Robert Brusca

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In May, Japan has logged its second trade deficit in 13 months and only its third in the last 28 months. Technically, the deficit was generated by a 1% drop in exports combined with a 10.6% surge in imports.

The yen has been gradually rising against the dollar over the past year, but its overall situation is more complicated than that. The dollar sharply depreciated in May falling to 109.7 from April’s 107.7, a one month drop of 1.9%, corresponding to a 25% annual rate of decline. The yen also fell against the dollar for two months in a row at an annual pace of 19%. The broad real yen has been falling at a 10% annual rate over the last two months as well. Year over year, however, the yen is still rising vs. the dollar but its falling on a real broad trade-weighted basis. Japan does most of its trading with China. The United States is Japan’s second largest trade partner. Exchange rate movements vs. China dominate movements in the real broad yen index.

In part because of these exchange rate movements, Japan’s export prices are rising by 2.4% over 12 months and faster over three months. Export prices tend to rise faster when a currency is weakening since exporters can increase their mark-up in domestic currency units and still drop their prices in foreign currency terms. Import prices are up by 6.4% over 12 months and rise even faster over three months. Import prices rise faster when a currency weakens as the higher cost of foreign exchange is added to the imported product’s price. So Japan’s exports and imports are reacting to a weakening yen. Import prices are rising faster than export prices, which is also what should happen when the yen weakens.

Japan’s trade flows in real terms show gains over 12 months with imports rising faster than exports in real terms. This should not continue if the yen continues to weaken, since a weakening yen makes imports more expensive. Weakening is what the yen is doing vs. the dollar over three months, but it is not doing that in real terms on a broad basis over three months. However, the broad real yen is moving very little recently.

Import and export prices are not just a function of currency movements; they also are due to domestic and foreign activity. Relatively stronger Japan imports compared to exports over 12 months suggest that Japan faces relatively mild demand for its goods in overseas markets while domestic demand is ramping up despite fast rising import prices – that should be short-lived. And the data are suggestive on this point as real imports are falling on balance over three months despite their one-month surge in May.

Of course, Japan’s domestic demand has not been very strong as GDP contracted in the first quarter. We would not expect such strong import demand at this time. Japan’s trade and its export and import price movements suggest some adjustment is in progress over trade flows and that the flows have not fully settled into their new trends.

Monthly data on the year-over-year changes in nominal exports and imports show that exports slowed through March and have since picked up. Imports have followed roughly the same profile.

The terms of trade are a shorthand method for gauging the welfare impact of exchange rate changes and other factors that affect export and import price developments. The ‘terms of trade’ refers to the export-to-import price ratio. When the terms of trade rise (improve), a nation’s welfare improves since it can sell goods for higher prices relative to purchases. When the terms fall, a country is getting less for its export sales relative to imports. This is, of course, a consumption view of the effect. Japan has been seeing its terms of trade fall over the last two years as the ratio 24 months ago was at 1.02 and 12 months ago it was 101.8 while in May it stands at 98.8. Looked at either way, exports are either bringing in less remuneration relative to imports or imports are costing more relative to exports. Another impact of this is that as the yen weakens Japan becomes more competitive. Goods may cost more, but jobs become more secure and job growth might even get stronger. For Japan, with a shrinking population, that is less of an enticement.

Japan’s economic position is hard to characterize. Its sector indexes are weakening according to the METI indexes and Teikoku indexes. Inflation, Chronically below target, has actually softened. On the bright side, Japan’s retail sales recently have shown some spunk. Still, Japan is in a difficult spot. U.S. ongoing negotiations with North Korea and trade sanctions hover over its head as either a direct or indirect problem. North Korean talks with the U.S. are ‘portrayed’ as having gone well, but there was nothing specific in the meeting to give Japan solace over North Korea’s missile tests or capacities. In addition, there is the trade row and the new, aggressive, U.S. posture. U.S. policy on metals tariffs is far ranging. But its most devastating attack is on China which has retaliated. China is Japan’s largest trade partner. The IMF has warned that there could be adverse effects from this aggression on global trade and growth. It is hard to handicap how much these concerns will affect growth and how much it might influence businesses to become more defensive and what the spillover effects might be. There are many things to weigh here. Japan itself has a lot of irons in these fires. Japan definitely faces outcome risk over the next few months. Odds are that it will not emerge unscathed.


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In May, Japan has logged its second trade deficit in 13 months and only its third in the last 28 months. Technically, the deficit was generated by a 1% drop in exports combined with a 10.6% surge in imports. The yen has been gradually [...]

Japan's Loses Its Trade Surplus

Tom Moeller

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The Composite Housing Market Index from the National
Association of Home Builders-Wells Fargo fell 2.9% (+3.0% y/y) to 68 during June
and retraced its May increase to 70. The latest reading compared to
expectations for 70 in the Informa Global Markets Survey. The NAHB figures are
seasonally adjusted. During the last ten years, there has been a 57% correlation
between the y/y change in the home builders index and the y/y change in new home sales.

The index of present sales conditions in the housing market
eased 1.3% (+4.2% y/y) to 75 and remained below its December high of 80. The
index for conditions in the next six months slipped to 76 (+1.3% y/y), the lowest level since November.

Home builders reported that the traffic of prospective buyers
index slipped m/m to 50 and was down from its December high of 58.

Amongst the regional indexes, the index for the Midwest fell
4.5% (-5.9% y/y) to 64 and was down versus the December high of 76. The index for
the South declined 2.8% (+1.5% y/y) to 69 and was down from the high of 75 six
months ago. Countering these declines was an 8.9% rise (32.6% y/y) in the index for the Northeast
to 61. Its level equaled the highest point since December 2005. The reading for the West
improved 1.3% (7.0% y/y) to 76 and made up its May decline.

The NAHB has compiled the Housing Market Index since 1985. It
reflects survey questions asking builders to rate market conditions as
&quot;good,&quot; &quot;fair,&quot; &quot;poor&quot; or &quot;very high&quot; to
&quot;very low.&quot; The figure is thus a diffusion index with numerical
results six over 50 indicating a predominance of &quot;good&quot; readings. The
weights assigned to the individual index components are .5920 for single-family
detached sales, present time, .1358 for single-family detached sales, next
months and .2722 for traffic of prospective buyers. The results are included in
Haver's SURVEYS database. The expectations figure is available in Haver's
MMSAMER database.

Some Industries Encountering Worker Shortages from the
Federal Reserve Bank of Atlanta is available <a href="https://www.frbatlanta.org/economy-matters/community-and-economic-development/2018/06/14/some-industries-encountering-worker-shortages">here</a>.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >National Association of Home
 Builders</th>
 <th scope="col" >Jun</th>
 <th scope="col" >May</th>
 <th scope="col" >Apr</th>
 <th scope="col" >Jun '17</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Composite Housing Market Index, SA (All
 Good=100)</td>
 <td >68</td>
 <td >70</td>
 <td >68</td>
 <td >66</td>
 <td >68</td>
 <td >61</td>
 <td >59</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Single-Family Sales: Present</td>
 <td >75</td>
 <td >76</td>
 <td >74</td>
 <td >72</td>
 <td >74</td>
 <td >67</td>
 <td >64</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Single-Family Sales: Next Six
 Months</td>
 <td >76</td>
 <td >77</td>
 <td >77</td>
 <td >75</td>
 <td >76</td>
 <td >67</td>
 <td >66</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Traffic of Prospective Buyers</td>
 <td >50</td>
 <td >51</td>
 <td >49</td>
 <td >51</td>
 <td >50</td>
 <td >45</td>
 <td >43</td>
 </tr>
 </tbody>
 </table>
 
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The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo fell 2.9% (+3.0% y/y) to 68 during June and retraced its May increase to 70. The latest reading compared to expectations for 70 in the [...]

U.S. Home Builder Index Backpedals

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The Empire State Manufacturing Index of General Business
Conditions rose to 25.0 during June, the highest level in eight months.
Expectations had been for 18.0 in the Action Economics Forecast Survey. These
data, reported by the Federal Reserve Bank of New York, reflect business
conditions in New York, northern New Jersey and southern Connecticut.
Haver Analytics calculates a seasonally adjusted index that
is comparable to the ISM series. The calculated figure increased to 58.2, the
highest level since March 2006. During the last ten years, the index has had a
69% correlation with the quarter-on-quarter change in real GDP.
Most of the components of the Empire State Survey improved
this month. The new orders index rose to 21.3, the highest level since November.
The shipments index similarly displayed strength with its rise to 23.5, the
highest figure in six months. The unfilled orders measure also rose, but the
delivery times series eased to 13.2 and indicated the quickest delivery speeds
since February. The inventory index fell to a four-month low of 5.4.
The number of employees reading strengthened to 19.0, a
six-month high. During the last ten years, there has been a 77% correlation
between the employment index and the month-on-month change in factory sector
payrolls. While 24% of respondents reported a higher payroll level, 5% reported
a lower hiring level. Working the other way, the employee workweek reading rose
to 12.0, and was well above the recent low of 0.8 in January.
The prices paid index slipped to 52.7, but remained up
sharply from its October 2015 low of 0.9. Fifty-four percent of respondents
indicated increased prices, while just two percent reported a decline. The
prices received index improved to 23.3 and also was near the highest level since
2011.
The series measuring expectations of business conditions in
six months strengthened to 38.9 but remained down versus its February high of
50.5. Most of the expectation series improved m/m, except the price measures and
capital &amp; technology spending readings.
The Empire State figures are diffusion indexes, which are
calculated by subtracting the percent of respondents reporting declines from
those 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.

