*** GONE FISHING ***

I am in Ungava salmon fishing until August 29.

Amid all the economic and financial uncertainties, demographics are the critical variable for longer term economic growth and standards of living. Investment strategies should be cognizant of the solid underlying trends.

McKinsey Global Institute

Our current economic systems and social contracts have developed over decades of growing populations, in particular working-age populations that drive economic growth and support and sustain people living longer lives. This calculus no longer holds.

A combination of higher productivity, more work per person, effective migration, and higher fertility rates can ensure global prosperity for the future. That said, no one of those levers alone will be enough, and each presents challenges. Bending the trajectory of the demographic shift will require society to rethink existing systems for work and retirement in ways that may compel a change in our social contract—no easy feat. (…)

As well-being and prosperity increase around the world, two outcomes—fewer children and longer lives—are reshaping global populations. Over the past several decades, families have shrunk in size virtually everywhere. In much of the world today, the total fertility rate, which we refer to as the fertility rate, is below the replacement rate of 2.1, which is the number of children needed to replace their parents. As a result, the global age mix is shifting. While many people call this phenomenon “aging,” in fact the declining number of young people—a youth deficit—is driving the bulk of the demographic shift

While declining fertility rates and changing population patterns are occurring everywhere, a first wave of regions, generally higher-income ones, has already begun to experience the effects of the demographic shift over the past several decades. Later waves of the same challenge will wash over many emerging economies in the next one to two generations. (…)

Working-age people account for the bulk of economic output, so their numbers relative to those of older and younger people determine a host of economic outcomes. All regions will see the share of working-age people in their populations decline, although at different paces and points in time. (…)

Among first wave regions are predominantly developed economies—Advanced Asia, Central and Eastern Europe, North America, and Western Europe—and Greater China, which has lower GDP per capita than other first wave regions but shares their demographic characteristics. These regions have an average total fertility rate of 1.2 children per woman today, and 67 percent of their combined population is working age, down from a high of 70 percent in 2010. In aggregate, this cohort is rapidly shrinking in these regions, where the share of the working-age population is projected to drop to about 59 percent by 2050.

There are two later wave groups of regions. A second wave has just reached the shores of Emerging Asia, India, Latin America and the Caribbean, and the Middle East and North Africa. Their total fertility rate is 2.2, and 67 percent of their population is working age today. This wave is still gathering momentum, however, and will peak in the 2030s in aggregate.

In Sub-Saharan Africa, the average fertility rate is 4.4 today, and just 56 percent of the population is working age. This share will continue to grow, peaking at 66 percent well into the second half of the century, when the third wave of the demographic shift hits its shores. (…)

For first wave regions, the declining share of working-age population is a relatively new development, and many companies, governments, and communities haven’t yet fully come to grips with the implications. Later wave regions, excluding Sub-Saharan Africa, still have time to prepare, but not much.

Globally, the support ratio was 9.4 in 1997. Put differently, there were more than nine working-age people to support one older person. Today, the global support ratio is 6.5. And by 2050, it is expected to fall to 3.9—that is, fewer than four people to support each senior.

This trend is starker in first wave economies, where the support ratio is already 3.9 today, down from 6.8 in 1997. The ratio is expected to fall to two working-age individuals for every person over 65 years by 2050. Among regions in the first wave, Advanced Asia, Greater China, and Western Europe will have the lowest support ratios by 2050; the ratio will fall fastest in Greater China.

The world reached its maximum number of annual births in 2012, when 146 million babies were born, and the global number of births will continue to slowly decline. According to the United Nations, the total number of people on Earth will peak in 2084, at just above ten billion, and start declining in the latter years of this century. (…)

Total population in first wave regions, however, peaked in 2020. On the current trajectory, the population of these regions will fall from 2.8 billion today to 2.6 billion by 2050 and to 1.9 billion by 2100. Only 22 of the 55 countries in these regions will have more people in 2050 than today, and populations in most of those countries will decline thereafter. Already, more people die each year than are born in 37 countries in first wave regions. Today, 60 percent of the world’s population aged 65 and older resides in these regions. By contrast, only 22 percent of those younger than 15 years live there.

Populations across later wave regions are still increasing. The second wave’s total population will reach its maximum by 2071, going from four billion today to five billion at its peak. Sub-Saharan Africa’s population will still be growing by the turn of the century and is projected to reach 3.5 billion by then, up from 1.3 billion today. (See sidebar “Predicting the future is hard, and demographers don’t agree.”)

These dynamics mean that the planet’s population is shifting toward later wave regions. By 2050, a quarter of the global population will live in first wave regions, compared with 35 percent of the world’s people today. According to UN projections, these regions could be home to less than 20 percent of the global population by 2100.

Even though Sub-Saharan Africa’s fertility rate is falling fast, almost 300 of the world’s next thousand babies will be born there. Nigeria alone will become home to 57 of the next thousand—or five more than the 52 born across Central, Eastern, and Western Europe combined. Similarly, 172 of the next thousand babies the stork delivers will be in India, where the birth rate overall has dropped below replacement but where the current population of women of childbearing age is still high.

By 2100, Sub-Saharan Africa will account for all of the net global population increase, doubling its current share to 34 percent. By contrast, Greater China’s share of the global population, today the second largest among the ten regions, will shrink by two-thirds, from 18 percent in 2023 to 6 percent by 2100. This would make Greater China’s population only 170 million larger than North America’s, according to UN estimates, compared with a difference of roughly one billion people today. (…)

By 2050, holding current hours worked per capita constant within each age group, later wave regions would account for more than two-thirds of all hours worked globally.

