Even with strong capex, US nonfinancial corporations are generating more cash than they are investing

Investor sentiment worldwide is positive, especially in AI-led Asia

Sectoral shift in US job openings

Meteoric rise in AI-related semiconductor exports fueling South Korea's export boom

Regional Fed surveys showing further manufacturing acceleration in August

Sharp drop in China demand for oil helping to limit impact of Middle East conflict on the price

Decades high real price of copper posing physical challenge to investment boom

Rising US long-term real yields point to strong demand for investment funding

US retail sales accelerate even as consumers remain gloomy

Retail gasoline price still well above pre-conflict level and now rising again

PMIs showing widespread revival of global economy

Crude oil price has returned to pre-conflict level but traffic through Hormuz still subpar

Surging orders for computers and electronics propelling durable goods orders

Next year's inflation forecasts are on the rise and above target

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

Elevated energy prices putting intense upward pressure on input prices around the globe

US is big leader in global surge in private AI investment

Larger-than-usual income tax refunds this year are supporting consumer spending

Sharply rising share of AI-related jobs

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

Recent pickup in US defense orders could help support overall growth ahead

Cost of transporting crude oil has soared to series high

Market-based inflation expectations have not yet reflected recent surge in oil prices

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Charles Steindel

State labor markets were somewhat improved in August. Four states reported a statistically significant increase in jobs—California gained 39,400 and New Mexico  Eight states saw statistically significant drops in their unemployment rate, though none was larger than .2 percentage points. The highest unemployment rates were in  DC (5.7%), Connecticut (5.1%), Oregon (5.1%), California (5.1%), and Michigan (5.0%). Nebraska, New Hampshire, Hawaii, Vermont, North Dakota, and South Dakota had unemployment rates under 3.0%, while  South Dakota’s 2.0% was the lowest in the nation.

Puerto Rico’s unemployment rate increased to 6.1%, reflecting a .7% increase in the island’s labor force (July saw a .8% rise), while the island’s job count was up 1,000.

State Labor Markets in August 2026

Mickey D. Levy

10-year Treasury yields averaged 4.2% in the 12 months ending February 2026. They now hover near 5%, a significant increase. Besides higher oil prices, several explanations are plausible. Real rates have risen associated with the sustained healthy economic growth and higher expected rates of return on investment, particularly reflecting the booming AI buildout that is involving more debt financing. Inflationary expectations have remained generally well-anchored, but market-based measures have risen a few tenths of a percent. And the persistence of budget deficits and projections of ever-rising government debt-to-GDP may be exerting pressure on yields.

This note focuses on oil prices and yields.  As a temporary negative supply shock to the economy, the higher oil prices are supposed to hurt economic activity which may be associated with lower real rates and are not supposed to impact intermediate and longer-run inflationary expectations.  But Chart 1 shows convincingly that short-run movements in WTI oil spot prices (measured in 21-day changes in dollar-per barrel) and 10-year Treasuries (21-day percentage point changes) have been very closely correlated since end of February 2026 when the bombing in Iran commenced. Chart 2 shows that the levels of the Treasury yields and oil prices.

WTI rose dramatically from $65/barrel end-of February to the high-$90s end-of-March, bounced around and rose to $108 in May and plummeted to $70 in early July during the temporary ceasefire and then ratcheted up during the summer to its current above $102. Treasury bond yields rose and fell and rose again with these fluctuations.

260916ML1.jpg

260916ML2.jpg

This note is not to understate my serious concerns about the mounting budget government debt, its plausible impact on interest rates that raises debt service costs, and how the persistent deficit spending is allocating national and financial resources and adversely affecting economic activity. Rather it highlights the sizable impacts the higher oil prices associated with the war in Iran have on treasury yields. A resolution of the Iran war that brings down oil prices would materially lower Treasury yields.

U.S. Treasury Yields and Oil Prices

Paul L. Kasriel

At the recent Jackson Hole annual Kansas City barbecue, Fed Chairman Warsh mentioned that if the Fed had paid more attention to the surge in the M2 money supply in 2021, it might have raised the federal funds rate sooner, which, in turn, might have moderated the sharp increase in consumer price inflation that ensued. Wow! The ghost of Milton Friedman, may his memory be a blessing, must have been talking to Warsh while he was at Stanford’s Hoover Institution. The Fed could do worse than paying more attention to the behavior of the M2 money supply. It could do better, though, by paying more attention to behavior of the sum of the monetary base (reserves of depository institutions held at the Fed plus currency) plus securities and loans on the books of depository institutions (broad thin-air credit). But where Fed Chairman does not quite get it is his continued emphasis on using the federal funds interest rate as the Fed’s operating instrument. If the ghosts of Milton Friedman and Robert Laurent (also, may his memory be a blessing) would have had more séance time with Warsh, they might have been able to convince him to abandon using the federal funds interest rate as the Fed’s policy instrument and instead directly set the level of depository institution reserves such that a constant rate of growth in a monetary quantity, be it M2 or thin-air credit, could be achieved. This would require some institutional changes such as the elimination of interest payments on reserves and the re-introduction of reserve requirements. (See, my August 25, 2026 commentary “[A Modest Monetary Policy Proposal for Fed Chairman Warsh to Consider](https://www.haver.com/articles/a-modest-monetary-policy-proposal-for-fed-chairman-warsh-to-consider)” for a discussion of these necessary institutional changes.)

Let’s compare the relationship between percentage changes in the M2 money supply and thin-air credit with goods/services price inflation. Plotted in Chart 1 are the percent changes in the annual averages of the M2 money supply (the blue bars) vs. the percent changes in the annual averages of the Gross Domestic Purchases chain-price index (the red line) starting in 1960. The highest positive correlation between the two series occurs when percent changes in M2 are advanced (lead) by two years. The correlation coefficient is 0.48. Although a correlation coefficient of 0.48 is a long way from the maximum possible value of 1.00, it’s not bad for government work.

260914PK1.jpg

Now, let’s compare the relationship between percentage changes in “broad” thin-air credit (the sum of the monetary base plus the securities and loans on the books of depository institutions) and goods/services price inflation. Plotted in Chart 2 are the percent changes in the annual averages of thin-air credit (the blue bars) vs. the percent changes in the annual averages of the of the Gross Domestic Purchases chain-price index (the red line), again, starting in 1960. The highest positive correlation between these two series occurs when percent changes in thin-air credit are advanced (lead) by two years. The correlation coefficient is 0.61, better than M2’s 0.48.

260914PK2.jpg

So, whether its today’s percentage changes in the M2 money supply or thin-air credit, history indicates that the largest effect on goods/services price inflation occurs two years later. Chairman Warsh, you could do worse by using today’s behavior of M2 as an indicator of the behavior of inflation two years from now. But you could do better by observing the behavior of today’s thin-air credit. If you really want to go down in the annals of outstanding Fed chairpersons, Chairman Warsh, you will abandon federal funds rate targeting and adopt direct reserves targeting to achieve a constant rate of growth in thin-air credit. If you do this, I predict that periods of excessive goods/services price inflation or deflation will be avoided. I also predict that asset-price bubbles will be avoided. So, assign one of your “task forces” to investigate my recommendations and determine the optimal constant rate of growth in thin-air credit.

Note: I am as tired of writing about thin-air credit as you are reading about it. I believe that the Federal Reserve could do a lot worse in conducting monetary than making the necessary institutional changes that would enable it to achieve a steady rate of growth in thin-air credit. But, to quote my son: “No one listens to me!” So, I will attempt to find other issues to rant about in the coming months.

Chairman Warsh and M2 – He Almost Gets It

Viewpoints: March 2023

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