Producer prices indicate continued inflationary expansion, but how long can it last?

 

 - by New Deal democrat

I usually do not pay much attention to producer vs. 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. Unfortunately, that means that since the start of the Iran war I’ve had to pay more attention to the PPI release.

Let’s start with the raw numbers. Producer prices for final demand (red) decreased -0.1% in July, while raw commodity prices (including oil)(gold) declined -0.8%. This compares with consumer inflation (blue), which increased 0.1%:

 On a YoY basis, PPI final demand was up 4.7%, and 8.3% for raw commodities, vs. 3.4% for consumer prices:

Significantly, the PPI increase for final demand services, which had been 4.6% or higher YoY for the past few months, decelerated to 3.9% in July - which unfortunately is still higher than any such reading aside from the immediately inflationary post pandemic period, and briefly in the summer of 2024:

Of more concern, as per my lede above, is that the YoY measure of final demand producer prices remained higher than the that for consumer prices. And 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:

This indicates that the underlying inflationary pulse has continued to go well beyond energy related prices. And, just like last month, 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. To summarize, 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. 

So my conclusion this month is the same as it was last month: “If producers stay squeezed, they are going to begin to make cost cuts where they can.” Which may include a freeze in new hiring, a cut in hours, or possibly even worse. In other words, this inflationary expansion is likely to either stop being inflationary, or stop being an expansion, sometime in the not too distant future.

Jobless claims continue to forecast a very positive economy in the near term

 

 - by New Deal democrat

Let’s take our regular weekly look at one of the most positive recent signs for the economy, initial and continuing jobless claims.

And they continued to be very positive. Initial claims rose 9,000 for the week to a still very tame 209,000, while the four week moving average was unchanged at 199,000. As a reminder, aside from several weeks in 2022, this average has not been below 200,000 for over half a century, when the US population was only about 1/2 of what it is now. Continuing claims, with the typical one week delay, declined -22,000 to 1.777 million:

As per usual, for forecasting purposes what we want to look at is the YoY comparison, and there initial claims were lower by 6.7%, the four week average by -10.3%, and continuing claims by -8.5%:

As I said above, this continues to be a very positive short leading indicator for the economy.

Finally, since it’s early in the month I won’t update the implications for the unemployment rate going forward this week. Instead, here is an update of the “quick and dirty” forecast model that includes the inverse of the YoY change in the four week average, plus the YoY change in stock prices:

Combined, these are the most positive they have been since the immediate post-pandemic Boom.

July consumer inflation: the second gift horse in a row, with gas prices down again and shelter subdued

 

 - by New Deal democrat

As I wrote yesterday, July’s CPI was likely to be subdued because on average the price of gas went down further in July. And it was, rising only 0.1% for the month and 3.4% YoY (blue). Perhaps more important, core CPI excluding food and energy (red) rose 0.2%, and was only 2.5% higher YoY, tied for its lowest advance since the pandemic was raging five years ago. And shelter, which is 1/3rd of the entire index, continued its deceleration, up only 0.1% for the month for the second month in a row, and 3.2% YoY (gold):

Ex-shelter, prices declined -0.1% for the month, and were up 3.5% YoY:

This is a complete change of dynamic from a few years ago, when energy prices were somnolent and shelter was driving inflation. Now shelter is helping keep headline inflation from re-accelerating.

Given its importance, let’s parse shelter further. As noted above, shelter prices increased only 0.1%.  Both of its two components, rent of primary residence (gold) and “owners’ equivalent rent” (red) each rose 0.1% for the month. The former was up only 2.9% YoY, while the latter was still up 3.2%. Recalling that the shelter computation had to be kludged during the government shutdown last fall, I suggest ignoring the small bump afterward and focusing on the last few months vs. before the shoutdown. And doing so, it is likely that the slow disinflation there is persisting:

But for the second month in a row, the big reason for the YoY deceleration in headline prices was energy costs (including gasoline), which declined another -2.9% in July alone, reducing the YoY gains to 14.7%:

Now let’s turn to the current and former “problem children,” which I define as significant components which have risen more than 4% YoY. The headline here is also good news, as, although I won’t bother with graphs, new vehicle costs rose only 0.1% for the month and are only up 0.5% YoY, while used vehicles increased 0.4% monthly, but have gone down in price by an average of -1.9% YoY. This is a market which has been worked to a new equilibrium after a sharp 20% increase in prices immediately after the pandemic.

