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/070201h.jpg" width="353">
The ISM Manufacturing Index fell back below 50 in January to 49.3, reversing December&#39;s gain and confounding forecasts of a further gain to over 51. Readings above 50 indicate that activity is expanding at half or more of the responding companies, taken to mean that the manufacturing sector is generally growing. Thus, the January figure just below 50 describes a basically flat pattern for the month, taking account of seasonal adjustment.
The change in the index was driven by inventories, which plunged from December&#39;s 48.5 to 39.9. This is the lowest reading since February 2002 and the sharpest month-on-month drop since July/August 1984. It indicates that manufacturers are reducing their holdings of materials and supplies. This item has only a 10% weight in the composite index, but the size of the decline means it reduced the index by 0.84 point.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070201i.jpg" width="353">
Production was the next largest contributing factor, decreasing 2.8 points to 49.6. It has a 25% weight, so it took 0.7 point away from the total index.
New orders were also weaker, but much more modestly, downshifting to 50.3 from 51.9 in December. This has the largest weight in the index calculation, 30%, and thus subtracted 0.48 from the total. Supplier deliveries are still positive, but less so, easing from 53.3 to 52.7 in January. This means that activity at vendors is moderating so fewer companies face protracted waiting times for deliveries of supplies.
Employment actually moved favorably, from 49.4 in December to 49.5 in January. The tiny improvement indicates that employment is falling at fewer companies, and indeed, with the reading so close to 50%, it is best described as &quot;steady&quot;.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070201j.jpg" width="353">
Prices paid by survey participants rebounded in January to 53.0 from 47.5 in December, largely recouping that month&#39;s decline. The press release from the Institute of Supply Management reports that aluminum, nickel and stainless steel went up in price, along with corn products. Copper, resins, natural gas and basic steel were all down. Note that the index is based on the number of companies reporting higher prices, not the number of commodities or materials with higher prices.
Finally among survey items of note this month, companies reported that their customers&#39; inventories rose further to 52.6 from 50.5. This measure has been above 50 for four months, but before October, had been below 50 since the middle of 2001. This item is read negatively: more survey respondents in January judged that their customers stocks&#39; are excessive, suggesting that those customers could cut back on future orders.
Taken together, this ISM report portrays a flat manufacturing sector, with little change in activity and sharp inventory reductions. A slowing in activity was indicated by industrial production data through December, and this ISM report implies that has carried forward into early 2007.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">ISM Manufacturing Survey</th>
<th scope="col">Jan 2007</th>
<th scope="col">Dec 2006</th>
<th scope="col">Nov 2006</th>
<th scope="col">Jan 2006</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Composite Index</td>
<td>49.3</td>
<td>51.4</td>
<td>49.9</td>
<td>55.3</td>
<td>53.9</td>
<td>55.5</td>
<td>60.5</td>
</tr>
<tr>
<td class="firstcol">Prices Index (NSA)</td>
<td>53.0</td>
<td>47.5</td>
<td>53.5</td>
<td>65.0</td>
<td>65.0</td>
<td>66.4</td>
<td>79.8</td>
</tr>
</tbody>
</table>
</body>
</html>

The ISM Manufacturing Index fell back below 50 in January to 49.3, reversing December's gain and confounding forecasts of a further gain to over 51. Readings above 50 indicate that activity is expanding at half or more of the [...]

January ISM Manufacturing Survey Gives Back December Gains

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070201c.jpg" width="353">
A 20,000 drop in initial unemployment insurance claims last week to 307.000 reversed half of the upwardly revised increase the prior week. Consensus expectations had been for 315,000 claims.
During the last ten years there has been a (negative) 77% correlation between the level of initial claims and the m/m change in nonfarm payroll employment.
The four-week moving average of initial claims fell to 304,750 (6.6% y/y).
Continuing claims for unemployment insurance jumped 71,000 (1.1% y/y).
The insured rate of unemployment remained at 1.9%, about where it&#39;s been since February.

<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/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">01/27/07</th>
<th scope="col">01/20/07</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>307</td>
<td>327</td>
<td>8.1%</td>
<td>313</td>
<td>332</td>
<td>343</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Continuing Claims</td>
<td>--</td>
<td>2,484</td>
<td>-3.2%</td>
<td>2,459</td>
<td>2,662</td>
<td>2,924</td>
</tr>
</tbody>
</table>
</body>
</html>

A 20,000 drop in initial unemployment insurance claims last week to 307.000 reversed half of the upwardly revised increase the prior week. Consensus expectations had been for 315,000 claims. During the last ten years there has been a [...]