At that time, Sub-Saharan Africa alone could account for 18 percent of global hours worked, doubling its share of work hours today. The share of the world’s work done by Chinese workers, on the other hand, could drop to 18 percent by 2050 from 26 percent today, and every other first wave region’s share is set to shrink. This could create an opportunity for many later wave countries to progress economically. Opportunities span the entire tradeable economy—services as well as manufacturing.

At least for the next quarter century, countries in later wave regions will account for more than half of global consumption, too, due to fast-growing young populations and growing incomes. For example, World Data Lab projects that India and Emerging Asia will account for 30 percent of global consumption at purchasing-power parity (PPP), up from 12 percent in 1997. By comparison, Advanced Asia, North America, and Western Europe could account for just 30 percent of the world’s consumption then, down from 60 percent in 1997. (…)

Over the longer term, countries in first wave regions may face the challenge of depopulation. Populations in 26 countries in these regions are on track to decline by a third or more by 2100, while in countries including China, Poland, and South Korea, they are expected shrink by half or more. Projections suggest that some countries with fertility rates below replacement, including France, the United Kingdom, and the United States, will have continued population growth through 2100 based on positive net migration. (…)

Declining populations would also challenge debt sustainability and the social contract, not to mention the global geopolitical balance. (…)

Many first wave economies face a virtually unprecedented depopulation challenge toward the end of the century, according to UN projections. More immediately, they face another challenge: increasing dependency that could depress economic growth over the next quarter century. As population pyramids become bottom-light and top-heavy, the well-being of a growing legion of older people and of society at large will depend on a stagnant or shrinking number of people who work, which will increase pressure on public finances. Youth scarcity could also modify consumption and savings patterns. (…)

GDP per capita depends on the number of hours worked per person and how productive each hour of work is, or productivity. Hours worked, in turn, depend on how much individuals of each age work, or labor intensity, and the number of people in each age group, or the age mix. Thus, GDP per capita growth depends on productivity growth, shifts in the age mix, and growth in labor intensity among people in each age cohort.

Under current projections, a changing age mix—more older people and fewer working-age people—will result in slower growth in hours worked and thus reduce GDP per capita growth if left unaddressed. To maintain GDP per capita growth, countries will need to influence their age mix, increase labor intensity, or boost productivity growth—or, more likely, rely on a combination of all three. (…)

Across first wave regions, weekly hours worked per capita peak at about 50 years of age and decline thereafter (Exhibit 11). The primary reason is falling labor force participation rates—fewer older people continue to work—but on average, older workers who are employed also work fewer hours.

(…) over the coming 25 years, the number of older people living in first wave regions will continue to grow while every other age cohort shrinks. This shift in the age mix could slow the growth in hours worked per capita across first wave regions by 2.2 hours per capita per week on average, thus slowing GDP per capita growth. (…)

A 0.4 percent drag on GDP per capita growth per year may seem trifling, but it isn’t. The shift in age mix could slow GDP per capita growth over the next quarter century, for example, by an average of $10,000 in Western Europe and $6,000 in Greater China. (…)

Productivity growth is the other lever underpinning GDP per capita growth, and generally the most important one. Across first wave economies, it has been the largest contributor to growth over the past quarter century. (…)

Maintaining past economic progress, let alone increasing it, will require measures to address the impact of demographic headwinds. In this section, we explore the three levers available—labor intensity, productivity, and age mix—to neutralize the drag on economic growth caused by shifting age mix. The third lever, influencing the age mix by increasing the number of working-age people, can be pulled via migration and higher fertility. However, the impact of higher fertility rates by 2050 would be negligible, as a baby born today would be barely joining the workforce. So we only analyze the impact of migration here.

The conclusion is clear: pulling on only one of these three levers will be insufficient to achieve this goal in most countries, so using some combination of all three will be needed to maintain growth and raise living standards. (…)

(…) the target for each country is equal to its past GDP per capita growth, which in many cases is not high. Italy’s target, for example, is a mere 0.4 percent annual growth. Should Italy want to achieve a healthier GDP per capita growth of, say, 1.5 percent, similar to that of the United States or Australia, the growth in hours per capita required would jump from 2.7 to a whopping 7.9, assuming constant past productivity growth of 0.3 percent per year. (…)

Assuming hours worked per capita grow at the same rate as in the past quarter century, productivity in most first wave countries would need to grow between 1 and 2 percent a year to maintain past GDP per capita growth (Exhibit 19). That level of increase may seem modest, but in Germany, for example, it means doubling the past decade’s average rate of annual productivity growth of 0.7 percent. In Spain, productivity growth needs to increase by about four times, even assuming labor intensity grows at past rates. If labor intensity does not increase—a plausible scenario—productivity in Germany and Spain would need to grow by 1.5 percent and 1.9 percent, respectively, per year.

While productivity can grow by raising capital investment and harnessing digital and automation technologies, most first wave countries have long struggled to do so.³² In fact, productivity growth has slowed in many of those countries over the past decade. For instance, US productivity over the past decade grew 0.8 percent per year on average, much less than its earlier annual growth of 2.0 percent.

