Tom Moeller

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The Conference Board's Composite Leading Economic Indicators index rose 1.1% (9.8% y/y) during November following an unrevised 0.9% October increase. The 0.3% September rise also was unrevised. It was the largest increase in six months and outpaced a 0.9% rise expected in the Action Economics Forecast Survey. The Leading Index is comprised of 10 components which tend to precede changes in overall economic activity.

Eight of the ten index components contributed positively to the November increase including the length of the average workweek, unemployment insurance claims, the ISM orders index, building permits, the interest rate spread between 10-year Treasuries and Fed funds as well as the leading credit index. Orders for consumer goods and materials as well as stock prices also contributed positively. The index of consumer expectations for business & economic conditions fell while real nondefense capital goods orders excluding aircraft held steady.

The Index of Coincident Economic Indicators rose 0.3% (3.6% y/y) in November after an unrevised 0.5% October increase. Stability in September also was unrevised. All four of the component series rose including nonagricultural employment, personal income less transfers, industrial production and real manufacturing & trade sales.

The Index of Lagging Indicators eased 0.1% during November (+0.8% y/y) following a 0.5% October rise, revised from 0.4%. September's increase was revised to 0.9% from 1.0%. The average duration of unemployment, the change in labor costs per unit of output slipped as did the six-month change in the services CPI. The business inventory/sales ratio, commercial & industrial loans outstanding and the consumer installment credit/personal income ratio rose. The banks' prime rate held steady.

The Conference Board figures are available in Haver's **BCI** database; the components are available there, and most are also in **USECON**. The expectations are in the **AS1REPNA** database. Visit the Conference Board's [site](http://www.conference-board.org/) for coverage of leading indicator series from around the world.

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- Most leading index components improve.
- Coincident indicators rise again.
- Lagging indicators ease modestly.

U.S. Leading Economic Indicators Strengthen in November

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Industrial production increased 0.5% (5.3% y/y) during November following a 1.7% October rise, revised from 1.6%. Motor vehicle parts shortages and recovery from Hurricane Ida affected production last month. A 0.7% rise had been expected in the Action Economics Forecast Survey. Manufacturing output rose 0.7% last month (4.6% y/y) following a 1.4% increase during October, revised from 1.2%.

Durable goods production rose 0.8% (4.9% y/y) last month after a 1.4% October gain. Motor vehicle production rose 2.2% (-5.4% y/y) following a 10.1% rise. Excluding the motor vehicle sector, factory output rose 0.6% (5.5% y/y) after a 0.8% gain. Elsewhere in the durable goods sector, high-tech product production rose 0.7% (6.3% y/y) after a 0.3% rise in October. Production of electrical equipment, appliances & components improved 0.2% (4.9% y/y) in November after falling 0.9% in October. Machinery output weakened 0.7% (+8.0% y/y) and reversed the prior month's gain. Output of computers & electronic products improved 0.8% (7.5% y/y) in November after falling in the prior two months. Primary metals production rose 0.5% (8.4% y/y) after a 1.6% gain while fabricated metals output rose 0.6% (5.0% y/y) last month, about the same as in each of the prior three months.

In the nondurable goods sector, production improved 0.5% (4.7% y/y) after rising 1.3% in October. Chemical production rose 0.5% (6.9% y/y) after a 2.1% rise. Petroleum & coal product output declined 1.2% (+12.7% y/y) after October's 3.8% recovery. Food, beverage & tobacco output rose 0.8% (0.2% y/y) after two months of 0.4% increase, but textile production rose 1.2% (5.7% y/y) in November and reversed the prior month's decline. Apparel production fell 0.5% (+5.3% y/y) after a 1.6% October decline.

Electric & gas utilities production declined 0.8% (+5.1% y/y) in November following October's 0.6% increase. Electric power output fell 1.9% (+4.2% y/y) but natural gas distribution rose 6.1% (11.7% y/y). Mining output rose 0.7% (9.2% y/y) after a 4.3% gain.

Capacity utilization rose to 76.8% in November from 76.5% in October. A utilization rate of 76.8% had been expected. In manufacturing, the utilization rate increased to 77.3% last month, the highest level since December 2018.

Industrial production and capacity are located in Haver's **USECON** database. Additional detail on production and capacity utilization can be found in the **IP** database. The expectations figures come from the **AS1REPNA** database.

