Last week was a busy one for economic news, from consumer confidence to the employment report. This week’s data will be all about prices—and whether inflation is picking up.
Last week’s news
On Tuesday, the personal income and spending reports were released. As expected, income growth remained steady at 0.4 percent for June, the same as for May. Spending growth also met expectations, with growth of 0.4 percent in June. There was a surprising upward revision to May’s numbers, however. This revision took spending growth from 0.2 percent to 0.5 percent. As such, actual spending levels were above expectations.
Also on Tuesday, the Conference Board’s survey of consumer confidence rose from 126.4 in June to 127.4 for July—beating expectations of a small drop. This result keeps consumer confidence at historically high levels. It also suggests that despite the trade concerns, consumers are not yet bothered.
With persistent income and spending growth, plus strong consumer confidence, these reports indicate continued expansion and a decent segue to the rest of the year.
The Federal Open Market Committee issued its regular meeting statement on Wednesday. As expected, the Fed did not take any action on interest rates at this meeting. The statement described the economy as strong—an upgrade to previous months—and highlighted no significant risks from trade. So, also as expected, markets concluded that a September rate hike is coming.
Business news, however, was not as good. On Wednesday, the Institute for Supply Management (ISM) Manufacturing index was released. It dropped from 60.2 in June to 58.1 for July, below the expected 59.4. This is a diffusion index, with values above 50 indicating expansion. So, the decline still indicates strong expansion but one that may be weakening. Manufacturing has been supported by strong international demand and a weak dollar, and these are changing.
On Friday, the ISM Nonmanufacturing index also underperformed. It dropped from 59.1 for June to 55.7 for July, well below the expected 58.6. This was the biggest drop in almost two years, and it took the index back to August 2017 levels. As with the manufacturing index, this is a diffusion index, and the result still indicates continued growth. But the significant drop, especially in conjunction with the weak manufacturing survey, raises the possibility that business confidence may be rolling over.
Also on Friday, the international trade report surprised to the downside, as the trade deficit went from $43.2 billion in May to $46.3 billion in June. The increase came as the goods trade deficit widened, while the tariff-driven boost from Chinese purchases of soybeans started to reverse. Also weighing on trade was the dollar’s recent appreciation. This report suggests that the improvement in the trade balance in the second quarter is unlikely to last, and trade may become a drag on growth again in the balance of the year.
Finally on Friday, the employment report came in with job gains of 157,000, well below expectations of 190,000. Still, the report was better than the headline number suggested; the prior two months were revised up by 59,000, more than making up for the shortfall. The unemployment rate dropped as expected from 4 percent to 3.9 percent. The average workweek stayed steady at 34.5 hours, although the prior month was revised up to 34.6 hours. Wage growth also came in as expected, at 0.3 percent for the month and 2.7 percent for the year. Despite the weak headline number, which happens occasionally, the details suggest the labor market remains solid and points to continued economic growth.
What to look forward to
On Thursday, the producer price reports are expected to show that the headline index, which includes energy and food, rose 0.3 percent for July, the same as the 0.3-percent increase in June. There may be some downside here, on declining energy prices. The question will be how much that factor is offset by tariff-driven increases in other input prices, especially steel and electronics. The annual change is expected to stay stable at 3.4 percent, indicating that longer-term inflation pressures remain above the Fed’s target range. The core index, which excludes energy and food, is also expected to remain steady at 0.3 percent for July, the same as for June. The annual number should remain solid at 2.8 percent. Although these figures are stable in the aggregate, under the surface, tariffs are reportedly driving a faster rise in inflation. The effect of tariffs, however, is not expected to show up in the aggregate numbers yet.
Also on Thursday, the consumer price reports are expected to show rising inflation at the headline level. The headline index, which includes food and energy, is expected to have risen 0.2 percent in July, up from 0.1 percent in June. The annual figure is also expected to have risen from 2.9 percent in June to 3 percent in July. The core price index, on the other hand, is expected to remain steady, with the monthly figure at 0.2 percent and the annual figure staying put at 2.3 percent. As with the producer price numbers, these figures would indicate that inflation continues to run above the Fed’s target levels, which should continue to drive interest rates up.
Have a great week!