Tom Moeller

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&bull; Private nonresidential building activity declines sharply.
&bull; Residential building improves slightly.
&bull; Public sector construction continues to ease.

The value of construction put-in-place weakened 0.3% (+7.5%
y/y) during May after edging 0.1% higher in April, revised from 0.2%. A 0.5% May
increase had been expected in the Action Economics Forecast Survey. Figures back
through 2019 were revised.

Private construction slipped 0.3% (+13.2% y/y) in May and
reversed a 0.3% April gain. Residential construction improved 0.2% (28.7% y/y)
as single-family building rose 0.8% (46.1% y/y) for the second straight month.
Multi-family building eased slightly (+25.6% y/y) after two months of strong
increase. Home improvement expenditures fell 0.6% (+8.9% y/y) after holding
steady in April.

Nonresidential construction declined 1.1% in May (-5.8% y/y)
after falling 0.5% during April. Transportation building strengthened 5.5% (-4.0%
y/y) and reversed the 4.0% April falloff. Offsetting this increase, lodging
construction fell 3.0% (-23.2% y/y) and education construction declined 3.0% (-19.9%
y/y). Commercial building eased 0.7% (-2.6% y/y) while office building held
steady (-8.3% y/y).

The value of public construction fell 0.2% during May (-8.7%
y/y). It was the fifth consecutive monthly decline. Spending on highways &amp;
streets, which makes up nearly one-third of public spending, improved 1.4% (-4.3%
y/y) and outlays on health care units eased 0.4% (+1.3% y/y). Power construction
rose 0.5% (5.6% y/y).

The construction spending figures, some of which date back to
1946 can be found in Haver's USECON database. The expectations reading is
in the AS1REPNA 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" >Construction Put in Place
 (SA, %)</th>
 <th>May</th>
 <th>Apr</th>
 <th>Mar</th>
 <th>May Y/Y</th>
 <th>2020</th>
 <th>2019</th>
 <th>2018</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd">
 <td class="firstcol" >Total</td>
 <td>-0.3</td>
 <td>0.1</td>
 <td>1.0</td>
 <td>7.5</td>
 <td>5.8</td>
 <td>4.2</td>
 <td>4.1</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Private</td>
 <td>-0.3</td>
 <td>0.3</td>
 <td>1.4</td>
 <td>13.2</td>
 <td>6.0</td>
 <td>2.1</td>
 <td>4.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;&nbsp; Residential</td>
 <td>0.2</td>
 <td>0.7</td>
 <td>2.2</td>
 <td>28.7</td>
 <td>15.1</td>
 <td>-2.2</td>
 <td>3.5</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;&nbsp; Nonresidential</td>
 <td>-1.1</td>
 <td>-0.5</td>
 <td>0.1</td>
 <td>-5.8</td>
 <td>-4.0</td>
 <td>7.3</td>
 <td>4.7</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Public</td>
 <td>-0.2</td>
 <td>-0.6</td>
 <td>-0.2</td>
 <td>-8.7</td>
 <td>5.2</td>
 <td>11.1</td>
 <td>4.3</td>
 </tr>
	 </tbody>
	 </table>
	 
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• Private nonresidential building activity declines sharply. • Residential building improves slightly. • Public sector construction continues to ease. The value of construction put-in-place weakened 0.3% (+7.5% y/y) during May after [...]

U.S. Construction Spending Falters in May

Carol Stone, CBE

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&bull; Continuing claims for state benefits rose moderately.
&bull; PUA claims rose for third consecutive week, but held to recent flat trend.
&bull; Total weeks claimed decrease to low since April 4, 2020.


Initial claims for unemployment insurance fell 51,000 in the week ended June 26 to 364,000 from 415,000 in the previous week, which was initially 411,000. The June 26 number was the lowest since March 14, 2020, just as the pandemic was settling in. The Action Economics Forecast Survey panel expected new claims to decline to 389,000. The 4-week moving average fell 6,000 last week to 392,750 from 398,750.

Initial claims for the federal Pandemic Unemployment Assistance (PUA) program rose for a third consecutive week, increasing to 115,267 in the June 26 week from an upward-revised 111,778 in the prior week (initially 104,682). Despite the three increases, the number of claims is maintaining a flat pattern near pandemic lows; this has been in place since early April. The PUA program provides benefits to individuals who are not eligible for regular state unemployment insurance benefits, such as the self-employed. Given the brief history of this program, these and other COVID-related series are not seasonally adjusted.