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- Factory output stands at highest level since January 2019.
- Durable & nondurable goods output slows.
- Capacity utilization increases.

U.S. Industrial Production Increases Moderately in November

Sandy Batten

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The Federal Reserve Bank of Kansas City reported that its manufacturing sector business activity index was unchanged at 24 in December after having reached a record high of 31 in October. The series dates back to July 2001. The ISM-Adjusted Index (NSA) fell to 59.1 in December from 60.3 in November and 65.3 in October, but still well above the break-even level of 50 that separates expansion from contraction.

The new orders index rebounded to 27 in December from -4 in November, recouping all of its November decline. The shipments index increased to 20 from 2 in November. Supplier delivery times retreated to 44 from the record high of 57 reached in November, indicating that while deliveries remain very slow, their pace has moderated. The production index fell again in December to 10 from 17 in November and 25 in October. The order backlog measure edged up to 13 from 10 in November.

The employment measure declined for the second consecutive month—to 18 from 27 in November and the record level of 34 reached in October. The workweek index slid further to 8 from 10 in November and 15 in October. The high was reached in July at 31. The special questions in this survey centered on labor costs. Lack of available labor was the top risk facing respondents. For 2022, nearly 70% of firms are planning to increase wages between 2% and 6%, and no firms expected wages to decrease. Additionally, over 85% of firms expected a more than 2% increase in other labor costs, such as benefits, training, and time off.

Inflation pressures remained elevated but eased a bit in December. The prices received index for finished products fell to 43 from 50 in November, the first decline in three months and well below the record level of 61 in August. The raw materials index eased further to a still very high level of 73 in December from 77 in November and the record of 87 in October.

The expectations reading for six months ahead fell to 25 from 35 in November with expectations for all major categories posting declines. This was the largest monthly decline in expectations since March 2020.

The latest survey was conducted in the five-day period from December 8 to December 13 and included 96 responses from plants in Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico and western Missouri.

The series dates back to July 2001. The diffusion indexes are calculated as the percentage of total respondents reporting increases minus the percentage reporting declines. Data for the Kansas City Fed Survey can be found in Haver's **SURVEYS** database.

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- Factory growth was unchanged in December from November.
- Supplier delivery times slowed sharply from November's record high, but remained elevated.
- Pace of price increases slowed.

Kansas City Fed Manufacturing Index Unchanged

Carol Stone, CBE

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Initial claims for unemployment insurance rose 18,000 to 204,000 in the week ended December 11 (-76.4% y/y) from 188,000 in the prior week, revised from 184,000 reported initially. The prior week’s readings were the lowest since September 6, 1969, that is, just over 52 years ago. The Action Economics Forecast Survey expected 196,000 claims for the latest week. The 4-week moving average fell to 203,750 in the week ended December 11 from 219,750 the week before.

Initial claims for the federal Pandemic Unemployment Assistance (PUA) program in the December 11 week rose to 1,854 (-99.6% y/y) from 1,835 in the prior week. This program expired on September 4. These claims averaged 107,756 per week during August, the last full month of the program. The PUA program provided 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.

Continued weeks claims for regular state unemployment insurance decreased to 1.845 million (-67.1% y/y) during the week ended December 4 from 1.999 million in the prior week, revised from 1.992 million. The insured unemployment rate fell back to 1.4% from 1.5%; just before the pandemic struck in March 2020, the rate was hovering at 1.2%.

In the week ended November 27, continued weeks claimed in the Pandemic Assistance Program (PUA) program rose to 194,189 from 124,536 (-98.0% y/y). The number of continued weeks claimed compares to 4.896 million in the last week of the program, September 4. Continued weeks claimed for Pandemic Emergency Unemployment Compensation (PEUC) increased to 136,413 in the November 27 week from 112,728 in the prior week and below the 3,644,555 claims during the last week of the program on September 4. This program covered people who had exhausted their state unemployment insurance benefits.

In the week ended November 27 the total number of all state, federal, PUA and PEUC continued claims was 2.458 million, up from 1.948 million the week before. These figures are not seasonally adjusted.

The state insured rates of unemployment in regular programs continue to vary. In the week ending November 27, the highest insured unemployment rates were in Alaska (3.15%), California (2.93%), New Jersey (2.55%), Hawaii (2.26%) and Illinois (2.25%). The lowest rates were Nebraska (0.30%), South Dakota (0.34%), Alabama (0.36), New Hampshire and Virginia (both 0.41%) Other state insured rates of unemployment in regular programs included Pennsylvania (1.96%), New York (1.83%), Texas (1.09%), and Florida (0.64%). 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 and is in the **AS1REPNA** database.

