Producer price declines are “less good” than consumer price declines, and on net that’s “bad”

 

 - by New Deal democrat

I pay a lot less attention to producer prices than to consumer prices. Partly that is because in the past few decades, the PPI has tended to be coincident with the CPI rather than leading it, and partly because so long as the YoY PPI is less than CPI, producers do not feel under pressure to make cost (i.e., payroll) cuts.

Which means unfortunately that since the start of the Iran war I’ve had to pay more attention to the PPI release.

And that continued with June’s release this morning — because, while it was “good,” at a decline of -0.3% for the month, it wasn’t *as* good as the -0.4% CPI decline. In other words, there’s a net +0.1% further pressure on producers. Here’s what the monthly change in CPI (blue), PPI for final demand (gold), and PPI for commodities (red, /2 for scale) which declined -1.2%, look like:

Of more concern is that while the YoY measure of final demand producer prices also declined slightly to +5.6%, it remains higher than the 3.5% YoY for CPI in June:

Although it hasn’t been a uniform rule, as this historical graph shows, when the YoY% increase in PPI exceeds CPI, more often than not that spells trouble:

Breaking down final demand between goods (red) and services (gold), for the month for former declined -1.2%, while the latter increased 0.2%:

Unsurprisingly on a YoY basis producer prices for goods (red) tend to be more more volatile than for services (gold):

But what is of concern in this breakdown is that the PPI increase for final demand services has been 4.6% or higher YoY for the past few months, higher than any such reading aside from the immediately inflationary post pandemic period, and briefly in the summer of 2024 

This strongly suggests that there is strong underlying inflationary pressure that has gone well beyond energy related prices. It also confirms what we have seen for a number of months now in the regional Fed indexes: widespread price increases in inputs, which are only incompletely being based on to buyers downstream.

And with the war flaring up again, it seems very unlikely that there will be another benign month for inflation when July’s numbers are crunched.

Last month I concluded in part: “Faced with a spike in price for inputs, producers can either absorb the increases, pass them on to consumes, or some of each. The regional Fed indexes for the past few months have indicated rampant input price hikes, with much - but not nearly complete - pass-throughs to consumers. That seems to be what we are seeing in the comparison of producer and consumer price spikes so far.”

If producers stay squeezed, they are going to begin to make cost cuts where they can. And if what I read elsewhere yesterday is true, that as much as 1/2 of all consumer spending recently has been due to the stock market’s wealth effect, the continuing economic expansion is considerably more fragile than it might appear on the surface.

June CPI: never look a gift horse in the mouth

 

 - by New Deal democrat

Never look a gift horse in the mouth. June’s CPI was that kind of gift horse, reversing all of the factors that have recently surged during the Iran war. As a bonus, inflation in shelter (1/3rd of the weight of the index) continued to abate.

Let’s start with the overall view. For the month, headline consumer prices declined -0.4%. Excluding food and energy, they were unchanged. Excluding shelter prices they declined -0.6%(!). On a YoY basis, headline prices gains (blue) decelerated from 4.2% to 3.6%. Core price gains (red) decelerated -0.2% to 2.6%. And ex-shelter, price gains (gold) decelerated -1.0% to 3.6%:

Shelter is 1/3ed of the entire index, and the good news continued there, as shelter prices increased only 0.1%, as did both of its components, rent and “owners’ equivalent rent.” This was one of the lowest increases in over five years. On a YoY basis, prices were still up 3.3%:

But of course the big reason for the decline in headline prices was energy costs (including gasoline), which declined -5.7% in June alone, reducing the YoY gains to 15.7%:

Although I won’t bother with graphs, the former problem children of new and used vehicles continued to sleep, with the price of new vehicles unchanged, and used vehicles down -0.2%. On a YoY basis, they are up only 0.5% and down -1.8%.

There was good news on our other recent “problem children” as well. Tansportation services (including car insurance and repairs) declined -0.3%. On a YoY basis they are now only up 2.9%:

And the AI data center related categories of electricity and utility services declined -1.0% and were up 0.5% respectively. On a YoY basis they are up 4.0% and 3.0% - not great but not as bad as in the past few months:

Finally, the decline in headline inflation was good news for both real nonsupervisory hourly wages (blue), up 0.6% for the month and slightly below unchanged YoY; and real aggregate nonsupervisory payrolls (red), up 0.3% for the month and up 1.0% YoY, although both remain about -0.5% below their February and January peaks respectively:

Recall that real appgrate nonsupervisory wages are an excellent short leading indicators for recession, and the fact that they rebounded in June means that, for now, recession risk is receding.

Movie review: “Disclosure Day”

 

 - by New Deal democrat

Today is a travel day for me, and there’s no big economic news today, so enjoy this movie review instead. Regular economic nerd-dom will resume tomorrow.

__________

“Disclosure Day” is Steven Spielberg at his stupidest.