Continuing claims for regular state unemployment insurance rose 56,000 in the week ended June 19 to 3.469 million; the prior week was revised upward 23,000 to 3.413 million. The insured rate of unemployment was also revised upward, going back to the 2.5% of the prior two weeks, and it remained there in the June 19 week. This rate reached a high of 15.9% in the week of May 9, 2020.

Continued claims for PUA fell to 5.936 million in the week ended June 12, again the lowest since the week ended April 25, 2020, from 5.951 in the previous week. Continued PEUC claims maintained their recent tight range, decreasing 12,117 to 5.262 million in the June 12 week from 5.274 million in the previous week. The Pandemic Emergency Unemployment Compensation (PEUC) program covers people who have exhausted their state unemployment insurance benefits.

The total number of all state, federal, and PUA and PEUC continued weeks claimed was 14.660 million in the week ended June 12, a decrease of 180,890 from the previous week. This was the lowest continued weeks claimed since April 4, 2020. These figures are not seasonally adjusted.

The state insured rates of unemployment in regular programs continued to vary widely. In the week ending May 29, the highest insured unemployment rates were in Rhode Island (5.10%), Nevada (4.43%), Connecticut (3.80%) California (3.61%) and Illinois (3.55%). The lowest rates were in South Dakota (0.61%), Alabama (0.65%), Utah (0.68%), Nebraska (0.75%) and Idaho (0.83%). Insured unemployment rates in other large states included New York (3.42%), Texas (1.63%) and Florida (1.07%). These state rates are not seasonally adjusted.


Data on weekly unemployment claims going back to 1967 are
contained in Haver's WEEKLY database, and they are summarized monthly in USECON.
Data for individual states are in REGIONW. The expectations figure is
from the Action Economics Forecast Survey, carried in the AS1REPNA 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" >Unemployment Insurance (SA,
 000s)</th>
 <th>06/26/21</th>
 <th>06/19/21</th>
 <th>06/12/21</th>
 <th>Y/Y %</th>
 <th>2020</th>
 <th>2019</th>
 <th>2018</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd">
 <td class="firstcol" >Initial Claims</td>
<td >364</td>
<td >415</td>
<td >418</td>
<td >-74.7</td>
<td >1,352</td>
<td >218</td>
<td >220</td>
 </tr>
 <tr>
 <td class="firstcol" >Initial Claims (NSA)</td>
<td >359</td>
<td >397</td>
<td >408</td>
<td >-74.8</td>
<td >1,353</td>
<td >218</td>
<td >221</td>
 </tr>
 <tr>
 <td class="firstcol" >Initial Claims Pandemic
 Unemployment Assistance (NSA)</td>
<td >115</td>
<td >112</td>
<td >98</td>
<td >-88.4</td>
 <td>--</td>
 <td>--</td>
 <td>--</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Continuing Claims</td>
 <td>--</td>
<td >3,469</td>
<td >3,413</td>
<td >-80.4</td>
<td >10,380</td>
<td >1,699</td>
<td >1,754</td>
 </tr>
 <tr>
 <td class="firstcol" >Continuing Claims (NSA)</td>
 <td>--</td>
<td >3,271</td>
<td >3,233</td>
<td >-81.3</td>
<td >10,370</td>
<td >1,704</td>
<td >1,763</td>
 </tr>
 <tr>
 <td class="firstcol" >Continuing Claims Pandemic
 Unemployment Assistance (NSA)</td>
 <td>--</td>
 <td>--</td>
<td >5,936</td>
<td >-55.1</td>
 <td>--</td>
 <td>--</td>
 <td>--</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Insured Unemployment Rate (%)</td>
 <td>--</td>
<td >2.5</td>
<td >2.5</td>
 <td>
 12.2 
 (June 2020)
 </td>
<td >7.1</td>
<td >1.2</td>
<td >1.2</td>
 </tr>
 </tbody>
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• Continuing claims for state benefits rose moderately. • PUA claims rose for third consecutive week, but held to recent flat trend. • Total weeks claimed decrease to low since April 4, 2020. Initial claims for unemployment insurance [...]

U.S. Initial Unemployment Insurance Claims Decrease to Pandemic Low

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&bull; Factory activity expands for 13th consecutive month.
&bull; Component movement is mixed.
&bull; Price increases continue to be broad-based.

