Producer Price Inflation - PPI Final Demand

The breakeven inflation rate and treasury yields have increased every year over year since hourly earnings growth hit a cycle high. The August PPI report missed expectations widely, signaling inflation isn’t a threat at all.

As you can see in the chart below, month over month PPI was down 0.1%. This was the first decline since February 2017. It missed expectations for 0.2% and was below last month’s flat reading. Year over year PPI was up 2.8% which fell from July’s 3.3% growth rate.

Excluding food and energy, month over month inflation fell 0.1% and year over year inflation was up 2.3%.

Month over month inflation was expected to be up 0.2% and the lowest estimate was for 0.1% growth. July inflation was up 0.1%. July’s year over year rate was 2.7%.

You can see trade services played a role in the weakness. Excluding it, inflation was up 0.1% month over month and 2.9% year over year. Month over month inflation missed estimates by 0.1% and missed July’s reading by 0.2%.

Producer Price Inflation - 

Year over year inflation was actually up 0.1% from July.

The moribund inflation at the base of the supply chain is much different from wage inflation. That’s good news for real wage growth.

Food prices fell 0.6% and energy prices were up 0.4%. As I mentioned earlier, trade service prices were weak. They fell 0.9% after falling 0.8% in July.

Year over year, prices were only up 0.8%. Construction prices were up 0.1%. Car prices were up 0.7%, but light truck prices were down 0.1%. Personal consumption inflation was flat, which signals PCE inflation will be low.

The industries impacted by tariffs were affected by inflation as steel mill products were up 2.6% month over month and 18.6% year over year. Aluminum prices were down 2.1% month over month and up 14% year over year.

Finally, fabricated metals prices were up 2.2% month over month and 15.7% year over year.

Producer Price Inflation - Politically Biased Small Businesses

The political bias in the small business index has always been suggested, but never tested. You can’t just look at the change in small business optimism to determine if the sentiment reading is biased because the fundamentals of the economy also change.

The chart below compares optimism with GDP growth and overlays the political party of the president. It neatly shows that optimism was slightly higher than reality during the presidency of George Bush and it was slightly pessimistic during the presidencies of Clinton and Obama.

It was also more positive early in Bush’s presidency and early in Obama’s presidency when recessions were ongoing.

The combination of political bias and the economic recovery in late-2016 has made small businesses much more optimistic than GDP indicates.

We have seen an improvement in growth, tax cuts, regulation cuts, and political bias all combine for a record small business sentiment reading. This shouldn’t be a surprise for most readers because there needs to be a confluence of factors to set a new 45 year record with any metric.

Growth isn’t at a 45 year high, but it has been solid in 2018. The hurricane could affect the final GDP numbers by a wide margin. Excluding that, 2018 growth will be one of the highest of this expansion.

Producer Price Inflation - Strong Consumer

Retail sales don’t come out until Friday, but we have the Redbook same store sales growth as a preview.

August month over month retail sales and the sales from the control group are expected to be up 0.4%. That’s a 0.1% slowdown for both stats. If the Redbook report has any predictive aspect to it, retail sales will be fantastic.

As released Redbook sales were up between 4.7% and 6.5% year over year in August.

Sales in September have been amazing so far as the first week’s same store sales growth was 6.3% which is down 0.2% from the last week of August. The back to school season was a huge success.

The last week in August had the highest same store sales growth in 13 years. Month to date sales versus the previous month were up 0.8%, which makes it the second best reading of the year for this comparison.

The full month year over year increase widened by 1.2% to 6.3%, the best level of the year.

Producer Price Inflation - July Consumer Credit

The consumer credit report is delayed as the July report was released on Monday. However, it’s still critical to see how much consumers are borrowing since consumer spending drives economic growth.

As you can see from the chart below, consumer credit outstanding increased $16.6 billion which is the 2ndhighest increase in 8 months. It is now at $3.918 trillion. June’s report was revised lower from $10.2 billion to $8.5 billion.

July’s report beat the consensus for $13.9 billion and the high end of the expected range which was $15.5 billion.

Non-revolving credit was up $15.4 billion which was up from $9.6 billion in June. This shows there is steady growth in student loans and auto loans.

Credit was up about 4.5% year over year; the debt to income ratio was 25.2% which is below the recent peak of 25.4% in late 2017, but above the recent trough of 24.5% in late 2016.

Producer Price Inflation - Jobless Claims Continue Their Downturn

Jobless claims have historically been a great indicator of when to buy and sell stocks.

However, they might not be this cycle because they have decoupled from the BLS job creation results. The jobless claims are simply too good. Last week’s claims fell 1,000 to 204,000.

The 4 week average fell from 210,000 to 208,000. Jobless claims and the 4 week moving average are both at  50 year lows even though the labor force is always growing.

As you can see from the chart below, claims have been below 250,000 for 43 weeks. There was no such streak in the 1980s, 1990s, or 2000s. This is the longest streak since the late 1960s when the labor force was much smaller.