Another former “problem child” was tansportation services (including car insurance and repairs). Here the former has also digested the big post-pandemic increase and is following the flatness in vehicle prices. Insurance declined -0.3% monthly and on a YoY basis they are down -4.5%; while repair prices continue to be an issue, up 0.6% monthly and 6.6% YoY::

But a new problem child may be groceries. These increased only 0.1% for the month, but are up 3.0% YoY, with several items like fruits and vegetables up 5.1%, breakfast cereal up 4.1%, bread up 4.0%, meats up 4.5%, seafood up 7.0%, milk up 5.1%, coffee up 10.3%, and sugar up 7.4%:

The complaints people have been making about the price of groceries are showing up in the data. Some of this may be a result from the product recalls we have heard so much about in the past month, and some of it may be downstream of the increase in prices of things like fertilizer secondary to the closure of the Strait of Hormuz.

Finally,  the AI data center related categories of electricity and utility services rose 0.3% monthly and up 4.3% YoY%. The electricity component was up 0.1% monthly and 0.7% YoY, while gas and oil utility services rose 4.2% for the month and is up 4.3% YoY. Additionally, computer software and accessories (not shown) rose 0.5% for the month and are up 21.2% (!) YoY:

Before I conclude, here’s a look at what the sleepy increase in headline inflation did for real nonsupervisory hourly wages (blue), which rose less than 0.1%  for the month but remain down -0.1% YoY; and real aggregate nonsupervisory payrolls (red), which were unchanged for the month and are up 0.8% YoY, although both remain about -0.5% and -0.2% below their February and January peaks respectively:

Recall that real aggregate nonsupervisory wages are an excellent short leading indicators for recession. The added information for July is a double-edged sword. On the one hand, it is very rare for this metric to stay below peak for more than half a year without a recession occurring shortly thereafter. On the other hand, a good coincident marker for the onset of recession is when they turn negative YoY - and right now there is no evidence that that is about to happen. But with the Strait of Hormuz still closed, and US emergency reserves almost all depleted, just don’t expect gas prices to cooperate for a third month in a row.

A “quick and dirty” look at anticipated consumer inflation in July

 

 - by New Deal democrat

Tomorrow we’ll get the CPI report for July. At first I thought this might resume the upward spike of April and May — but maybe not.

My “quick and dirty” way to create a back of the envelope estimate of consumer inflation is to divide the change in gas prices (conservatively) by 16, and then add 0.15% for underlying upward pressure in non-energy areas. What is somewhat surprising is that, *on average,* gas prices declined -2.9% in July, from $4.05 to $3.93/gallon. Dividing by 16 gives us a decline of 0.2%, so if we add 0.15% to that, we get a change in CPI of between 0 and -0.1% (red in the graph below), compared with actual inflation through June (blue):

The Cleveland Fed, which has an inflation nowcast, is also expecting somewhat subdued inflation, at a 0.2% monthly increase:

This translates into a 3.5% YoY increase:

Which, following up my post yesterday, would at least be less bad for real nonsupervisory payrolls, which would decline -0.1% for the month, but remain higher by 4.1% YoY, and so even if contracting from their peak at the beginning of this year would not be signaling any imminent recession.

In July, the existing home market remained in its suboptimal equilibrium

 

 - by New Deal democrat

I wrote last month in my summary of that existing home sales report: “The housing market has reached a new, suboptimal equilibrium in sales, construction, prices, and inventory. Until some new positive or negative shock occurs (like a surprise new Fed hiking regimen), expect little change in this important leading sector of the economy, which is needless to say neutral for forecasting purposes.” 