The Institute for Supply Management (ISM) reported that its
Composite Index of Manufacturing Sector Activity slipped to 60.6 during June,
falling back after its May increase to 61.2. A reading of 61.1 had been expected
in the Action Economics Forecast Survey. During the last 15 years, there has
been a 42% correlation between the composite index and the quarterly change in
real GDP. Before the recession began, there had been a 67% correlation.

Movement amongst the component series was mixed in June. A
lower new orders reading led last month's slowdown, declining to 66.0 after
rising to 67.0 in May. The figure has been near the current level since October
of last year. The supplier deliveries reading fell to 75.1 from 78.8. It
continued to indicate dramatically slower product delivery speeds versus two
years ago. Fifty-four percent (NSA) of respondents reported slower speeds while
three percent reported a quickening. Working higher was the production index to
60.8 after declining to 58.5 in May. The inventories index rose slightly to
51.1, the highest level since October.

The employment index fell to 49.9 during June from 50.9 in
May. Indicating a marginal decline in payrolls, it brought the reading to the
lowest since November of last year. An increased 26.6% (NSA) of respondents
reported more hiring, up from 20.8% in May. An increased 19.3% reported fewer
jobs, up from 7.2% three months earlier.

The prices paid index jumped to 92.1 last month after easing
to 88.0 in May. It was the highest point since July 1979. A strengthened 84.8%
of respondents reported higher prices while only 0.7% reported them lower.

Amongst other ISM series not included in the composite, the
order backlog figure fell sharply to 64.5 (NSA), but remained well above 45.3
twelve months earlier. The new export measure edged higher to 56.2 from 55.4.
The figure remained down versus a November high of 57.8.

The ISM figures are based on responses from over 400
manufacturing purchasing executives from 20 industries, which correspond to
their contribution to GDP in 50 states. These data are diffusion indexes where a
reading above 50 indicates expansion. The figures from the Institute for Supply
Management can be found in Haver's USECON database; further detail is
found in the SURVEYS database. The expectations number is available in
Haver's AS1REPNA database.

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<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" >ISM Mfg (SA)</th>
 <th>Jun</th>
 <th>May</th>
 <th>Apr</th>
 <th>Jun'20</th>
 <th>2020</th>
 <th>2019</th>
 <th>2018</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd">
 <td class="firstcol" >Composite Index</td>
 <td>60.6</td>
 <td>61.2</td>
 <td>60.7</td>
 <td>52.2</td>
 <td>52.5</td>
 <td>51.2</td>
 <td>58.9</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;New Orders</td>
 <td>66.0</td>
 <td>67.0</td>
 <td>64.3</td>
 <td>56.7</td>
 <td>54.0</td>
 <td>51.2</td>
 <td>61.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Production</td>
 <td>60.8</td>
 <td>58.5</td>
 <td>62.5</td>
 <td>56.0</td>
 <td>53.8</td>
 <td>51.3</td>
 <td>60.9</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Employment</td>
 <td>49.9</td>
 <td>50.9</td>
 <td>55.1</td>
 <td>41.1</td>
 <td>44.3</td>
 <td>50.9</td>
 <td>56.9</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Supplier Deliveries</td>
 <td>75.1</td>
 <td>78.8</td>
 <td>75.0</td>
 <td>57.0</td>
 <td>61.6</td>
 <td>52.9</td>
 <td>62.0</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Inventories</td>
 <td>51.1</td>
 <td>50.8</td>
 <td>46.5</td>
 <td>50.2</td>
 <td>48.8</td>
 <td>49.9</td>
 <td>52.9</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Prices Paid Index (NSA)</td>
 <td>92.1</td>
 <td>88.0</td>
 <td>89.6</td>
 <td>51.3</td>
 <td>54.0</td>
 <td>49.1</td>
 <td>71.7</td>
 </tr>
	 </tbody>
	 </table>
	 
</body></html>

• Factory activity expands for 13th consecutive month. • Component movement is mixed. • Price increases continue to be broad-based. The Institute for Supply Management (ISM) reported that its Composite Index of Manufacturing Sector [...]