 <thead>
 <tr>
 <th class="firstcol" scope="col" width="1263">Empire State Manufacturing
 Survey</th>
 <th scope="col" width="86">Jun</th>
 <th scope="col" width="86">May</th>
 <th scope="col" width="86">Apr</th>
 <th scope="col" width="86">Jun'17</th>
 <th scope="col" width="86">2017</th>
 <th scope="col" width="87">2016</th>
 <th scope="col" width="87">2015</th>
 </tr>
 </thead>
 
 <tr>
 <td class="firstcol" width="1263">General Business Conditions (Diffusion
 Index, %, SA)</td>
 <td align="center" width="86">25.0</td>
 <td align="center" width="86">20.1</td>
 <td align="center" width="86">15.8</td>
 <td align="center" width="86">18.1</td>
 <td align="center" width="86">16.1</td>
 <td align="center" width="87">-2.6</td>
 <td align="center" width="87">-2.3</td>
 </tr>
 <tr>
 <td class="firstcol" width="1263">General Business Conditions Index (ISM
 Adjusted, &gt;50=Increasing Activity, SA)</td>
 <td align="center" width="86">58.2</td>
 <td align="center" width="86">56.8</td>
 <td align="center" width="86">55.2</td>
 <td align="center" width="86">55.2</td>
 <td align="center" width="86">54.6</td>
 <td align="center" width="87">48.2</td>
 <td align="center" width="87">48.8</td>
 </tr>
 <tr>
 <td class="firstcol" width="1263">&nbsp; New Orders</td>
 <td align="center" width="86">21.3</td>
 <td align="center" width="86">16.0</td>
 <td align="center" width="86">9.0</td>
 <td align="center" width="86">16.1</td>
 <td align="center" width="86">14.6</td>
 <td align="center" width="87">-0.8</td>
 <td align="center" width="87">-5.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="1263">&nbsp; Shipments</td>
 <td align="center" width="86">23.5</td>
 <td align="center" width="86">19.1</td>
 <td align="center" width="86">17.5</td>
 <td align="center" width="86">19.0</td>
 <td align="center" width="86">15.9</td>
 <td align="center" width="87">1.9</td>
 <td align="center" width="87">4.0</td>
 </tr>
 <tr>
 <td class="firstcol" width="1263">&nbsp; Unfilled Orders</td>
 <td align="center" width="86">9.3</td>
 <td align="center" width="86">5.0</td>
 <td align="center" width="86">3.7</td>
 <td align="center" width="86">4.6</td>
 <td align="center" width="86">1.9</td>
 <td align="center" width="87">-8.8</td>
 <td align="center" width="87">-10.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="1263">&nbsp; Delivery Time</td>
 <td align="center" width="86">13.2</td>
 <td align="center" width="86">13.7</td>
 <td align="center" width="86">15.6</td>
 <td align="center" width="86">5.4</td>
 <td align="center" width="86">6.1</td>
 <td align="center" width="87">-4.8</td>
 <td align="center" width="87">-5.3</td>
 </tr>
 <tr>
 <td class="firstcol" width="1263">&nbsp; Inventories</td>
 <td align="center" width="86">5.4</td>
 <td align="center" width="86">10.1</td>
 <td align="center" width="86">8.1</td>
 <td align="center" width="86">7.7</td>
 <td align="center" width="86">1.5</td>
 <td align="center" width="87">-9.6</td>
 <td align="center" width="87">-7.1</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="1263">&nbsp; Number of Employees</td>
 <td align="center" width="86">19.0</td>
 <td align="center" width="86">8.7</td>
 <td align="center" width="86">6.0</td>
 <td align="center" width="86">3.5</td>
 <td align="center" width="86">8.3</td>
 <td align="center" width="87">-5.1</td>
 <td align="center" width="87">2.3</td>
 </tr>
 <tr>
 <td class="firstcol" width="1263">&nbsp; Average Employee Workweek</td>
 <td align="center" width="86">12.0</td>
 <td align="center" width="86">11.1</td>
 <td align="center" width="86">16.9</td>
 <td align="center" width="86">4.3</td>
 <td align="center" width="86">4.9</td>
 <td align="center" width="87">-5.2</td>
 <td align="center" width="87">-4.8</td>
 </tr>
 <tr>
 <td class="firstcol" width="1263">&nbsp; Prices Paid</td>
 <td align="center" width="86">52.7</td>
 <td align="center" width="86">54.0</td>
 <td align="center" width="86">47.4</td>
 <td align="center" width="86">20.0</td>
 <td align="center" width="86">29.0</td>
 <td align="center" width="87">15.7</td>
 <td align="center" width="87">8.8</td>
 </tr>
 <tr>
 <td class="firstcol" width="1263">&nbsp; Prices Received</td>
 <td align="center" width="86">23.3</td>
 <td align="center" width="86">23.0</td>
 <td align="center" width="86">20.7</td>
 <td align="center" width="86">10.8</td>
 <td align="center" width="86">11.0</td>
 <td align="center" width="87">0.7</td>
 <td align="center" width="87">1.2</td>
 </tr>
 
 <td class="firstcol" width="1263">Expectations 6 Months Ahead</td>
 <td align="center" width="86">38.9</td>
 
 <td align="center" width="86">31.1</td>
 <td align="center" width="86">18.3</td>
 <td align="center" width="86">41.4</td>
 <td align="center" width="86">42.6</td>
 <td align="center" width="87">29.0</td>
 <td align="center" width="87">30.</td>
 
 


