Economy seems to be taking a snooze
June Consumer Prices, Retail Sales, Industrial Production and Real Earnings
KEY DATA » CPI: 0 percent; Less Food and Energy: +0.1 percent/ Sales: -0.2 percent/ IP: +0.4 percent; Manufacturing: +0.2 percent/ Earnings: +0.2 percent; OverYear: +0.8 percent
IN A NUTSHELL » “With inflation low, consumption soft and manufacturing growth mediocre, it is hard to say the economy’s animal instincts are out in full force.” WHAT IT MEANS » Fed Chair Yellen made it clear that the Fed would continue the process of
normalizing rates and its balance sheet. But she also indicated that the pace of normalization would be slow, and given the results of Friday’s data dump, there is every reason for that to happen. Let’s start with inflation. Six months ago, price gains were accelerating the Fed’s 2 percent target was in sight. Indeed, the Consumer Price Index, either including or excluding food and energy, was rising faster
than the Fed’s goal. Not anymore. Inflation barely budged in June. Energy prices did drop sharply, but even excluding that segment, consumer costs rose minimally. If it weren’t for the large increase in medical costs, we would have had a negative number. Most other costs were flat, down or up modestly. Inflation is decelerating, a trend that is not making the Fed members happy as the members really want to normalize financial conditions.
The flat prices did allow for inflation-adjusted wages to rise moderately
in June. But over the year, the increase was a paltry 0.8 pecent. It is hard to get any significant increase in consumption if household purchasing power is going nowhere.
One reason that prices are so soft is that consumer demand is weak. Retail sales fell in June, the second consecutive monthly decline. That is true whether you include or exclude vehicles. A drop in gasoline prices was a major factor in the sluggish sales but even taking out the price effects, demand went nowhere. The only bright spots were online
sales and purchases of building and garden supplies. We didn’t even eat out, as restaurant demand fell sharply.
Industrial production did surge in June as oil and gas drilling picked up, despite falling prices. That is nice to see as the energy sector restrained growth for much of 2016. While manufacturing output improved decently, the increase came after a decline in May. In the second quarter, industrial production rose at a modest 1.4 percent pace. That is hardly a sign of a sector on a roll.
MARKETS AND FED POLICY
IMPLICATIONS » Consumers didn’t spend and manufacturers didn’t produce a lot more during the spring. That doesn’t provide much hope that economic growth accelerated much from the moribund first quarter gain. The rate could approach 3 percent, but only if inventories expanded sharply. Unfortunately, any building of stocks was likely unintended and will have to be worked off in the summer. We get second quarter GDP numbers in two weeks and there will be other data to come, so let’s wait before we get too concerned about the condition of the economy. That said, Friday’s reports imply that the Fed will go very slowly normalizing rates, but it also means that businesses will have to really hustle to find ways to keep earnings growing strongly. With the University of Michigan’s mid-month consumer sentiment index showing another decline and inflation-adjusted wages rising modestly, where growth will come from is anyone’s guess.