Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040830b.jpg" width="353">
The Australian current account deficit increased to $12, 061 million Australian dollars in the second quarter from $10,293 million A$ in the first quarter. The deficit thus continues to run at close to 6% of GDP.
In spite of the high current account deficit, the exchange rate has begun to strengthen again after a brief decline from February to July of this year. The exchange rate had increased 63% from its low point of $.4900 US$ on September 24, 2001 to $.7979 on February 17th of this year. As of last Friday it was$.7040, up from $6980 on July 28th.
The current account has been offset by an almost equal capital inflow. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040830c.jpg" width="353"> Other factors--errors and omissions and changes in reserves--have played a minor role in balancing the international accounts. As the two charts show, it is the capital account which currently appears to have the greater impact on the exchange rate. With the free flow of capital, a country can, for a time, experience a rising exchange rate in the face of a worsening current account. In the long run, however, continued current account deficits may lead to conditions that will discourage capital inflows and necessitate structural changes in the economy.
In the attached charts exchange rates, from the Haver data base, Daily, are plotted along with the quarterly current and capital and financial account. In the table below exchange rates from the Haver data base Australia are shown as of the end of the period.

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<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">&nbsp;</th>
<th scope="col">Q2 04</th>
<th scope="col">&nbsp; Q1 04</th>
<th scope="col">&nbsp; Q4 03</th>
<th scope="col">Q3&nbsp;03</th>
<th scope="col">2003&nbsp;</th>
<th scope="col">&nbsp; 2002&nbsp;</th>
<th scope="col">&nbsp; 2001&nbsp;</th>
<th scope="col">&nbsp;2000</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Balance of Payments (mil A$)</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td></td>
</tr>
<tr>
<td class="firstcol">Current Account</td>
<td>-12016</td>
<td>-10293</td>
<td>-12186</td>
<td>-12932</td>
<td>-46046</td>
<td>-300517</td>
<td>-16099</td>
<td>-26225</td>
</tr>
<tr class="odd">
<td class="firstcol">Capital and Financial Account</td>
<td>12047</td>
<td>10667</td>
<td>12670</td>
<td>12879</td>
<td>46601</td>
<td>31674</td>
<td>16615</td>
<td>25419</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Exchange Rate US$/A$ (EOP)</td>
<td>0.6889</td>
<td>0.7589</td>
<td>0.7360</td>
<td>0.6801</td>
<td>0.7500</td>
<td>0.5662</td>
<td>0.5106</td>
<td>0.5540</td>
</tr>
</tbody>
</table>
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The Australian current account deficit increased to $12, 061 million Australian dollars in the second quarter from $10,293 million A$ in the first quarter. The deficit thus continues to run at close to 6% of GDP. In spite of the high [...]

Australia's Capital Inflows Continue to Support the Australian Dollar

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040830a.jpg" width="353">
Personal income grew much less than expected last month. The 0.1% July gain was the weakest in nearly two years, followed a slim 0.2% rise in June and fell short of Consensus expectations for a 0.5% increase.
A 0.5% decline (+6.6% y/y) in proprietors&#39; income was the source of much of last month&#39;s disappointment and that was driven by a 5.4% drop in farmers&#39; income. Wages &amp; salaries rebounded 0.4% (+4.4% y/y) from the slight decline in June. The rebound was paced by a 0.6% (2.7% y/y) increase in manufacturing wages.
Personal disposable income rose a slight 0.1% (4.3% y/y). After accounting for a 2.4% y/y rise in prices, real disposable income rose a much reduced 1.8% y/y.
Consumer spending jumped 0.8% following an upwardly revised 0.2% June decline. Higher light vehicle sales pulled durables up 4.1%. Non-durable goods sales rose a slight 0.2%, held back by lower gasoline prices, and services spending rose 0.4% (5.1% y/y). 
The PCE chain price index fell slightly. Prices less food &amp; energy also were weak, unchanged m/m (1.5% y/y) due to another decline in durables prices (-0.4% m/m, -1.9% y/y). Services prices rose a moderate 0.2% (2.5% y/y). &quot;A Crude Crude Oil Calculation&quot; from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/publications/mt/20040801/cover.pdf"> here</a>.
The savings rate fell to 0.6% and prior months&#39; figures were revised down.

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<colgroup><col><col><col><col><col><col></colgroup>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E711/@E71102/@E71102.HTM"> Disposition of Personal Income</a></th>
<th scope="col">July</th>
<th scope="col">June</th>
<th scope="col">Y/Y</th>
<th scope="col"> 2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Personal Income</td>
<td>0.1%</td>
<td>0.2%</td>
<td>4.9%</td>
<td>3.2%</td>
<td>1.8%</td>
<td>3.5%</td>
</tr>
<tr>
<td class="firstcol">Personal Consumption</td>
<td>0.8%</td>
<td>-0.2%</td>
<td>5.9%</td>
<td>5.2%</td>
<td>4.6%</td>
<td>4.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Savings Rate</td>
<td>0.6%</td>
<td>1.3%</td>
<td>2.2%</td>
<td>1.4%</td>
<td>2.0%</td>
<td>1.8%</td>
</tr>
<tr>
<td class="firstcol">PCE Chain Price Index</td>
<td>-0.0%</td>
<td>0.2%</td>
<td>2.4%</td>
<td>1.9%</td>
<td>1.4%</td>
<td>2.1%</td>
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Personal income grew much less than expected last month. The 0.1% July gain was the weakest in nearly two years, followed a slim 0.2% rise in June and fell short of Consensus expectations for a 0.5% increase. A 0.5% decline (+6.6% [...]