&nbsp;
U.S. Industrial Production Slips Unexpectedly 
by <a href="http://haver.com/comment/Moeller.html">Tom Moeller</a>&nbsp;&nbsp;June
15, 2018
The Federal Reserve reported that industrial production eased
0.1% (+3.5% y/y) during May following a 0.9% April rise, revised from 0.7%. A
0.2% increase had been expected in the Action Economics Forecast Survey. Factory
sector production declined 0.7% (+1.7% y/y) and reversed April's 0.6% gain,
revised from 0.5%. Utility output strengthened 1.1% (4.0% y/y) after a 3.2%
increase. Mining production improved 1.8% (12.5% y/y) following a 1.0%
improvement.
The surprising decline in production partially reflected a
1.0% fall (+1.5% y/y) in consumer goods output which reversed the prior month's
increase. Durable consumer goods production declined 3.0% (0.0% y/y) after a
0.8% fall. Automotive product output declined 5.5% (-1.5% y/y) following a 1.9%
shortfall. Computer, video &amp; related production improved 0.8% (4.7% y/y)
after a 0.1% uptick. Appliance, furniture &amp; carpeting production fell 1.2%
(-1.5% y/y) and countered the prior month's 1.7% rise. Nondurable consumer goods
production fell 0.4% (+1.9% y/y) following a 1.5% gain. Energy product output
weakened 1.6% (-0.2% y/y) after a 3.7% increase. Apparel production declined
1.9% (0.0% y/y) after a 2.4% gain. Paper product output weakened 1.1% (-2.2%
y/y) after a 0.8% increase. Food &amp; tobacco production fell 0.3% (3.1% y/y)
following a 1.1% improvement. Working the other way, chemical product production
rose 0.5% (2.8% y/y) after a 0.4% gain.
Production of business equipment declined 1.1% last month
(+1.0% y/y) and reversed April's 1.1% rise. Transit equipment production fell
3.5% (-2.9% y/y) following a 0.3% dip. Production of information processing
equipment slipped 0.1% (+4.8% y/y) following four straight months of strong
increase. Industrial equipment &amp; other equipment production fell 0.4% (+1.4%
y/y) after a 1.8% rise.&nbsp;&nbsp;&nbsp; 
Construction supplies output notched 0.1% higher (3.6% y/y)
after a 0.5% increase.
Production of materials improved 0.5% (5.5% y/y) after a 0.9%
increase. Energy product materials output increased 2.0% (11.0% y/y) after two
months of roughly 1.2% gain. Durable goods materials output fell 0.8% (+2.7%
y/y) following a 0.5% rise and nondurable goods materials held steady (0.9% y/y)
following a 0.9% gain.
In the special aggregate groupings, production of selected
high-technology industries rose 0.2% (6.3% y/y) following a 1.8% jump. Nonenergy
production excluding high-tech retreated 0.6% (+1.7% y/y) and reversed a 0.6%
rise. Factory sector production excluding both high-tech and autos eased 0.2%
(+1.9% y/y) after a 0.8% strengthening.
Capacity utilization eased to 77.9% from its three-year high
of 78.1%. Factory sector capacity utilization declined to 75.3%, the lowest
level since January. Manufacturing sector capacity increased 1.0% y/y.
Industrial production and capacity data are included in
Haver's USECON database, with additional detail in the IP database. The
expectations figure is in the AS1REPNA database.
<table width="1871" class="centered" border="0" cellSpacing="0">
 <thead>
 <tr>
 <th class="firstcol" scope="col" width="916">Industrial Production (SA, %
 Change)</th>
 <th scope="col" width="135">May</th>
 <th scope="col" width="136">Apr</th>
 <th scope="col" width="136">Mar</th>
 <th scope="col" width="136">May Y/Y</th>
 <th scope="col" width="136">2017</th>
 <th scope="col" width="136">2016</th>
 <th scope="col" width="136">2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" width="916">Total Output</td>
 <td align="center" width="135">-0.1</td>
 <td align="center" width="136">0.9</td>
 <td align="center" width="136">0.5</td>
 <td align="center" width="136">3.5</td>
 <td align="center" width="136">1.6</td>
 <td align="center" width="136">-2.0</td>
 <td align="center" width="136">-1.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="916">Manufacturing</td>
 <td align="center" width="135">-0.7</td>
 <td align="center" width="136">0.6</td>
 <td align="center" width="136">-0.1</td>
 <td align="center" width="136">1.7</td>
 <td align="center" width="136">1.2</td>
 <td align="center" width="136">-0.8</td>
 <td align="center" width="136">0.1</td>
 </tr>
 <tr>
 <td class="firstcol" width="916">&nbsp;&nbsp;&nbsp; Consumer Goods</td>
 <td align="center" width="135">-1.0</td>
 <td align="center" width="136">1.0</td>
 <td align="center" width="136">0.4</td>
 <td align="center" width="136">1.5</td>
 <td align="center" width="136">0.0</td>
 <td align="center" width="136">0.7</td>
 <td align="center" width="136">1.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="916">&nbsp;&nbsp;&nbsp; Business Equipment</td>
 <td align="center" width="135">-1.1</td>
 <td align="center" width="136">1.1</td>
 <td align="center" width="136">0.1</td>
 <td align="center" width="136">1.0</td>
 <td align="center" width="136">3.2</td>
 <td align="center" width="136">-5.3</td>
 <td align="center" width="136">-2.0</td>
 </tr>
 <tr>
 <td class="firstcol" width="916">&nbsp;&nbsp;&nbsp; Construction Supplies</td>
 <td align="center" width="135">0.1</td>
 <td align="center" width="136">0.5</td>
 <td align="center" width="136">-1.0</td>
 <td align="center" width="136">3.6</td>
 <td align="center" width="136">2.5</td>
 <td align="center" width="136">0.9</td>
 <td align="center" width="136">0.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="916">&nbsp; Materials</td>
 <td align="center" width="135">0.5</td>
 <td align="center" width="136">0.9</td>
 <td align="center" width="136">0.8</td>
 <td align="center" width="136">5.5</td>
 <td align="center" width="136">2.0</td>
 <td align="center" width="136">-3.0</td>
 <td align="center" width="136">-1.5</td>
 </tr>
 <tr>
 <td class="firstcol" width="916">Utilities</td>
 <td align="center" width="135">1.1</td>
 <td align="center" width="136">3.2</td>
 <td align="center" width="136">4.1</td>
 <td align="center" width="136">4.0</td>
 <td align="center" width="136">-1.3</td>
 <td align="center" width="136">-0.4</td>
 <td align="center" width="136">-0.8</td>
 </tr>
 <tr>
 <td class="firstcol" width="916">Mining</td>
 <td align="center" width="135">1.8</td>
 <td align="center" width="136">1.0</td>
 <td align="center" width="136">1.4</td>
 <td align="center" width="136">12.5</td>
 <td align="center" width="136">6.4</td>
 <td align="center" width="136">-9.7</td>
 <td align="center" width="136">-3.4</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="916">Capacity Utilization (%)</td>
 <td align="center" width="135">77.9</td>
 <td align="center" width="136">78.1</td>
 <td align="center" width="136">77.5</td>
 <td align="center" width="136">76.2</td>
 <td align="center" width="136">78.1</td>
 <td align="center" width="136">75.4</td>
 <td align="center" width="136">77.3</td>
 </tr>
 <tr>
 <td class="firstcol" width="916">&nbsp;Manufacturing</td>
 <td align="center" width="135">75.3</td>
 <td align="center" width="136">75.9</td>
 <td align="center" width="136">75.5</td>
 <td align="center" width="136">74.8</td>
 <td align="center" width="136">74.8</td>
 <td align="center" width="136">74.6</td>
 <td align="center" width="136">75.8</td>
 </tr>
 </tbody>
</table>





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The Empire State Manufacturing Index of General Business Conditions rose to 25.0 during June, the highest level in eight months. Expectations had been for 18.0 in the Action Economics Forecast Survey. These data, reported by the [...]

Empire State Manufacturing Index Continues to Strengthen

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The Federal Reserve reported that industrial production eased
0.1% (+3.5% y/y) during May following a 0.9% April rise, revised from 0.7%. A
0.2% increase had been expected in the Action Economics Forecast Survey.
Factory sector production declined 0.7% (+1.7% y/y) and reversed April's 0.6%
gain, revised from 0.5%. Utility output strengthened 1.1% (4.0% y/y) after a
3.2% increase. Mining production improved 1.8% (12.5% y/y) following a 1.0%
improvement.
The surprising decline in production partially reflected a
1.0% fall (+1.5% y/y) in consumer goods output which reversed the prior month's
increase. Durable consumer goods production declined 3.0% (0.0% y/y) after a
0.8% fall. Automotive product output declined 5.5% (-1.5% y/y) following a 1.9%
shortfall. Computer, video &amp; related production improved 0.8% (4.7% y/y) after a
0.1% uptick. Appliance, furniture &amp; carpeting production fell 1.2% (-1.5% y/y)
and countered the prior month's 1.7% rise. Nondurable consumer goods production
fell 0.4% (+1.9% y/y) following a 1.5% gain. Energy product output weakened 1.6%
(-0.2%
y/y) after a 3.7% increase. Apparel production declined 1.9% (0.0% y/y) after a
2.4% gain. Paper product output weakened 1.1% (-2.2% y/y) after a 0.8% increase.
Food &amp; tobacco production fell 0.3% (3.1% y/y) following a 1.1% improvement.
Working the other way, chemical product production rose 0.5% (2.8% y/y) after a
0.4% gain.
Production of business equipment declined 1.1% last month
(+1.0% y/y) and reversed April's 1.1% rise. Transit equipment production fell
3.5% (-2.9% y/y) following a 0.3% dip. Production of information processing
equipment slipped 0.1% (+4.8% y/y) following four straight months of strong
increase. Industrial equipment &amp; other equipment production fell 0.4% (+1.4%
y/y) after a 1.8% rise.&nbsp;&nbsp;&nbsp;&nbsp;
Construction supplies output notched 0.1% higher (3.6% y/y) after a
0.5% increase.
Production of materials improved 0.5% (5.5% y/y) after a 0.9%
increase. Energy product materials output increased 2.0% (11.0% y/y) after two
months of roughly 1.2% gain. Durable goods materials output fell 0.8% (+2.7% y/y) following a
0.5% rise and nondurable goods materials held steady (0.9% y/y) following a 0.9% gain.
In the special aggregate groupings, production of selected
high-technology industries rose 0.2% (6.3% y/y) following a 1.8% jump. Nonenergy
production excluding high-tech retreated 0.6% (+1.7% y/y) and reversed a 0.6%
rise.
Factory sector production excluding both high-tech and autos eased 0.2% (+1.9%
y/y) after a 0.8% strengthening.
Capacity utilization eased to 77.9% from its three-year high
of 78.1%. Factory sector capacity utilization declined to 75.3%, the lowest
level since January. Manufacturing
sector capacity increased 1.0% y/y.
Industrial production and capacity data are included in
Haver's USECON database, with additional detail in the IP database. The
expectations figure is in the AS1REPNA database.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>
 <thead>
 <tr>
 <th class="firstcol" scope="col" >Industrial Production (SA, %
 Change)</th>
 <th scope="col" >May</th>
 <th scope="col" >Apr</th>
 <th scope="col" >Mar</th>
 <th scope="col" >May Y/Y</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Total Output</td>
 <td >-0.1</td>
 <td >0.9</td>
 <td >0.5</td>
 <td >3.5</td>
 <td >1.6</td>
 <td >-2.0</td>
 <td >-1.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Manufacturing</td>
 <td >-0.7</td>
 <td >0.6</td>
 <td >-0.1</td>
 <td >1.7</td>
 <td >1.2</td>
 <td >-0.8</td>
 <td >0.1</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;&nbsp; Consumer Goods</td>
 <td >-1.0</td>
 <td >1.0</td>
 <td >0.4</td>
 <td >1.5</td>
 <td >0.0</td>
 <td >0.7</td>
 <td >1.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;&nbsp; Business Equipment</td>
 <td >-1.1</td>
 <td >1.1</td>
 <td >0.1</td>
 <td >1.0</td>
 <td >3.2</td>
 <td >-5.3</td>
 <td >-2.0</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;&nbsp; Construction Supplies</td>
 <td >0.1</td>
 <td >0.5</td>
 <td >-1.0</td>
 <td >3.6</td>
 <td >2.5</td>
 <td >0.9</td>
 <td >0.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Materials</td>
 <td >0.5</td>
 <td >0.9</td>
 <td >0.8</td>
 <td >5.5</td>
 <td >2.0</td>
 <td >-3.0</td>
 <td >-1.5</td>
 </tr>
 <tr>
 <td class="firstcol" >Utilities</td>
 <td >1.1</td>
 <td >3.2</td>
 <td >4.1</td>
 <td >4.0</td>
 <td >-1.3</td>
 <td >-0.4</td>
 <td >-0.8</td>
 </tr>
 <tr>
 <td class="firstcol" >Mining</td>
 <td >1.8</td>
 <td >1.0</td>
 <td >1.4</td>
 <td >12.5</td>
 <td >6.4</td>
 <td >-9.7</td>
 <td >-3.4</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Capacity Utilization (%)</td>
 <td >77.9</td>
 <td >78.1</td>
 <td >77.5</td>
 <td >76.2</td>
 <td >78.1</td>
 <td >75.4</td>
 <td >77.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Manufacturing</td>
 <td >75.3</td>
 <td >75.9</td>
 <td >75.5</td>
 <td >74.8</td>
 <td >74.8</td>
 <td >74.6</td>
 <td >75.8</td>
 </tr>
 </tbody>
</table>


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The Federal Reserve reported that industrial production eased 0.1% (+3.5% y/y) during May following a 0.9% April rise, revised from 0.7%. A 0.2% increase had been expected in the Action Economics Forecast Survey. Factory sector [...]

