (56.1% y/y) from $4.23 in the prior week. Prices were up from the
low of $2.52 last February.

Gasoline prices declined to an average $2.54 per
gallon (+0.2% y/y) from $2.61 during last week. Prices have fallen from an
average high of $2.90 early last month, to the lowest level since January.
Haver Analytics constructs factors to adjust for the marked seasonal variation
in prices. The seasonally-adjusted gasoline price fell four cents last week to
$2.63 per gallon.

During the latest four weeks, gasoline demand fell 2.6%
y/y; total petroleum product demand rose 6.9% y/y. Gasoline inventories
strengthened 7.1% y/y, but inventories of all petroleum products declined 1.2%
y/y. Crude oil input to refineries has risen 0.5% y/y in the last four weeks.

These data are reported by the U.S. Department of Energy. The
price data can be found in Haver's WEEKLY and DAILY databases.
Greater detail on prices, as well as the demand, production and inventory data,
along with regional breakdowns, are in OILWKLY.

<a href="/comment/181127c.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/181127c.png"></a>
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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >Weekly Energy Prices</th>
 <th scope="col" >11/26/18</th>
 <th scope="col" >11/19/18</th>
 <th scope="col" >11/13/18</th>
 <th scope="col" >Y/Y %</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd">
 <td class="firstcol" >Retail Gasoline ($ per Gallon Regular,
 Monday Price)</td>
 <td >2.54</td>
 <td >2.61</td>
 <td >2.69</td>
 <td >0.2</td>
 <td >2.47</td>
 <td >2.31</td>
 <td >2.03</td>
 </tr>
 <tr>
 <td class="firstcol" >Light Sweet Crude Oil, WTI ($ per bbl,
 Previous Week's Average)</td>
 <td >53.90</td>
 <td >56.94</td>
 <td >61.56</td>
 <td >-6.2</td>
 <td >50.87</td>
 <td >43.22</td>
 <td >48.90</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Natural Gas ($/mmbtu, LA, Previous
 Week's Average)</td>
 <td >4.70</td>
 <td >4.23</td>
 <td >3.58</td>
 <td >56.1</td>
 <td >2.96</td>
 <td >2.49</td>
 <td >2.62</td>
 </tr>
 </tbody>
 </table>
 
</body></html>

West Texas Intermediate crude oil prices fell to an average of $53.90 per barrel last week (-6.2% y/y) from $56.94 in the prior week. It was the seventh consecutive weekly decline from the peak of $75.11 in early-October and the [...]

U.S. Crude Oil Prices Decline; Natural Gas Costs Surge

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Both the German manufacturing IFO gauge and the Markit manufacturing gauge show fading trends in Germany. Still, the topical readings range from weak to very strong, depending on the nature of the response. Generally, current conditions metrics are firm to very strong while expectations range from strong (construction) to quite weak (manufacturing).

In November all the climate readings backtracked. The all-sector reading fell by 1.8 points, with manufacturing falling by 1.7 points and construction by 2.6 points. The current business situation slipped by nearly two points in November while expectations also were off by nearly two points.

Despite equal step backs for current conditions and expectations, the two readings are at very different places. On the long stretch of data since 1991, the current business situation ranks in the 93.8 percentile of its queue of data – an extremely strong reading. In contrast, expectations rank in their 55.6 percentile. Expectations are just a nudge or so above their median (of 0.6) which occurs at a ranking of 50%. In contrast, not only is the current business situation reading high-ranking, that fact is reinforced by its median being at -3.5, leagues of distance from its current 33.1 reading.

Quite obviously, the current readings are strong and solid and impressively firm. Separately, the manufacturing sector has an 84.6 percentile standing with construction at a 99.4 percentile standing.

Breaking form, expectations show construction still extremely solid and strong at a queue standing of 97.8 percentile compared to manufacturing where the standing is at its 40th percentile, well below its median (median is at 6.8 compared to the topical expectations reading of 2.5).

Both the IFO and the Markit indexes are telling the same story on the deflation of the manufacturing sector.

The ongoing weakness in global equites and ongoing drop in oil prices are not reasons to increase confidence in the economy. So far, no policymaker has referenced them.