U.S. Personal Income Sluggish. Farmers' Income Fell, Wages OK

Carol Stone, CBE

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040827d.jpg" width="353">
Unemployment increased in Japan in July, according to data reported today by the Ministry of Public Management, Home Affairs, Posts and Telecommunications. The unemployment rate rose from 4.6% in June to 4.9%, the highest in five months. Headline writers in the press declared that the economic recovery in Japan was faltering.
Indeed, the trajectory of labor market indicators is not unambiguously upward. Employment is down from an April peak and also lower than its year-ago amount. Even so, the number of people employed rose 90,000 in July and remains well above a recent trough in November. The Japanese &quot;recovery&quot; is proceeding in fits and starts, making any single month&#39;s performance hard to put into a trend or context.
At the same time, the rise in unemployment occurred because of an increase in the labor force. After falling sharply for two months, the total of those employed and unemployed in July regained about half its May-June loss. It is seen in the graph that the labor force has shrunk persistently since the middle of 1998. The July snapback reversed the previous month&#39;s 0.3% fall in labor force participation as a percent of the working-age population. Such developments, if sustained, can suggest improved expectations among potential workers who begin to hunt for new jobs they believe might now be available; this is a sign of recovery even as it keeps the unemployment rate from decreasing until actual hiring catches up.

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<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Seasonally Adjusted, Millions</th>
<th scope="col">July 2004</th>
<th scope="col">June 2004</th>
<th scope="col">May 2004</th>
<th scope="col">July 2003</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
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</thead>
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<tr class="odd">
<td class="firstcol">Employment</td>
<td>63.24</td>
<td>63.15</td>
<td>63.53</td>
<td>63.33</td>
<td>63.17</td>
<td>63.30</td>
<td>64.10</td>
</tr>
<tr>
<td class="firstcol">Unemployment</td>
<td>3.27</td>
<td>3.05</td>
<td>3.05</td>
<td>3.52</td>
<td>3.50</td>
<td>3.59</td>
<td>3.40</td>
</tr>
<tr class="odd">
<td class="firstcol">Labor Force*</td>
<td>66.51</td>
<td>66.20</td>
<td>66.58</td>
<td>66.85</td>
<td>66.67</td>
<td>66.89</td>
<td>67.50</td>
</tr>
<tr>
<td class="firstcol">Population, Age 15+</td>
<td>109.84</td>
<td>109.82</td>
<td>109.95</td>
<td>109.68</td>
<td>109.62</td>
<td>109.27</td>
<td>108.86</td>
</tr>
<tr class="odd">
<td class="firstcol">Participation Rate* (%)</td>
<td>60.6%</td>
<td>60.3%</td>
<td>60.6%</td>
<td>61.0%</td>
<td>60.8%</td>
<td>61.2%</td>
<td>62.0%</td>
</tr>
<tr>
<td class="firstcol">Unemployment Rate ** (%)</td>
<td>4.9%</td>
<td>4.6%</td>
<td>4.6%</td>
<td>5.3%</td>
<td>5.3%</td>
<td>5.4%</td>
<td>5.0%</td>
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Unemployment increased in Japan in July, according to data reported today by the Ministry of Public Management, Home Affairs, Posts and Telecommunications. The unemployment rate rose from 4.6% in June to 4.9%, the highest in five [...]

Japanese Unemployment Rises in July, But So Does Employment; Signs of Recovery Ambiguous

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040827c.jpg" width="353">
The University of Michigan&#146;s consumer sentiment index for August rose to 95.9 from the mid-month reading of 94.0. That still was lower than 96.7 in July. Consensus expectations had been for 94.0.
During the last ten years there has been a 75% correlation between the level of consumer sentiment and the y/y change in real PCE.
The expectations sub-index improved to 88.2 versus the mid-month read of 84.7. The index of current economic conditions eased slightly to 107.9 from 108.4 mid-month.
The University of Michigan survey is not seasonally adjusted.The mid-month survey is based on telephone interviews with 250 households nationwide on personal finances and business and buying conditions. The survey is expanded to a total of 500 interviews at month end.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM"> University of Michigan</a></th>
<th scope="col"> Aug</th>
<th scope="col"> July</th>
<th scope="col">Y/Y</th>
<th scope="col"> 2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Consumer Sentiment</td>
<td>95.9</td>
<td>96.7</td>
<td>5.3%</td>
<td>87.6</td>
<td>89.6</td>
<td>89.2</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>107.9</td>
<td>105.2</td>
<td>8.7%</td>
<td>97.2</td>
<td>97.5</td>
<td>100.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Consumer Expectations</td>
<td>88.2</td>
<td>91.2</td>
<td>2.7%</td>
<td>81.4</td>
<td>84.6</td>
<td>82.3</td>
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The University of Michigans consumer sentiment index for August rose to 95.9 from the mid-month reading of 94.0. That still was lower than 96.7 in July. Consensus expectations had been for 94.0. During the last ten years there has [...]