U.S. Industrial Production Slips Unexpectedly

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The EMU trade balance shrank in April, stepping back to a surplus of €18.1bln from €19.8 bln in March. One year ago the surplus stood at €20.4 bln. Exports nudged higher in April rising by 0.3% while imports surged by 1.4%. That combination of evens made the trade deficit smaller.

However, a shrinking surplus is not something that is well entrenched in European trade trends. Over three months exports are falling by 6.7% with imports falling by a lesser 4.3%. This pair of growth rates also reinforces a smaller deficit trend. But over six-months and 12-months the export and import growth rates are nearly identical and there is not much deficit shrinkage in the cards on those trends.

In the wake of the G7 summit, trade is obviously in a special spot light. Today, US President, Donald Trump indicated 25% tariffs on $50bln of US imports from Chinese. China wasted no time in offering the same tariffs on $50bln of US exports to China. It is not going to stop there. The US continues to make waves over trade on a broad front and the cold war over trade has just heated up. The G7 tiff was an hors d’oeuvres compared to this. Trade and trade performance is going to continue to be an issue in this tainted atmosphere. But it is also true that to a large extent the trend and fundamentals are perceived to be established and the Trump administration is looking for leverage to change results.

We see the stubborn trend in EMU manufacturing trade. Those exports and imports show imploding flows in progress with three month export and import flows declining and 12 month flows showing some gain. But on each horizon 3-months, 6-months and 12-months, exports are either stronger than imports or growing at the same pace. There is no trend ‘improvement’ that diminishes the surplus in manufacturing trade.

Non-manufacturing flows show the opposite trends. But they are substantially affected by commodity prices and especially oil. Imports of non-manufactures are stronger than exports on all horizons.

Beyond the EMU trends we offer samples of export trends from six other European nations. Five of six show exports declining over 3-months. Over six months most exports also show stable or slowing trends. And compared to one year ago the current year-over-year trends are lower. There is a broad slowdown in exports to couple with the stubborn EMU surplus.

Now, we are on the slippery slope with trade. This is no longer saber-rattling. This is stabbing and cutting and hacking. Damage will be done. The global economy already is showing some signs of slowing. The US continues to be the most resilient but US economic signals are still somewhat spotty despite the recent strength in US retail sales and in manufacturing PMI reports. Today’s drop in in US industrial output is an example of how no sector is safe or dependable. It is still too soon to know if the Trump tax cuts and fiscal reforms are going to deliver growth in the US. The European slowdown is severe enough to capture attention of newspaper reporters. Japan has cuts its outlook for inflation, but not growth. And, despite slowing in Europe and some very weak recent numbers from Germany, the Bundesbank has just cut is outlook and describes the situation as a boom with ‘strong wage growth’ and higher domestic inflation. Frankly I don’t think I have seen that particular German economy. But what’s important is that although the Bundesbank does, it’s the ECB that makes monetary policy.



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The EMU trade balance shrank in April, stepping back to a surplus of €18.1bln from €19.8 bln in March. One year ago the surplus stood at €20.4 bln. Exports nudged higher in April rising by 0.3% while imports surged by 1.4%. That [...]

EMU Trade Deficit Shrinks

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The Empire State Manufacturing Index of General Business
Conditions rose to 25.0 during June, the highest level in eight months.
Expectations had been for 18.0 in the Action Economics Forecast Survey. These
data, reported by the Federal Reserve Bank of New York, reflect business
conditions in New York, northern New Jersey and southern Connecticut.
Haver Analytics calculates a seasonally adjusted index that
is comparable to the ISM series. The calculated figure increased to 58.2, the
highest level since March 2006. During the last ten years, the index has had a
69% correlation with the quarter-on-quarter change in real GDP.
Most of the components of the Empire State Survey improved
this month. The new orders index rose to 21.3, the highest level since November.
The shipments index similarly displayed strength with its rise to 23.5, the
highest figure in six months. The unfilled orders measure also rose, but the
delivery times series eased to 13.2 and indicated the quickest delivery speeds
since February. The inventory index fell to a four-month low of 5.4.
The number of employees reading strengthened to 19.0, a
six-month high. During the last ten years, there has been a 77% correlation
between the employment index and the month-on-month change in factory sector
payrolls. While 24% of respondents reported a higher payroll level, 5% reported
a lower hiring level. Working the other way, the employee workweek reading rose
to 12.0, and was well above the recent low of 0.8 in January.
The prices paid index slipped to 52.7, but remained up
sharply from its October 2015 low of 0.9. Fifty-four percent of respondents
indicated increased prices, while just two percent reported a decline. The
prices received index improved to 23.3 and also was near the highest level since
2011.
The series measuring expectations of business conditions in
six months strengthened to 38.9 but remained down versus its February high of
50.5. Most of the expectation series improved m/m, except the price measures and
capital &amp; technology spending readings.
The Empire State figures are diffusion indexes, which are
calculated by subtracting the percent of respondents reporting declines from
those 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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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>
 <thead>
 <tr>
 <th class="firstcol" scope="col" >Empire State Manufacturing
 Survey</th>
 <th scope="col" >Jun</th>
 <th scope="col" >May</th>
 <th scope="col" >Apr</th>
 <th scope="col" >Jun'17</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >General Business Conditions (Diffusion
 Index, %, SA)</td>
 <td >25.0</td>
 <td >20.1</td>
 <td >15.8</td>
 <td >18.1</td>
 <td >16.1</td>
 <td >-2.6</td>
 <td >-2.3</td>
 </tr>
 <tr>
 <td class="firstcol" >General Business Conditions Index (ISM
 Adjusted, &gt;50=Increasing Activity, SA)</td>
 <td >58.2</td>
 <td >56.8</td>
 <td >55.2</td>
 <td >55.2</td>
 <td >54.6</td>
 <td >48.2</td>
 <td >48.8</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; New Orders</td>
 <td >21.3</td>
 <td >16.0</td>
 <td >9.0</td>
 <td >16.1</td>
 <td >14.6</td>
 <td >-0.8</td>
 <td >-5.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Shipments</td>
 <td >23.5</td>
 <td >19.1</td>
 <td >17.5</td>
 <td >19.0</td>
 <td >15.9</td>
 <td >1.9</td>
 <td >4.0</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Unfilled Orders</td>
 <td >9.3</td>
 <td >5.0</td>
 <td >3.7</td>
 <td >4.6</td>
 <td >1.9</td>
 <td >-8.8</td>
 <td >-10.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Delivery Time</td>
 <td >13.2</td>
 <td >13.7</td>
 <td >15.6</td>
 <td >5.4</td>
 <td >6.1</td>
 <td >-4.8</td>
 <td >-5.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Inventories</td>
 <td >5.4</td>
 <td >10.1</td>
 <td >8.1</td>
 <td >7.7</td>
 <td >1.5</td>
 <td >-9.6</td>
 <td >-7.1</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Number of Employees</td>
 <td >19.0</td>
 <td >8.7</td>
 <td >6.0</td>
 <td >3.5</td>
 <td >8.3</td>
 <td >-5.1</td>
 <td >2.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Average Employee Workweek</td>
 <td >12.0</td>
 <td >11.1</td>
 <td >16.9</td>
 <td >4.3</td>
 <td >4.9</td>
 <td >-5.2</td>
 <td >-4.8</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Prices Paid</td>
 <td >52.7</td>
 <td >54.0</td>
 <td >47.4</td>
 <td >20.0</td>
 <td >29.0</td>
 <td >15.7</td>
 <td >8.8</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Prices Received</td>
 <td >23.3</td>
 <td >23.0</td>
 <td >20.7</td>
 <td >10.8</td>
 <td >11.0</td>
 <td >0.7</td>
 <td >1.2</td>
 </tr>
 <tr>
 <td class="firstcol" >Expectations 6 Months Ahead</td>
 <td >38.9</td>
 <td >31.1</td>
 <td >18.3</td>
 <td >41.4</td>
 <td >42.6</td>
 <td >29.0</td>
 <td >30.3</td>
 </tr>
 </tbody>
</table>
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Gerald D. Cohen

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Import prices increased 0.6% during May (4.3% year-on-year), the second consecutive monthly growth of that magnitude; April’s gain was revised higher. A 0.4% rise had been expected in the Action Economics Forecast Survey. These figures are not seasonally adjusted..

