Regional Fed reports indicate elevated inflation is likely to continue

 

 - by New Deal democrat

[Note: Blogger has (hopefully) temporarily prevented me from putting up new posts. So if you scroll down to last weekend, I’ve amended my “Weekly Indicators” update with the new post I had planned for today. Cross your fingers that this goes away by tomorrow]

In It appears that both producer and consumer inflation are going to continue at elevated levels, despite the actual *de*flation in June.

Here’s a look at the average of the New York and Philadelphia Fed’s prices paid (blue) and prices received (orange) diffusion manufacturing indexes: 

In July, the average for prices paid decelerated from 57.1 to 53.1, while that for prices received accelerated from 26.1 to 29.3. Keeping in mind that 0.0 is the equilibrium point, these are both very elevated numbers, although - like last week’s PPI vs. CPI numbers - they indicate that producers are not able to pass on all of their upstream price increases, meaning pressure on profit margins.

Here’s what the prices paid average (/4 for scale) looks like compared with commodity prices YoY:

While the correlation isn’t perfect, especially last year, it is usually pretty close, e.g., an increase in the prices paid average correlates very well with a YoY% increase in commodity inputs.

Similarly, the prices paid average (/8 for scale) correlates well with the YoY% change in the final demand prices for producer goods (yellow) and in a more muted way with consumer prices YoY (violet):

That translates into a possible 0.5% advance in producer prices for July, and a 0.2% or 0.3% advance in consumer prices, in order to maintain the YoY averages of 6.7% and 3.5% respectively.

If both the prices paid and prices received components of the regional Fed reports suggest that elevated inflation levels continue to be likely, the collapse of the fragile “cease fire” in the Persian Gulf region has caused oil prices to increase to over $80/barrel again, and more importantly, average gas prices at the pump to go back over $4/gallon:

I do not see any real abating of inflation at any point in the immediate future, and further, it will put more pressure on the Fed to defy the Administration’s wishes, and raise interest rates.

The manufacturing sector of the economy continued to improve in June

 

 - by New Deal democrat

There’s a brief hiatus from new data early this week, so let me briefly look at the manufacturing economy, for which industrial production was reported on Friday.

To briefly recap my overall position: despite the chaos coming out of Washington, the economy has been on a moderate rebound this year, albeit with inflationary problems in part still due to tariffs and in part due to the continued closure of the Strait of Hormuz. Meanwhile the AI Boom (or, more likely, bubble) in the building of data centers has been powering stock market gains, which in turn are powering “wealth effect” spending by the upper income tier. If either or both of those trends reverse, we’re in trouble. But they haven’t stumbled, yet.

And manufacturing continued to improve in June, according to the report. While manufacturing production (red) was unchanged, gas and electric utility production (most closely tied to the data center Boom, gold, right scale) increased 0.4%, leading the total figure (blue) to increase 0.1% to a new post-pandemic record:

On a YoY basis, manufacturing production was up 1.1%, while utility production was up 2.8% - again showing the strong influence of data center building. Total industrial production was also up 1.1%:

Interestingly, the YoY change in utility production suggests that the Boom in data center construction may be abating somewhat.

This is similar to what we see in the average of the New York and Philadelphia Fed headline manufacturing indexes (blue) and new orders component (red):

Both of these are at 4+ year highs, suggesting that the improvement in manufacturing that we started to see late last year is continuing.

In which I defend the criticism of “bloodless quants”

 

 - by New Deal democrat

The other day a cartoonist named hausofdecline created a little stir on Bluesky with this cartoon:

As you can already see from the two notes above the cartoon, it was quickly dunked on by data types. Here’s a further sample of the pile-on:

Well, your correspondent is one data nerd who will rise to the defense of hausofdecline.

What their cartoon highlights is the difference between the economy *as a whole* and the distribution of gains or losses within the economy. In response to the womans’s complaint that “I can’t afford to feed my family” the “bloodless quant” replies “that’s ludicrous” because “the stock market is at an all time high.” 

Touché. 

Indeed, the economy *as a whole* IS doing relatively well, especially considering the destructive chaos emanating from Washington. But the stock market helps describe the K-shaped economy.

Let me step back a little bit and put the market in context. One of the data relationships I noticed over a decade ago, and continues to be consistently true is that the stock market, a short leading indicator (blue) does not *anticipate* corporate profits, a long leading indicator (red) so much as it *reacts* to them, especially when averaged on a quarterly basis, shown below for the last 10 years:

Corporate profits in the GDP were last reported for Q1, but so far the indications are that Q2 is going to be another blowout quarter. As the graph below shows, corporate profits have more than doubled in the past 10 years. Measured from just before the pandemic, they have increased on average about 10% *every year.* But even that was outdone by the stock market, which over the same time rose an average of *13%* every year:

In fact, it has been very rate over the past 10 years for the stock market not to have risen over 10% a year, as shown below by subtracting 10% from its YoY performance:

Apropos of my “quick and dirty” forecasting method, the S&P500 has only been negative YoY during periods of economic stress, with recession (caused by the pandemic) or near-recession conditions.

And although there are serious concerns about whether it is approaching or already in a bubble, the advance-decline line (red below) has actually been increasing in the lastest market advance:

Typically when there has been a bubble in the past, the large majority of stocks are declining, with advances concentrated in the bubbly sector.