U.S. Consumer Sentiment Up Through August

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040827b.jpg" width="353">
US real GDP growth last quarter was revised slightly lower to 2.8% from 3.0%, about in line with Consensus expectations.
Higher exports did not raise US output as much as previously estimated. Export growth in 2Q was revised down to 6.2% (AR, 10.5% y/y) from the initial estimate of 18.4% growth. Combined with an upward revision to import growth to 14.1% (11.0% y/y) from 9.3%, that raised the trade sector&#39;s subtraction from GDP growth to 1.4 percentage points. News of the record (by far) trade deficit of $55.5B in June drove the revision.
Corporate profit growth slowed considerably to 0.6% (AR, 18.4% y/y) from 13.6% growth in 1Q and 30.2% in 4Q03. Profits in the financial and the foreign sectors fell. In the US nonfinancial corporate sector profit growth remained firm at 20.4% (AR, 26.4% y/y) as firms grew more efficient, indicated by the 3.8% (19.6% y/y) rise in profits per unit of output.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040827a.jpg" width="353"> 
Growth in domestic final demand was a stronger 3.4% versus the initial estimate of 2.7% growth. Real PCE growth was revised up to 1.6% from 1.0% and business fixed investment spending was raised to 12.1% (10.7% y/y) from 8.8%. Growth in equipment &amp; software spending was raised to 13.7% (13.7% y/y) from 10.0%. Residential investment growth was about unchanged at a surging 14.8% (12.8% y/y).
Inventory investment contributed a somewhat larger 0.7 percentage points to growth than the 0.3 points initially estimated, and that was about half the positive contribution in 1Q.
Prices grew the same 3.2% as initially estimated.
This 2001 paper from the Federal Reserve Bank of New York presents an <a href="http://www.newyorkfed.org/research/staff_reports/sr122.html"> overview of labor &amp; total factor productivity</a> and discusses why it is such an important topic. 
Fed Chairman Alan Greenspan&#39;s testimony today in Jackson Hole, Wyoming is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2004/20040827/default.htm"> here</a>.

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<thead>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM"> Chained 2000$, % AR</a></th>
<th scope="col"> 2Q &#39;04 (Prelim.)</th>
<th scope="col"> 2Q &#39;04 (Advance)</th>
<th scope="col"> 1Q &#39;04 (Final)</th>
<th scope="col"> Y/Y</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">GDP</td>
<td>2.8%</td>
<td>3.0%</td>
<td>4.5%</td>
<td>4.7%</td>
<td>3.0%</td>
<td>1.9%</td>
<td>0.8%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Inventory Effect</td>
<td>0.7%</td>
<td>0.3%</td>
<td>1.2%</td>
<td>0.7%</td>
<td>-0.1%</td>
<td>0.5%</td>
<td>-0.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">Final Sales</td>
<td>2.1%</td>
<td>2.8%</td>
<td>3.3%</td>
<td>4.0%</td>
<td>3.1%</td>
<td>1.4%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Trade Effect</td>
<td>-1.4%</td>
<td>-0.1%</td>
<td>-0.8%</td>
<td>-0.1%</td>
<td>-0.3%</td>
<td>-0.7%</td>
<td>-0.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic Final Demand</td>
<td>3.4%</td>
<td>2.7%</td>
<td>3.9%</td>
<td>4.3%</td>
<td>3.4%</td>
<td>2.1%</td>
<td>1.8%</td>
</tr>
<tr>
<td class="firstcol">Chained GDP Price Index</td>
<td>3.2%</td>
<td>3.2%</td>
<td>2.8%</td>
<td>2.3%</td>
<td>1.8%</td>
<td>1.7%</td>
<td>2.4%</td>
</tr>
</tbody>
</table>
</body>
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US real GDP growth last quarter was revised slightly lower to 2.8% from 3.0%, about in line with Consensus expectations. Higher exports did not raise US output as much as previously estimated. Export growth in 2Q was revised down to [...]

Foreign Trade Drag Reduced 2Q US GDP Growth, Domestic Corporate Profits Slower But Firm