ISM Manufacturing Index Eases in June

Recent aggressive policy easing in China has given a massive boost to equity prices

FOMC expects much more easing now than in June

US is clear world leader in business capital spending on artificial intelligence

Blue Chip forecasters expect US to lead aggressive policy rate cuts over coming year—apart from Japan

Ratio of job openings to the number unemployed in the US now below pre-pandemic level

U.S. layoffs not showing as much cooling in labor markets as unemployment rate

While goods prices have moderated, service price inflation remains elevated and sticky

Since Jan 2023, BCEI US outlook has improved, worsened for Japan and the euro area

Persistent negative US economic surprises leading to big rate-cut expectations

Germany is Euro area weakling

Flash PMIs show good start to Q3 in US; loss of momentum in the euro area

Chinese economy on downtrend could threaten global economy

Working age population labor force participation near all-time high as retirements increase

Blue Chip forecasters look for widespread policy rate cuts just ahead

Flash June PMIs point to a widespread slowdown apart from the US

Announcement of snap French election is causing concern across Europe

The UK economy’s post-pandemic under-performance relative to its pre-pandemic trend

US Beveridge Curve back to near pre-pandemic levels

Negative economic surprises in the US but positive in Europe, especially the UK

Latest PMIs show US losing momentum while RoW is gaining momentum

Sticky services prices behind sticky overall PCE inflation

Flash April PMIs point to slower growth in the US but a pickup in Europe and Japan

Outlook strengthens for US while it weakens for other major economies

Crude petroleum prices are having a big impact on inflation expectations

Inflation surprising to upside in the US; by contrast to the downside in the euro area

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Nonfarm payrolls increased 254,000 (1.5% y/y) in September after rising 159,000 in August, revised from 142,000, and 144,000 in July, revised from 89,000. Expectations had been for a 150,000 rise in the Action Economics Forecast Survey. The three-month average change of 186,000 is the strongest since May.

Average hourly earnings increased 0.4% last month following a gain of 0.5% in August, revised from 0.4%. The y/y earnings gain edged up to 4.0% from 3.9% in August and 3.6% in July, but remained below the 5.9% high in March 2022. A 0.3% September increase had been expected.

The unemployment rate, measured in the household survey, edged down to 4.1% in September from 4.2% in August. It reached a low of 3.4% in April of last year. An unchanged 4.2% had been expected. Household employment rose 430,000 after increasing 168,000 in July. The labor force increased 150,000 after a 120,000 July gain. The overall unemployment rate, including workers who were marginally attached & working part-time for economic reasons declined to 7.7% from 7.9%.

In the **payroll survey**, private-sector employment increased 223,000 (1.4% y/y) in September after rising 114,000 in August. Construction sector employment increased 25,000 (2.8% y/y) last month after rising 31,000 in August. Factory sector payrolls eased 7,000 (-0.2% y/y) after falling 27,000. Mining & logging sector jobs rose 3,000 (-0.6% y/y) during September after rising 1,000 in each of the prior two months.

Private service-producing employment strengthened 202,000 in September (1.5% y/y) after a 109,000 August rise. Increases varied greatly amongst service sector categories. Private education & health service jobs rose 81,000 (3.8% y/y) after rising 60,000 in August while leisure & hospitality employment rose 78,000 (2.0% y/y) after a 53,000 gain. Professional & business service jobs rose 17,000 (0.4% y/y) after easing 4,000 in both August and July. Within that category, the number of temporary jobs fell 13,800 (-6.0% y/y) and have fallen consistently since a March 2022 high. Trade, transportation & utilities employment gained 13,000 (0.6% y/y) after falling 5,000 while financial activities jobs rose 5,000 in September (0.4% y/y) after improving 10,000 in August. Information sector employment increased 4,000 in last month (-0.2% y/y) after falling 7,000 in August.

Government sector payrolls improved 31,000 in September (2.1% y/y) after increasing 45,000 in August. Local government jobs improved 16,000 (2.0% y/y) after rising 33,000 in August while state government employment rose 13,000 (2.5% y/y) after an 11,000 gain. The number of federal government jobs increased 2,000 (1.7% y/y) following a 1,000 rise.

