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

Global equity markets are fearing a major economic disruption from soaring oil prices

Is recent drop in sentiment signaling softer growth ahead?

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Ethan Harris

The employment report confirmed that the labor market is roughly in equilibrium. Now focus shifts to the August inflation data. I think a rate hike is quite likely on the 15th if the August data either match or exceed consensus forecasts.

**In times like this, data dependence make sense**

The Fed is often criticized for being too “data dependent.” Critics argue that tying policy to upcoming data: (1) makes the Fed backward looking, (2) adds to volatility as markets over-react to each release, and (3) signals the lack of a fundamental framework.

I disagree. After a period of hawkish or dovish news, there is always a period of high data dependence. At that stage incoming data becomes the final straw. In this instance high and rising inflation (chart) has created a strong focus on the August inflation data. After 65 months of above-target inflation, every member of the FOMC wants to hike if inflation does not return to target in a “timely manner.”

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**The tipping point**

The million-dollar question is what constitutes a “timely” return to target and what reading in August would confirm or contradict that goal?  The best approach is to look at August inflation readings relative to consensus forecast. If the numbers are below consensus, the doves will have an argument to stand on and may get enough support to stay on hold. However. If they come in above consensus, it is game over: doing nothing would damage credibility. Indeed, now that the FOMC has put us all on high alert, even consensus-like numbers should be enough to trigger a hike.

**I’m sticking to my forecast**

Of course, in any given month anything can happen. However, my fundamental view is that inflation will remain sticky high. The labor market may be in equilibrium, but the overall economy seems hot, with GDP running persistently above estimates of potential output (chart). Monetary policy is loose, judging by easy financial conditions (and, incidentally, accelerating money growth). The evidence is growing that the neutral funds rate is around 4%, not 3%. Fiscal policy is easy.

Outside of the neutral signals from the labor market, leading indicators of consumer price inflation signal strength. The PPI is strong. Survey measures of input and output prices remain robust and supplier delivery times as slowing. There is likely more pass through from high energy prices and tariffs. The AI build out is far from over. The Cleveland Fed’s Inflation Nowcasting tool has core PCE accelerating to 3.4% in August and 3.5% September.

It doesn’t look like “mission accomplished” to me. I continue to see a high probability of a September hike and another hike in December.

260904EH2.jpg

Source: CBO, BEA and author’s calculation

No mas: the Fed and Inflation

Andrew Cates

Kevin Warsh used his first Jackson Hole address as chairman of the Federal Reserve last week to signal that the next move in US interest rates is more likely to be up than down. He is not alone. The European Central Bank raised rates in June and may go further, and several other central banks have turned hawkish. It is a puzzle. Growth has slowed, unemployment has drifted up, and core inflation across the advanced economies is not far above target. Why is the world's monetary tide turning towards tightening?

The official answer is that they are guarding against a shift in expectations. Supply-driven inflation need not persist; it does so only if firms and households come to expect it, and set wages and prices accordingly. Having misjudged the 2021 shock as transitory, central bankers are unwilling to take that chance a second time. So they are tightening not to reverse the shock, which no rate can do, but to keep expectations anchored.

That, though, is the lesser part of the story. The central banks are treating as a cyclical episode what is in truth a change of regime. For a generation the advanced economies enjoyed abundant supply and abundant capital: globalisation held down the price of goods, a global surplus of saving held down the price of money, and monetary policy had only to manage demand. Both conditions are now reversing, together. Supply has become scarce and costly; so has capital; and the two are related. The consequences are large. Inflation of this kind cannot be brought down by interest rates, only resisted at the cost of a recession. The real cost of capital has risen durably, not cyclically. And investors positioned for the old regime — a central bank that eases into every downturn, government bonds that hedge equities, real rates that subside to their former lows — are positioned for a world that will not return.