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040827b.jpg" width="353">
US real GDP growth last quarter was revised slightly lower to 2.8% from 3.0%, about in line with Consensus expectations.
Higher exports did not raise US output as much as previously estimated. Export growth in 2Q was revised down to 6.2% (AR, 10.5% y/y) from the initial estimate of 18.4% growth. Combined with an upward revision to import growth to 14.1% (11.0% y/y) from 9.3%, that raised the trade sector&#39;s subtraction from GDP growth to 1.4 percentage points. News of the record (by far) trade deficit of $55.5B in June drove the revision.
Corporate profit growth slowed considerably to 0.6% (AR, 18.4% y/y) from 13.6% growth in 1Q and 30.2% in 4Q03. Profits in the financial and the foreign sectors fell. In the US nonfinancial corporate sector profit growth remained firm at 20.4% (AR, 26.4% y/y) as firms grew more efficient, indicated by the 3.8% (19.6% y/y) rise in profits per unit of output.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040827a.jpg" width="353">
Growth in domestic final demand was a stronger 3.4% versus the initial estimate of 2.7% growth. Real PCE growth was revised up to 1.6% from 1.0% and business fixed investment spending was raised to 12.1% (10.7% y/y) from 8.8%. Growth in equipment &amp; software spending was raised to 13.7% (13.7% y/y) from 10.0%. Residential investment growth was about unchanged at a surging 14.8% (12.8% y/y).
Inventory investment contributed a somewhat larger 0.7 percentage points to growth than the 0.3 points initially estimated, and that was about half the positive contribution in 1Q.
Prices grew the same 3.2% as initially estimated.
This 2001 paper from the Federal Reserve Bank of New York presents an <a href="http://www.newyorkfed.org/research/staff_reports/sr122.html"> overview of labor &amp; total factor productivity</a> and discusses why it is such an important topic. 
Fed Chairman Alan Greenspan&#39;s testimony today in Jackson Hole, Wyoming is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2004/20040827/default.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM"> Chained 2000$, % AR</a></th>
<th scope="col"> 2Q &#39;04 (Prelim.)</th>
<th scope="col"> 2Q &#39;04 (Advance)</th>
<th scope="col"> 1Q &#39;04 (Final)</th>
<th scope="col"> Y/Y</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">GDP</td>
<td>2.8%</td>
<td>3.0%</td>
<td>4.5%</td>
<td>4.7%</td>
<td>3.0%</td>
<td>1.9%</td>
<td>0.8%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Inventory Effect</td>
<td>0.7%</td>
<td>0.3%</td>
<td>1.2%</td>
<td>0.7%</td>
<td>-0.1%</td>
<td>0.5%</td>
<td>-0.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">Final Sales</td>
<td>2.1%</td>
<td>2.8%</td>
<td>3.3%</td>
<td>4.0%</td>
<td>3.1%</td>
<td>1.4%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Trade Effect</td>
<td>-1.4%</td>
<td>-0.1%</td>
<td>-0.8%</td>
<td>-0.1%</td>
<td>-0.3%</td>
<td>-0.7%</td>
<td>-0.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic Final Demand</td>
<td>3.4%</td>
<td>2.7%</td>
<td>3.9%</td>
<td>4.3%</td>
<td>3.4%</td>
<td>2.1%</td>
<td>1.8%</td>
</tr>
<tr>
<td class="firstcol">Chained GDP Price Index</td>
<td>3.2%</td>
<td>3.2%</td>
<td>2.8%</td>
<td>2.3%</td>
<td>1.8%</td>
<td>1.7%</td>
<td>2.4%</td>
</tr>
</tbody>
</table>
U.S. Consumer Sentiment Up Through August 
by <a href="/comment/Moeller.html">Tom Moeller</a> August 27, 2004


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/040827c.jpg" width="353">
The University of Michigan&#146;s consumer sentiment index for August rose to 95.9 from the mid-month reading of 94.0. That still was lower than 96.7 in July. Consensus expectations had been for 94.0.
During the last ten years there has been a 75% correlation between the level of consumer sentiment and the y/y change in real PCE.
The expectations sub-index improved to 88.2 versus the mid-month read of 84.7. The index of current economic conditions eased slightly to 107.9 from 108.4 mid-month.
The University of Michigan survey is not seasonally adjusted.The mid-month survey is based on telephone interviews with 250 households nationwide on personal finances and business and buying conditions. The survey is expanded to a total of 500 interviews at month end.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM"> University of Michigan</a></th>
<th scope="col"> Aug</th>
<th scope="col"> July</th>
<th scope="col">Y/Y</th>
<th scope="col"> 2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Consumer Sentiment</td>
<td>95.9</td>
<td>96.7</td>
<td>5.3%</td>
<td>87.6</td>
<td>89.6</td>
<td>89.2</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>107.9</td>
<td>105.2</td>
<td>8.7%</td>
<td>97.2</td>
<td>97.5</td>
<td>100.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Consumer Expectations</td>
<td>88.2</td>
<td>91.2</td>
<td>2.7%</td>
<td>81.4</td>
<td>84.6</td>
<td>82.3</td>
</tr>
</tbody>
</table>
</body>
</html>

Reaccelerating goods price inflation along with sticky services inflation clouds the outlook

Falling oil prices aren't pulling down inflation expectations, pointing to a boost from increased tariffs

Equity market exuberance outpacing macroeconomic data

Apart from Japan, Blue Chip forecasters expect further sizable monetary easing

US production rebounded in Q2, but demand continued to slow

US leader, Germany trailer for real GDP growth over past 3 years

Negative US inflation surprises leading G10 down

Deflation continues in China

Incoming data surprising on downside in US; positive surprises elsewhere

FOMC expects more inflation and less growth than in March

With escalation of Israel/Iran conflict, geopolitical risk has recently surged while US trade policy uncertainty has ebbed

Renewed supply chain pressures point to a rebound in global inflation ahead

Apart from Japan, Blue Chip forecasters look for further significant monetary policy easing

Apart from the US, productivity is moribund

Financial market concerns ebb even though policy uncertainty continues to soar

US tariff revenues nearly doubled in April

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

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

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

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

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

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The **PCE chain price index** increased 0.2% (2.6% y/y) after rising an unrevised 0.3% in June and an unrevised 0.2% in May. The y/y gain steadied at 2.6%. It was increased from 2.2% y/y in April. Energy prices fell 1.1% (-2.7% y/y) after rising 0.9%, while food & beverage prices eased 0.1% (+1.9% y/y) following a 0.3% rise. The price index excluding food & energy rose a steady 0.3%, after two straight 0.2% increases. The y/y gain edged up to 2.9% last month from 2.8% in June. It was increased from a low of 2.6% in April.

