PPI Signaled that Inflation is Not Cooling

By | July 19, 2021

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.

Overview

Global shares held steady while U.S. Treasury yields hovered near multi-month lows on Friday, as markets looking for U.S. consumer data as the next test of the Federal Reserve’s dovish rates outlook. Oil markets were on course for their biggest weekly drop since May as traders bet supply from OPEC producers could rise to meet an expected increase in demand as economies recover from the pandemic. How quickly does the global economy recover has become an issue, with a resurgence in infections rates across a number of countries, particularly in Africa and parts of Asia as the Delta variant takes hold. MCSI’s broadest index of Asian-Pacific shares outside of Japan fell 0.4%. Markets continue to be supported by ultra-easy monetary policy from most of the world’s central banks yet are skittish given the COVID concerns and are uneasy that policymaker support might be yanked too early if inflation fears rise.

Wall Street ended lower on Friday, weighed down by technology stocks, while investors worried about a rise in coronavirus cases tied to highly contagious Delta variant. The Dow Jones Industrial Average fell 0.86% to end at 34,686.08, while the S&P 500 lost 0.75% to 4,327.19 and the Nasdaq Composite dropped 0.78% to 14,429.43. With the S&P up about 15% so far this year, investors are looking for strong company forecasts to justify high valuations. Second quarter earnings season picks up in the new week. Analysts on average expect 72% in earnings per share for S&P companies. Data form the Commerce Department showed retail sales rebounded 0.6% last month as spending is shifting to services, bolstering expectations that economic growth accelerated in the second quarter.

Inflation figures came in hot last week, with a 0.9% jump in the headline CPI and an equally large jump in the core index. Inflationary pressures continue to build and businesses continue to pass on the costs. Again, large gains in a few small categories at the center of the nation’s reopening and supply chain issues drove the increase, including air fare and hotel prices and another large gain in the price of used cars. June’s increase drove the core CPI up 4.5%, the largest yearly increase in roughly 30 years. Looking across products, the gain in inflation is not as extreme as the core increase suggests. However, housing and food prices are rising and spending usually is not delayed as that of a car purchase.

The PPI also signaled that inflation is not cooling. The PPI for final demand rose 1.0% in June and is up 7.3% in the past year. The PPI report showed that intermediate and raw material costs are rising, as well as services for shipping. The ongoing strength in inflation did not seem to faze Fed Chair Jay Powell, who in his testimony to Congress last week, continued to emphasize that price pressures will ease as current bottlenecks ease. However, there are few signs that costs and supply constraints are easing yet. Industrial production rose 0.4% in June on strong utility and mining output. Manufacturing fell 0.1%, hurt by a 6.6% drop in automobile production. Excluding auto production, manufacturing increased 0.4%. For the second quarter, total IP was up 5.5% on an annual rate and manufacturing 3.7%, despite a drop of 22.5% in output at the auto sector. More production will ease price pressures and we have seen wood costs retreat significantly from peaking in May. In a glimmer of hope that the worst of the supply bottlenecks may be passing, the Philadelphia and the New York Fed’s manufacturing’s survey showed delivery times did not lengthen, while shipments increased.

The retail sales report showed that consumers are not put off by rising prices. Retail sales rose 0.6% in June beating expectations of a small decline. Consumers are pivoting away from home to more social and experience spending. For example, furniture and building materials fell again last month, while restaurants and personal care jumped. Overall, the retail sales report was solid, indicative that households emerging from the pandemic in a solid position are willing to spend on both goods and services. The shift towards services will continue and demand for goods will cool off a bit.

This week will be light on economic data, with a focus on housing starts and existing home sales.

Latest Data

The U.S. Economy:

Confidence among small businesses improved slightly in June after declining in May. The NFIB Optimism Index increased by 2.9 points to 102.5, the first time the index exceeded 100 since November 2020. Seven of the 10 components improved and three declined. Owners expecting better business conditions over the next six months rose 14 points to a net negative 12%, Earnings over the past three months improved to a net 5%. 46% of owners reported job openings that could not be filled, a decrease from May but still historically high. The net percent of owners raising average selling prices increased 7 points to a net 47%, the highest reading since January 1981. Small business owner’s optimism is rising, yet a record number of employers are having problems finding labor. Owners are also having a hard time keeping inventory stocks up with strong sales and supply chain problems.

The Consumer Price Index increased 0.9% in June, following a 0.6% increase in May. It was the largest 1-month change since June 2008. Over the past 12 months, the index has increased 5.4%, the largest 12-month increase since the 5.3% increase for the time period ending August 2008. The index for used cars and trucks continued to rise sharply, increasing 10.5% in June. This accounted for more than one-third of the seasonal adjusted increase. Food prices 0.8% in June, up from a 0.4% rise in May. The energy index increased 1.5% in June, with gasoline prices rising 2.5% for the month. Excluding food and energy, the core index rose 0.9% in June after a 0.7% increase in May. The core index was up 4.5% in June from a year earlier, the largest increase since November 1991. Although inflation has increased sharply in the last few months, the Fed is likely to look through the rise because of transitory factors The semiconductor shortage, supply chain disruptions, and past increases in energy prices. These pressures should start to fade by year’s end or early next year.