Supply has tightened on every front. In the past month alone the United States imposed 50 per cent tariffs on Canadian goods; American forces struck Iranian launchers at the Strait of Hormuz, returning Brent above $90; and a glacier collapse on the Nepal-Tibet border destroyed a regional trade route. Each raised costs, and none can be addressed by a policy rate. To these has been added a contraction in the supply of labour. The administration's immigration enforcement, recently extended to withdraw work authorisation from more than a million people, has reduced the workforce available to construction, agriculture and services, and raised wage costs in those sectors. None of this is a temporary deviation from a stable trend. The real cost of energy has risen for a quarter of a century to a record; reshoring is reconstructing supply chains at higher cost; and demographic change was tightening labour markets before enforcement intensified. The cheap and frictionless supply of the globalisation era has ended.

The data bear this out. Decompose US core inflation into demand- and supply-driven components and the demand-driven part has fallen to around one percentage point, with supply accounting for almost the entire excess over target (Figure 1). Across the G10, core rates are grouped close to target, none much above two and a half per cent (Figure 2). The demand that monetary policy governs has already been contained; wage growth is slowing, and market-based measures of inflation expectations remain near target. What sustains inflation above target is supply.

260902AC1.jpg

Figure 1. Supply- and demand-driven contributions to US core PCE inflation. Source: San Francisco Fed (Shapiro decomposition) via Haver Analytics.

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Figure 2. Core inflation across the G10 — latest level and three-month direction. Source: Haver Analytics.

Capital has moved in the same direction, and the investment boom is not the offset it appears to be. The advanced economies are being asked to invest on a scale not seen in decades — in artificial intelligence, the energy transition, defence, and the fiscal deficits that accompany them — while the pool of saving available to fund it is shrinking, as the corporate sector shifts from net lender to net borrower and China channels less of its surplus into Western assets. Artificial intelligence adds to the pressure rather than relieving it: data centres are heavy consumers of electricity, the energy transition brings forward the demand for power and metals, and any supply it may eventually release lies well beyond the capital it now absorbs. The price of capital has already adjusted. The real yield on advanced-economy government debt, having declined for four decades to a record low during the 2022 inflation, has risen to its highest since before the financial crisis (Figure 3). The era of near-zero rates was the anomaly, not the level to which policy will return.

260902AC3.jpg

Figure 3. Advanced-economy real 10-year government bond yield (nominal less CPI inflation), annual average. Source: OECD and national statistics via Haver Analytics; author's calculations.

The central banks, in short, are applying the wrong instrument. They are using a tool that acts on demand against an inflation that originates in supply, and against a cost of capital that has risen for structural reasons; the most it can achieve is a recession that leaves those forces intact. A higher policy rate cannot lower the oil price, replace the workers being removed, or add to the supply of saving. The expectations they are defending show little sign of dislodging, while the recession they would risk in defending them is the greater danger.

Investors are making the opposite error, still positioned for a world that has ended. The central-bank put does not operate when growth and inflation diverge; bonds and equities fall together in a supply shock, as they did in 2022; and the real rate remains high because capital is genuinely scarce, not because policy is temporarily restrictive. The assets that benefit are claims on real resources — energy and its inputs; those most exposed are long-duration bonds and the highly valued equities that a low cost of capital supported. September's decision matters less than the regime that produced it. The age of abundance is over, and neither policy nor markets have adjusted to its end.

The age of abundance is over — and neither policy nor markets have caught up

Charles Steindel

The Federal Reserve Bank of Philadelphia’s state coincident indexes in July showed modest to moderate growth. In the one-month changes, six states-scattered across the nation--had increases greater than .5 percent (Washington, Nevada, Rhode Island,  South Carolina, North Dakota, and Wyoming). Hawaii and Alabama saw declines. Over the three months ending in July six states (West Virginia, Rhode Island, South Carolina,  Delaware, Nevada, and New Hampshire) had increases above 1.5 percent. Kentucky, Hawaii, and Alabama had declines , with Alabama’s index down a marked 1.34 percent. Over the last twelve months, no state saw an increase of 4 percent or more—Nevada’s 3.76 percent was the highest (six other states had increases above 3 percent). Alabama and Connecticut were down, and six others saw increases of less than one percent.  r percent (Idaho was up 3.62 percent), and six others were at or higher than three percent.

The independently estimated national estimates of growth over the last three and twelve were, respectively, .54 and 1.88 percent. Both measures appear to be a bit lower than what the state numbers would have suggested.

State Coincident Indexes in July 2026

Viewpoints: August 2018

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