Initial Jobless Insurance Claims Back Down

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070201a.jpg" width="353">
Personal income increased 0.5% after two months of 0.3% rise and matched Consensus expectations. For the year, income rose 6.4%, faster than the 5.2% gain during 2005.
Wages &amp; salaries jumped 0.6% (6.4% y/y) and for the whole year rose 6.6% after the 5.1% increase during 2005. Last year&#39;s gain was the strongest since 2000. Factory sector wages made up for the prior month&#39;s slip with a 0.2% (3.8% y/y) increase. The full year gain of 4.7% also was the strongest since 2000. Wages in the private service-producing industries rose a strong 0.8% (7.0% y/y) and for the year rose 7.2%.
Interest income declined 0.4% (+3.0% y/y) for the third consecutive month and earlier months&#39; gains were revised away. Dividend income surged 1.1% (11.7% y/y) for the fourth month and for the year rose 11.3%.
Disposable personal income advanced 0.5% (5.2% y/y), better than the 0.3% increase during November and for the year rose 5.5%. Personal taxes increased 0.7% (10.9% y/y) and for the year rose 13.3%. Real disposable personal income rose 0.2% (2.9% y/y) last month and for the year rose 2.7%. Real disposable income per capita rose 1.8% last year, up from the 0.2% gain during 2005.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070201b.jpg" width="353">
Personal consumption surged 0.7% last month after an unrevised 0.5% gain during November and matched expectations. Last month&#39;s gain was helped by a 4.4% (-2.1% y/y) increase in unit auto sales. That lowered the year&#39;s gain in spending to 6.0% from 6.5% during 2005. Spending on nondurables grew 1.6% last month and 7.0% for the year but adjusted for higher prices nondurables spending grew just 0.6% in December and 3.8% last year. Real consumer spending rose 0.3% after a 0.5% November gain and grew 3.2% for the year, down from 3.5% during 2005.
The personal savings rate was a more negative -1.2% during December and in 2006 averaged -1.0%. Should the Decline in the Personal Saving Rate Be a Cause for Concern? from the Federal Reserve Bank of Kansas City is available <a href="http://www.kansascityfed.org/PUBLICAT/ECONREV/PDF/2Q06garn.pdf">here</a>.
The PCE chain price index rose a firm 0.4% due to a 3.7% gain in gasoline prices which has since more than reversed. Prices less food &amp; energy ticked up 0.1% after no change in November. The three month change in core prices fell to 1.7% (AR), the lowest since February.

<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/@E7/@E711/@E71102/@E71102.HTM">Disposition of Personal Income</a></th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Personal Income</td>
<td>0.5%</td>
<td>0.3%</td>
<td>5.9%</td>
<td>6.4%</td>
<td>5.2%</td>
<td>6.2%</td>
</tr>
<tr>
<td class="firstcol">Personal Consumption</td>
<td>0.7%</td>
<td>0.5%</td>
<td>6.0%</td>
<td>6.0%</td>
<td>6.5%</td>
<td>6.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Savings Rate</td>
<td>-1.2%</td>
<td>-1.0%</td>
<td>-0.3% (Dec. &#39;05)</td>
<td>-1.0%</td>
<td>-0.4%</td>
<td>2.0%</td>
</tr>
<tr>
<td class="firstcol">PCE Chain Price Index</td>
<td>0.4%</td>
<td>0.0%</td>
<td>2.3%</td>
<td>2.8%</td>
<td>2.9%</td>
<td>2.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Less food &amp; energy</td>
<td>0.1%</td>
<td>0.0%</td>
<td>2.2%</td>
<td>2.2%</td>
<td>2.1%</td>
<td>2.0%</td>
</tr>
</tbody>
</table>


</html>

Personal income increased 0.5% after two months of 0.3% rise and matched Consensus expectations. For the year, income rose 6.4%, faster than the 5.2% gain during 2005. Wages & salaries jumped 0.6% (6.4% y/y) and for the whole year [...]