Durable goods prices eased 0.1% (+1.1% y/y) in July, after rising 0.5% in June. Home furnishings & appliance prices edged 0.1% higher (2.5% y/y), after increasing 1.3%. Recreational goods & vehicle costs declined 0.9% (-0.3% y/y) and reversed the 0.9% June strengthening. Motor vehicle & parts prices rose 0.2% (1.6% y/y), after a 0.4% June decline.

Prices of nondurable goods eased 0.1% (+0.2% y/y) last month after rising 0.4% in June. Clothing prices held steady both m/m and y/y after rising 0.3% in June. Food & beverage prices eased 0.1% (+1.9% y/y), following a 0.4% June increase. Gasoline & other energy prices fell 1.7% (-9.6% y/y), after rising 0.9% in June.

Services prices in July rose 0.3% (3.6% y/y), after four straight 0.2% increases. Housing & utility prices rose 0.2% (4.3% y/y), after two consecutive 0.3% increases, and services prices excluding energy & healthcare gained 0.4% (3.7% y/y) after two 0.2% gains. Healthcare prices rose 0.2% (2.7% y/y), after rising 0.4%. The cost of financial services & insurance jumped 1.2% (5.5% y/y) after rising 0.4% in June. Recreation services costs rose 0.3% (3.2% y/y) after rising 0.1%. Transportation prices gained 0.2% (4.4% y/y), following a 0.1% rise, while hotel & restaurant prices improved 0.1% (2.8% y/y) after a slight June decline.

**Personal consumption expenditures (PCE)** rose 0.5% (4.7% y/y) last month after increasing 0.4% in June, revised from 0.3%, after holding steady in May. The July rise matched expectations in the Action Economics Forecast Survey. When adjusted for price changes, PCE improved 0.3% in July (2.1% y/y) after rising 0.1% in June.

Real spending on durable goods increased 2.0% (3.2% y/y) in July, after falling for three straight months. Real spending on motor vehicles jumped 4.5% (3.5% y/y), after falling sharply in both June and May. Real outlays on furnishings & appliances improved 0.2% (0.9% y/y), after falling in each of the prior month. Real spending on recreational goods & vehicles increased 1.5% (4.9% y/y) last month, after falling 0.4% in June. Spending on “other” durable goods improved 0.4% (2.6% y/y) after rising 0.2% in June.

Nondurable goods spending in real terms rose 0.3% (2.7% y/y) in July after gaining 0.6% in June. Real clothing & footwear purchases rose 0.6% (4.9% y/y) last month, following a 0.5% rise during June. Real food & beverage purchases strengthened 0.7% (1.7% y/y) after rising 0.4%. Real outlays on gasoline & other energy products fell 1.3% (-1.5% y/y), after rising 1.5%. Real spending on “other” nondurable goods edged 0.1% higher (4.1% y/y) last month, following a 0.6% rise in June.

Real spending on services improved 0.1% (1.7% y/y) in July for the second straight month. Real spending on housing & utilities rose 0.1% (1.1% y/y) in July, for a second consecutive month, while real health care spending also rose 0.1% (3.9% y/y) after rising 0.2%. Real spending on food services & accommodations eased 0.2% (+1.7% y/y), after rising 0.4% in June. Real spending on financial services & insurance rose 0.2% (2.4% y/y) after increasing 0.4% in June. Real spending on transportation services rose 0.3% (-0.0% y/y) in July, after falling 0.6% in June. Recreation spending slipped 0.1% (+1.0% y/y), the same as in June. Spending on “other” services rose 0.3% (2.7% y/y) for the second straight month.

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**Personal income** rose 0.4% last month (5.0% y/y) after increasing 0.3% in June. A 0.5% gain was expected. Wages & salaries moved 0.6% higher (5.3% y/y), following a 0.1% increase during June. Rental income increased 0.5% (4.0% y/y) in July, after falling for three straight months. Proprietors’ income improved 0.7% (2.3% y/y), after a minimal 0.1% increase. Income from assets rose 0.1% (1.4% y/y), after holding steady in June, and current transfer receipts were unchanged (8.3% y/y) following a 1.1% June increase.

Disposable personal income increased 0.4% (4.6% y/y) during July following a 0.3% June rise. After adjusting for price changes, disposable income improved 0.2% (2.0% y/y) after holding steady in June.

The personal saving rate held steady in July at 4.4%, after falling from 5.0% in April. It still stands well above low of 3.5% in December of last year. Personal saving fell 1.7% (+5.8% y/y) in July, after declining 0.9% in June.

The personal income and consumption figures are available in Haver’s **USECON** database with detail in the **USNA** database. The Action Economics forecasts are in **AS1REPNA**.

**Let’s Get On with It** from Fed Governor Christopher J. Waller is available [here](https://www.federalreserve.gov/newsevents/speech/waller20250828a.htm).