The 0.4% September rise in private-sector average hourly earnings reflected a 0.5% gain (4.9% y/y) in the goods-producing sector which followed a 0.4% improvement in August. Earnings in construction improved 0.4% (4.6% y/y) while factory sector earnings rose 0.5% (5.1% y/y), following a 0.4% gain. In the private services-sector, earnings rose 0.3% last month (3.7% y/y) after a 0.5% gain. Professional & business service sector earnings strengthened 0.8% (5.0% y/y) after a 0.6% rise. Leisure & hospitality earnings improved 0.2% (4.3% y/y) after rising 0.3%. Financial sector earnings increased 0.2% (4.2% y/y) after a 0.5% gain. Private education & health services earnings improved 0.3% (3.1% y/y) for the fourth straight month. Trade, transportation and utilities pay edged 0.1% higher (2.8% y/y) in September after a 0.4% rise. Information sector earnings declined 0.4% (+3.6% y/y) after strengthening 1.1% in July.

241004C5.jpg

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The length of the average workweek in the private sector eased to 34.2 hours in September after rising in August to 34.3 hours. The workweek in the goods-producing sector of 39.9 hours compared to 39.8 hours in August. The construction sector average workweek lengthened to 39.2 hours from 39.0. The factory sector workweek held steady at 40.0 hours while the average workweek in the private service sector slipped to 33.1 hours. The aggregate weekly hours index in the private sector, a key indicator of production and income, slipped 0.1% in September (+0.9% y/y) after rising 0.3%. The Q3 average increased 0.2% (AR) from Q2’24.

In the **household survey**, the jobless rate fell to 4.1% as employment rose 0.3% and the size of the labor force edged 0.1% higher. The labor force participation rate was 62.7% for the third straight month. The rate for teenagers rebounded to 37.2%, while for individuals aged 20-24, it was little-change at 70.6%. For rate for workers aged 25-54, the rate fell to 83.8% but for workers 55 and over, it held steady at 38.6 hours.

The employment/population ratio for all workers rose to 60.2% in September and has been moving sideways since early last year. It remained below its high of 61.1% in February 2020, just prior to the pandemic.

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

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- Surprising job strength is narrowly based.
- Earnings increase is better-than-expected; August pay growth lifted.
- Jobless rate slips to three-month low.

U.S. Payroll Employment Accelerates in September and Wage Growth Firms; Jobless Rate Edges Lower

Robert Brusca

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French industrial output rose sharply in August, a gain of 1.6% after declining by 0.2% in July. Output in August was led by consumer goods; nondurable goods output increased 4.2% month-to-month in August while consumer durable goods output increased by 3% month-to-month. Output of capital goods was also strong during the month, with a 1.6% gain, although intermediate goods output continued to be weak, falling by 0.4% in August and dropping for the second month in a row.

Sequentially French output explodes over three months although it's relatively mild mannered over 12 months and over six months. The strength in French output is relatively recent. Manufacturing output gains 0.3% over 12 months; over six months it is falling at a 0.5% annual rate but that transforms into a 31.1% annual rate over three months as output sharply recovered in June and in August.

**Sequential growth for MFG components**
Components find consumer durable goods output falling by 6.3% over 12 months, gaining at a 4% annual rate over six months then rising at a strong 14.9% annual rate over three months showing steady acceleration. Consumer nondurable goods output rises by 5.9% over 12 months; output slows to gain at a 4.3% annual rate over six months then it expands sharply to grow at a 19% annual rate over three months. French capital goods output is up only 0.3% over 12 months, but it then expands at a 1.5% annual rate over six months and gains at a 14.2% annual rate over three months showing steadily accelerating growth on this time sequence. Intermediate goods output falls by 3.4% over 12 months, falls more sharply, at a 6.6% annual rate over six months, then cuts that weakness to only a 0.2% annual rate drop over three months.

**Quarter-to-date**
With two months into the third quarter, manufacturing output is rising at 1.6% annual rate, with consumer nondurable output up at a 7% annual rate and consumer durable goods output up at a 3.8% annual rate. Capital goods output is up at a 4.3% annual rate; intermediate goods output is falling at a 5% annual rate in the quarter-to-date.

During this period when output has been experiencing some mild increases, they have transformed into strong increases over three months. Yet, motor vehicle registrations have been consistently weak. That important big ticket consumer item has not taken off.

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**Manufacturing: IP vs. PMI**
The chart shows that manufacturing output as measured by the IP index has been relatively flat. But output as signaled by the S&P PMI survey has showed building weakness in French manufacturing. The PMI trend to weakness was being arrested early in 2024 but then the incipient rebound turned into more weakness. Just this month there has been some small rebound and stabilization in the MFG PMI.