U.S. Personal Income Firm, Core Prices Tame

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070201a.jpg" width="353">
Personal income increased 0.5% after two months of 0.3% rise and matched Consensus expectations. For the year, income rose 6.4%, faster than the 5.2% gain during 2005.
Wages &amp; salaries jumped 0.6% (6.4% y/y) and for the whole year rose 6.6% after the 5.1% increase during 2005. Last year&#39;s gain was the strongest since 2000. Factory sector wages made up for the prior month&#39;s slip with a 0.2% (3.8% y/y) increase. The full year gain of 4.7% also was the strongest since 2000. Wages in the private service-producing industries rose a strong 0.8% (7.0% y/y) and for the year rose 7.2%.
Interest income declined 0.4% (+3.0% y/y) for the third consecutive month and earlier months&#39; gains were revised away. Dividend income surged 1.1% (11.7% y/y) for the fourth month and for the year rose 11.3%.
Disposable personal income advanced 0.5% (5.2% y/y), better than the 0.3% increase during November and for the year rose 5.5%. Personal taxes increased 0.7% (10.9% y/y) and for the year rose 13.3%. Real disposable personal income rose 0.2% (2.9% y/y) last month and for the year rose 2.7%. Real disposable income per capita rose 1.8% last year, up from the 0.2% gain during 2005.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070201b.jpg" width="353">
Personal consumption surged 0.7% last month after an unrevised 0.5% gain during November and matched expectations. Last month&#39;s gain was helped by a 4.4% (-2.1% y/y) increase in unit auto sales. That lowered the year&#39;s gain in spending to 6.0% from 6.5% during 2005. Spending on nondurables grew 1.6% last month and 7.0% for the year but adjusted for higher prices nondurables spending grew just 0.6% in December and 3.8% last year. Real consumer spending rose 0.3% after a 0.5% November gain and grew 3.2% for the year, down from 3.5% during 2005.
The personal savings rate was a more negative -1.2% during December and in 2006 averaged -1.0%. Should the Decline in the Personal Saving Rate Be a Cause for Concern? from the Federal Reserve Bank of Kansas City is available <a href="http://www.kansascityfed.org/PUBLICAT/ECONREV/PDF/2Q06garn.pdf">here</a>.
The PCE chain price index rose a firm 0.4% due to a 3.7% gain in gasoline prices which has since more than reversed. Prices less food &amp; energy ticked up 0.1% after no change in November. The three month change in core prices fell to 1.7% (AR), the lowest since February.

<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/@E7/@E711/@E71102/@E71102.HTM">Disposition of Personal Income</a></th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Personal Income</td>
<td>0.5%</td>
<td>0.3%</td>
<td>5.9%</td>
<td>6.4%</td>
<td>5.2%</td>
<td>6.2%</td>
</tr>
<tr>
<td class="firstcol">Personal Consumption</td>
<td>0.7%</td>
<td>0.5%</td>
<td>6.0%</td>
<td>6.0%</td>
<td>6.5%</td>
<td>6.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Savings Rate</td>
<td>-1.2%</td>
<td>-1.0%</td>
<td>-0.3% (Dec. &#39;05)</td>
<td>-1.0%</td>
<td>-0.4%</td>
<td>2.0%</td>
</tr>
<tr>
<td class="firstcol">PCE Chain Price Index</td>
<td>0.4%</td>
<td>0.0%</td>
<td>2.3%</td>
<td>2.8%</td>
<td>2.9%</td>
<td>2.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Less food &amp; energy</td>
<td>0.1%</td>
<td>0.0%</td>
<td>2.2%</td>
<td>2.2%</td>
<td>2.1%</td>
<td>2.0%</td>
</tr>
</tbody>
</table>
Initial Jobless Insurance Claims Back Down 
by <a href="/comment/Moeller.html">Tom Moeller</a> February 1, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070201c.jpg" width="353">
A 20,000 drop in initial unemployment insurance claims last week to 307.000 reversed half of the upwardly revised increase the prior week. Consensus expectations had been for 315,000 claims.
During the last ten years there has been a (negative) 77% correlation between the level of initial claims and the m/m change in nonfarm payroll employment.
The four-week moving average of initial claims fell to 304,750 (6.6% y/y).
Continuing claims for unemployment insurance jumped 71,000 (1.1% y/y).
The insured rate of unemployment remained at 1.9%, about where it&#39;s been since February.

