Economic Perspectives Update

PPI annual inflation continues to moderate 

The Producer Price Index (PPI) for final demand rebounded 0.4% in October, the most in six months, and above the consensus of 0.3%. It was led by a 0.7% rise in goods PPI, the most since March, as energy prices spiked 2.8%, while food prices advanced 1.3%. Services PPI rose a more modest 0.3%, led by trade margins. PPI for final demand ex-food and energy increased 0.3%, also above the consensus of 0.2%.

Despite the notable monthly increase, annual inflation pressures weakened. On a y/y basis, the PPI for final demand slipped to 1.1%, the slowest pace in more than three years, while PPI ex-food and energy eased to 1.5%, the least since February 2017. Both peaked in 2H 2018 and have been on a downward trend since then. Moreover, intermediate producer prices were lower than a year ago across most stages of the production flow. Falling pipeline pressures suggest continued low PPI inflation in the near-term.

Jobless claims up, consumer comfort down 

Initial claims for unemployment insurance spiked 14,000 last week, the most since April, to 225,000, a five-month high. The consensus was for a 4,000 increase to 215,000. The four-week average of claims picked up 1,750 to 217,000, a four-month high. This is still a very low level compared to history, and indicates that labor markets remain tight. But we are watching this trend closely for early signs of changes in labor demand.

The weekly spike in claims likely weighed on consumer attitudes, with the Bloomberg Consumer Comfort Index falling 1.1 points, down for the fourth straight week, to 58.0, its lowest level since February. The four-week cumulative decline was the biggest since May 2012. All three index components fell, led by worsening views on the state of the economy. The longer-term trend of comfort, as measured by the 52-week average, has also leveled off, following a steady ascent over the past three years. This could weigh on retail sales growth in the upcoming holiday shopping season.

Budget deficit on a widening path 

The federal government posted a budget deficit of $134.5 billion in October, up 33.8% from a year ago. The Office of Management and Budget projects the deficit will reach $1.045 trillion in fiscal year 2020. Indeed, on a 12-month total basis, the deficit is already at $1.018 trillion, representing 4.8% of GDP, the biggest gap since May 2013.

The 12-month total federal outlays increased 7.5% y/y, while receipts picked up a more moderate 3.3% y/y. Notably, health expenditures rose 6.6% on a smoothed y/y basis, the most since March 2017, which was separate from the 6.2% y/y increase in Medicare outlays. Net interest spending growth was still in the double-digits at 14.5%, while its share of total outlays was 8.3%, near its highest level since September 2008. Corporate income tax receipts rose 5.3% on a smoothed y/y basis, up for the first time since December 2017, as the impact of tax cuts wears off.

Source: Ned Davis Research