From the beginning of 2023 through the second quarter of 2024, productivity growth spiked in the United States to top 2 percent per year, while it flatlined in many Western European countries and Australia. This suggests that the United States may be better positioned to jump-start growth, although that remains an open question. The future holds opportunities and risks for productivity growth everywhere. For example, while AI promises to propel productivity, increasingly fragmented global value chains and the growth of traditionally low-productivity service sectors like healthcare due to increasing longevity could restrain productivity growth.

China faces a special challenge. It is a first wave country because of its current demographic profile, but its GDP per capita of $21,000 (after adjusting for purchasing power) is closer to that of later wave regions. The country’s population is aging faster than almost anywhere else on Earth due to its low and declining fertility rate. To achieve a 4.9 percent growth target, China would need to grow its productivity by 5.5 percent a year, on average, through 2050 to counteract the demographic shift. This target is challenging, though not unattainable. While Chinese annual productivity growth over the past quarter century has been impressive, above 8 percent, it has slowed down more recently. Since the pandemic and through 2023, Chinese productivity grew by 5.2 percent annually.As the country develops further, maintaining such very high rates of productivity growth will not be an easy feat.

All in all, relying on either of these levers, labor intensity and productivity growth, to offset the impact of the demographic shift on its own is unlikely to do the job. Fortunately, countries can use them in combination. The possible combinations of hours and productivity growth needed to maintain GDP per capita growth vary by country.

For example, Germany could achieve past growth by increasing productivity at 0.9 percent per year while also increasing hours of work per capita by 2.2 or, alternatively, by growing productivity at 1.4 percent and hours of work per capita by 0.5 hour. It could also attain past growth with a middle point of productivity and hours between these two outcomes, for example productivity growth of 1.1 percent and an additional 1.6 weekly hours per capita. What is clear is that most countries in the first wave will likely need to rely on both. (…)

While increasing fertility rates is critical for population growth over the long term, babies born today will barely have entered the labor market by 2050, reducing the potential impact of higher fertility rates over much of the next quarter century. Migration can more immediately help countries grow their working-age population. However, the increase in migration needed to maintain GDP per capita growth is significant. (…)

Other metrics illustrate the scale of migration required to maintain the economic status quo. For instance, new research estimates that if advanced economies relied on migration alone to maintain support ratios at today’s levels, in many cases as much as half of their populations would be foreign born by 2050, assuming each migrant brings one dependent. (…)

In the USA:

Why Americans Aren’t Having Babies The costs and rising expectations of parenthood are making young people think hard about having any children at all

Americans aren’t just waiting longer to have kids and having fewer once they start—they’re less likely to have any at all.

The shift means that childlessness may be emerging as the main driver of the country’s record-low birthrate. 

Women without children, rather than those having fewer, are responsible for most of the decline in average births among 35- to 44-year-olds during their lifetimes so far, according to an analysis of the Census Bureau’s Current Population Survey data by University of Texas demographer Dean Spears for The Wall Street Journal. Childlessness accounted for over two-thirds of the 6.5% drop in average births between 2012 to 2022.  

While more people are becoming parents later in life, 80% of the babies born in 2022 were to women under 35, according to the Centers for Disease Control and Prevention’s National Vital Statistics data.   

“Some may still have children, but whether it’ll be enough to compensate for the delays that are driving down fertility overall seems unlikely,” says Karen Benjamin Guzzo, director of the Carolina Population Center at the University of North Carolina at Chapel Hill.

The change is far-reaching. More women in the 35-to-44 age range across all races, income levels, employment statuses, regions and broad education groups aren’t having children, according to research by Luke Pardue at nonprofit policy forum the Aspen Economic Strategy Group.

Birthrates among 35- to 44-year-olds give demographers who study fertility an early look into millennials’ changing approach to parenthood. But these researchers also look closely at women over 40, reasoning that if a woman doesn’t have a child by then, she is more likely to remain childless.   

The number of American women over 40 who had no children was declining until 2018, according to Current Population Survey data, when it then began to rise again. Now, some demographers and economists expect the increase in childlessness will be sustained due to shifts in how people think about families. (…)

Throughout history, having children was widely accepted as a central goal of adulthood.

Yet when Pew Research Center surveyed 18- to 34-year-olds last year, a little over half said they would like to become parents one day. In a separate 2021 survey, Pew found 44% of childless adults ages 18 to 49 said they were not too likely, or not at all likely, to have children, up from 37% who said the same thing in 2018.

As more women gained access to birth control and entered the workforce in the 1970s, reshaping family life and expectations around gender, Americans began having fewer kids. By 1980, the average number of children per family was 1.8, down from a high of 3.6 during the post-Depression baby boom, according to Gallup.

Now, researchers say, having children at all has begun to feel optional. (…)

Nobody will dispute that kids are expensive. Whether they have become more so in recent years—and the extent to which that is driving down birthrates—is more complicated.

Parents are spending more on their children for basics such as housing, food and education—much of that due to rising prices. Another factor, however, is the drive to provide children with more opportunities and experiences.     

Middle-class households with a preschooler more than quadrupled spending on child care alone between 1995 and 2023, according to an analysis of Bureau of Labor Statistics and Department of Agriculture data by Scott Winship at think tank the American Enterprise Institute.  

Yet only about half of the increase is due to rising prices for the same quality and quantity of care. (Child care prices are up 180% overall since the mid-90s, according to BLS data.)

The remaining half is coming from parents choosing more personalized or accredited care for a given 3- to 5-year-old, or paying for more hours, Winship says.