Central banks increasingly are going to be in the spotlight. So far, no one has blinked. But growth is slowing and the Baltic dry goods index has been backing lower, pointing to weakening trade volume.

One growing problem internationally is that many governments seem to have less of a mandate for their mission. Theresa May has been struggling with accomplishing and defining her Brexit mandate without much support even now with a deal in the offing. The EU is dealing with rogue Italy and Brexit opportunism from Spain and France. Taiwan’s government has just lost support. In the U.S., Democrats have seized the House and the political environment is far from harmonious. Geopolitical tensions still simmer with Saudi relations pressured everywhere in the wake of the Khashoggi killing and increasingly over the unpopular war in Yemen. China is still assertive over its South China Sea hold. Russian has just aggressively seized several Ukraine vessels in the Black Sea. Of course, U.S.-Iranian relations are in a poor state.

These events provide a background of instability to an economic environment that had been gradually repairing itself after a long deep recessionary episode but has itself become less vibrant and has begun to show some weakness. The risks in this system are mounting and becoming more complex and because trade tensions seem to be the centerpiece of instability the weakness has drawn in and undermined all players. There is no indelible source of strength anymore. The outlook is up for grabs. No one has gotten extremely pessimistic, but the potential for bad events to engage and take control is now a palpable risk.


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Both the German manufacturing IFO gauge and the Markit manufacturing gauge show fading trends in Germany. Still, the topical readings range from weak to very strong, depending on the nature of the response. Generally, current [...]

German IFO Shows Slippage in Conditions and Expectations

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The Federal Reserve Bank of Chicago reported that its
National Activity index increased to 0.24 during October from 0.14 in September.
The three-month moving average was fairly steady at 0.31. During the last ten
years, there has been a 64% correlation between the Chicago Fed Index and the
q/q change in real GDP.

Improvement in the October index was led by the Employment,
Unemployment &amp; Hours series to 0.19, its highest level since February. The
Production &amp; Income reading eased to 0.06 and has been trending lower since
the Spring. The Sales, Orders &amp; Inventories figure held steady at 0.04 and
remained down following an August jump. The Personal Consumption &amp; Housing
indicator eased to -0.05 and has been down since an upward spike in March.

The CFNAI is a weighted average of 85 indicators of national
economic activity. It is constructed to have an average value of zero and a
standard deviation of one. Since economic activity tends toward trend growth
rate over time, a positive index reading corresponds to growth above trend and a
negative index reading corresponds to growth below trend.

The Chicago Federal Reserve figures are available in Haver's SURVEYS database.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >Chicago Federal Reserve Bank</th>
 <th scope="col" >Oct</th>
 <th scope="col" >Sep</th>
 <th scope="col" >Aug</th>
 <th scope="col" >Oct '17</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >National Activity Index (percent)</td>
 <td >0.24</td>
 <td >0.14</td>
 <td >0.53</td>
 <td >0.84</td>
 <td >0.13</td>
 <td >-0.12</td>
 <td >-0.26</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;3-Month Moving Average</td>
 <td >0.31</td>
 <td >0.30</td>
 <td >0.38</td>
 <td >0.31</td>
 <td >--</td>
 <td >--</td>
 <td >--</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Production &amp; Income</td>
 <td >0.06</td>
 <td >0.09</td>
 <td >0.29</td>
 <td >0.68</td>
 <td >0.05</td>
 <td >-0.07</td>
 <td >-0.21</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Employment, Unemployment
 &amp; Hours</td>
 <td >0.19</td>
 <td >0.05</td>
 <td >0.10</td>
 <td >0.12</td>
 <td >0.08</td>
 <td >0.02</td>
 <td >0.07</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Personal Consumption &amp;
 Housing</td>
 <td >-0.05</td>
 <td >-0.04</td>
 <td >-0.04</td>
 <td >-0.01</td>
 <td >-0.05</td>
 <td >-0.07</td>
 <td >-0.08</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Sales, Orders &amp;
 Inventories</td>
 <td >0.04</td>
 <td >0.04</td>
 <td >0.19</td>
 <td >0.05</td>
 <td >0.05</td>
 <td >-0.00</td>
 <td >-0.04</td>
 </tr>
 </tbody>
 </table>
 
</body></html>

The Federal Reserve Bank of Chicago reported that its National Activity index increased to 0.24 during October from 0.14 in September. The three-month moving average was fairly steady at 0.31. During the last ten years, there has been [...]