A big budget, bloated, logically incoherent, sprawling mess of a movie that is what happens when there is nobody left in the Big Name’s orbit who has the authority to say “no.” It’s as if he was possessed by M. Night Shyamalan and forced to make yet another attempt at B-grade sci fi.

For example: the good guy escapes one of many attempts by the bad guys to kidnap him by - I kid you not - crawling around in plain sight and driving a car into the thick of them amid a hail of bullets. Later, as if to cover all his sci-fi bases, (and there are lots of callbacks to both “Close Encounters of the Third Kind” and “E.T.”, both better movies by far, among other sci-fi films) the good guy is standing in a field of grain that spontaneously develops crop circles, for no apparent reason and no significance to the plotline, 

Or how about the bad guys? They start out the movie having already kidnaped one character and threatening to kill her, kidnap another character later, plot the murder of a hero, later seriously attempt a double murder, and then at the end, when shooting one of the heroes would entirely defeat them, simply shrug as if to say “Oh well. We lost. Let’s go home.”

And then there’s the final scene, which can only be described as the return of a geriatric E.T., which entirely logically undercuts the entire drama up until that point. If you have a live alien, why bother with a worldwide “Disclosure” of video which nowadays everyone would dismiss as AI slop? 

And the very very end, which makes you think, I sat through 2 1/2 hours for this?

The high point of the movie was when I had to leave the theater for 5 minutes during the climactic scene in order to take a pee.

If you’re upset that this review contains spoilers (and really, it doesn’t), be grateful. I gave you back 2 1/2 hours of your life to do something better.

Weekly Indicators for July 6 - 10 at Seeking Alpha

 

 - by New Deal democrat

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

The high frequency data continues to confirm my Big Picture outlook that after a near-miss or possible “mini-recession” late last year, the economy is rebounding. In particular, the YoY improvements, already Booming, in consumer spending are accelerating even more. Some of this is probably the wealth effect from stock portfolios, and some may be big tax refunds to upper income households due to last year’s Billionaire Bust-out Bill.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me for putting it all together for you with a little gas money for summer excursions.

This is what entrenched economic power looks like

 

 - by New Deal democrat

As we come to the end of the week after the payrolls report, when typically almost nothing is reported, I wanted to follow up on several posts I wrote last week: one, revisiting the configuration of long leading indicators, and second, that Republics are very durable unless and until they are overmatched by entrenched interests that cannot be dislodged by a majority.

Let me go back to a point I made that recessions don’t happen unless there is a real setback to producers and consumers, as reflected in real corporate profits (blue) and real retail sales per capita (red):

As indicated above, to some extent, America has been economically blessed in that aside from the Giant Flaming Meteor of Death, i.e., COVID, there has been no recession in the past 17 years. That’s quite a good record!

But when one looks at the distribution of corporate profits and worker income, a more disturbing story is told. Here is what (nominal) corporate profits (blue) and aggregate nonsupervisory payrolls look like, both normed to 100 in 1987:

They began to diverge in the 1990s, then much more in the 2000s, further after the Great Recession, and then racheted further out of equilibrium after COVID. As of the first Quarter of 2026, nominally aggregate nonsupervisory payrolls have quadrupled, but corporate profits have increased 20x! Put another way, economic power has become increasingly entrenched among corporate ownership. This is reflected in another graph you may recall seeing here and/or elsewhere in the past few years, of the labor share of the economy, normed to 100 as of its generational peak at the beginning of 2000:

Labor now only takes 87% of what it did then, a new low for this series that goes all the way back to the 1940s. Although I won’t show the graph, labor share peaked in 1960. The 2000 high was 3% below that, and the current share is only 81% of the 1960 share.

This, quite simply, shows economic power becoming increasingly entrenched over time among the wealthy. 

Interestingly, aside from what may be happening at present, only one of the times when the corporate share increased sharply via profits coincided with a tax cut: in the aftermath of George W. Bush’s 2001 tax cut. Perhaps surprisingly, after both recent recessions, that featured extensive stimulus programs, corporate profits surged and the labor share declined sharply. As shown below, despite both stimulus programs real median household declined through 2012 and 2022, respectively:

Which suggests that even though stimulus may be aimed at average American households, the mechanics by which it works is that those households *spend* the payments in order to get them through difficult times. Once spent, those funds wind up in the hands of producers, i.e., they become concentrated in the largest corporations - which don’t spend them, but engage in stock buybacks and soaring executive compensation. So even though they accomplish their short term goal, over the long term they wind up helping to entrench wealth, suggesting that all economic stimulus programs should come with a back end corporate tax surcharge acting to “sop up” those extra gains once the crisis has passed.

This leads to a deeper discussion of the *dynamics* of economics and politics over time; in other words, how this came to be. That discussion involves the economics of bargaining power, the psychology of attraction to gains and avoidance of losses, and how human behavior learning strategies for the same apply, which is something I have read about and studied for decades. But this post is long enough, and rather than turn it into a veritable book, that will be the subject for a follow-up later.