“People say kids are more expensive, but a lot of this comes from parenting becoming more intensive so people are spending more on their kids,” says Melissa Kearney, an economist at the University of Maryland who researches children and families.

It has always been costly and time-consuming to raise kids, she says, and it has always come into conflict with other priorities. What’s changed is that more people are deciding not to have children at all. (…)

“With geopolitical issues, climate change, it’s like what are you bringing them into and then dropping them off and saying, ‘good luck!’” says Mills, who is 27 and works for a tech company. “There’s no real confidence that things are going to get better.” (…)

The couple’s other consideration is financial. Despite both having well-paying jobs, they say they haven’t been able to afford a house in Boston, where they live, amid low supply and high interest rates.

Laubenthal, a 27-year-old asset manager, calculated that they could retire at 55 with the same spending power if they don’t have kids. He then did the math to account for two children, factoring in costs of daycare, college, clothing and other essentials. That pushed their retirement back by 13 years, to age 68.

“That’s a big gap,” he says. His conclusion: Retire early, and skip kids.

Immigration will make the difference between future population growth or decline

(…) While much attention politically and otherwise has been given the racial diversity of immigrants and their contribution to making America “less white,” the new census projections make clear that the nation will become more racially and ethnically diverse regardless of immigration levels.

(…) over the entire projection period through 2060, white persons who do not identify as other racial or ethnic groups will see declines in their population under all immigration scenarios.  This is due to their older age structure, leading to what demographers call “natural decrease” (the excess of deaths over births), which overtakes their gains via immigration. Under all immigration scenarios, the nation’s white population declines each year.

Thus, all population gains are attributable to persons who identify as other racial groups, including persons who identify as two or more races.Of these groups, Latino or Hispanic Americans are projected to show the largest gains under each immigration scenario. While Latino or Hispanic Americans are projected to assume sizeable portions of future immigrant flows, their large share of the U.S. resident population at the beginning of the projection period (19%) ensures that their natural increase will contribute to future population gains even under the low and zero immigration scenarios.

Because of these dynamics, under each immigration scenario, the U.S. will experience a rise in the share of the total population that identifies as a nonwhite racial or ethnic group, above its 2022 level of 41%. By 2060, that share will grow to 57% in the high immigration scenario, 55% in the main scenario, 53% in the low scenario, and 49% in the zero immigration scenario. (…)

Already in 2022, people identifying as Latino or Hispanic, a race other than white, or two or more races comprise 51% of the under-18 population. (…)

Even with average immigration levels, the nation’s population will experience decade-wide growth levels far below any we have sustained in our history due to reduced fertility and increases in deaths in an aging population. Because immigrants and their children on the whole are younger than the rest of the U.S. population, they will help counter the decline and slow growth of America’s youth and working-age populations over future decades as our senior population continues to swell. (…)

Although the U.S. faces population growth and aging challenges in the decades ahead, we are still in a better position than many other developed countries such as Japan, Italy, Germany, and other European nations—due in large part to the healthy immigration levels we experienced over the past 30 to 40 years. While immigration remains a hot-button political issue that focuses on illegal immigrants and asylum seekers, it is crucial to move the discussion to a serious analysis of the importance of immigration for the nation’s demographic and economic growth, and how broad policies such as comprehensive immigration reform can address our future needs. (…)

Festivals and Parades Are Canceled Amid US Immigration Anxiety From LA to Pittsburgh, fears over immigration raids are dampening cultural vibrancy as events are canceled.

Pittsburgh had planned to host its first-ever local World Cup this summer, a community soccer competition inspired by the global tournament and aimed at celebrating the city’s cultural diversity. The weeks-long event, which was set to begin in June, would have featured teams made up of residents from the city’s vast immigrant community, who’d play under the flags of their national origins.

But city officials called off the games amid growing anxieties over President Donald Trump’s immigration crackdown. The city also canceled its annual International Parade and Festival, which previously brought out vendors and performers from dozens of cultural groups. In a statement from Mayor Ed Gainey’s office to Bloomberg, spokesperson Olga George said both events were canceled out of “an abundance of caution” after consulting with residents and community stakeholders.

Many in the city’s Latino community told Monica Ruiz, executive director of the local immigrant advocacy group Casa San Jose, that they weren’t planning to attend either event even before their cancellation. “They’re very vulnerable, and they didn’t want to be in a situation where they could go somewhere to have a great time — and then end up in a different country,” she said, referring to the Trump administration’s controversial method of deporting noncitizens to countries other than their own.

Similar concerns have prompted organizers across the US to reconsider holding public events that celebrate different ethnicities or that might draw large crowds from immigrant and refugee communities. (…)

The concern comes as federal immigration agents ramp up raids and arrests in order to meet the White House’s goal of detaining at least 3,000 undocumented migrants a day.

Earlier this year, organizers in Chicago and Philadelphia both called off their Cinco de Mayo parades, citing safety concerns from their respective Mexican communities that the events may become targets for raids. And in Los Angeles, several July 4 celebrations, including in predominantly Hispanic communities, were canceled amid a series of US Immigration and Customs Enforcement raids that prompted nationwide protest. (…)

As arrests have increased, so has the share of detained migrants with no criminal records. US citizens have reportedly also been swept up in raids amid accusations that the agency has engaged in widespread racial profiling during their operations.