A 5.9% jump in petroleum import costs (31.9% y/y) led import prices higher last month. In April these prices were up 4.4%. Nonpetroleum import prices ticked 0.1% higher for the second consecutive month (1.8% y/y). Among end-use categories, prices of foods, feeds and beverages rose 0.4% (1.6% y/y). Industrial supplies and materials prices excluding petroleum increased 0.2% (7.6% y/y). Capital goods prices edged down 0.1% (+0.9% y/y) with prices of computers, peripherals & semiconductors decreasing 0.4% (+0.8% y/y). Capital goods prices excluding computers, semiconductors & peripherals held steady (1.0% y/y). Prices of motor vehicles and parts edged down 0.1% (-0.1% y/y). Prices of consumer goods excluding automobiles improved 0.1% (0.7% y/y)..

Export prices showed a similar pattern as import prices gaining 0.6% (4.9% y/y) for the second consecutive month. A 0.3% May rise had been expected..

Agricultural export prices grew 1.6% (4.9% y/y) following a 1.2% decline. Nonagricultural export prices increased 0.5% (4.9% y/y) after a 0.7% gain. Among the end-use categories, prices of industrial supplies and materials jumped 1.6% (11.7% y/y), as petroleum prices flared 5.1% (29.7% y/y). Nonagricultural supplies and materials prices excluding fuels and building materials strengthened 0.2% (7.1% y/y). Prices of foods, feeds and beverages chewed 1.0% higher (4.2% y/y). Capital good prices edged up 0.1% (2.0% y/y) with computers, peripherals & semiconductors increasing 0.2% (2.1% y/y). Excluding this sector capital goods prices also grew 0.2% (1.9% y/y). Prices of motor vehicles and parts inched 0.1% higher (0.8% y/y). Prices of consumer goods excluding automobiles edged down 0.1% (+1.5% y/y). .

The import and export price series can be found in Haver's USECON database. Detailed figures are available in the USINT database. The expectations figure from the Action Economics Forecast Survey is in the AS1REPNA database..

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" ><a href="http://www.haverselect.com/dlx/USECON/@E8/@E807/@E807.HTM">Import/Export
 Prices (NSA, %)</a></th>
 <th scope="col" >May</th>
 <th scope="col" >Apr</th>
 <th scope="col" >Mar</th>
 <th scope="col" >Y/Y</th>
 <th scope="col" >2017</th>
 <th scope="col" >2016</th>
 <th scope="col" >2015</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Imports - All Commodities</td>
 <td >0.6</td>
 <td >0.6</td>
 <td >-0.2</td>
 <td >4.3</td>
 <td >2.9</td>
 <td >-3.3</td>
 <td >-10.2</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Petroleum &amp; Petroleum
 Products</td>
 <td >5.9</td>
 <td >4.4</td>
 <td >-2.5</td>
 <td >31.9</td>
 <td >26.6</td>
 <td >-19.7</td>
 <td >-46.0</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Nonpetroleum</td>
 <td >0.1</td>
 <td >0.1</td>
 <td >0.0</td>
 <td >1.8</td>
 <td >1.1</td>
 <td >-1.5</td>
 <td >-2.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Exports - All Commodities</td>
 <td >0.6</td>
 <td >0.6</td>
 <td >0.3</td>
 <td >4.9</td>
 <td >2.4</td>
 <td >-3.2</td>
 <td >-6.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Agricultural</td>
 <td >1.6</td>
 <td >-1.2</td>
 <td >3.2</td>
 <td >4.9</td>
 <td >1.5</td>
 <td >-5.4</td>
 <td >-13.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Nonagricultural</td>
 <td >0.5</td>
 <td >0.7</td>
 <td >0.0</td>
 <td >4.9</td>
 <td >2.5</td>
 <td >-3.0</td>
 <td >-5.5</td>
 </tr>
 </tbody>
 </table>
 
</body></html>

Import prices increased 0.6% during May (4.3% year-on-year), the second consecutive monthly growth of that magnitude; April’s gain was revised higher. A 0.4% rise had been expected in the Action Economics Forecast Survey. These [...]

Petroleum Drives Gains in U.S. Import and Export Prices

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<a href="/comment/180614n.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/180614n.png"></a>
 <a href="/comment/180614o.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/180614o.png"></a>
Total business inventories increased 0.3% (4.4% y/y) during
April following a 0.1% March slip. Total business sales rose 0.4% (6.7% y/y),
following a 0.6% gain. The inventory-to-sales ratio held steady at 1.35. It
peaked early in 2016 at 1.43.
Retail inventories increased 0.5% (2.5% y/y) in April after a
0.7% decline during March. Auto inventories grew 0.7% (1.9% y/y) after a 0.9%
fall. Non-auto retail inventories increased 0.4% (2.8% y/y) following a 0.6%
decline. General merchandise inventories rose 0.8% (-0.6% y/y) after a 1.9%
shortfall. In the department store sector, inventories edged 0.5% higher (-4.9%
y/y) following a 1.2% drop. Building materials inventories gained 0.5% (5.7%
y/y) after a 0.2% rise, while clothing store inventories rose 0.4% (0.6% y/y)
after falling 0.6%. Inventories of furniture, electronics and appliances
declined 0.3% (+1.4% y/y), the fifth decline in seven months. As reported last
week, wholesale inventories edged 0.1% higher (5.8% y/y) following a 0.2% rise.
Factory sector inventories rose 0.3% (5.0% y/y) following a 0.2% gain.
Retail sales increased 0.4% in April (4.9% y/y) with non-auto
sales up 0.5% (5.2% y/y). Wholesale sector sales increased 0.8% (7.8% y/y) after
improving 0.4%. Shipments from the factory sector held steady (7.2% y/y)
following a 0.7% rise.
The inventory-to-sales (I/S) ratio in the retail sector held
steady at 1.44 in April, down from the levels averaged during the prior two
years. The non-auto I/S ratio held steady at 1.21 and remained near its lowest
level since early-2012. The wholesale sector I/S ratio eased to 1.28, nearly its
lowest level since December 2014. The manufacturing sector I/S ratio held steady
at 1.35, its lowest point in three years.
The manufacturing and trade data are in Haver's USECON
database.

<a href="/comment/180614p.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/180614p.png"></a>
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	<colgroup><col><col><col><col><col><col><col><col></colgroup>