Chicago Fed National Activity Index Improves

Even with expected tariff-induced increases in inflation, BCFF forecasters look for a more aggressive round of monetary easing

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

Wage growth slowing in the US and Euro area; elevated and sticky in the UK

Stagflation-lite: Blue Chip forecasts below-trend growth and elevated inflation

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

US and Japan ended 2024 on solid ground in contrast to Europe

US economy expected to outperform other major economies in 2025

Only modest evidence of AI-related surge in US productivity growth

Previous Trump tariffs fading. A boost from new tariffs ahead?

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

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Nonfarm labor productivity fell 0.8% (SAAR) during Q1’25 after increasing 1.7% in Q4’24, revised from 1.5%. A 0.6% decline had been expected in the Action Economics Forecast Survey. It was the first productivity decline since Q2’22. The y/y increase during Q1 fell to 1.4% from 2.1% in Q4. It was below a 3.3% high in the first quarter of last year. Productivity fell as real value-added output dropped 0.3% last quarter (+2.2% y/y) after increasing 2.5% in Q4, and hours worked lengthened 0.6% (0.8% y/y) following a 0.8% gain.

Compensation per hour increased 4.8% last quarter following a 3.7% Q4 rise. Despite the strength of these last two increases, y/y growth decelerated to 2.7% from a 6.8% high one year earlier. Nevertheless, the productivity decline raised unit labor costs by 5.7% (1.3% y/y) in Q1 versus expectations for a 5.2% increase. It followed a 2.0% gain during Q4 and was the strongest quarterly increase in a year.

Factory sector productivity surged 4.5% (1.5% y/y) during Q1’25 following three consecutive increases of roughly 0.5%. This strength was accompanied by a 6.2% rise (2.2% y/y) in hourly compensation which came after two consecutive increases of approximately 4.1%. The strength in productivity lowered the rise in unit labor costs to 1.6% from 3.8% in Q4. The y/y gain fell to 0.7% from 2.0% in Q4 and stood below the 6.2% y/y increase in Q1’24.

The productivity and labor cost data are available in Haver’s **USECON** database. The Action Economics expectations figures are in the **AS1REPNA** database.

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- Productivity declines with lower output.
- Compensation surge exacerbates labor market stress.
- Factory sector productivity surge lessens cost pressure.

U.S. Productivity Declines in Q1’25; Unit Labor Costs Surge

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The National Association of Realtors' Fixed Rate Mortgage Housing Affordability Index (HAI) rose 0.6% (3.2% y/y) in March to 103.2 after rising 0.9% to 102.6 in February and rising 0.8% in January to 101.7. The level of home affordability has risen 14.8% from its low of 89.9 in October 2023. It remains 42.4% below the high of 179.2 in April 2020.

The rise in affordability in March occurred as the median price of an existing single-family home rose 1.8% (2.9% y/y) to $408,000 which was offset by a decline in mortgage rates to 6.73% from 6.92% in February. The price compared to the record $432,900 in June 2024. The decline in mortgage rates compared to a recent low of 6.26% in September of last year and a 7.70% high during October of 2023. It remained well above a December 2020 low of 2.73%. These changes lowered the principal & interest payment by 0.2% (+1.1% y/y) to $2,113 per month. That was well above the most recent low of $984 in February 2020. Monthly mortgage payments averaged a lessened 24.2% of income during March. They remained up from a low of 14.0% of income in April 2020.

The rise in housing costs in March was accompanied by improvement in median family income. It increased 0.4% (4.4% y/y) to a record $104,705 after rising 0.4% in February and 0.7% in January.

Housing affordability improved m/m across the country in March. The index edged 0.1% higher (2.8% y/y) to 134.5 in the Midwest. It remains the most affordable region of the country. In the South, the index 0.9% (5.4% y/y) to 106.6 and the affordability index in the Northeast increased 2.1% (-2.6% y/y) to 95.7. In the West, where homes are the least affordable, the index rose 0.8% (3.3% y/y) to 71.8 in March.

