There are lots of reports on the U.S. economy worth mentioning today. First, data from the Bureau of Labor Statistics (BLS) showed that wholesale inflation pressures in America increased last month, with the producer price index for final demand (PPI-FD) rising by 0.5 percent. This was above the 0.3 percent gain economists had expected, the third month-over-month increase in a row, and the largest sequential gain since 2012. “Core” PPI-FD, which excludes the more volatile food and energy components, also rose in June (+0.4 percent), due largely to gains in services costs, particularly in the transportation, warehousing, and securities brokerage and dealing arenas. The consumer price index (CPI) for all urban consumers, though, provided a slightly cooler reading on U.S. inflation. Specifically, both headline and core CPI lifted by 0.2 percent in June, below expectations as automobile-related deflation weighed on the indices. However, this was still the 4th month-over-month increase in a row for headline CPI, and core CPI on a year-over-year basis rose by 2.3 percent in June, matching the post-recession high for annual growth. Rising shelter costs (rents) have been a big driver of this uptick in consumer inflation. Altogether it remains clear that inflationary pressures in America are starting to gain a little bit of a hold in the economy, although producers so far appear to be feeling it a bit more than consumers due to rebounding commodity prices (input costs) and a pickup in worker compensation.
Next, a report from the Census Bureau showed that advance estimates of retail and food services sales for June totaled $457.0 billion, an increase of 0.6 percent from May and much better than the 0.1 percent gain economists expected. Core retail sales, which exclude the volatile autos and gasoline components, jumped by 0.7 percent last month, an encouraging sign of broad household spending. Moreover, 11 of the 13 business categories saw sales increase in June, and U.S. nonstore retail sales, e.g. Amazon, grew at the fastest annual pace since 2006. Overall, this was a strong report which suggests that American consumers remain confident enough in the U.S. job market and their prospective wage growth to continue to increase their discretionary outlays. Further, this was a great way to cap a solid quarter for consumer spending, and it is therefore likely that many analysts will start to raise their forecasts for Q2 U.S. gross domestic product (GDP) growth.
Elsewhere, a report from the Federal Reserve Board of Governors showed that U.S. industrial activity rebounded in June, with total production rising by 0.6 percent. This was a better gain than expected and a welcome turnaround following May’s 0.3 percent decline. However, much of the increase was due to a 2.4 percent surge in utilities, which can largely be attributed to more people turning on their air conditioning as temperatures rose in June above the norm. On a year-over-year basis, industrial production fell 0.7 percent in June, better than May but still the 10th month in a row of annual declines. Elsewhere in the report, manufacturing, which makes up roughly 75 percent of all industrial production, declined by 0.4 percent last month, and capacity utilization, sometimes used as a leading indicator of inflation and potential output, jumped to 75.4 percent, much closer to the long-term (1972–2015) average. Historically, though, the Federal Reserve generally does not like to raise rates when capacity utilization is under 80 percent and declining.
More recent data from the New York Fed showed that manufacturing activity in the Northeast region of the country slowed considerably this month, with the general business conditions index plunging to just 0.55 in July. This was significantly worse than economists had expected but still the 4th positive (expansionary) reading in the past five months. Under the hood, measures of new orders, shipments, total employment, and the average employee workweek all deteriorated in July, and surveyed managers were found to be less optimistic about general business conditions over the next half a year. Capital expenditure plans declined this month but technology investment rose markedly.
Finally, the consumer sentiment index from the University of Michigan slid to 89.5 in the first half of July, much worse than expected and one of the lower readings of the past year. Americans’ views of both current and future economic conditions deteriorated significantly this month, with the latter collapsing to a nearly 2-year low. The report's authors attributed the broad sentiment weakness to “increased concerns about prospects for the national economy.” Most of this pessimism, though, was reported by respondents from higher-income households, not surprising since this demographic group is more likely to have investments that are sensitive to global shocks, e.g. Brexit. Richard Curtin, director of the Michigan Survey of Consumers, added that “While stock prices quickly rebounded, an underlying sense of uncertainty about global prospects as well as the outlook for the domestic economy have not faded. To be sure, the overall decline in the sentiment index was rather minor, and could be anticipated to recover some of those losses in late July or early August.” Elsewhere in the report, consumer respondents’ views of their personal finances and buying plans remained solid, and long-term inflation expectations held steady at a historically low 2.6 percent.
Sources: Econoday, Twitter, Bloomberg, ZH, U.S. Department of Labor, U.S. Department of Commerce, FRBG, FRBNY, UoM, FRBSLPost author: Charles Couch