And since the Trump administration reversed a more-than-decade-old policy in January restricting immigration officers from making arrests in sensitive locations like schools and churches, ICE has vastly expanded its targets to places outside the workplace, including parks, outdoor markets, small businesses and even parking lots.

In June, armed and masked agents swarmed a popular flea market in the Los Angeles County suburb of Santa Fe Springs, one that typically drew large crowds of vendors and shoppers on weekends. Witnesses to the raid at the Santa Fe Springs Swap Meet told the Los Angeles Times that several people were taken away, and that agents approached anyone who “looked Hispanic in any way.” (…)

Such raids have had chilling effects on communities nationwide, and the impacts go beyond the cancellation of organized gatherings, said Guttlein. Parks in heavily Hispanic neighborhoods — where families often met up for play dates and intimate celebrations — are now quieter than usual as many choose to stay out of public spaces. Many are skipping out on doctor’s appointments, school, work and even court hearings as families essentially go into hiding. Shops and restaurants in immigrant communities have also seen foot traffic plummet.

“This is a product of the Trump administration’s prioritization of meeting quotas for detentions and for removal, and not prioritizing the safety of our community,” Guttlein said. “We now as a society are having to assess the risk to our safety when it comes to normal things.” (…)

Growth and hiring accelerate in August, whilst selling price inflation hits three-year high

The headline S&P Global US PMI Composite Output Index rose to an eight-month high in August, edging up from 55.1 in July to 55.4, according to the ‘flash’ reading (based on about 85% of usual survey responses). Output has now grown continually for 31 months, with the latest two months seeing the strongest back-to-back expansions since the spring of 2022.

A sustained robust expansion was reported in the services economy, albeit with business activity growth dipping slightly from July’s year-to-date high. the latest two months seeing the strongest back-to-back expansions since the spring of 2022, assisted by a modest return to growth of services exports. Companies reported improved confidence from customers and new product offerings.

The ongoing service sector expansion was accompanied by a marked acceleration of output growth in the manufacturing sector, where production surged after a slowdown in July to register the steepest monthly rise since May 2022. Having come close to stalling in July, new order inflows in the goods-producing sector also picked up in August, with growth hitting the highest since February 2024 principally on the back of rising domestic demand but also helped by the largest rise in goods exports for 15 months.

While many manufacturers reported improved sales and demand, the upturn in production and order inflows was in part linked to renewed inventory building. Stocks of finished goods rose to an extent not previously recorded since data were first available in 2007, while stocks of purchased inputs showed the second-largest rise seen for over three years.

While stock building was partly fueled by expectations of rising demand, some factories also reported increased safety-stock building amid fears of supply shortages or to protect against further price rises, in turn reflecting the recent impact of import tariffs.

Tariffs were reported as the key driver of further cost increases in August. Companies across both manufacturing and service sectors collectively reported the steepest rise in input prices since May and the second-largest increase since January 2023. Rates of increase accelerated in both sectors. While the manufacturing cost rise was especially large, being the second-steepest since August 2022, the service sector increase was the second-highest since June 2023.

Average prices charged for goods and services rose at the sharpest rate since August 2022 as firms passed higher costs on to customers. Although goods price inflation cooled slightly for a second month in a row, it remained among the highest seen over the past three years. Service sector price inflation meanwhile was the sharpest since August 2022.

Employment rose for a sixth successive month, with the pace of job creation hitting the highest since January (and one of the strongest rates seen for over three years). Service providers took on staff at the fastest pace for seven months while factory job gains reached the highest since March 2022.

Companies largely took on additional staff in response to rising backlogs of work. Uncompleted orders rose for a fifth consecutive month, rising in August at a pace unsurpassed since May 2022 reflecting stronger demand and near-term capacity constraints at some companies.

Backlogs rose at an unchanged and therefore joint-steepest rate since May 2022 in the services economy, while manufacturing backlogs also rose to the greatest extent in over three years.

Having dipped in July, companies’ expectations about output in the year ahead rose to a two-month high in August, though remained below the level seen at the start of 2025 and also the survey’s long-run average.

Service sector sentiment revived partly from a drop in July but continued to run weaker than seen in May and June, and far below levels recorded at the turn of the year. This was closely linked to ongoing concerns regarding government policy. While support from policies such as tariffs helped lift manufacturing optimism in August to a level well-above the post-pandemic average, the degree of optimism in the goods-producing sector remained below January’s recent high, reflecting concerns over higher costs and the impact of geopolitical uncertainty, especially in relation to international trade and supply chains.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence:

“The data are consistent with the economy expanding at a 2.5% annualized rate, up from the average 1.3% expansion seen over the first two quarters of the year.

“Companies across both manufacturing and services are reporting stronger demand conditions, but are struggling to meet sales growth, causing backlogs of work to rise
at a pace not seen since the pandemic-related capacity
constraints recorded in early 2022. Stock building of finished goods has also risen at a survey record pace, linked in part to worries over future supply conditions. (…)

“The resulting rise in selling prices for goods and services suggests that consumer price inflation will rise further above the Fed’s 2% target in the coming months. Indeed, combined with the upturn in business activity and hiring,
the rise in prices signaled by the survey puts the PMI data more into rate hiking, rather than cutting, territory according to the historical relationship between these economic indicators and FOMC policy changes.”

This sequence is interesting:

June 29: We learned that the “resilient consumer” has not increased its consumption since December (actually –0.2%), the first meaningful slowdown since the pandemic and a very rare occurrence outside of recessions.

