Weekly Economic Vital Signs - Inflation Is Coming

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by: Lawrence Fuller
Summary

This is a weekly series focused on analyzing the previous week’s economic data releases.

The objective is to concentrate on leading indicators of economic activity to determine whether the economy is strengthening or weakening, and the rate of inflation is increasing or decreasing.

This week, we examine the small business optimism, the JOLTS report, the Producer Price Index, the Consumer Price Index, and real-wage growth.

NFIB Small Business Optimism

Small business optimism remains near expansion highs in the June survey, and it certainly doesn't suggest that the economy needs monetary stimulus. Uncertainty is on the rise, which is curbing sales and profit expectations, but this is largely due to trade and tariff polices. Job openings and plans to hire more workers remain strong, and credit conditions remain favorable. This report is consistent with a rate of growth that is moderating from last year's 3% pace.

One notable aspect of this report is on the inflation front, where we are starting to see indications that consumer prices are on the rise.

JOLTS Report

Job openings declined mostly in May to a still lofty 7.323 million, while hiring also showed a decline 5.725 million. The level of quits, or workers leaving their jobs to find a better one, has been steady all year long. This does not suggest we will see a further rise in the rate of income growth. Again, this report does not call for an easing of monetary policy. There are plenty of jobs available. The problem is matching available workers with the skills employers require.

Producer Price Index

The Producer Price Index (PPI) increased 0.1% in June and is now up 1.7% over the past year, which is down from last month's 1.8% annual increase. Energy price declines are weighing on the headline number. The core rate, which excludes food and energy, is up a faster-than-expected 0.3% for the month and 2.3% year-over-year.

I continue to think we see price increases at the producer and consumer levels in the months ahead as tariffs feed into the pipeline. The core CPI should follow the increase in selling prices we are seeing in the chart below. This will also start to show up in the Fed's preferred gauge of inflation-core Personal Consumption Expenditures.

Consumer Price Index

Consumer prices rose 0.1% in June and 1.6% over the past year. The core rate increased 0.1% for the month and 2.1% on a year-over-year basis. The decline in energy prices is what brought the overall rate down to 1.6% from 1.8% in the prior month. The Fed focuses on the core, which is now slightly above target. Leading the core rate higher is housing where rents rose 0.4% last month and 3.9% year-over-year.

Real (inflation-adjusted) average hourly earnings for production and nonsupervisory employees rose 0.2% in June, while hours worked per week were unchanged. This resulted in real average weekly earnings rising 1.9% year-over-year, which is up from 1.7% in May. Real average weekly earnings are up 1.3% over the past year, which is up from 1.1% in May and 0.8% in April. It is nice to see a gradual pick up in real weekly take-home pay, but what concerns me is that the number of hours worked is declining and the rate of inflation looks like it will increase at a faster pace than average hourly earnings growth. This could result in a decline in real wages.

Conclusion

The rate of economic growth is clearly slowing from last year's pace, but it doesn't appear to be detrimental to the expansion just yet. The consumer continues to spend, and consumption accounts for approximately 70% of our economic activity. Still, the weakening trends in manufacturing and capital investment don't look to improve anytime soon. At the same time, we are seeing signs that the rate of inflation is increasing. So long as this doesn't stunt the growth in real wages, I think the economy can continue to grow at a 1-2% pace.

The Fed may cut interest rates at the end of the month, but I think doing so will simply be wasting ammunition it will need down the road to battle an inevitable contraction in economic growth and bear-market decline in the stock market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Lawrence Fuller is the Managing Director of Fuller Asset Management, a Registered Investment Adviser. This post is for informational purposes only. There are risks involved with investing including loss of principal. Lawrence Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Fuller Asset Management. There is no guarantee that the goals of the strategies discussed by will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security.