<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/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">01/27/07</th>
<th scope="col">01/20/07</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>307</td>
<td>327</td>
<td>8.1%</td>
<td>313</td>
<td>332</td>
<td>343</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Continuing Claims</td>
<td>--</td>
<td>2,484</td>
<td>-3.2%</td>
<td>2,459</td>
<td>2,662</td>
<td>2,924</td>
</tr>
</tbody>
</table>
January ISM Manufacturing Survey Gives Back December Gains 
by <a href="/comment/Moeller.html">Carol Stone (for Tom Moeller)</a> February 1, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070201h.jpg" width="353">
The ISM Manufacturing Index fell back below 50 in January to 49.3, reversing December&#39;s gain and confounding forecasts of a further gain to over 51. Readings above 50 indicate that activity is expanding at half or more of the responding companies, taken to mean that the manufacturing sector is generally growing. Thus, the January figure just below 50 describes a basically flat pattern for the month, taking account of seasonal adjustment.
The change in the index was driven by inventories, which plunged from December&#39;s 48.5 to 39.9. This is the lowest reading since February 2002 and the sharpest month-on-month drop since July/August 1984. It indicates that manufacturers are reducing their holdings of materials and supplies. This item has only a 10% weight in the composite index, but the size of the decline means it reduced the index by 0.84 point.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070201i.jpg" width="353">
Production was the next largest contributing factor, decreasing 2.8 points to 49.6. It has a 25% weight, so it took 0.7 point away from the total index.
New orders were also weaker, but much more modestly, downshifting to 50.3 from 51.9 in December. This has the largest weight in the index calculation, 30%, and thus subtracted 0.48 from the total. Supplier deliveries are still positive, but less so, easing from 53.3 to 52.7 in January. This means that activity at vendors is moderating so fewer companies face protracted waiting times for deliveries of supplies.
Employment actually moved favorably, from 49.4 in December to 49.5 in January. The tiny improvement indicates that employment is falling at fewer companies, and indeed, with the reading so close to 50%, it is best described as &quot;steady&quot;.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070201j.jpg" width="353">
Prices paid by survey participants rebounded in January to 53.0 from 47.5 in December, largely recouping that month&#39;s decline. The press release from the Institute of Supply Management reports that aluminum, nickel and stainless steel went up in price, along with corn products. Copper, resins, natural gas and basic steel were all down. Note that the index is based on the number of companies reporting higher prices, not the number of commodities or materials with higher prices.
Finally among survey items of note this month, companies reported that their customers&#39; inventories rose further to 52.6 from 50.5. This measure has been above 50 for four months, but before October, had been below 50 since the middle of 2001. This item is read negatively: more survey respondents in January judged that their customers stocks&#39; are excessive, suggesting that those customers could cut back on future orders.
Taken together, this ISM report portrays a flat manufacturing sector, with little change in activity and sharp inventory reductions. A slowing in activity was indicated by industrial production data through December, and this ISM report implies that has carried forward into early 2007.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">ISM Manufacturing Survey</th>
<th scope="col">Jan 2007</th>
<th scope="col">Dec 2006</th>
<th scope="col">Nov 2006</th>
<th scope="col">Jan 2006</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Composite Index</td>
<td>49.3</td>
<td>51.4</td>
<td>49.9</td>
<td>55.3</td>
<td>53.9</td>
<td>55.5</td>
<td>60.5</td>
</tr>
<tr>
<td class="firstcol">Prices Index (NSA)</td>
<td>53.0</td>
<td>47.5</td>
<td>53.5</td>
<td>65.0</td>
<td>65.0</td>
<td>66.4</td>
<td>79.8</td>
</tr>
</tbody>
</table>


</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 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.

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**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.

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**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.

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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.

U.S. GDP Q2’25 Growth Revised Up; Profits Improve

Sandy Batten

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The Kansas City Fed manufacturing composite index was unchanged at 1 in August from July. This was the second consecutive month that the index has been positive, indicating the manufacturing in the KC Fed district continue to inch up in August. Prior to the positive reading in July, the index had been negative for 22 consecutive months. The index’s most recent high was 31 reached in both April 2021 and October 2021. The durable manufacturing sector was mostly flat in August, while nondurable manufacturing activity declined slightly driven by printing activities and paper and chemical manufacturing. 

The August survey was open for a six-day period from August 20-25, 2025 and included 103 responses from plants in Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico, and western Missouri.

The ISM-adjusted index calculated by Haver Analytics rose to 51.1 (NSA) in August from 50.2 in July. This was the fifth reading above the critical 50 level that separates expansion from contraction in the past six months, a further indication of expanding manufacturing activity.

For the major component indexes, the production index was 0 in August, but this was up from -3 in July. The new orders index rose to 5 in August, its highest reading since May 2022, from 2 in July. The shipments index increased to 6 in August from 3 in July. The employment index was 0 in August, but this was up from -11 in July. Also, the average workweek index rebounded to 3 in August after having been in negative territory for the previous four months. Supplier delivery times were unchanged at 7 in August. The elevation of this index since April may indicate some incipient supply-chain disruptions from higher tariffs. In contrast, raw materials inventories fell to -7 in August from 8 in July.