July 24: S&P Global’s flash PMI rose sharply from 52.9 in June to 54.6 powered by the services economy.

July 31: Real consumer expenditures rose only 0.1% MoM in June, 0.0% in the last 3 months and are unchanged in the last 6 months. All spending categories are weak. Real final sales to private domestic purchasers are up a slow 1.2% annualized in Q2.

August 1: The U.S. added 73,000 jobs in July. Revisions cut down the jobs growth originally reported for May and June by a combined 258,000. That left May as having added just 19,000 jobs and June just 14,000.

August 5: S&P Global’s final Services PMI jumped to a seven-month high of 55.7 in July, up from 52.9 in June. “The rate of expansion in new business picked up from June. The latest rise was solid and the fastest since January. The pace of job creation remained only modest, however.”

But everybody focused on the ISM survey: “The ISM index fell to 50.1, a reading that is consistent with the slowest possible pace of expansion. It is the third-lowest reading since the pandemic year of 2020. While the service-sector is still expanding, that expansion looks like it is girding to a halt. (…) business activity, new orders and employment are all lower. Employment fell to 46.4 from 47.2.”

August 21: S&P Global’s flash PMI rose to an eight-month high from 55.1 in July to 55.4 in August. The latest two months seeing the strongest back-to-back expansions since the spring of 2022. The last two months saw the the strongest back-to-back expansions in services since the spring of 2022. Employment rose for a sixth successive month, with the pace of job creation hitting the highest since January (and one of the strongest rates seen for over three years). Service providers took on staff at the fastest pace for seven months while factory job gains reached the highest since March 2022.”

Most large past divergences between S&P Global and the Employment ISM surveys ended up in favor of S&P Global. If this one is no exception:

• The ISM releases on September 2 (manufacturing) and 4 (services) could be surprising to many. If S&P Global is right, the US economy is actually quite strong and employment growth has strengthened in August.
• The FOMC would be wise to stay put a while longer, particularly since both surveys agree on accelerating inflation, fueled not only by tariffs but by strong underlying demand and limited supply.

Ed Yardeni: “The S&P Global flash purchasing managers’ indexes were strong in August. The M-PMI jumped significantly from 49.8 to 53.3, while the NM-PMI edged down from 55.7 to 55.4.”

This is supported by very strong real world data from corporate America in Q2: S&P 500 earnings are up 12.9% (14.8% ex-Energy), largely beating the July 1 forecast of +5.8%. Revenues are up 6.3% (7.4% ex-E) vs +3.7% expected. Corporate guidance remains solid.

Walmart’s US comps rose 4.6% in the quarter ended August 1, +3.6% in volume. The company raised its full-year sales guidance from +3-4% to +3.75-4.75%, a sign that back-to-school sales are solid.

Sustained employment growth is supported by unemployment claims not deteriorating much so far. On a YoY basis, claims are down 3.9% (4-w avg). Continued claims are up 6.1% but that’s not worsening from the past year.

Growth and demand are thus not a problem.

Inflation is more problematic: “The two business surveys show that both their prices-paid and prices-received indices remain elevated. They both recently rose at the same time as the Trump administration imposed tariffs.” (Yardeni)

Interestingly, Walmart said yesterday that it is seeing more tariff effects but is largely absorbing them as best it can. Walmart said its prices were up 1.0% YoY last quarter. The mammoth retailer is helping keep goods inflation reasonably low so far.

The problem, however, is services inflation as S&P Global put it: “Service sector price inflation meanwhile was the sharpest since August 2022.”

Pity Jay Powell.

Divisions Grow Inside Fed Ahead of Decision on September Rate Cut Cleveland Fed’s Hammack opposes cuts citing rising inflation, while Boston Fed’s Collins signals openness amid labor market concerns

(…) Boston Fed President Susan Collins shared Hammack’s inflation concerns but signaled openness to a rate cut as soon as next month.

Collins said she saw more risks of weaker-than-expected employment trends. She flagged how higher tariffs might squeeze consumers’ purchasing power, which could weaken spending.

If data before the Fed’s September meeting hints at “the risks of worsening labor market conditions relative to those risks of elevated inflation…then it may be appropriate soon to begin dialing back” interest rates, said Collins, who has a vote on rates this year.

Hammack said she is less inclined to cut interest rates because she sees rates as being much closer than some of her colleagues do to a so-called neutral rate that neither spurs nor slows growth.

Hammack voted in favor of two rate cuts last September and November but opposed a third cut in December. “The picture is radically different today,” she said, given relative stability in the labor market and inflation moving up instead of down. Cutting rates in that environment “doesn’t seem appropriate.” (…)

Collins said she expected inflation to continue rising through the end of the year before resuming an earlier decline in 2026.

She said it was too soon to rule out larger or more persistent increases in prices. But at the same time, the Fed couldn’t “wait until we know everything that’s going” to happen, she said. “That’s going to be much too late.”

• Kansas City Fed’s Schmid shows hesitation about widely expected September rate cut

(…) Schmid pushed back on market pricing that points strongly to the Federal Open Market Committee lowering its key borrowing rate next month.