While existing home sales are much less important in terms of economic impact, they are about 90% of the market, and generally trend in accord with new home sales. And, like new home sales, they are very much downstream of mortgage rates, which have been in a range of 6% to 7% for almost all of the past four years:

Although with the Iran war they have risen from 5.99% in February to 6.69% last week, they are still well within that range.

So, unsurprisingly, while existing home sales in July declined a seasonally adjusted -1.7% monthly to 4.06 million on an annualized basis, this is almost exactly in the middle of its range of between 3.85 - 4.30 annualized for the past three+ years:

If sales follow mortgage rates, prices follow sales, and unsurprisingly with rangebound sales, prices on a YoY basis have been relatively calm as well. These are not seasonally adjusted, so we look at them YoY. And since February of last year, there has been no YoY comparison higher than 3.0%. in July the YoY comparison was +2.0%. (For the record, on a monthly basis they declined -2.0%, but this is the typical seasonal pattern):

Again, this is similar to both Case Shiller (blue) and FHFA (red) repeat home sales indexes and the median price of new homes (gold), which are up only 1.1%, 2.2%, and down -3.0% YoY respectively:

This year the most lagging metric, inventory, has also fallen in line. In July, the YoY% change in existing home inventories was -0.6%. By contrast, as recently as last December it was up 7.9% YoY, and in March was up 4.5% YoY:

Again, we see similar flatness in YoY new home inventories (blue), down -2.4%, the active listing count of homes for sale nationwide (red), up 1.9%, and the new listing count (gold), up 2.4%:

So my conclusion this month is the same as last month. While there may be some slightly upward pressure on prices, with the background financial fundamentals the same, the existing home market has reached a suboptimal equilibrium, with something like a -500,000 decline in housing inventory available compared with ten years ago; and rangebound sales as well.

Scenes, both positive and negative, from the July employment report

 

 - by New Deal democrat

As per usual, there’s no economic news today, the first Monday after the employment report. So let’s dig into some detail about what was naughty and what was nice from Friday’s anemic report.

Let me start with the naughty, and in particular the -50,000 job losses (seasonally adjusted) in local education. While this is in large part an issue with difficult seasonal adjustments in the summer when many staff are temporarily laid off, Ben Casselman highlighted that it isn’t the only reason; school employment has been swan diving for a few months:

To which Joshua Goodman makes an excellent point:

I looked up these funds, and sure enough, they were paid out to school districts over a three year period that ended in September 2024. Funds allocated had to be spent by March of this year. So it looks like Joshua Goodman is correct.

But of course losses in education jobs weren’t the only negative point. After stabilizing in 2024 and 2025, the YoY% change in average hourly wages (blue) have also been decelerating sharply this year, even as inflation (red) has accelerated:

Historically wage growth decelerates during sharp slowdowns and recessions; and having inflation pick up even more has never been a good sign:

Additionally, aggregate nonsupervisory payrolls (blue) increased less than 0.1% in July:

Should consumer prices increase more than 0.1% in July, this will mark another downturn in real payrolls, which peaked in January. This would be an important yellow flag for recession. On the other hand, the real number has historically tended to turn negative YoY within a month or two before or after a recession begins, and almost certainly that will not happen this month unless there is a very sharp increase in consumer inflation on the order of 0.8% or more, which is unlikely:

And of course total employment has grown only 373,000 in the past 15 months, for an average of 25,000 per month. As shown in the graph below, employment (red) has increased only 0.3% since the end of 2024. Of the other three noteworthy monthly series tracked by the NBER for recession dating, real personal income less transfers (orange) has actually declined since then, having peaked in summer 2025:

Although there may have been a “mini-recession” last summer and autumn, while the consumer-side metrics as per above have stalled or declined, the economy has been kept out of recession by the producer side, via industrial production (blue) and real sales (green).