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- Core price increase y/y matches highest since February.
- Real spending moderation centers on services.
- Real disposable income improves; personal savings rate steadies.

U.S. Core PCE Price Inflation Up in July; Real Spending Slows Y/Y 

Winnie Tapasanun

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The advance estimate of the U.S. international trade deficit in goods widened to a larger-than-expected $103.57 billion in July after narrowing to $84.85 billion in June, data from the U.S. Census Bureau showed. The July reading, the second widening in the goods trade deficit in three months, was slightly smaller than a $103.92 billion shortfall in July 2024. A deficit of $90.2 billion for July had been expected by the Action Economics Forecast Survey. The deficit reached a record $161.95 billion in March. In Q2'25, the goods trade deficit narrowed to $266.96 billion, the smallest since Q4'23, after ballooning to a record $465.035 billion in Q1'25; the monthly deficit averaged $88.99 billion in Q2'25, down from a record $155.01 billion in Q1'25.

Total goods exports dipped 0.1% m/m (+3.0% y/y), the third consecutive monthly decline, to $177.97 billion in July, the lowest level since January, after a 0.7% decrease to $178.08 billion in June. April registered a record high of $190.08 billion. Exports were up 9.6% from a June 2023 low but down 2.1% from a July 2022 high. The m/m decline in exports in July reflected exports m/m drops of 2.4% (+16.3% y/y) in other goods, 0.9% (+5.1% y/y) in nonfood consumer goods excluding autos, and 0.8% (-1.2% y/y) in industrial supplies & materials. To the upside, exports for the following end-use categories rose m/m in July: automotive vehicles & parts (2.2%; -4.0% y/y), capital goods excluding autos (0.7%; 7.0% y/y), and foods, feeds & beverages (0.5%; 1.4% y/y).

Total goods imports rebounded 7.1% m/m (1.7% y/y), the first monthly increase since March, to a four-month-high $281.54 billion in July following a 4.6% drop to $262.94 billion in June. March registered a record high of $344.59 billion. Imports were up 11.9% from a June 2023 low but down 2.6% from a March 2022 high. The m/m rebound in imports in July reflected m/m rises in most imports end-use categories. These included a 25.4% surge (the first m/m increase and the largest since January; 4.9% y/y) in industrial supplies & materials as well as rises of 11.5% (23.5% y/y) in other goods, 4.8% (14.7% y/y) in capital goods excluding autos, 2.4% (4.9% y/y) in foods, feeds & beverages, and 2.1% (-12.2% y/y) in nonfood consumer goods excluding autos. In contrast, imports of automotive vehicles & parts, the only end-use category with a monthly decline in July, fell 3.2% (-14.1% y/y), the third m/m fall in four months, on top of a 3.6% June decrease.

The advance international trade data can be found in Haver's **USECON** database. The expectation figure is from the Action Economics Forecast Survey, which is in **AS1REPNA**.

- Deficit: $103.57 bil. in July, jumping 22.1% from June’s $84.85 bil.
- Exports -0.1%, down for the third straight month, led by a 2.4% decline in exports of other goods.
- Imports +7.1%, up for the first time since March, led by a 25.4% surge in imports of industrial supplies & materials.

U.S. Goods Trade Deficit Balloons in July; Largest Since March’s Record High

Robert Brusca

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Inflation in the monetary union was tepid across the large, early-reporting, economies in August. The HICP rose by 0.2% on the month in Germany, rose by 0.1% in France, while it was flat in both Italy and Spain. However, these outstanding readings followed several months of stronger inflation; in particular in July German prices rose by 0.2%, in Italy the gauge rose by 0.3%, in France by 0.4%, and in Spain by 0.5%.

As a result, over three months, inflation is running hot on the headline gauge, over 2% in France, Italy, and Spain, and just below it, at a 1.8% annual rate in Germany. Over 12 months, inflation is well behaved, but that headline is up 0.8% in France, rises by 1.7% over 12 months in Italy, by 2.1% in Germany, and at a 2.6% pace in Spain. That is a bit more mixed but still quite solid set of results. The EMU-wide HICP for July – on a one-month lag- rises by 2.1% over 12 months with a core at 2.3%.

Core inflation is not well reported on an early basis. The Italian core rate rose 0.2% in August with Spain at 0.3%; both Italy and Spain logged increases of 0.3% in July and in June and as a result the 3-month inflation rate on the core for Italy and Spain runs at 2.7% in Italy and at 3.8% for Spain. These, of course, are much higher and more disturbing numbers for inflation. The 6-month inflation rate for core Italy and Spain runs at 2.9% and 3.1%, respectively, while over 12 months the Italian core is up by only 2.1% and the Spanish core is up by only 2.4%. The kick up and inflation for the core is a relatively recent phenomenon.

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These statistics give the ECB some room and some time to maneuver, since headline inflation is in pretty good shape and the inflation issues are scattered and have emerged more recently from the core and with growth still weak and with rising unemployment in Germany where it just topped 3 million for the first time in a decade. There may not be any impetus to have to raise rates to cool inflation. The European Central Bank, like the Federal Reserve, is likely playing a watch and wait game with the economic statistics, and this month the watch and wait game turned pretty much in its favor with very good headline figures although still having some difficult core figures. It will take a little time before we get the core numbers for the rest of the monetary union members to fill in to understand exactly where those trends sit.