“We’re in a really good spot, and I think we really have to have very definitive data to be moving that policy rate right now,” he said during a “Squawk Box” interview that aired Thursday. “In September, we’ll get around tables and we’ll collaborate and we’ll figure it out, but yeah, I think there’s a lot to be said between now and September.” (…)

• Fed’s Goolsbee Says He Hopes Dangerous Inflation Data Was a Blip

(…) “The last inflation report that came in, where you saw services inflation — which is probably not driven by the tariffs — really start shooting up,” he said. “It’s a dangerous data point, I’m hoping that that’s bit of a blip.” (…)

Germany falls back into ‘recessionary territory’ as second-quarter GDP revised down Europe’s largest economy contracted 0.3% as exports and investment drop

A Bolder Blend: The Forces Behind Stronger Productivity Growth

(…) An economy’s potential output growth can be broken into two parts: labor productivity growth and labor force growth. With stricter immigration and population aging weighing on growth in the labor supply, strong labor productivity growth is all the more necessary to keep output growth solid. When workers are more productive, firms tend to enjoy increased profitability, which can provide them flexibility to absorb higher costs, reinvest in the business or lower selling prices. Solid productivity growth has contributed to inflationary pressures easing since the pandemic.

Labor productivity measures the efficiency of production and is calculated as output per hour worked. Productivity growth is typically noisy quarter-to-quarter, and this year has been more volatile than usual due to massive swings in trade flows distorting overall output growth.

For instance, output per hour worked in the nonfarm business sector rose at a 2.4% annualized pace in the second quarter, bouncing back from a 1.8% annualized decline in the first quarter. Smoothing through the noise with a four-quarter moving average, nonfarm labor productivity was up 1.8% year-over-year in the second quarter, matching its average annualized pace since the end of 2019. At that pace, this cycle’s run-rate is noticeably higher than the prior cycle’s average of 1.5% and is closer to its historic average of 2.1%.

 

To frame the discussion, we decompose labor productivity growth into three broad categories: labor composition, capital input and total factor productivity.

Labor composition reflects shifts in the skills and experience of the workforce and can be thought of as a measure of labor quality. Capital input reflects investment in tangible and intangible assets, less depreciation. This category essentially tracks the tools workers have at their disposal. Meantime, total factor productivity (TFP) is the portion of productivity not accounted for by labor and capital inputs. TFP can be viewed as a proxy for process improvements and other innovations that give workers better tools and methods for production.

Labor composition has had a small effect on productivity growth over the past few decades and is not a major driver of the recent rise. Data on age and education are used to proxy worker experience and skills, and while educational attainment has risen, sustained improvements in labor composition have been restrained by cyclicity. (…)

Unlike labor composition, capital deepening has been a steadfast source of productivity growth. Capital investment has contributed an average of 1.08 percentage points to labor productivity growth since the end of 2019, roughly on par with the 1.04 percentage point contribution in the cycle before the pandemic. Although gross business fixed investment jumped following the pandemic lockdowns, elevated borrowing costs and economic uncertainty have weakened growth over the past few years, underpinning the roughly unchanged contribution from capital input in the cycle to date.

Source: Federal Reserve Bank of San Francisco and Wells Fargo Economics

Even as the capital stock’s contribution to labor productivity growth has moved sideways over the past decade, the composition of investment has shifted. Before the pandemic, capital investment was broad-based across equipment, software and research & development. Today, business investment has pivoted away from equipment and more toward software and research & development.

The shift reflects further diffusion of automation software and broadening experimentation with artificial intelligence. Investment in structures has also picked up. Federal government incentives have underpinned private construction of manufacturing facilities that will eventually produce “high-tech” equipment and components, such as computers and semiconductors, while at the same time, investment in data centers has boomed.

After accounting for the contributions from capital input and labor composition, faster growth in total factor productivity has been the differentiating factor behind stronger labor productivity growth this cycle. Since the end of 2019, TFP has risen at a 0.7% average annualized pace, running a bit hotter than the prior cycle’s average of 0.5%. Identifying the sources of TFP is inherently difficult, as the measure itself is computed as a residual and thus is not directly observable. That said, research has pointed to several potential TFP enhancers.

One prominent theory on stronger TFP growth this cycle centers around work-from-home. Roughly 27% of paid work days were worked remotely in July, up from 7% in 2019. While the focus time afforded by working from home may help experienced employees work more efficiently, it can also make collaboration difficult. Less experienced workers cannot as easily consult with co-workers or supervisors on issues when working remotely, which can stunt their productivity growth. In short, the casual relationship between the rise in work-from-home and higher TFP growth since the pandemic remains contested.

Source: Federal Reserve Bank of San Francisco and Wells Fargo Economics

Source: U.S. Department of Labor and Wells Fargo Economics

Another theory points to the period of significant labor market churn in the wake of the pandemic. The quit rate soared to its highest on record in 2022 (3.0%), reflecting the droves of workers switching jobs in pursuit of higher wages and better skills matches. The broad reallocation of labor likely boosted TFP growth in subsequent years as employees brought fresh ideas to their new employers and employee effort improved with the more preferable job match. The recent normalization in the quit rate, however, suggests any lift to productivity from worker reallocation has likely run its course.

Another potential source is an increase in entrepreneurship since the pandemic. Applications for business formations jumped roughly 50% in the second half of 2020 from the same period in 2019 and are continuing to run well-ahead of pre-pandemic levels. The burst of new firms along with increased job-switching can help spur innovation within industries and increase dynamism across the economy.