In addition to the bad data, there was some mixed data in the form of aggregate hours worked, which declined -0.1% for the month. Historically, hours decline more intensely than jobs, and turn negative YoY before jobs do as well:

But here’s what the last several years look like:

Despite the monthly decline, on a YoY basis hours have improved compared with the total number of jobs, something that has typically happened during recoveries from slowdowns or recessions.

There was also some positive data. First, as forecast by the declines in jobless claims (Blue, right scale), the unemployment rate (red, left scale) declined to an 18 month low of 4.1%:

Additionally, the leading sectors of manufacturing employment (red), construction (gold) and goods production as a whole (blue) all saw increases in the month:

And the average workweek in manufacturing increased to a new post-pandemic high:

Of course, much of this is tied to the AI data center construction Boom, so cross your fingers that it does not prove to be a bubble. I do think that this positive trend will have to reverse before any recession might begin.

Weekly Indicators for August 3 - 7 at Seeking Alpha

 

 - by New Deal democrat

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

The choice of what to highlight this week was very easy, because it was practically screamed from this following graph:

Corporate profits were through the roof in Q2, driven not just by AI-related companies but even more by the tidal wave of windfall profits by the energy companies, whose costs remained the same while gas prices skyrocketed. Corporate profits increased 22% in this quarter alone, and were almost 50% higher (!) than just one year ago, which itself had been an all-time record. 

Earlier this week that “right now, the stock market *is* the economy,” because it is the surge in stock prices which is driving much of consumer spending. Between these profits and the punk jobs report yesterday, that is even moreso the case.

As usual, clicking over and reading will bring you up to the virtual moment as to all of the economic data, and reward me with a penny or two towards my next lunch excursion.

July jobs report: school’s out for summer! Plus many other indicators take a sabbatical as well

 

 - by New Deal democrat

My Big Theme for the past few months has been that the AI Boom (or possibly bubble) is counterbalancing a stagnant or even shallowly recessionary rest of the economy. After three good reports in a row, the June employment report had been very weak, and July was even worse - but with a MAJOR caveat. Take out the -49,600 loss in local government education jobs, and we eked out a +27,000 gain for the month — still pretty poor. But the goods production portion of the economy continues to be a bright spot.

Below is my in depth synopsis.

HEADLINES:

• -23,000 jobs lost. Private sector jobs increased 30,000, while government jobs subtracted -53,000. As per the above, almost all of those government losses were in local education, and almost certainly because of the difficulty with seasonal adjustments as there are always big layoffs in this sector for the summer months. The three month average rose declined to a meager 20,000.
• The pattern of downward revisions to previous months once again occurred this month. May was revised lower by -66,000, and June was revised lower by -37,000, for a total decline of -103,000.
• The alternate, and more volatile measure in the household report, declined once again, by -87000 jobs. On a YoY basis, this series was negative for the sixth month in a row, now sharply down by -963,000 jobs, or over -80,000 per month
• The U3 unemployment rate declined another -0.1% to 4.1%. 
• The U6 underemployment rate declined -0.1% to 7.9%.
• Further out on the spectrum, those who are not in the labor force but want a job now declined -125,000 to 5.920 million, the 2nd lowest number in the past 12 months..

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and help us gauge how much the post-pandemic employment boom is shading towards a downturn vs. rebounding. These were almost entirely positive.

• The average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, was unchanged at 41.7 hours, the highest number in 5 years, just surpassing its 2021 peak.

• Manufacturing jobs rose 5,000, the 4th increase in the last 12 months.
• Truck driving reversed its decline ever so slightly, by +100.
• Construction jobs rose +22,000.
• But Residential construction jobs, which are even more leading, declined -500, taking out their interim low from last April, and setting a new 3 year low.
• Goods producing jobs as a whole rose +25,000. 

• Temporary jobs, which had declined by over -650,000 since late 2022, rose by +3,400, continuing to improve from their post-pandemic low set last October.
• The number of people unemployed for 5 weeks or less declined -222,000 to 1.960 million, the lowest number in over 3 years.

