Looming recession

Inflation Station

Inflation, have you heard of it? We got two inflation reports this week – the consumer price index and the producer price index. Typically, the producer price index is a precursor to what consumer prices might do in the future as higher/lower costs get passed from producers to their customers. While we’ve been looking for inflation to start slowing, both prints came in higher than expected. Producer prices increased 11.3% in the last year – 90% of it was driven by higher energy costs. Consumer prices came in 9.1% higher than last year. While food and energy drove a lot of the increase in prices, the inflation is being seen across most categories of spending. 

Moral of the story: Both consumer and producer prices are continuing to increase month-over-month, and that’s the sequential growth where we’re looking for a pause. Adjusting wages for inflation, hourly earnings are down 1% over the month and down 3.6% over the last year as higher prices are eating into consumers’ wallets. After seeing both these inflation prints, investors are expecting the Federal Reserve to become even more aggressive in implementing policies to combat inflation, running the economy into a recession, and then having to ease policy as early as next spring to try and pull the economy out of a recession. Addressing inflation is also becoming public policy priority #1 as we approach the November elections.

Sales, but make them not real

Retail sales increased 1% in the month of June, with spending increasing across a pretty wide variety of categories. Not surprisingly, we’re paying a lot for gas and food – both in grocery stores and restaurants as dining out is becoming more expensive. I paid $30 for two burritos from our neighborhood hole-in-the-wall Mexican restaurant this week, and I was shocked because I think the price actually used to be $20 not too long ago. 

Moral of the story: These retail sales numbers aren’t adjusted for inflation, though, so much of the gain in “retail sales” for the month of June was really just growth in prices rather than true growth in the volume of sales. That being said, consumers are able to navigate through these higher prices for right now but we’re definitely testing the limits.  

Small business talk 

The NFIB Small Business Optimism Index (basically provides a health check for small businesses, which account for about 50% of the US private workforce) fell 3.6 points in June to 89.5, which is the sixth straight monthly decline. In addition to the struggles of inflation and labor shortages that are plaguing small businesses today, sentiment about future conditions continues to deteriorate pretty meaningfully. At this point, only 28% of owners expect real sales (aka adjusted for inflation) to be higher looking forward and outlook for policy changes are also worrisome as there have been rumblings for tax increase and higher regulations out of DC.

Moral of the story: Small businesses are the backbone of our economy and account for a huge part of our employment in this country. The continuously worsening sentiment in this part of the economy is not surprising but also not a good look. 

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