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- Initial claims increase just 18,000 from 52-year low.
- Continuing claims in regular programs ease.
- Insured jobless rate also eases, approaches pre-pandemic level.

U.S. Initial Unemployment Insurance Claims Rise Modestly

Kathleen Stephansen, CBE

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The Federal Reserve Bank of Philadelphia's Manufacturing Business Conditions Index plummeted to 15.4 in December from 39.0 in November. It was the lowest reading since December 2020, when the index stood at 11.1. A reading of 27.0 had been expected by the Action Economics Forecast Survey. The percentage of firms reporting improving conditions dropped to 26.8% from 41.8% in November, while the share reporting weaker conditions rose to 11.4% from 2.8% in November. The share reporting no change rose to 59.1% in December from 55.4% in November.

Haver Analytics calculates an ISM-Adjusted General Business Conditions Index using the same methodology as the national ISM index. The reading declined to 60.2 in December from 65.4 in November.

Performance of the subindexes was mostly negative. The new orders index dropped to 13.7 this month from admittedly a multi-year high of 47.4 in November. The shipments index dropped to 15.3 from 32.1 in November. The unfilled orders index declined to 11.4 this month from 27.4 last month, while the delivery times index eased to 31.4 and the inventory index eased to 13.2.

The employment index rose 33.9 this month from 27.2 in November. Thirty-nine percent of respondents reported more hiring, while 5.2% lowered employment. The average workweek reading eased to 30.4 from the six-month high of 30.6 in November.

The index of prices paid declined to 66.1 in December from 80.0 the prior month. Sixty-eight percent of respondents reported paying higher prices, while 2.3% paid less. The index of prices received dropped to 50.4 this month from 62.9 last month.

The Philadelphia Fed also surveys expectations for business activity in the coming six months. The expectations index for future activity index fell to 19.0 in December from 28.5 in November. The reading reached a high of 69.2 in June of this year. Expected new orders, shipments and inventories all fell but employment and delivery times rose. The expected prices reading fell, as did the capital expenditures to 20.0 this month following a small decline in November.

The survey panel consists of 150 manufacturing companies in the third Federal Reserve District (which consists of southeastern Pennsylvania, southern New Jersey and Delaware). The diffusion indexes represent the percentage of respondents indicating an increase minus the percentage indicating a decrease in activity. The ISM-adjusted figure, calculated by Haver Analytics, is the average of five diffusion indexes: new orders, shipments, employment, delivery times and inventories with equal weights (20% each). Each ISM-adjusted index is the sum of the percent responding "higher" and one-half of the percent responding "no change".

The figures from the Philadelphia Federal Reserve dating back to 1968 can be found in Haver's **SURVEYS** database. The expectation from the Action Economics Forecast Survey is available in **AS1REPNA**.

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- Component declines were broad based.
- New orders dropped from the November multi-year high.
- Delivery times eased.

U.S. Philadelphia Fed Manufacturing Index Dropped Sharply in December

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Housing starts rose 11.8% (8.3% y/y) during November to 1.679 million units (SAAR) from 1.502 million in October, revised from 1.520 million. It was the highest level of housing starts since March. A November level of 1.570 million starts had been expected in the Action Economics Forecast Survey.

The rise in starts overall in November reflected an 11.3% gain (-0.8% y/y) in single-family starts to 1.173 million. The increase was to the highest level since March and followed four consecutive months of decline. Starts of multi-family homes improved 12.9% (37.1% y/y) to 506,000, the highest level since February 2020.

Building permits increased 3.6% (0.9% y/y) to 1.712 million from 1.653 million in October, revised from 1.650 million. It was the highest level of permits in three months. Permits to build single-family homes gained 2.7% (-4.5% y/y) to 1.103 million. Permits to build multi-family homes rose 5.2% (12.6% y/y) in November to 609,000.

By region, housing starts rose 27.5% in the Northeast (-9.1% y/y) in November to 130,000. Starts in the South improved 18.4% (15.8% y/y) to 933,000. Starts in the West increased 5.1% (-0.2% y/y) to 412,000. Partially offsetting these gains was a 7.3% decline (7.9% y/y) in starts in the Midwest to 204,000.

