There were a few important reports on the U.S. economy released this morning. First, data from the Bureau of Labor Statistics (BLS) showed that wholesale inflation pressures in America increased last month, as the producer price index for final demand (PPI-FD) rose by 0.3 percent in September. This was the largest sequential gain since June, helped by sharp increases in gasoline and investment advisory costs, and annual growth (+0.7 percent) climbed to the highest reading in nearly two years. “Core” PPI-FD, which excludes the more volatile food and energy components, rose by 0.2 percent in September and 1.2 percent over the past twelve months. Healthcare services costs, one of the PPI components used in the measure of overall U.S. inflation preferred by the Federal Reserve, i.e. the Personal Consumption Expenditures (PCE) core price index, lifted by only 0.1 percent in September. This could help Fed officials justify their decision to not raise rates at the September Federal Open Market Committee (FOMC) meeting, although some PPI components suggest otherwise. More importantly, overall U.S. inflation remains below the Fed’s “target” but the apparent uptick in wholesale costs last month suggests that the consumer price index (CPI), due out next week, could rise by a lot more than expected. If true that would imply that Social Security recipients will wind up receiving a better cost of living adjustment (COLA) for 2017 than previously estimated.
Next, the consumer sentiment index from the University of Michigan registered 87.9 in the first half of October. This was down from 91.2 in September, much worse than economists had expected, and the lowest headline reading in more than a year. Much of the weakness this month was concentrated among U.S. households with annual incomes below $75,000, whose index score fell to the lowest level since 2014. Americans’ views of current economic conditions improved this month but outlooks for the future deteriorated significantly, with the latter falling to a roughly 2-year low. Further, the percentage of surveyed consumers reporting worse personal finances compared to a year ago due to higher debt hit a record high this month. Richard Curtin, director of the Michigan Survey of Consumers, added that “It is likely that the uncertainty surrounding the Presidential election had a negative impact, especially among lower income consumers, and without that added uncertainty, the confidence measures may not have weakened. Prospects for renewed gains, other than a relief rally following the election results, would require somewhat larger wage increases and continued job growth as well as the maintenance of low inflation.”
Elsewhere, a report from the U.S. Census Bureau showed that advance estimates of retail and food services sales for September totaled $459.8 billion. That was a 0.6 percent increase from August’s upward revised decline, and the best monthly gain since June. Over the past twelve months through September, headline retail sales have risen by 2.7 percent, a welcome improvement from August but annual growth remains near the low-end of the recovery range. Core retail sales, which exclude the autos and gasoline components, rose by 0.3 percent in September, and the so called “control group” lifted by just 0.1 percent. The latter is used in the calculation of U.S. gross domestic product (GDP) and was much weaker than the 0.4 percent gain economists had expected.
Sources: Econoday, Twitter, Bloomberg, ZH, U.S. Department of Commerce, BofAML, U.S. DoL, University of Michigan, FRBSLPost author: Charles Couch