However, based on the early returns, the ECB is probably relatively happy with how inflation is sitting even with the core rates slightly excessive and varied. There doesn't appear to be any burgeoning inflation problem; there's some kind of a modest core inflation issue building in Italy and Spain and we'll have to watch that in the coming months. For now, the ECB should be relatively content.

Europe

EMU Large Country Inflation Runs Cold – Over Tepid Cores

Andrew Cates

**The US labour market**
The latest data highlight a growing sense of fragility in the US labour market. The unemployment rate, while still relatively low by historical standards, has been edging higher through the course of this year. More telling, however, is the signal from this week’s consumer confidence survey from Conference Board and specifically the labour market differential — the gap between the share of consumers saying jobs are plentiful versus those saying jobs are hard to get. That balance has narrowed sharply, moving back toward levels historically associated with softer labour demand and rising unemployment.

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**Goods and services inflation** 
Haver’s breakdown of goods and services CPI inflation in the advanced economies highlights where fresh risks are emerging. Goods inflation, which had been receding sharply after the pandemic supply shocks, has recently shown signs of firming again. Some of this probably reflects the impact of US tariff policies, which are raising import costs and putting renewed upward pressure on traded goods prices. While services inflation remains the more stubborn component in most advanced economies, the risk is that tariffs could reintroduce stickiness into goods prices, slowing the overall disinflation process.

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**China, Europe and US trade policy**
A consequence of US tariff policies has been a sharp contraction in Chinese exports to the US market, with much of the surplus redirected elsewhere. Europe in particular has recorded near double-digit import growth in recent months, raising concerns that Beijing is deflecting its industrial overcapacity problem rather than resolving it, effectively transferring the pressure onto trading partners. China’s authorities, however, have begun to push back, introducing measures to curb excess supply and rein in so-called “involution,” including clampdowns on price wars across several industries.

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**China’s excess capacity and Europe**
A closer look at Europe–China trade shows that electric vehicles remain a key flashpoint. Import volumes from China have continued to rise even as per-unit prices fall sharply from a year ago —evidence suggesting that industrial overcapacity persists, with low-cost Chinese EVs increasingly challenging European automakers. The surge has carried on despite EU tariffs of up to 45% on battery EVs, as Chinese producers have adapted by pushing plug-in hybrids and expanding onshore production in Europe to bypass duties and defend market share.

250828Z4.jpg

**Wage growth in the US and Europe** 
Turning back to inflation dynamics, the UK stands out for its persistent wage pressures. While posted wage growth has cooled across the US and euro area, the UK measure has remained elevated at around 6% year-on-year, well above pre-pandemic norms. This stickiness reflects a still-tight labour market in key service sectors, even as broader activity has slowed and unemployment has edged higher. For the Bank of England, it underscores the dilemma: headline inflation is easing, but underlying pay growth risks keeping services inflation uncomfortably high, complicating the timing and scale of policy easing.

250828Z5.jpg

**The UK economy**
The UK’s net international investment position has deteriorated noticeably in recent years, with both direct investment and portfolio flows showing persistent weakness. The latest data underline how net FDI has turned increasingly negative, while the portfolio investment balance has also eroded, leaving the UK more reliant on volatile short-term funding sources. This deterioration comes against a backdrop of heightened investor unease about the riskiness of UK debt markets, where elevated gilt yields and rising debt-servicing costs have amplified concerns over fiscal sustainability. Taken together, these trends underscore the vulnerability of the UK’s external position at a time when global capital is arguably proving more selective and risk sensitive.

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Global markets have continued to rally into late summer, buoyed by AI optimism, dovish signals from central bankers at Jackson Hole, and expectations of easier policy ahead. Yet beneath the surface, risks to the world economy are accumulating. In the US, labour market indicators point to softening conditions (chart 1), while tariff-driven pressures are beginning to push goods prices higher (chart 2). Global trade flows are being reshaped by US policy, with China’s excess capacity increasingly diverted toward Europe, most visibly through surging exports of electric vehicles (EVs) (charts 3 and 4). At the same time, wage growth remains stubbornly elevated in the UK, complicating disinflation (chart 5), while concerns are mounting over the country’s external vulnerabilities as net FDI and portfolio positions weaken against the backdrop of jittery debt markets (chart 6). Together, these dynamics highlight the tension between buoyant market performance and a global economy still grappling with structural fragilities.

Charts of the Week: Riskbusters

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Real GDP grew 3.3% (SAAR) during the second quarter of 2025, revised from a 3.0% gain reported initially. The increase followed an unrevised 0.5% decline in Q1. A 3.1% rise had been expected in the Action Economics Forecast Survey. Growth during the last four quarters of 2.1% compared to 2.0% y/y in Q1, and remained below its most recent high of 3.2% in Q4 2023.

After-tax corporate profits without IVA & CCA adjustment increased 1.4% (7.0% y/y) last quarter after easing 0.8% in Q1. Before-tax earnings with IVA & CCA rose 1.7% (4.3% y/y) after falling 2.3% in Q1. Financial sector earnings rose 1.4% (15.3% y/y) after rising 2.3% in Q1. Nonfinancial corporate profits rose 2.2% (2.5% y/y) after falling 2.5% in Q1. Earnings from abroad eased 0.7% (-0.4% y/y) following a 7.3% Q1 decline.