On the inflation front, the prices paid for raw materials index remained elevated but fell to 43 in August from 47 in July and a local high of 51 in June. Forty-four percent of respondents reported an increase in raw materials prices in August, down from 48% in July and 53% in June, while only 4% reported a decrease, down from 5% in July and 6% in June. The prices received for finished products index increased to 21 in August from 18 in July. This index has fluctuated in a range between 17 and 21 for the past four months.

Expectations for future activity remained positive, with the composite index rising to 11 from 8, as firms anticipate an improvement in production and new orders. While expectations have been trending up over the past several months, they remain depressed relative to the recent high reading of 17 last December. Capital expenditures expectations remained in negative territory in August for the second consecutive month but edged up to -3 from -4 in July.

The series dates back to July 2001. The diffusion indexes are calculated as the percentage of total respondents reporting increases minus the percentage reporting declines. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. Data for the Kansas City Fed Survey can be found in Haver’s **SURVEYS** database.

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- Index remained (though barely) in positive territory for the second consecutive month, indicating that manufacturing activity was inching up.
- Prior to last month, the index had been negative for 22 consecutive months.
- Positive readings across most key components.

FRB Kansas City Manufacturing Index Unchanged in August

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The Pending Home Sales Index weakened 0.4% in July (+0.7% y/y) to 71.7 after falling an unrevised 0.8% in June and rising an unrevised 1.8% in May, according to the National Association of Realtors (NAR). The Index remained 42.7% below its most recent peak of 125.1 in October 2021. The index is a forward-looking measure of home sales based on contract signings.

The fall in pending home sales occurred as the average rate on a 30-year mortgage rose to 6.72% in July after holding steady m/m at 6.82% in June. These rates remained well above a low of 5.22% in August 2022 and more than double a record-low 2.68% in December 2020.

Pending home sales were mixed last month in the four major regions of the country. Sales in the Midwest declined 4.0% (+1.3% y/y) in July after easing 0.8% in June. Sales in the Northeast fell 0.6% both m/m and y/y, after holding steady in June. In the South, sales eased 0.1% (+1.8% y/y) following a 0.6% June decline, but sales in the West increased 3.7% (-1.9% y/y), reversing a 3.9% June drop.

The pending home sales index measures sales at the time the contract for the purchase of an existing home is signed, similar to the Census Bureau's new home sales data. In contrast, the National Association of Realtors' existing home sales data are recorded when the sale is closed, which is usually a couple of months after the sales contract has been signed. In developing the pending home sales index, the NAR found that the level of monthly sales contract activity leads the level of closed existing home sales by about two months.

The series dates back to 2001 and are available in Haver's **PREALTOR** database. Weekly mortgage interest rates from the Mortgage Bankers Association can be found in the **WEEKLY** database.

- Decline adds to June weakness.
- Regional changes are mixed.


U.S. Pending Home Sales Decline in July

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance declined to 229,000 during the week of August 23, after rising to 234,000 in the week of August 16, revised from 235,000. The Action Economics Forecast Survey expected 230,000 initial claims for last week. The four-week moving average of initial claims increased to 228,500 from 226,000, revised from 226,250. It was the highest level since the second week of July.

In the week ended August 16, the total number of unemployment insurance beneficiaries – also known as “continuing claims” – decreased by 7,000 to 1.954 million from 1.961 million in the prior week, revised down by 11,000 from 1.972 million. The four-week moving average rose to 1.956 million in the week ending August 16, the highest level in six weeks, and up from 1.952 million in the prior week, revised from 1.955 million.

In the week ending August 16, the insured rate of unemployment (the number of beneficiaries as a percent of covered employment) was 1.3% for the twelfth consecutive week.

The insured unemployment rate varied greatly across individual states and territories. In the week ended August 9, the highest unemployment rates were in New Jersey (2.75%), Rhode Island (2.58%), Massachusetts (2.18%), Minnesota (2.17%), California (2.11%), Washington (2.08%), District of Columbia (2.04%), and Puerto Rico (2.02%). The lowest were in South Dakota (0.28%), Florida (0.42%), and Alabama and North Carolina (both 0.47%). Rates in other notable states include Pennsylvania (1.92%), New York (1.73%), Illinois (1.72%), and Texas (1.24%). These state data are not seasonally adjusted.

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

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- Initial claims declined in latest week after a surge in the prior week.
- Continuing claims declined.
- Insured unemployment rate holds steady.

Economy in Brief: February 2007

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January ISM Manufacturing Survey Gives Back December Gains

Initial Jobless Insurance Claims Back Down

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