The housing starts and permits figures can be found in Haver's **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

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- Both single- and multi-family starts increase.
- Regional changes are mostly positive.
- Building permits strengthen.

U.S. Housing Starts Improve Sharply in November

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Total retail sales including food service and drinking establishments increased 0.3% (18.2% y/y) during November following a 1.8% October rise, revised from 1.7%. A 0.8% rise in November sales had been expected in the Action Economics Forecast Survey. The gain in September sales was revised to 0.7% from 0.8% reported last month. Sales excluding motor vehicles and parts also rose 0.3% in November (19.5% y/y) following a 1.8% October gain, revised from 1.7%. A 0.9% increase had been expected. The gain in nonauto sales in September sales was revised to 0.6% from 0.7%.

Sales in the retail control group, which excludes autos, gas stations, building materials and food services, eased 0.1% last month (+13.7% y/y) following a 1.8% October rise, revised from 1.6%.

Motor vehicle sales eased 0.1% (+13.4% y/y) in November after a 1.7% October increase. Unit motor vehicle sales increased eased 0.2% last month (-18.5% y/y) following a 6.0% increase.

Retail purchases via the internet were unchanged (12.1% y/y) last month following a 4.1% strengthening. Furniture & home furnishing store sales also held steady in November (16.3% y/y) after rising 2.8% in October. Electronics & appliance store sales declined 4.6% in November (16.8% y/y) after rising 3.1% in the prior month. General merchandise store sales fell 1.2% last month (+14.2% y/y) and reversed most of the prior month's gain. Within that category, department store sales weakened 5.4% (+27.6% y/y) following a 2.5% rise. To the upside, sporting goods, hobby and book store sales were firm as a 1.3% rise (20.0% y/y) added to strength in the prior two months. Apparel store sales rose 0.5% last month (34.8% y/y) after a 0.2% rise.

Gasoline service station sales increased 1.7% (52.3% y/y) following a 3.7% October increase as gas prices continued to rise. The gain accompanied a 4.9% surge in gasoline prices (seasonally adjusted by Haver) which followed an 8.9% increase. Building materials & garden equipment sales rose 0.7% last month (9.3% y/y) after a 2.5% October increase.

In the nondiscretionary sales categories, grocery & beverage store sales increased 1.3% during November (8.6% y/y) after rising 1.0% in October. Health & personal care store sales declined 0.6% (+7.2% y/y), the third consecutive month of decline.

Sales at restaurants & drinking establishments rose 1.0% last month (37.4% y/y) after a 0.3% October increase. It was the largest increase since July.

The retail sales data can be found in Haver's **USECON** database. The Action Economics forecast is in the **AS1REPNA** database.

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* **Auto sales ease.**
* **Online sales hold steady.**
* **Gasoline sales strengthen with higher prices.**

U.S. Retail Sales Disappoint in November

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The Empire State Manufacturing Index of General Business Conditions edged higher to 31.9 in December from to 30.9 in November and 19.8 in October. A decline to 25.0 had been expected in the Action Economics Forecast Survey. An increased 45.2% of respondents reported improved business conditions in December, up from 43.0% last month, while 13.2% reported that conditions had worsened, up slightly from 12.1% in November. The latest survey was conducted between December 2 and December 9.

Haver Analytics constructs an ISM-adjusted Empire State diffusion index using methodology similar to the ISM series. The latest reading fell to 60.8 in December from 62.5 in November, indicating that activity remained robust in December though the pace slowed slightly. A reading above 50 signifies growth. Moreover, in contrast to the ISM index, the headline Empire Index reflects the answer to a single question and is not calculated from its components. The slight decline in the ISM-adjusted Empire Index indicates that readings on the components were not quite as strong as the headline index indicated.

The index's component series mostly declined slightly in December. The new orders measure slipped to 27.1 from 28.8. Shipments fell to 27.1 from 28.2. Inventories edged down to 9.1 from 9.3. The delivery time index declined for the second consecutive month—to 23.1 from 32.2. So, while delivery times remained historically quite long, they lengthened less in December. A lessened 34.7% of respondents reported increased delivery times versus 38.1% in November, while 11.6% reported shorter deliver times, up sharply from 5.9% in November. However, the unfilled orders series rose to 19.0 in December from 12.7 in November.