The Housing Affordability Index (HAI) equals 100 when a median-income borrower qualifies for an 80% mortgage on a median-priced existing single-family home. The HAI had exceeded 100 in each month since July 1990 and reached its all-time high of 213.3 in January 2013; since then, it fell below 100 for the first time in June 2022.

Data on Housing Affordability can be found in Haver’s **REALTOR** database. Median home sales prices are also available in **USECON**. Higher frequency interest rate data are found in **SURVEYS**, **WEEKLY**, and **DAILY**.

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- Home prices rise but mortgage rates decline.
- Median income improves.
- Affordability increases across the country.

U.S. Housing Affordability Improves Slightly in March

Carol Stone, CBE

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Initial claims for unemployment insurance were 228,000 seasonally adjusted in the week ended May 3, down from 241,000 in the previous week, which was unrevised. For the latest week, the Action Economics Forecast Survey had expected a smaller decline to 233,000.

In the week ended April 26, the total number of unemployment insurance beneficiaries – also known as “continuing claims” – was 1.879 million, down from 1.908 million in the April 19 week.

The insured unemployment rate, that is, the number of beneficiaries as a percentage of covered employment, returned to its longstanding rate of 1.2% in the April 26 week; this rate has held that amount since continuously since the week of January 6, 2024, except for the prior week’s 1.3%.

As we do highlight in every week’s discussion, economic conditions vary widely across individual states and territories. In the week ended April 19, the highest unemployment rates were in New Jersey and Rhode Island (both at 2.48%), California (2.26%), Washington (2.14%) and New York (1.85%). The lowest were in Florida (0.36%), South Dakota (0.37%), Alabama (0.41%), Virginia (0.45%) and Nebraska (0.47%). Rates in other notable states include Illinois (1.78%), Pennsylvania (1.53%) and Texas (1.14%). These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986. The expectations figure is from the Action Economics Forecast Survey in the **AS1REPNA** database.

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- Continued claims for unemployment insurance decreased 29, 000 in the week ended April 26.
- Insured unemployment rate returns to longstanding 1.2%.
- Across the states, the insured unemployment rate ranges from 0.36% to 2.48%.

U.S. Initial Unemployment Insurance Claims Ease 13,000 in the May 3 Week

Andrew Cates

**The global business cycle** 
The recent sharp decline in the Future Output Balance in the global composite PMI survey reflects a sudden deterioration in global business expectations. The sweeping tariffs, introduced in April 2025, have generated heightened uncertainty around trade policy and sparked fears of retaliatory actions from key trading partners. As a result, businesses worldwide are scaling back their expectations for future output, wary of rising costs, disrupted demand flows, and a broader shift toward protectionism that could undermine global economic momentum.

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Note: The extreme declines in the Future Output Balance that were recorded in the early months of 2020 (at the height of the COVID pandemic) have been removed from this chart.

**Global supply chain pressures**
Still, despite the marked deterioration in global business expectations, this second chart below provides a reassuring counterpoint: as of now, there is little evidence that global supply chain pressures have materially intensified. Both the New York Fed’s Global Supply Chain Pressure Index and the Baltic Exchange Dry Index remain relatively subdued, especially compared to the pandemic-era spikes of 2020–2022. While there has been heightened concern following the April 2025 US tariff announcements, these trade policy shifts have yet to translate into measurable physical disruption in logistics or freight rates. The stability of these indices suggests that although sentiment has taken a hit, global shipping networks and supply flows are, for now, absorbing the shock. However, this calm may prove fragile if the policy environment hardens further or retaliatory trade actions begin to compound the strain.

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**Expectations for central banks’ policy rates** 
Adding to the picture of mounting economic caution, the latest Blue Chip Financial Forecasts survey reveals that expectations for policy easing over the next 12 months have become even more pronounced than in previous months. While earlier surveys had already pointed to a further extension of the global rate-cutting cycle, the latest results suggest forecasters now anticipate a deeper and more aggressive round of monetary easing—most notably from the US Federal Reserve, which is now expected to deliver nearly a full percentage point in rate cuts over the next 12 months. The sharp deterioration in business sentiment is reshaping the macro narrative: central banks are no longer simply guiding inflation lower, but are instead preparing to confront the risk of a deeper, demand-driven slowdown.