It's here from the PMI, that data give much more of a sense of French output being weak than we get from looking at the industrial output report itself. French industrial output has been fairly flat, but with a small uptrend in place.

Smoothed year-on-year gains show that French output generally saw year-on-year expansion from early-2022 to May 2024. Since then, output has been more erratic with a deep decline logged in May IP. The sector has subsequently been digging itself back out. This month’s surge in output is continuing evidence of that recovery in progress. We do not get the same sense of weakness from looking at French IP data that we form looking at French PMI data.

France

French IP Ignites for a Month

Andrew Cates

**Policy rate expectations**
Blue Chip panellists continue to forecast that policy rates in most major economies will decline sharply in coming months. The ECB, for example, is expected to lower its key policy rates by around 105 basis points over the next 12 months while the BoE is expected to lower its Bank rate by 125 bps over the same time frame. These forecasts contrast with the US where policy rates are expected to be lowered by 125 basis point between now and this time next year. The BoJ in the meantime continues to remain an outlier in this generic global trend with Japan’s policy rate specifically expected to climb by 45bps over the next 12 months.

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**The US labour market**
Ahead of the payrolls data for September that are due later this week there have been some mixed messages on the state of the US labour market in recent days. September’s ADP report concerning private sector employment, for example, was a little stronger than expected. On the weaker side, the latest Job Openings and Labour Turnover (JOLTS) survey revealed a steep decline in the number of people in the US workforce that have been quitting their jobs, a strong signal that the labour market is loosening. As chart 2 below suggests, that ought to additionally imply weaker wages pressures in the period ahead as well.

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**Geopolitical risks and oil prices**
Soft landing narratives have been aided by evidence suggesting that labour markets are cooling, that wage pressures are ebbing and that broader inflationary pressures are fading. But, as noted above, the escalation of geopolitical turbulence in the Middle East is now challenging these views. A widely watched gauge of geopolitical risks has bolted sharply higher in recent days off the heels of this turbulence, as evidenced in chart 3 below. And energy markets – oil prices in particular – appear to now be responding to this instability as well.

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**The real consumer price of energy versus US productivity growth**
It goes without saying that energy prices exert a powerful influence over the world economy. Aside from headline inflation linkages, high real energy prices have arguably been a key factor that’s kept productivity growth in many major economies muted over the past few years. As chart 4 below indicates, longer-term upswings in US productivity growth have tended to be preceded by weaker real energy prices. Equally, longer-term downswings in productivity have typically followed periods when real energy prices have been rising.

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**Globalisation versus de-globalisation** 
A further disruption of supply chains is also a looming threat to the world economy if the instability in the Middle East were to intensify. In the background to this, and thanks to several additional factors that have undermined world trade in recent years, a de-globalisation of the world economy has been unfolding. That said, latest data from the World Bank suggest we should not get too carried with that de-globalisation narrative. The level of world trade in services, for example, reached a record high in 2023.

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**Indebtedness and interest rates**
There is no doubt that ongoing geopolitical instability, combined with other factors such as heightened protectionism, could accelerate a broader trend toward de-globalization in the coming period. This, along with other structural challenges such as high energy prices and ageing demographics, may be hindering long-term productivity growth. Offsetting factors do exist, most notably the productivity potential of Artificial Intelligence. However, until those offsets fully materialize, many policymakers are likely to again rely on monetary policy tools and other re-leveraging initiatives to boost economic growth to politically acceptable levels. The strong negative correlation between long-term US real interest rates and global indebtedness in chart 6 below highlights how these policy efforts have become central to maintaining economic stability, often at the expense of increasing financial vulnerabilities.

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In recent weeks, financial markets have generally aligned with expectations of a soft landing for the global economy, facilitated by more accommodative policies from central banks (see chart 1). This week’s dataflow have largely reinforced these views (see chart 2) as have the communications from many policymakers. However, the escalation of geopolitical turbulence in the Middle East in recent days is now challenging this narrative. By potentially choking supply chains and raising risk premiums in energy markets, there could be growth and inflation-related consequences for the world economy in the coming weeks (see charts 3). This also serves as a reminder that there are longer-term headwinds that are placing a brake on global growth at present, including high real energy prices (chart 4), de-globalization pressures (chart 5) and lingering debt-related imbalances (see chart 6). And many of these issues could be exacerbated if the turmoil in the Middle East were to intensify.