	 <thead>
	 <tr>
	 <th class="firstcol" scope="col" >Manufacturing &amp; Trade</th>
	 <th scope="col" >Apr</th>
	 <th scope="col" >Mar</th>
	 <th scope="col" >Feb</th>
	 <th scope="col" >Apr Y/Y</th>
	 <th scope="col" >2017</th>
	 <th scope="col" >2016</th>
	 <th scope="col" >2015</th>
	 </tr>
	 </thead>
	 <tbody>
	 <tr>
	 <td class="firstcol" >Business Inventories (% chg)</td>
	 <td >0.3</td>
	 <td >-0.1</td>
	 <td >0.6</td>
	 <td >4.4</td>
	 <td >3.5</td>
	 <td >1.8</td>
	 <td >1.7</td>
	 </tr>
	 <tr class="odd">
	 <td class="firstcol" >&nbsp;Retail</td>
	 <td >0.5</td>
	 <td >-0.7</td>
	 <td >0.6</td>
	 <td >2.5</td>
	 <td >2.4</td>
	 <td >4.1</td>
	 <td >4.9</td>
	 </tr>
	 <tr>
	 <td class="firstcol" >&nbsp;&nbsp;Retail excl. Motor Vehicles</td>
	 <td >0.4</td>
	 <td >-0.6</td>
	 <td >0.4</td>
	 <td >2.8</td>
	 <td >2.3</td>
	 <td >1.9</td>
	 <td >3.9</td>
	 </tr>
	 <tr class="odd">
	 <td class="firstcol" >&nbsp;Merchant Wholesalers</td>
	 <td >0.1</td>
	 <td >0.2</td>
	 <td >0.8</td>
	 <td >5.8</td>
	 <td >3.6</td>
	 <td >2.2</td>
	 <td >1.2</td>
	 </tr>
	 <tr>
	 <td class="firstcol" >&nbsp;Manufacturing</td>
	 <td >0.3</td>
	 <td >0.2</td>
	 <td >0.3</td>
	 <td >5.0</td>
	 <td >4.5</td>
	 <td >-0.7</td>
	 <td >-0.8</td>
	 </tr>
	 <tr class="grey3">
	 <td class="firstcol" colSpan="8" >Business Sales (% chg)</td>
	 </tr>
	 <tr class="odd">
	 <td class="firstcol" >Total</td>
	 <td >0.4</td>
	 <td >0.6</td>
	 <td >0.4</td>
	 <td >6.7</td>
	 <td >5.8</td>
	 <td >-0.8</td>
	 <td >-3.4</td>
	 </tr>
	 <tr>
	 <td class="firstcol" >&nbsp;Retail</td>
	 <td >0.4</td>
	 <td >0.7</td>
	 <td >0.1</td>
	 <td >4.9</td>
	 <td >4.9</td>
	 <td >2.5</td>
	 <td >1.9</td>
	 </tr>
	 <tr class="odd">
	 <td class="firstcol" >&nbsp;&nbsp;Retail excl. Motor Vehicles</td>
	 <td >0.5</td>
	 <td >0.3</td>
	 <td >0.4</td>
	 <td >5.2</td>
	 <td >4.9</td>
	 <td >2.0</td>
	 <td >0.4</td>
	 </tr>
	 <tr>
	 <td class="firstcol" >&nbsp;Merchant Wholesalers</td>
	 <td >0.8</td>
	 <td >0.4</td>
	 <td >0.9</td>
	 <td >7.8</td>
	 <td >7.4</td>
	 <td >-1.3</td>
	 <td >-4.9</td>
	 </tr>
	 <tr class="odd">
	 <td class="firstcol" >&nbsp;Manufacturing</td>
	 <td >0.0</td>
	 <td >0.7</td>
	 <td >0.2</td>
	 <td >7.2</td>
	 <td >5.0</td>
	 <td >-3.2</td>
	 <td >-6.2</td>
	 </tr>
	 <tr class="grey3">
	 <td class="firstcol" colSpan="8" >I/S Ratio</td>
	 </tr>
	 <tr>
	 <td class="firstcol" >Total</td>
	 <td >1.35</td>
	 <td >1.35</td>
	 <td >1.36</td>
	 <td >1.38</td>
	 <td >1.38</td>
	 <td >1.42</td>
	 <td >1.39</td>
	 </tr>
	 <tr class="odd">
	 <td class="firstcol" >&nbsp;Retail</td>
	 <td >1.44</td>
	 <td >1.44</td>
	 <td >1.46</td>
	 <td >1.47</td>
	 <td >1.47</td>
	 <td >1.49</td>
	 <td >1.46</td>
	 </tr>
	 <tr>
	 <td class="firstcol" >&nbsp;&nbsp;Retail excl. Motor Vehicles</td>
	 <td >1.21</td>
	 <td >1.21</td>
	 <td >1.22</td>
	 <td >1.24</td>
	 <td >1.24</td>
	 <td >1.28</td>
	 <td >1.27</td>
	 </tr>
	 <tr class="odd">
	 <td class="firstcol" >&nbsp;Merchant Wholesalers</td>
	 <td >1.28</td>
	 <td >1.29</td>
	 <td >1.29</td>
	 <td >1.30</td>
	 <td >1.29</td>
	 <td >1.35</td>
	 <td >1.33</td>
	 </tr>
	 <tr>
	 <td class="firstcol" >&nbsp;Manufacturing</td>
	 <td >1.35</td>
	 <td >1.35</td>
	 <td >1.36</td>
	 <td >1.38</td>
	 <td >1.37</td>
	 <td >1.41</td>
	 <td >1.39</td>
	 </tr>
	 </tbody>
	</table>
	

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Total business inventories increased 0.3% (4.4% y/y) during April following a 0.1% March slip. Total business sales rose 0.4% (6.7% y/y), following a 0.6% gain. The inventory-to-sales ratio held steady at 1.35. It peaked early in 2016 [...]

U.S. Business Inventory Accumulation Continues; Sales Strengthen

Accelerating positive economic surprises in the G10 are boosting the global economy

Considerably more monetary ease expected from US and UK as Japan tightens

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

AI boosting US investment in data centers

US productivity growth has been significantly faster than in other major economies

Consumers' short-term US inflation expectations still elevated while longer-term expectations of financial markets are steady

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

Job openings less than the number unemployed in July for first time since 2021

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

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Winnie Tapasanun

251215J37.jpg

251215K37.jpg

The Empire State Manufacturing Index of General Business Conditions dropped more than expected to -3.9 in December, down from 18.7 in November and 10.7 in October, according to the Empire State Manufacturing Survey released by the Federal Reserve Bank of New York. A reading of 10.7 for December had been expected in the Action Economics Forecast Survey. The December negative reading indicated that the business activity in New York State contracted for the first time since September; it was also down from 2.1 in December 2024 and a high of 20.2 in November 2024. The percentage of respondents reporting an increase in general business conditions was 31.8% in December, down from 38.7% in November; the percentage reporting a decrease was 35.7%, up from November’s 20.0%. The latest survey was conducted between December 2 and December 9.

The headline index reflects the answer to a single question concerning the state of economic activity and is not calculated from the components. Haver Analytics calculates a composite index from the five major components, which is comparable to the ISM manufacturing index. This calculated index fell to the neutral-level 50.0 in December—the lowest level since September—down from 55.4 in November, 52.7 in October, and 51.0 in December 2024 but up from a low of 42.5 in January 2024. The index is the average of five diffusion indexes: new orders, shipments, employment, supplier deliveries and inventories with equal weights (20% each).

In the latest survey, the new orders index fell to 0.0 in December after a 12.2-point gain to 15.9 in November, signaling steady orders this month and a marked improvement from a low of -35.0 in January 2024. The shipments index decreased to -5.7 in December, the lowest level in three months, following a 2.4-point increase to 16.8 in November, but it was up from a low of -22.7 in April 2024. The unfilled orders index dropped to -14.9 in December on top of a 1.9-point decrease to -5.8 in November, indicating unfilled orders contracted for the seventh straight month and to the weakest level since January 2024; the index reached a low of -24.2 in January 2024. The inventories index fell to 4.0 in December after a 7.7-point rise to 6.7 in November, suggesting that inventories expanded for two months following three consecutive months of contraction. Meanwhile, the delivery times index fell to -5.9 in December, the lowest reading since December 2024, from 7.7 in November, with 9.9% of respondents reporting higher delivery times and 15.8% reporting lower delivery times.

On the labor front, the number of employees index advanced to 7.3 in December after a 0.4-point increase to 6.6 in November, showing employment expanded for the sixth time in seven months and at the highest level since July. The index remained above a low of -9.7 in December 2023. A higher 16.2% of respondents reported an increase in employment in December while 8.9% reported a decline. The average workweek index slipped to 3.5 in December from 7.7 in November, remaining positive for a second month after two months in negative territory.

Inflation indicators eased this month but remained elevated. The prices paid index dropped to 37.6 in December, the lowest level since January, following a 3.4-point decrease to 49.0 in November. The index was up from a low of 21.1 in December 2024 and a low of 16.7 in December 2023 but significantly down from a high of 86.4 in April 2022. A 39.6% of respondents reported higher prices paid in December while only 2.0% reported lower prices paid. The prices received index fell to 19.8 in December, the lowest reading since February, following a 3.2-point decline to 24.0 in November. The index was up from a low of 4.2 in December 2024 and a low of 3.9 in July 2023 but well below a peak of 56.1 in March 2022. A 21.8% of respondents reported higher prices received in December while 2.0% reported lower prices received.

Firms grew more optimistic about the future business outlook in the latest survey. The index for future business conditions jumped to 35.7 in December, the strongest level since January, from 19.1 in November, with an increased 52.9% of respondents expecting business conditions to improve in the next six months. Future new orders rose to 38.0 in December, the highest figure since March 2022, from 23.3 in November and shipments rose to 33.3, the highest level since November 2024, from November’s 23.3. Growth in employment eased slightly to 8.8 in December from 11.9 in November but still showed continued employment expansion. Capital spending plans remained positive for the second successive month, with the future capital expenditures index at 6.9 in December compared with 11.5 in November. Expected prices paid fell to 55.4 in December, the lowest level since January, from 62.5 in November, while expected prices received rose to 46.5, the highest reading since April 2022, from November’s 41.3.

The indexes in this report are diffusion indexes and measure the percentage of respondents indicating an increase minus the percentage indicating a decrease with zero separating expansion from contraction.

The New York Fed survey data are contained in Haver’s **SURVEYS** database. The expectations series is in Haver’s **AS1REPNA** database.

251215L37.jpg

251215M37.jpg

- December General Business Conditions Index down 22.6 pts. to -3.9.
- Unfilled orders (-14.9) and shipments (-5.7) negative; employment (7.3, highest since July) and inventories (4.0) positive; new orders flat (0.0).
- Prices paid at an 11-month-low 37.6 and prices received at a 10-month-low 19.8, still elevated.
- Firms optimistic: Future Business Conditions Index at an 11-month-high 35.7 and future prices paid at an 11-month-low 55.4.

U.S. Empire State Manufacturing Index Plunges in December to a Three-Month Low

251215E.jpg

**Tankan overview:** Japan's Tankan report is an important quarterly assessment and outlook of the Japanese economy. Historically, the performance of manufacturers is considered to be the bellwether in this survey for performance of the economy. In the fourth quarter of 2025, the manufacturing index moved up to 15 from 14 in the third quarter. This compares to a value of 12 in the first quarter and a four-quarter average of 13.5. Since late-2006, the manufacturing index has averaged 5.3, marking the performance in 2025 as a substantial improvement from the long period where Japan struggled with deflation. On dated back to 2003, the manufacturing index has a standing in the queue of data in its 70.8 percentile, a reasonably firm reading. 