So yes, the stock market is showing that the economy as a whole is continuing to expand at a decent rate. But while those whose main wealth is tied up in stock ownership have seen it increase by about 14% a year for the past 10 years, by contrast here’s what has happened to house prices compared with income:

Deflated by average nonsupervisory hourly wages, house prices shot up over 20% in the aftermath of the pandemic, and even now are still up over 17% in real terms. And that’s just the price of the house, not accounting for the fact that the monthly mortgage payment in interest alone has doubled, as mortgage rates increased from 3% to 6%. By the way, the same obtains if I deflate by median household income or median usual weekly earnings:

And finally, let me repeat, although I won’t bother with the graph this time, that both real average nonsupervisory wages and real personal income are *down* YoY at present, and aggregate real nonsupervisory payrolls have only risen 0.7% during that time. Something that hausofdecline alluded to in their rebuttal:

I feel a little seen. Is hausofdecline a reader?

My “Weekly Indicators” post is up at Seeking Alpha. 

Despite oil prices heading back north of $80/barrel this past week, the underlying fundamentals in all time frames remain positive, including most importantly consumer spending.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a penny or two for compiling and organizing it for you.

Housing permits and starts continue to show a sector at an equilibrium

 

 - by New Deal democrat

Last week I wrote at length about how the entire housing market had reached an equilibrium, where almost all of the metrics were more or less flat. Meaning that this important long leading sector for the economy was about as neutral as it could be.

This morning’s data on housing permits, starts, and units under construction continued that trend, with very little change YoY.

Housing permits issued declined -43,000 in June to 1.367 million annualized, while the much more volatile number of starts rose 223,000 to 1.427 million annualized. Single family permits, which are the least volatile metric conveying the most signal, declined -21,000 to 871,000 annualized. What is most important is that both single family and total permits stayed within their 12 month ranges of 864,000-929,000 and 1.347 million - 1.540 million annualized:

The generally flat trend shows up even more clearly when we compare the numbers YoY:

Permits are down -2.3%, starts higher by 3.5%, and single family permits down only -0.2%.

The generally flat trend is now showing up in the most lagging metric in this report, which is housing units under construction. These declined only -2,000 to 1.264 million units annualized. This series has been virtually unchanged for the past six months:

As I have frequently pointed out over the past 24 months, this metric is the last one to turn down before recessions. And last year it was consistently in territory consistent with recessions in the past. But just as interestingly, in the past it has only flattened out, and started to improve on a YoY basis, only at the end of recessions and beginnings of expansions. That is exactly what the YoY comparison shows now:

Units under construction are still down -6.2% YoY, but the YoY comparison has improved sharply since the end of last year. Again, this is most consistent with recession danger passing.

This is not a great equilibrium, because as a society we need much more housing built. But this is not a sector that is sliding further towards recession.

June retail sales: more evidence of a Boom in consumer spending (even ex-gas)

 

 - by New Deal democrat

Let’s take a look at retail sales, especially real retail sales, one of my favorite economic indicators, which was updated for June this morning. This is because consumer spending is about 70% of the economy, and also because historically consumption leads employment. Let’s see what happened during a month that gas prices declined sharply.

Nominally, total retail sales rose 0.2% in June. But since there was actual *de*flation in consumer prices by -0.4%, real retail sales rose 0.6% (blue):

Since gas prices have been a major driver of inflation in the past few months, here’s a look at the monthly % changes in nominal retail sales excluding gas stations (orange) vs. total retail sales (blue). Retail sales excluding-gas increased a very strong 0.7%:

In other words, real sales ex-gas increased over 1% (!) in June.

On a YoY basis, nominal total retail sales were up 6.7%. In real terms they were up 3.1%. 

This is the highest YoY comparison since 2022. As we have seen with the weekly Redbook sales reports, consumer spending is simply Booming.

As I wrote last month, it is *very* likely that this is “wealth effect” spending by upper income consumers triggered by the near 20% rise in the stock market since the end of March. Recently Menzie Chinn at Econbrowswer reposted a report from economists at the Bank of France that about 50% of all US consumer spending in 2025 was fueled by the wealth effect from rising stock market prices:

 

Needless to say, if the stock market gains have reflected a bubble in AI data center construction spending, then this could all reverse quite sharply.

Finally, since consumption leads employment, here is the update of YoY real retail sales (/2 for scale) together with employment (red):

Last month, I said that “this suggests that on a YoY basis the rebound we have seen in the last three jobs reports is likely to continue in the next several months.”  Despite the relatively poor June jobs report, that remains the case.

Jobless claims continue to portray a “low hire, *no* fire” economy

 

 - by New Deal democrat

Let’s take our usual weekly look at jobless claims, along with stock prices 1/2 of my “quick and dirty” forecasting method.

And they continued to forecast expansion. Initial claims declined -8,000 for the week to 208,000, with the four week moving average declining -4,750 to 214,250. With the typical one week delay, continuing claims declined -16,000 to 1.805 million:

On the YoY% basis more important for forecasting, initial claims were down -5.9%, the four week average down -6.4%, and continuing claims down -7.4%:

We continue with the “low hire, *no* fire” economy. Here’s what that suggests for the unemployment rate in the next several months based on the historical record:

This suggests that the unemployment rate is going to decline further in the next several months.