Employment indicators in the survey weakened in December. The number of employees index fell to 21.4 from 26.0 in November. However, the November reading was a record high for the series dating back to July 2001. The percentage of respondents reporting increases in employment fell to 26.7% in December from 29.2% in November while 5.3% reported a decline in employment, up from 3.2% in November. The average workweek series fell sharply to 12.1, its lowest reading in four months, from 23.1 in November.

Inflation pressures remain intense though the pace of price increases slowed. The prices paid index dipped to 80.2 in December from 83.0 in November. The record high was 83.5 in May. A lower 81.8% of respondents paid higher prices for inputs in December, down from 83.1% in November while only 1.7% paid less (though this was up from zero in November). The prices received measure fell to 44.6 from a record 50.8 in November.

The index of business conditions in six months slipped to 36.4 in December from 36.9 in November and 52.0 in October. It was the lowest reading in seven months. Expectations for new orders, shipments, prices paid and delivery times fell while expectations for unfilled orders, inventories, prices received, employment and the average workweek rose. Expectations for both capital spending and technology spending also rose slightly.

The Empire State data, reported by the Federal Reserve Bank of New York, reflect business conditions in the manufacturing sector in New York, northern New Jersey and southern Connecticut. The headline measure is constructed from the answer to a single question on business conditions. The Empire State figures are diffusion indexes, which are calculated by subtracting the percent of respondents reporting declines from the percent reporting gains. The data are available in Haver's **SURVEYS** database. The ISM-adjusted headline index dates back to 2001. The Action Economics Forecasts can be found in Haver's **AS1REPNA** database.

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- Activity posted solid growth for second consecutive month.
- Components a little weaker than headline index.
- Still substantial increases in both input and selling prices though pace of increase slowed.
- Expectations slip again but components mostly stronger.

U.S. Empire State Index Edges Up in December

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Winnie Tapasanun

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The U.S. ISM Services PMI edged down to 54.0 in June, the third m/m decline in four months, following a 0.9-point increase to 54.5 in May, according to data from the Institute for Supply Management, indicating expansion in the services sector for the 24th straight month, albeit at a slightly slower pace. The June index, while above 50.8 in June 2025 and a low of 49.4 in June 2024, remained below its recent high of 56.1 in February and a record-high 67.5 in November 2021. The 12-month average was 53.1, pointing to continued growth in the U.S. services sector. The Action Economics Forecast Survey had also expected 54.0 for June.

Haver Analytics constructs a composite index combining the services index and the manufacturing reading. This index slipped to 53.9 in June after a 0.9-point increase to 54.4 in May, signaling expansion for the 13th consecutive month but at a slightly slower rate. The latest reading was above 50.6 in June 2025 and a low of 49.3 in June 2024, while remaining below a record-high 66.7 in November 2021. These series date back to July 1997.

In the latest services survey, the business activity index fell to 55.4 in June following a 1.8-point rise to 57.7 in May, indicating continued expansion in business activity for 24 months in a row, though at the slowest pace since March. The index was above a low of 50.0 in June 2024 but below a peak of 70.9 in November 2021. In June, 24.3% of respondents (NSA) reported higher activity while 14.5% reported an activity decline. The new orders index decreased to 55.1 in June after a 3.8-point gain to 57.3 in May, reflecting expansion in new orders for the 13th successive month but at a slower pace. The index was above a low of 47.2 in May 2025 but below a high of 61.0 in February 2023 and a record-high 69.2 in October 2021. In June, 25.9% of respondents (NSA) reported higher new orders while 17.1% reported declines. Meanwhile, the supplier deliveries index (NSA) fell to 54.4 in June from 55.2 in May, indicating slower supplier delivery performance for the 19th straight month after one month in faster territory in November 2024.

On the labor front, the employment index recovered to 51.2 in June from 47.9 in May, showing employment activity in the services sector expanded for the first time since February. The latest reading was above a low of 43.5 in December 2023 but below a high of 54.1 in June 2023 and a peak of 58.9 in April 2021. An increased 16.0% of respondents (NSA) indicated higher employment in June while 10.9% reported declines.

On the inflation front, the prices index fell to a still-elevated 67.7 in June from 71.3 in May, indicating prices paid by services organizations for materials and services had risen (i.e., above 50) since June 2017 but at the slowest rising pace in four months. The index was above a low of 53.9 in March 2024 but significantly below a peak of 83.7 in March 2022. In June, 40.7% of respondents (NSA) reported higher prices while only 3.8% reported price declines.