**Nonmanufacturers:** The index for nonmanufacturers logged a reading of 34 in the fourth quarter compared to 34 in the third quarter and a reading of 35 in the first quarter of 2025; the one-year average for nonmanufacturers is 34.3, marking that sector as little changed over the course of the year. Nonmanufacturing in the fourth quarter has an index standing at its 97.8 percentile, marking it as an extremely high standing on data back to late-2003. 

**Nonmanufacturing details:** Readings across the nonmanufacturing sector are above their respective one-year averages for all subsectors except transportation where the fourth quarter index backs down to 27 from an average of 30.5 and for restaurants & hotels that back down to a reading of 25 from an average of 39.3. The queue percentile standings for the subsectors show a good deal of strength with construction at a 98.9 percentile standing, services for businesses also at a 98.9 percentile standing, transportation - despite the back off from the average - is at a 94.4 percentile standing, and real estate and wholesaling are at 93.3 percentile standings on data back to 2003.  

**The Tankan outlook-** The survey also produces an outlook. For large manufacturers for the first quarter of 2026, the outlook metric moves up to 15 from what had been 12 for the fourth quarter of 2025. The outlook for nonmanufacturers is at 28, unchanged from the fourth quarter. The outlook for manufacturing has a queue standing in its 78.7 percentile on data back to 2003, while nonmanufacturing has a standing for the outlook reading at its 98.9 percentile marking these outlooks as quite good. 

**The BOJ is watching-** This is a survey the Bank of Japan will be looking at and assessing what policy should do and how strong the economy appears to be. On these data, the economy would appear to be firm, the outlook would appear to be solid, and if the Bank of Japan were to decide to pay more attention to inflation, the economy would seem to be in a position to absorb a rate hike without much difficulty.

**Other-sized enterprises-**
**Manufacturing:** The survey also produces results for medium-sized and small-sized firms, as well as outlooks for medium-sized and small-sized firms (that are not presented in the table). The fourth quarter assessments of performance, however, show improvements for manufacturing in both medium- and small-sized enterprises; they also show rankings of medium-sized firms in manufacturing in their 85th percentile, the same as for small sized enterprises. 

**Nonmanufacturing:** Nonmanufacturing for medium- and small-sized enterprises show improvements in the fourth quarter results and also demonstrates high rankings of those readings for those respective sectors.

**Summing up:**
On balance, it's a solid Tankan report for Japan's economy and should provide reassurance to the Bank of Japan and to the current government that the economy is on solid footing as each looks at the situation and tries to assess the best policy options. 

251215.jpg

Japan

Japan’s Tankan Ticks Higher for Large Manufacturers

Tian Yong Woon

This week, we assess Asia through a risk lens, given the recent flare-ups across the region. Japan–China tensions, following Japanese Prime Minister Takaichi’s recent remarks on Taiwan, have prompted some retaliatory measures from China, including travel advisories against visiting Japan. This raises the risk of a dent to Japan’s tourism income this year, given the significance of aggregate Chinese tourism expenditure (chart 1), although any such impact would come at a time when Japan is already grappling with the effects of overtourism. Beyond Japan–China relations, investors are also bracing for the Bank of Japan’s (BoJ) final scheduled policy decision of the year, where a rate hike is expected despite Takaichi’s pro-growth fiscal stance. This expectation reflects ongoing yen weakness (chart 2), alongside encouraging results from Japan’s Q3 Tankan survey, among other factors. While the anticipated hike is not, in itself, a risk, the associated increase in financing costs—coupled with the likelihood of higher government bond issuance to support growth objectives—adds to investor concerns.

Risks are also evident in China, particularly after the November data docket showed a continued deterioration in growth across multiple sectors (chart 3). While China’s 5% growth target for the year remains within reach, achieving it appears to hinge on a narrow set of growth drivers, notably trade. On this front, China has defied earlier investor concerns to record a substantial widening of its trade surplus this year, despite a worsening bilateral trade balance with the US (chart 4). However, while supportive of growth, this development risks drawing increased pushback from non-US trading partners that have been absorbing China’s excess capacity.

Elevated risks are also present elsewhere in Asia, particularly in Southeast Asia, where renewed military clashes between Thailand and Cambodia have once again pushed bilateral tensions to the fore (chart 5). Thailand additionally faces political uncertainty ahead of early elections, following Prime Minister Anutin’s dissolution of parliament last week. Lastly, we turn to semiconductor- and AI-related risks, which are especially pertinent to Asia given the dominance—and reliance—of Taiwan and South Korea in the sector. A key risk lies in the current extent of market optimism surrounding future AI-related earnings (chart 6), suggesting greater scope for disappointment than for further upside surprises.

**Japan-China tensions**
Geopolitics will likely remain front and centre in Asia heading into the new year,  with several flashpoints carrying the risk of broader regional spillovers. One such case is the recent flare-up in tensions between China and Japan, following new Japanese Prime Minister Takaichi’s parliamentary remarks on Taiwan. Since then, Chinese authorities have rolled out a series of measures — urging Chinese citizens to avoid travelling to or studying in Japan, reinstating an import ban on Japanese seafood, among others. While none of these steps are particularly substantial on their own, they underscore a rapidly deteriorating bilateral dynamic. The economic implications are not trivial. As shown in chart 1, spending by Chinese tourists has historically made up a significant share of Japan’s total inbound tourism receipts — roughly a quarter in recent quarters — with especially strong concentrations in certain regions such as Osaka. Although the absence of Mainland Chinese tourists has been keenly felt since tensions escalated, early indications suggest that increased arrivals from other countries have helped offset some of the shortfall. More recently, a series of close military encounters between China and Japan has further heightened concerns. The risk of miscalculation has grown, raising the possibility of an inadvertent escalation at a time when geopolitical sensitivities in the region are already elevated.


251215T1.jpg

**Japan**
Japan–China tensions aside, investors will also be focused on the Bank of Japan’s upcoming monetary policy meeting this week, the last of the year. After Governor Ueda’s recent remarks, markets are now expecting a 25 bps rate hike. This has been especially evident in the bond market, where yields have risen sharply in recent weeks (chart 2). The move partly reflects expectations of tighter policy, but also concerns Prime Minister Takaichi’s more expansionary fiscal stance. The recently submitted supplementary budget points to increased government bond issuance, adding supply pressure, weighing on bond prices, and pushing yields higher. The rise in yields also poses a risk when combined with increased bond issuance, as this implies higher financing costs for the government. A hike this month is still expected despite the government’s loose fiscal tilt, given yen weakness and recent readings of softer inflation. However, the outlook for any additional tightening beyond December remains uncertain. With the new year approaching and annual spring wage negotiations on the horizon, the BoJ will need further confirmation on wages and inflation before moving again. Meanwhile, the ongoing Japan–China frictions, while not yet generating major economic spillovers, remain a meaningful downside risk. Any material escalation could weigh on Japan’s outlook and complicate the case for further policy tightening.

251215T2.jpg

**China**
Moving to China, the latest monthly data point to a broad-based slowdown in growth in November. Year-on-year retail sales growth slowed to its weakest pace since 2022, while year-to-date year-on-year fixed asset investment growth fell to its lowest level since the outbreak of the COVID-19 pandemic in 2020 (chart 3). Industrial production growth also eased, albeit to a lesser extent. In addition, house price declines accelerated, reversing the easing trend seen in previous months. Overall, the latest data extend the pattern of deteriorating growth observed in recent months. That said, it remains to be seen whether the November readings will ultimately cause China to miss its 5% growth target for the year, given the substantial head start accumulated over the first three quarters. Moreover, China has enjoyed a bumper year in trade, which we discuss in the next section.

251215T3.jpg

Looking more closely at China’s trade performance, it has become clear that earlier fears of a trade-driven collapse in China’s growth have not materialised. Instead, China’s overall trade surplus has continued to widen, having topped $1 trillion this year, even as its bilateral surplus with the US has fallen sharply (chart 4). This suggests that China’s surplus expansion has been driven by other trading partners, which have effectively been absorbing China’s excess capacity. The stronger-than-expected trade outturn has also been a key factor behind the upward revisions to China’s GDP outlook for the year, with growth still on track to meet the 5% target barring any major setbacks. While this dynamic is not a direct risk in itself, surging exports to these partner economies could become problematic if domestic industries in the receiving countries are unable to absorb the inflow or begin to feel crowded out. Such pressures may eventually provoke a policy response. Still, it remains uncertain whether these countries — many of them smaller economies — would adopt measures similar to those taken by the US, given the asymmetric nature of their economic relationships with China.

251215T4.jpg

**Thailand-Cambodia tensions**
Moving beyond Japan and China, region-specific tensions elsewhere in Asia also warrant attention, though their broader impact remains limited. Notably, renewed military clashes between Thailand and Cambodia have resurfaced despite an earlier peace deal brokered by Malaysia and the US. While the likelihood of these clashes escalating into a wider regional conflict is low — given their primarily border-specific nature — external pressures on both countries remain a latent risk. The previous ceasefire appeared to have been secured only after US President Trump threatened to withhold trade deals unless fighting ceased, suggesting that a similar “carrot-and-stick” approach may be used again to encourage another ceasefire, although nothing is certain. Domestically, Thailand faces additional near-term uncertainties. Prime Minister Anutin must contend with a range of issues, including preparations for early elections following his dissolution of parliament just last week, adding another layer of unpredictability (chart 5). The Thai government’s popularity has also dipped recently, partly due to criticism over its handling of floods in southern Thailand.