Wages of non-managerial workers 

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.04, or +0.1%, to $32.40, for a YoY gain of +3.2%, except for one month the lowest since December 2019. This is also lower than the 3.5% YoY inflation rate as of May.

Aggregate hours and wages: 

• The index of aggregate hours worked for non-managerial workers *declined* another -0.1%, and is up 0.8% YoY, about average for the past 12 months.

• The index of aggregate payrolls for non-managerial workers rose only +0.1%, and is up 4.1% YoY, tied for the second-lowest comparison for the past 5 years, and only 0.6% above the YoY inflation rate through June.

Other significant data:

• Professional and business employment rose for the fourth month in a row, by +18,000. These tend to be well-paying jobs. This remains above its low from last October, and has turned higher YoY as well.
• The employment population ratio declined another -0.1% to 58.9%, vs. 61.1% in February 2020, and its lowest since October 2021.
• The Labor Force Participation Rate declined -0.1% to 61.4% , vs. 63.4% in February 2020, and the lowest since February 2021. IMPORTANT: both the EPOP and LFPR are greatly affected by the retiring Boomer population. In the prime age 25-54 demographic, they are virtually unchanged.

SUMMARY

Lat month I described June’s report a “a big stumble.” If so, on the surface at least, this month was a faceplant. It was the 5th absolute decline in the past 12 months. Only 316,000 jobs, or an average of 26,000 per month, have been added in that time. This is just barely holding its head above water, even with the net loss in immigration.

That being said, the report was not nearly as bad as the headline. As indicated above, almost -50,000 of the -53,000 decline was accounted for by local government education jobs. Big layoffs in this sector happen every summer, and are notoriously difficult to seasonally adjust for, and thus there are often one or more outliers during those months. But as per the discussion above,  almost all of the leading indicators in the report increased in manufacturing, construction, truck transportation, and goods production in general. Further, as per my weekly discussion about jobless claims, the unemployment rate did decline another -0.1% to a 12 month low.

But there were other negatives as well, with very weak average and aggregate wage growth, and another actual decline in hours worked. It is possible that, once we have the July CPI number, that real aggregate payrolls will have turned negative YoY, which would be a powerful recession warning signal.

Leaving aside the education jobs issue, I would describe this report as being just on the plus side of being dead in the water.

Very positive “superlow” new jobless claims forecast an unemployment rate under 4% in the next few months

 

 - by New Deal democrat

The superlow number of job losses in the country continues to be one of the two most powerfully positive signals for the entire economy.

Last week only 199,000 people filed for new jobless benefits, the third week in a row that the number was fewer than 200,000. The four week moving average declined -4,500 to 198,750, the first time that number has been below 200,000 since briefly in 2022. With the typical one week delay, continuing claims rose 24,000 to 1.801 million:

Aside from those several weeks in 2022, the only other time in the entire 60 year history of this data series that this number has been under 200,000 was during 1968 and 1969, when the US population was only about 1/2 of what it is today:

These are just extremely powerful positive numbers.

As per usual, for forecasting purposes, the YoY% changes are more important; and here, initial claims were down -11.9%, the four week moving average down -10.1%, and continuing claims down -8.3%:

This is about the very best comparison in the entire post-pandemic period.

Unsurprisingly, when we put this together with stock prices for the “quick and dirty” forecasting method, we also see that this is about the most positive the two have been in tandem:

Finally, with the July jobs report due tomorrow, here is our final look at what initial and continuing claims suggest about the direction of the unemployment rate over the next several months:

Earlier this week I read that Goldman is forecasting a 0.1% increase in the unemployment rate in tomorrow’s report. I suppose that is possible, given the upward blip in new claims in June. But the last time new and continuing unemployment claims were at this level in 2023 and early 2024, the unemployment rate was 3.7%-3.9%. And that is the direction the unemployment rate is likely to take in the next few months.