Additionally, the new export orders index edged up to 50.4 in June from a neutral 50.0 in May, showing new export orders expanded for the fourth time in five months, while the imports index fell to 49.4 from 51.1, marking the first contraction since January. The inventories index dropped to 51.2 in June from 62.5 in May (the highest level since May 2010), indicating inventories expanded for the fifth successive month. The inventory sentiment index fell to 52.6 in June from 55.2 in May, showing continued expansion since May 2023. The backlog of orders index rebounded to 54.9 in June from 51.3 in May, registering the fifth consecutive month of expansion following 11 straight months of contraction. 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: 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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- ISM Services PMI down to 54.0 in June, remaining above the 12-month avg. of 53.1.
- Business Activity (55.4) expands for the 24th consecutive mth.; New Orders (55.1) for the 13th straight mth.; Employment (51.2, first expansion since Feb.); Supplier Deliveries (54.4 vs. 55.2).
- Prices Index (67.7) at a four-month low, still indicating prices rising since June ’17.

U.S. ISM Services PMI Eases in June, Still Indicating Expansion for the 24th Straight Month

Robert Brusca

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The global PMI data for a select group of 24 countries and their composites, provided on the graph, indicate a slight overall improvement for the total PMIs in June, with the service sector getting slightly stronger as the manufacturing sector is slightly weaker.

Conditions, however, remain uneven. The overall average for the PMI composite in June moved up to 51.4 from 50.7 in May, but the May reading had fallen from 51 in April. The median rose to 50.8 in June from 50.2 in May, but it had been at 51.2 in April. There continues to be a great deal of weakness and irregularity in the progression of the global economy—not surprisingly with the recent data coming during the period when oil prices had surged in the Strait of Hormuz had been closed. We now are seeing different conditions in force, and we'll see how much improvement occurs in July if the current global situation remains improved.

In June, nine of twenty-four reporters had PMI readings below 50, indicating contraction in economic activity. In May, there had been ten such reporters, while in April there had been nine. These readings, of course, are less than half of the reporters; however, it's still a very large proportion of the reporters where the total PMI gauges are indicating economic contraction. Over three months, there are nine reporters with average readings below 50; over six months, there are only seven; and over 12 months, there are six. This progression tells us that the situation has been getting worse rather than better.

Based on monthly data, the European Monetary Union, Germany, France, Russia, Egypt, and Qatar each recorded three consecutive months of readings below 50, indicating contraction in each of those months. Sequentially, over 12 months, six months, and three months, only France, Russia, Ghana, Egypt, and Qatar show consistent readings that average below 50 (based on raw data).

The queue standings of the levels reported by countries in June show only seven with standings above the 50th percentile; this means there are only seven countries whose PMIs in June are higher than their average back to January 2022. Not surprisingly with the recent events really focused on oil prices and the situation in the Middle East and the closure of the Strait of Hormuz, some of the weakest ranking readings are coming from oil producers in the Middle East such as Qatar (6.1%), the UAE (1.5%), Saudi Arabia (6.1%), and Egypt (18.2%). Clearly, the interruption of the oil flow and war damage has had an outsized impact on these data.

However, quite apart from the current situation and the closure of the Strait, if we calculate the average PMI standing rather than the ranking just the average of the PMI total sector ranking, there are four countries that have averaged readings below 50 based on monthly data back to January 2022. Those countries are France, Zambia, Egypt, and Kenya. The average readings across all countries back to January 2022 is a reading of 52.3. The highest ranking during this previous period is from India; its ranking is at 58.1. Ironically, some of the strongest readings in the earlier period come from oil producers whose current rankings are so low such as Saudi Arabia at 56.6, the UAE at 54.6, and Qatar at 53.4.

There has been upward momentum this month, particularly in services, while manufacturing backtracked. However, the trend to improve conditions is no longer so clear. What is clear is that the outlook is going to depend upon whatever peace agreement proves durable involving Iran and traffic through the Strait of Hormuz. This conclusion is not rocket-science; it is obvious. And it's going to take close-watching because there have been so many missteps around alleged ceasefires and treaty discussions that we can't be very sure about what's going to play out in the future and what will last.

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Globally S&P PMIs Gain a Modicum of Traction

Tian Yong Woon

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

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

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

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

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

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

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

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Asia

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

Andrew Cates

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

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

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

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

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

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

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

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Charts of the Week: Forecasters Hold Firm

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

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

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

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

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

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

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