Foreign trade balance improvement added 4.95 percentage points to growth last quarter after subtracting 4.61 percentage points in Q1. Imports fell 29.8% (+1.3% y/y) after surging 38.0% in Q1. Exports declined 1.3% (+2.0% y/y) after improving 0.4% in Q1. Inventories subtracted 3.29 percentage points from growth after adding 2.59 percentage point to Q1 growth.

Real final sales to domestic purchasers grew 1.6% (2.4% y/y), revised from 1.1%, in Q2 after rising 1.5% in Q1. Personal consumption expenditures rose 1.6% (2.4% y/y), revised from 1.4%, following a 0.5% gain. Durable goods spending rose 2.6% (4.6% y/y) after falling 3.7% in Q1. Motor vehicle purchases strengthened 11.7% (6.7% y/y) after declining 11.2% in Q1. Spending on home furnishings & appliances weakened 2.1% (+3.5% y/y) following a 1.5% rise. Recreational goods & vehicle outlays fell 3.5% (+4.3% y/y) last quarter after a 0.4% Q1 gain.

Nondurable goods outlays in constant dollars rose 2.3% (3.0% y/y) following 2.1% growth in Q1. Apparel spending increased 5.4% (4.8% y/y) following a 7.0% rise. Food & beverage buying gained 0.3% (1.5% y/y) after a 1.0% increase. Gasoline & fuel oil purchases weakened 1.4% (+0.9% y/y) after gaining 3.6% in Q1.

Real spending on services increased 1.2% (1.9% y/y) after a 0.6% gain. Outlays on housing & utilities eased 0.4% (+1.1% y/y) after rising 2.9% in Q1. Health care expenditures rose 4.2% (4.8% y/y) after a 3.1% increase. Transportation outlays declined 2.9% (-0.6% y/y) after a 1.4% rise, while recreation spending rose 3.6% (0.7% y/y) following a 5.1% decline. Restaurant & hotel expenditures increased 5.1% (1.9% y/y) after falling 1.8%. Financial services expenditures rose 1.9% (2.3% y/y) following a 0.1% Q1 increase.

Business fixed investment in constant dollars increased 5.7% last quarter (4.2% y/y), revised from 1.9%, following a 10.3% surge in Q1. Expenditures on structures declined 8.9% (-3.4% y/y), after falling 2.4% in Q1. Expenditures on producers’ durable equipment increased 7.4% (7.7% y/y), revised from 4.8%, after surging 23.7% in Q1. Outlays on information processing equipment rose 10.1% (20.1% y/y), revised from 5.5%, after soaring 72.8% during Q1. Industrial equipment investment rose 6.7% (4.0% y/y) after a 4.7% rise. Transportation equipment investment surged 20.4% (6.8% y/y) after a 6.9% gain. Intellectual property product spending rose 12.8% last quarter (5.2% y/y) following a 6.0% rise.

Residential structures investment in real terms declined a little-revised 4.7% (-1.3% y/y), the fourth decline in the last five quarters.

250828O8.jpg

250828P8.jpg

Government spending eased 0.2%, revised from up 0.5% in Q2 (+1.8% y/y) after a 0.6% decline. Federal government expenditures declined 4.7% (+0.7% y/y) after falling 4.6% in Q1. National defense expenditures increased 1.4% (3.0% y/y) after declining 7.1% in Q1. State & local government spending rose 2.6% (2.5% y/y) following a 2.0% rise.

The GDP chain price index rose an unrevised and expected 2.0% last quarter (2.5% y/y) after increasing 3.8% in Q1. The PCE chain price index increased 2.0% (2.4% y/y) following a 3.7% rise. The PCE price index excluding food and energy rose 2.5% (2.7% y/y) after increasing 3.5% in Q1. The business fixed investment price index edged 0.5% lower (+1.1% y/y) after a 0.4% rise. The residential price index rose 1.1% (2.6% y/y) after a 4.1% rise while the government price index increased 3.3% (3.1% y/y) following a 4.6% rise.

The GDP data can be found in Haver’s **USECON** and **USNA** databases. **USNA** contains virtually all of the Bureau of Economic Analysis detail in the national accounts. The Action Economics consensus estimates can be found in **AS1REPNA**.

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- Business investment strengthens & consumer spending firms.
- U.S. business earnings reverse Q1 decline.
- Increase in price index is unrevised, remaining roughly half of Q1’s gain.

Economy in Brief: 2004

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Australia's Capital Inflows Continue to Support the Australian Dollar

U.S. Personal Income Sluggish. Farmers' Income Fell, Wages OK

U.S. Personal Income Sluggish. Farmers' Income Fell, Wages OK

Japanese Unemployment Rises in July, But So Does Employment; Signs of Recovery Ambiguous

Japanese Unemployment Rises in July, But So Does Employment; Signs of Recovery Ambiguous

U.S. Consumer Sentiment Up Through August

Foreign Trade Drag Reduced 2Q US GDP Growth, Domestic Corporate Profits Slower But Firm

Foreign Trade Drag Reduced 2Q US GDP Growth, Domestic Corporate Profits Slower But Firm