Source: U.S. Department of Commerce and Wells Fargo Economics

Source: U.S. Department of Commerce and Wells Fargo Economics

What about today’s most gripping innovation of all—generative AI? While it is still early to see the effect on TFP growth, generative AI will likely play a more integral role in the coming years. Capital investment in software and R&D has already strengthened amid broadening adoption, which has supported the capital input contribution to labor productivity growth. As workers learn to work with and gradually integrate generative AI into their processes, the second-order effect of today’s capital deepening should be a rise in efficiency and other process improvements that manifest in TFP gains tomorrow.

Yet, there remains significant uncertainty on how long it will take AI to diffuse throughout the economy. The Census Bureau estimates just 9% of firms used AI in the production of goods or services in May, which is a far cry from widespread adoption. Although that is a low starting point, we suspect the speed of AI adoption will be faster than that of personal computers and the internet, as the adoption cost associated with AI is generally low. Many office places already have the physical hardware needed and many workers have likely experimented with AI tools outside of work.

As the tailwinds from generative AI continue to muster, the outlook for productivity growth remains positive, but momentum has somewhat dissipated this year due to other factors. The whipsawing of trade policy left many businesses scrambling to reconfigure production flows and delaying major investments amid elevated uncertainty. With more time allocated to defensive maneuvers and less time allocated to growth-enhancing activities, nonfarm labor productivity has been essentially unchanged since the end of 2024.

Should economic growth continue to moderate, the trend in productivity is unlikely to pick up meaningfully this year. Slower sales pose a particularly acute threat to small businesses who often operate on thin profit margins and are at greater risk of closure, which would unwind some of the lift from entrepreneurship since the pandemic. Other firms may hunker down rather than ramp up capital investment or launch new products and processes this year.

As economic activity improves in 2026 with less restrictive monetary policy and more stimulative fiscal policy, we expect labor productivity growth to edge higher again. Stronger growth is poised to bolster capital investment, which stands to benefit from deregulation as well; a less restrictive regulatory environment could enable businesses to focus resources on their primary areas of production. Improvement in the labor market could also rekindle job-switching.

The degree of improvement in the medium term remains uncertain with the countervailing forces of lower immigration and higher trade barriers. While a cut-off in low-skill immigration could force domestic businesses to invest more heavily in capital, the current environment could deter high-skill immigration as well, which would curtail knowledge spillover and innovation.

Meantime, higher tariffs reduce foreign competition and weigh on the incentive for domestic firms to improve efficiency. That said, the manufacturing sector has a higher output per hour worked than most of the service sector, so faster growth in this industry than the broader economy could bolster overall productivity growth.

The Congressional Budget Office projects nonfarm labor productivity growth to settle at an annual rate of 1.5% by 2030, essentially in-line with its pre-pandemic average. We are optimistic that productivity will run stronger than that— likely closer to, if not a bit higher than, its historic trend of 2.1%.

Capital deepening has already gathered momentum this cycle and is likely to continue to intensify amid the diffusion of generative AI and re-shoring of “high-tech” production. We have less conviction on TFP, as the timing and degree of efficiency gains from AI remain uncertain. We are somewhat cautious in the near term given pandemic-related tailwinds have faded and policy cross-currents could dampen the jolt from AI. Even so, productivity growth a little over 2% would counteract slowing growth in the labor force and still keep potential output growth stronger than it was in the cycle preceding the pandemic.

Time will tell if this “capital deepening” will prove profitable enough for the mega spenders. Read below:

DeepSeek unveils V3.1 model with agent focus and China chips

The 685-billion-parameter model introduces what DeepSeek calls a “hybrid inference structure,” allowing users to toggle between rapid “non-thinking” responses for basic queries and slower “thinking” mode for complex reasoning tasks through a “DeepThink” button on the platform. According to the company’s WeChat announcement, this represents “our first step toward the agent era”.

DeepSeek-V3.1 delivers significant performance improvements over its predecessors, scoring 71.6% on the prestigious Aider coding benchmark and achieving comparable results to proprietary models like Anthropic’s Claude Opus while costing substantially less. The model processes tasks at approximately $1.01 each, compared to nearly $70 for equivalent workloads from competing systems.

The release coincides with DeepSeek’s preparation for next-generation Chinese-made AI chips, utilizing FP8 (8-bit floating point) processing formats optimized for domestic hardware. This technical specification suggests the company is positioning itself for China’s emerging semiconductor ecosystem as Beijing pushes to reduce dependence on Western chip manufacturers.

The timing appears deliberate, coming as the Trump administration recently permitted Nvidia to resume limited AI chip sales to China through its H20 model, though Beijing’s response has been notably tepid. Chinese officials have advised domestic firms against relying on the American chips, reflecting broader ambitions for technological self-sufficiency.

• Chinese semiconductor shares surge after DeepSeek gives boost to homegrown chips

Cambricon Technologies led a rally of Chinese chipmakers on Friday after artificial intelligence start-up DeepSeek unveiled an updated model that would be compatible with domestically made semiconductors. (…)

“If DeepSeek can use China-made chips, then the rest of the semiconductor universe will fly,” said Wee Khoon Chong, a senior strategist at BNY. “The potential demand for Chinese chips is going to be huge.” Huawei is widely seen as the main competitor in China to Nvidia, with its Ascend AI chip series being broadly adopted by state-owned enterprises and telecoms companies. (…)

“The fact that China can tell people not to buy H20 must mean they know there’s an alternative. Otherwise, they would just be shooting themselves in the foot,” said BNY’s Chong. (…)