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Charts of the Week: Geopolitical Scarring

Winnie Tapasanun

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The U.S. ISM Services PMI rose to 54.9 in September, the highest level since February 2023, after a 0.1-point uptick to 51.5 in August, according to today’s report by the Institute for Supply Management, indicating expansion in the services sector for the third straight month, in seven of nine months in 2024, and for the 49th time in 52 months. The September index was up from a four-year-low 48.8 in June, 53.4 in September 2023, and a low of 49.0 in December 2022; however, having remained down from a record-high 67.1 in November 2021. The 12-month average was 51.8, reflecting strong growth in the U.S. services sector. The Action Economics Forecast Survey had expected 51.7 for September.

Haver Analytics constructs a composite index combining the services index and the manufacturing reading. This index rose to 53.9 in September after a 0.2-point increase to 51.0 in August, showing expansion for fourth time in five months. The latest figure was higher than a four-year-low 48.8 in June, 52.8 in September 2023, and a low of 48.9 in December 2022; nevertheless, having remained well below a record-high 66.3 in November 2021. These series date back to July 1997.

In the latest services survey, the business activity index rebounded to 59.9 in September from 53.3 in August, indicating business activity expanded for the 51st time in 52 months and at the highest level since May. The index was up from its recent low of 49.6 in June and a low of 52.7 in December 2022 but below a record-high 69.5 in November 2021. An increased 30.1% of respondents (NSA) reported higher activity in September while a lessened 8.2% reported an activity decline. The new orders index advanced to 59.4 in September from 53.0 in August, indicating expansion in new orders for the 50th time in 52 months and at the fastest pace since February 2023. The index was up from its recent low of 47.3 in June and a low of 45.0 in December 2022 but down from a record-high 69.5 in October 2021. An increased 30.9% of respondents (NSA) reported higher orders in September while a lessened 10.4% reported a decline. Meanwhile, the supplier deliveries index (NSA) rose to 52.1 in September from 49.6 in August, indicating slower supplier delivery performance after two months in faster territory.

On the labor front, the employment index decreased to 48.1 in September on top of a 0.9-point decline to 50.2 in August, showing employment activity in the services sector contracted after two months of expansion. The latest reading, while above a low of 43.8 in December 2023, was below a high of 54.1 in August 2023 and a high of 58.3 in April 2021. A lessened 13.0% of respondents (NSA) indicated higher employment in September while 14.4% reported a decline.

On the inflation front, the prices index rose to 59.4 in September after a 0.3-point increase to 57.3 in August, indicating prices paid by services organizations for materials and services had risen (i.e., above 50) since June 2017 and at the fastest rate since January’s high of 64.0. The index was up versus its recent low of 53.4 in March and a low of 54.8 in June 2023; however, having remained significantly below a record-high 83.8 in March 2022. An increased 22.7% of respondents (NSA) reported price rises in September while a lessened 6.0% reported price declines.

Additionally, the new export orders index increased to 56.7 in September following a 7.6-point drop to 50.9 in August, indicating new export orders expanded for the 10th time in 11 months at a faster rate. The imports index rebounded to 52.7 in September from 50.3 in August, registering the third consecutive month of expansion after contracting in June and May. The inventories index advanced to 58.1 in September from 52.9 in August, indicating inventories expanded for the second successive month and at the fastest pace since May 2023. The inventory sentiment index fell to 54.0 in September after declining to 54.9 in August, showing continued expansion since May 2023 but at the slowest rising rate since June 2023. The backlog of orders index increased to 48.3 in September after dropping to 43.7 in August, posting the third contraction in four months. These series are not seasonally adjusted and not included in the ISM Services PMI total.

The ISM Services PMI is a composite index consisting of four equally weighted diffusion indexes (25% each): Business Activity, New Orders, Employment, and Supplier Deliveries. A reading above 50 indicates expansion in the services sector; below 50 suggests contraction. Supplier Deliveries is the only ISM index that is inversed; a reading above 50 indicates slower deliveries. The ISM figures are available in Haver's **USECON** database, with additional detail in the **SURVEYS** database. The expectations figure from Action Economics is in the **AS1REPNA** database.

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- 54.9 in September vs. 51.5 in August, higher than expected; 3.1 pts. above the 12-month avg. of 51.8.
- Business Activity (59.9, a four-month high), New Orders (59.4, the highest since Feb. ’23), Employment (48.1, the first contraction since June), and Supplier Deliveries (52.1 vs. 49.6).
- Prices Index rises 2.1 pts. to 59.4, the highest since January.