The Producer Price Index increased 1.0% in June, following a 0.8% rise in May. On an unadjusted basis, the final demand index moved up 7.3% in June, the largest advance since the 12-month data was first calculated in November 2010. Nearly 60% of the June advance can be traced to a 0.8% advance in final demand services. The final demand goods index moved up 1.2%. Prices for final demand less foods, energy and trade services rose 0.5% in June, following a 0.7% rise in May.  For the 12 months ending in June, the core index moved up 5.5%, the biggest jump since the 120month data was first calculated in August 2014.  The Fed projects that most of the recent surge in prices is transitory and that inflationary pressures will fade in a short term of time.

Industrial production increased 0.4% in June, following a 0.7% increase in May. Manufacturing output edged down 0.1% and was 0.8% below its pre-pandemic level. The decline in manufacturing came largely from a 6.6% decline in the production of motor vehicles and parts. Excluding motor vehicles and parts, manufacturing output increased 0.4%. Utility production increased 2.7% reflecting heightened demand for air conditioning. The index for mining increased 1.4%, Durable goods production slipped 0.2%. In addition to motor vehicles, declines of more than 1% were recorded by nonmetallic minerals, electrical equipment and appliances and components. Nondurable goods rose 0.2%. For the second quarter, total industrial production increased at an annual rate of 5.5%. Manufacturing advanced 3.7% despite a drop of 22.5% for motor vehicles and parts.

Manufacturing, which accounts for 11.9% of the U.S. economy is being supported by the massive fiscal stimulus, low interest rates, which have contributed to strong demand for goods. Spending is starting to shift towards services. The strong demand for goods is straining the supply chain, leaving manufacturers grabbling with shortages of raw material and labor. The falloff in auto production has boosted demand for used cars and trucks, the major driver of inflation in recent months. Despite the problems, production of most items is getting stronger and that will act to limit price increases down the road. The outlook for manufacturing is good and low inventories will provide more fuel in coming months. Eventually, spending will shift more towards services and manufacturing will cool towards a more normal historical level.

Retail sales increased 0.6% in June, up 18% from June 2020. The June advance was above expectations and followed a downward revised 1.7% decline for May. Sales excluding motor vehicles and gasoline advanced 1.3% in June. Motor vehicles and parts sales fell 2.0% and furniture and home furnishing sales fell 3.6% in June. Electronics and appliance stores saw a 3.3% advance. Building material & garden supply store sales fell 1.6%. Gasoline sales were up 2.0%. Apparel sales jumped 2.6%. Food and drinking establishments recorded a 2.3% advance as that sector is still re-opening. The report was deemed good news for GDP growth, which is projected to have increased around 9% in the second quarter. With 160 million people vaccinated, spending is shifting towards services, which are not accounted for in the retail sales report. That suggests, spending on goods is still strong. With rising wages and healthy employment growth and a high savings rate, the outlook for spending is good. However, the shift towards services will continue and eventually mean a cooler environment for goods demand.

Business inventories increased 0.5% in May, up 4.5% from a year earlier. Manufacturer’s stocks were up 0.9% in May, while retail stocks fell 0.6% and wholesale inventories advanced 1.3%. Total business sales fell 0.3% but were up 28.7% from a year earlier.  The inventory-to-sales ratio increased to 1.26 from 1.25 for April. Inventories are still at low levels, especially in the auto industry, This suggests a need for greater production when the supply chains get fixed.

Important Data Releases This Week

The June ISM services report will be released on Tuesday, July 6 at 10:00 AM.  The May ISM services index beat expectations and rose to a level of 64, another all-time high. Like, the manufacturing sector, the service sector have to contend with labor shortages, supply chain constraints and delivery problems. These problems will linger although we do see some easing in coming months. The index should come in at 63.9 for June.

The June housing starts report will be issued on Tuesday, July 20 at 8:30 AM. Housing starts rose to a 1.572 million annual pace in May. Year-to-date shows starts are up around 25% compared to 2019. However, high costs of materials and lack of labor have constrained activity in the face of strong demand. Wood prices have fallen recently, giving builders a respite. We expect starts to come in at a 1.60 million pace for June.

The June existing home sales report will be released on Thursday, July 22 at 10:00 AM. Existing home sales fell for a fourth consecutive month in May but are still running at a 5.8 million annual pace. The slowdown in sales likely is an impact of affordability, where the median price of an existing is sitting at $350.000. We project existing home sales will hit a 6.0 million pace for June.

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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.