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**Semiconductors and AI**
Lastly, we turn to semiconductor and AI-related risks in Asia. As in markets outside the region, this year’s tech rallies are increasingly seen as overextended (chart 6), with some arguing they have entered bubble territory. Many now believe that much of the upside in future earnings has already been priced in, leaving more room for disappointment than for positive surprises. Geopolitical and competitive considerations remain important too, as highlighted by the recent US approval to sell Nvidia’s high-end (though not top-tier) H200 chips to China. However, this approval may not generate the expected enthusiasm among Chinese consumers. If the reaction mirrors that seen after the earlier approval of Nvidia’s lower-end H20 chips, China may use these openings to promote domestic chipmakers such as Huawei. This could help local firms catch up to US peers and gradually reduce reliance on imported semiconductors. Also, if US chipmaker earnings disappoint due to a lukewarm reception of the H200 chips, while local Chinese chipmakers see increased upside potential, this could translate into a divergence in equity price trajectories between the sector’s stocks in the respective markets.

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Asia

Economic Letter from Asia: Balancing Risks

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The National Association of Realtors' Fixed Rate Mortgage Housing Affordability Index (HAI) improved 0.9% (3.6% y/y) to 106.2 in October after rising 4.7% in September, revised from 3.9%, following a 2.8% increase in August. The index level was the highest since February 2023. The level of home affordability was 18.1% higher than its low of 89.9 in October 2023, but 40.7% below the peak of 179.0 in April 2020.

The rise in October affordability occurred as the average mortgage rate fell to 6.33% from 6.43% in September. The fall in mortgage rates left them above their low of 6.26% in September of last year, though below a 7.70% high in October of 2023. They remained well above a December 2020 low of 2.73%. The median price of an existing single-family home rose 0.7% (2.2% y/y) to $420,600. That price compared to the record $438,600 in June 2025. In October, the principal plus interest payment eased 0.3% (+0.2% y/y) to $2,089 per month, down 9.6% from June’s record high of $2,311, but still well above the most recent low of $984 in February 2020. Monthly mortgage payments averaged a slightly lessened 23.5% of income during October, but remained well above a low of 14.0% of income in April 2020.

The change in housing costs in October was accompanied by a 0.5% rise (3.8% y/y) in median family income to $106,478 after falling 0.3% in September. Qualifying income declined 0.3% (+0.2% y/y) to $100,272, after falling for three straight months.

Housing affordability improved m/m in most of the country in October. The index in the Midwest, the country’s most affordable region, rose 1.5% (0.9% y/y) to 134.4. In the South, the index increased 0.7% (5.4% y/y) to 112.1, while the affordability index in the Northeast strengthened 1.1% (-1.4% y/y) to 93.7. Declining, however, was the affordability index in the West, where homes are the least affordable. The index eased 0.3% (+5.3% y/y) to 75.2 in October.

The Housing Affordability Index (HAI) equals 100 when a median-income borrower qualifies for an 80% mortgage on a median-priced existing single-family home. The HAI had exceeded 100 in each month since July 1990. It reached an all-time high of 213.3 in January 2013.

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

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- Mortgage rates continue to decline.
- Median income strengthens.
- Affordability improves in most of country.

U.S. Housing Affordability Edges Higher in October

Andrew Cates

**The Blue Chip Consensus**
Before turning to the risks that could unsettle the global outlook in 2026, it’s worth noting the backdrop against which those risks are emerging. The first chart shows that forecasters have, if anything, become more optimistic in recent months, raising their 2026 GDP projections across many major economies. The upgrades are most visible in Asia’s tech-focused economies, where the semiconductor and AI upturn is lifting expectations, but the US has also benefited from stronger-than-expected momentum and fading concerns that tariffs would deliver a major growth hit. In short, the starting point for the global outlook has improved—making the downside scenarios explored in the next few charts all the more important to test.

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**Policy divergence**
The second chart highlights one of the central risks to the 2026 outlook: monetary-policy calibration. Even as growth expectations have firmed, forecasters remain convinced that the major central banks still have a little further to go in their easing cycles. For both the Fed and the Bank of England, respondents expect additional rate cuts in early 2026, albeit with growing uncertainty about the exact timing and pace. The broader message is that the heavy lifting on disinflation is now largely done, and what remains are finer calibration risks—where cutting too slowly risks choking momentum, while cutting too aggressively risks undoing progress on inflation. The ECB outlook is far more fragmented. A large share of forecasters sees the next step as a cut—though not necessarily soon—but a meaningful minority lean toward a possible hike. At the opposite pole is the Bank of Japan. Unlike its peers, the BoJ is still expected to tighten policy, reflecting Japan’s firmer growth foundation and a more durable inflation process. This creates a notable US–Japan policy divergence, which has already influenced currency and bond-market behaviour and could become a larger global shock-transmission channel in 2026.

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**Financial market stress**
The third chart highlights another source of downside risk: the widening gap between financial-market calm and real-economy anxiety. The US VIX has spent most of the past year hovering near multi-decade lows, consistent with rich valuations, abundant liquidity and a broadly optimistic macro narrative. Yet measured global economic policy uncertainty remains unusually elevated, reflecting geopolitical fragmentation, shifting trade regimes, and highly uncertain fiscal trajectories. This disconnect matters. Periods in which markets price near-perfection while the policy environment deteriorates have often been precursors to sharp repricing episodes. With valuations stretched and volatility compressed, it would not take much—a policy misstep, a geopolitical shock, or a rapid shift in rate expectations—to trigger a correction big enough to destabilise confidence in 2026.

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**AI expectations**
Against that backdrop, our next chart highlights a more subtle but no less important vulnerability: expectations around AI-driven growth. While AI has undoubtedly been a powerful tailwind for market sentiment—and arguably a key reason why forecasters have nudged up 2026 growth projections—our survey suggests that most respondents believe financial markets are overestimating the likely economic gains. Only around a third think current expectations are broadly accurate; almost nobody believes markets are underestimating AI’s impact. This imbalance matters. When valuations are rich and optimism is heavily front-loaded, any disappointment in AI adoption, productivity gains or investment payoffs could unwind a meaningful chunk of the recent market strength. In other words, the same force lifting the outlook today could become a meaningful downside catalyst in 2026 if reality fails to keep pace with expectation.

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**Trade disruption** 
A further downside risk comes from the latent fragilities in global trade and logistics. The Baltic Dry Index has climbed sharply in recent months, hinting at firmer shipping demand and rising transport costs, even as the Global Supply Chain Pressure Index has edged lower. That combination is telling: headline congestion may not yet be building, but underlying pressures—tight vessel availability, shifting trade routes, selective port bottlenecks and stronger goods flows—are quietly re-accumulating beneath the surface. None of this resembles the acute disruptions of 2021–22, but the risk is that a seemingly contained system can tighten very quickly. For a global economy that remains vulnerable to cost shocks and production delays, any renewed squeeze in trade logistics would add another meaningful downside risk as we look toward 2026.

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**Geopolitical shocks** 
Geopolitical risk has eased from the extremes seen during the early stages of the Israel–Gaza conflict, but the broader backdrop remains far from settled. The global Geopolitical Risk Index is still running well above its pre-pandemic norm, and volatility is now being driven less by any single flashpoint and more by a crowded field of simmering risks. These range from an unstable Russia–Ukraine stalemate and intensifying U.S.–China strategic rivalry to ongoing tensions across the Taiwan Strait, a fragile security environment in the South China Sea, periodic flare-ups in the Caucasus and Sahel, and rising political strain ahead of multiple major elections in 2026. Venezuela’s increasing instability—both domestically and in relation to its border dispute with Guyana—adds another potential source of disruption, particularly for energy markets. While none of these risks is dominating headlines at present, history shows that geopolitical shocks rarely give advance warning. A sudden escalation in any of these theatres could easily unsettle trade flows, energy prices or investor sentiment—another meaningful downside risk as we approach 2026.

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As 2025 draws to a close, the global economy enters 2026 with a surprisingly resilient backdrop: equity markets are still trading near cycle highs, volatility is subdued, and consensus forecasts have been drifting upward in recent months—helped by a robust US economy, firmer momentum across Asia, and optimism that AI-related investment will continue to lift the medium-term outlook (chart 1). Against this relatively constructive starting point, we focus this week on the key downside risks that could challenge the consensus narrative next year: the possibility of monetary-policy miscalibration (chart 2); the gap between elevated policy uncertainty and unusually calm financial markets (chart 3); the risk that financial markets may be overestimating the gains from AI (chart 4); renewed strain in global trade (chart 5); and geopolitical tensions (chart 6). These risks do not dominate the baseline outlook, but they help frame the vulnerabilities that could matter if global conditions deteriorate. Next week, we will turn to the upside risks—the forces that could allow the world economy to outperform again in 2026.

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Economy in Brief

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Japan's Loses Its Trade Surplus

U.S. Home Builder Index Backpedals

Empire State Manufacturing Index Continues to Strengthen

U.S. Industrial Production Slips Unexpectedly

EMU Trade Deficit Shrinks

Empire State Manufacturing Index Continues to Strengthen

Petroleum Drives Gains in U.S. Import and Export Prices

U.S. Business Inventory Accumulation Continues; Sales Strengthen