U.S. ISM Services PMI Jumps in September; Highest Level Since February ’23

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New orders for manufactured goods eased 0.2% (+0.9% y/y) during August, after strengthening 4.9% in July, revised from 5.0%, according to the Census Bureau. Orders declined 3.3% in June. The Action Economics Forecast Survey expected a 0.2% increase in total factory orders. Excluding the transportation sector, orders eased 0.1% (+0.5% y/y) after rising 0.3% in July.

New orders for durable goods were unchanged during August (+1.5% y/y), unrevised from the advance release, and followed a 9.8% July gain. The weakness in durable goods orders reflected a 0.8% easing (+2.5% y/y) in transportation sector orders. This followed a 34.6% jump in July, which was buoyed by higher civilian aircraft orders. Motor vehicle & parts orders eased 0.7% (-1.8% y/y) after a 1.0% decline. Orders for all factory products outside the transportation sector slipped 0.1% (+0.5% y/y) in August following a 0.3% July increase. Elsewhere, primary metals orders rose 0.2%, up 0.1% y/y. Machinery orders gained 0.4% (0.1% y/y), while computer & electronics rose 0.4% (2.8% y/y). Electrical equipment orders rose 2.4% (2.8% y/y), following a 0.8% decline.

Shipments by all manufacturing industries eased 0.5% in August (+1.0% y/y) after rising 0.8% in July. Durable goods shipments fell 0.6% (+1.7% y/y) after two months of roughly 1.1% gain. Transportation product shipments fell 2.0% (+5.0% y/y) after a 3.4% rise. Shipments excluding the transportation sector eased 0.2% (+0.2% y/y) after rising 0.3% in July. Machinery shipments rose 0.3% in August (-0.9% y/y) while computer & equipment shipments eased 0.2% (-0.1% y/y). Electrical equipment & appliance shipments rose 0.4% (+0.7% y/y). Nondurable goods shipments, which equal orders, fell 0.5% (+0.3% y/y) after increasing 0.6% in July. Food product shipments eased 0.1% (+1.3% y/y) while apparel shipments rose 0.4% (-2.4% y/y) after two months of decline. Textile product shipments weakened 1.7% both m/m and y/y after falling 0.3% in July. Paper product shipments rose 0.3% (2.1% y/y), following a 0.8% increase. Petroleum & coal product shipments declined 2.3% (-10.9% y/y) in August, after rising 0.5%. Basic chemical shipments rose 0.3% (5.8% y/y) after a 0.8% July increase.

There are no unfilled orders figures for nondurable goods industries. Unfilled orders for durable goods rose 0.4% (4.1% y/y) in August after a 0.2% rise. Transportation unfilled orders rose 0.5% (6.8% y/y) after increasing 0.3% in July. Excluding transportation, unfilled orders rose 0.2% (-0.4% y/y) after holding steady in July. Unfilled orders for durable goods less transportation have been trending sideways since 2022. Unfilled orders for machinery eased 0.1% (-3.7% y/y) while electrical equipment & appliance backlogs rose 0.4% (-0.0%) after a 0.2% decline.

Inventories of all manufactured products rose 0.1% in August (0.6% y/y) after holding steady in July. Durable goods inventories edged 0.1% higher (1.3% y/y) after holding steady in July. Transportation equipment inventories edged 0.1% higher (4.7% y/y) and inventories less transportation rose 0.2% (-0.4% y/y) after holding steady for five straight months. Nondurable goods inventories rose 0.2% (-0.5% y/y) after remaining unchanged for two months, though petroleum inventories rose 0.8% (-1.9% y/y) in August after easing 0.1% in July.

Manufacturers’ orders and shipments of durable and nondurable goods, along with unfilled orders and inventories, are compiled by the U.S. Census Bureau. They are available in Haver’s **USECON** database. The Action Economics forecast data are in the **AS1REPNA** database.

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- Improved y/y in orders momentum remains in place.
- Shipments weighed down by a decline in nondefense aircraft sales.
- Unfilled orders and inventories rise modestly.

Economy in Brief: July 2021

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U.S. Construction Spending Falters in May

U.S. Initial Unemployment Insurance Claims Decrease to Pandemic Low

ISM Manufacturing Index Eases in June