The economically weighted ISM indexes for July show a reasonably strong but stagflationary expansion

 

 - by New Deal democrat

The economically weighted ISM manufacturing + services indexes continue to be the best timely snapshot of the US economy. With this morning’s update of the services index through July, let’s see what they say. As a quick refresher, I particularly look at the three month average to smooth out noise, and weigh manufacturing at 25% and services at 75%. 

The headline services index, as well as its more leading new orders component, have been consistently positive with the exception of several months last summer. That continued in July. [Note: in all graphs below, the manufacturing component is in blue, with services in gray.]

The headline services index came in at 54.1 [recall that any reading over 50 means expansion]. The three month average was 54.2. Since the three month average for manufacturing was 54.3, the economically weighted average was also 54.2:

New orders came in at 57.2, among its strongest readings of the past three years. The three month average was 56.5, which as it happens was the exact same average for manufacturing, meaning - naturally! - that the economically weighted average was also 56.5:

But if the headline and leading new orders components were very positive, the same could not be said of employment, which in the services index slid back into contractionary territory at 47.4. The three month average was 48.8. The manufacturing employment subindex averaged a very slightly positive 50.4, meaning the economically weighted average was 49.2:

The monthly average of the two employment subindexes has diverged from the official jobs report this year, which has been positive for 5 of 6 months, and showing a gain of over 100,000 jobs in 4 of them. By contrast, the ISM weighted average has only shown expansion in two of them: February and June. Possibly the two metrics will be more aligned once the gold standard for employment QCEW is released for Q1 at the end of this month.

Finally, widespread price increases continue to be a problem, with the prices paid index for services coming in at 70.3, with the three month average at 68.8. The three month average for manufacturing showed even more widespread pricing pressure at 75.4, meaning the economically weighted average was 71.2:

This is a “less worse” result than during spring, but is otherwise the worst since late 2022 (note that unlike the other three graphs, this one shows the last five years for better comparison).

To sum up, as of July the economically weighted ISM averages show an economy in reasonably strong expansion, but characterized by strong inflationary pressures and weak employment; i.e., a positive but stagflationary environment.

My updated “consumer nowcast” is up at Seeking Alpha; plus, more confirmation in the June JOLTS report

 

  - by New Deal democrat

Yesterday I posted the update of my “consumer nowcast” over at Seeking Alpha.  

As a refresher, this system looks at the various sources that can power increased consumer spending, which is 70% of the economy. When all of those sources are shut down, a recession almost invariably occurs. Unsurprisingly, the only significant source of such an increase this year has been appreciation in stock market portfolios among the upper income segment. 

This is fundamental evidence for my current view of the economy, which is that despite the chaos emanating from 1600 Pennsylvania Ave., the economy has been resilient, as manufacturers have found a modus vivendi with the tariff situation, and the big tax windfalls to the wealthiest of the wealthy have found their way into AI data center construction, which has been expansionary and lucrative for everything downstream. That being said, if the AI construction Boom proves to be a bubble (spoiler: I think it is), then the economy is open to a self-reinforcing negative cycle of stock market losses and pullbacks in consumer spending.

The JOLTS report for June was also released yesterday. This added very little to what we already knew about the employment situation: there is very little hiring, and even less firing, which nets out to slight improvement compared with last year. Here’s the situtation with the “soft data” of job openings postings (blue), actual hires (red), and voluntary quits (gold) normed to 100 as of just before the pandemic:

The small upturn since last autumn is apparent, and the slight improvement also shows up in the YoY comparisons of the same data, with both hires and quits being up less than 1% YoY, with openings up over 2%. I’ve also included layoffs and discharges (inverted, purple), which are down over -4% YoY):

To reiterate: hiring up slightly, firing down more. Here’s the firing data in absolute terms shown by itself:

Note the slight but apparent downturn beginning last November, which is also when jobless claims manifested a significant decline as well.

So my headline take on the economy remains the same: make no mistake, it is growing. But that growth is led by a narrow sector, and a narrow source of consumer spending. Pending more Administration-induced chaos.