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**Energy prices and inflation** 
Adding further context to the growing expectations for policy easing, oil prices have dropped sharply in recent weeks—driven by mounting concerns over global growth, as reflected in weakening business sentiment and softer demand indicators. The chart below provides a longer-run perspective on why this matters: energy prices have historically played a central role in shaping the global inflation trajectory. The strong positive correlation (r = 0.83) between median world energy price inflation and median core consumer price inflation underscores the powerful pass-through effects energy costs can have on broader price dynamics. While core inflation tends to be stickier, this historical relationship makes clear that sustained declines in energy prices often foreshadow broader disinflationary trends.

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**Intangibles versus tangibles** 
Shifting focus from short-term cyclical risks to longer-term structural dynamics, the next chart below underscores a fundamental transformation in the composition of US investment: the economy has increasingly been built on intangibles. Over the past several decades, investment in intangible assets—such as software, intellectual property, R&D, and brand equity—has steadily climbed and, since the mid-2010s, has overtaken investment in both structures and equipment as a share of GDP. This shift reflects the rise of a knowledge-based, innovation-driven economy, but it also introduces new forms of vulnerability. Unlike physical capital, intangible assets rely heavily on trust, reputation, legal protections, and global openness. In this context, escalating trade frictions and a more confrontational US economic stance—as signalled by the recent tariff wave—risk eroding the goodwill and institutional credibility that underpin much of the value created by intangibles. If geopolitical uncertainty undermines the perceived reliability of US intellectual property protections or weakens global collaboration, it could pose a deeper structural challenge to future growth than any immediate cyclical downturn.

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**Investment in Artificial Intelligence**
The centrality of intangibles to the US growth model is nowhere more evident than in the explosion of private investment in artificial intelligence. As this chart illustrates, global AI investment has surged over the past decade—reaching new highs in 2024—and the United States has consistently accounted for the lion’s share of that spending. This reflects not only America’s previous leadership in frontier technologies but also its dependence on intangible capital, from algorithms and data infrastructure to human expertise and institutional trust. However, this dominance also underscores the strategic stakes of current policy choices. In an environment of rising trade tensions and potential fragmentation, the foundations of US leadership in AI—cross-border collaboration, data openness, and global market access—could be at risk.

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Financial market sentiment has rebounded in recent weeks, buoyed by signs of de-escalation in the US-led trade war and growing confidence that central banks—particularly the Federal Reserve—will step in with more rate cuts to cushion any fallout. Yet beneath the surface, a more sobering picture of the global economy persists. For example, latest PMI surveys reveal that global business expectations have slumped to their lowest levels since the pandemic, reflecting widespread unease about the growth outlook (chart 1). While supply chain pressures have so far remained contained, suggesting no repeat of the logistical chaos seen during the pandemic (chart 2), the latest Blue Chip Financial Forecasts survey reveals that forecasters are now pencilling in deeper and more widespread monetary easing than previously anticipated—an acknowledgment that demand is faltering (chart 3). Falling oil prices further reinforce this view: they are both a symptom of weakening global demand and a potential source of disinflation, reducing the urgency for central banks to maintain tight policy (chart 4). At the structural level, the US economy's increasing reliance on intangible assets—ranging from intellectual property to reputation—has made it more vulnerable to geopolitical frictions and the erosion of global trust (chart 5). This risk is compounded by America's dominant role in AI investment, a sector symbolic of both its economic strengths and its exposure to international perceptions (chart 6). The longer-term challenge, then, is not just navigating the current downturn, but ensuring that the institutional goodwill and cross-border openness that support the modern US economy are not sacrificed in a more fragmented and uncertain global order.

Charts of the Week: Relief Rally Meets Recession Risk

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At today’s meeting of the Federal Open Market Committee, the target range for the Fed funds rate was left unchanged at 4.25% to 4.50%. This followed reductions at three consecutive meetings in the fall of 2024. Rates remain below the high of 5.25% to 5.50% in place in mid-September. Today’s target range matched expectations in the Action Economics Forecast Survey.

The statement following the meeting indicated that, “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook has increased further. The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.”

“The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

The Fed continued, “The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage backed securities.”

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- FOMC holds funds rate target at late-December level.
- Risk assessments include higher unemployment & inflation.

Economy in Brief: November 2018

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