More Positive Signals in August 2009, But Is Inflation Heating Up?: Producer Price Index, Retail Sales Increase and Inventories Decline

Three of the latest reports on the economy from August 2009 suggest improving conditions and a possible warning sign on inflation.  The producer price index rose rather sharply, with food and energy prices flaring up once again as the dollar falls and commodity prices in general head higher.  Retail sales showed a sharp rebound, suggesting that maybe consumer spending is not as depressed as we thought (though the government’s “cash-for-clunkers” program provided the main boost).  Finally, business inventories declined in July 2009, suggesting that demand for goods may be on the rise.  A key issue is how much of the positive news is driven by the private sector as opposed to government spending. 

Part of the confusion over what these numbers are really telling us lies in the fact that government spending and stimulus programs have greatly influenced the outcome.  One might posit that the government programs will end, like cash-for-clunkers has, and the economic recovery will lose steam as private sector spending fails to keep up.  That would be bad news for businesses and the markets, but it would also mean that inflation is not really an immediate threat.  However, where one government program ends, others march on, like the first-time homebuyer tax credit (which expires December 1, 2009, but may be extended), Federal Reserve purchases of mortgage-backed securities to support the mortgage market, and the recent announcement from the Treasury Department that tax rules relating to refinancing of commercial real estate mortgages will be eased, to name a few. 

Trying to accurately read the economic “tea leaves” in an environment like this is difficult to say the least.  Notice, too, that equity markets do not seem to mind being driven by government spending, at least not yet.  Good news is rewarded and bad news is ignored.  The assumption by the markets must be that governments are going to do anything to keep the recovery going and whatever the consequences may be is not a concern until later.  The problem is that so much easy money is already blowing up energy and raw materials prices (click on Leading Economic Indicators/Oil/Copper/Gold on the menu bar above to see how quickly prices have ballooned yet again). 

The following is a brief breakdown of the PPI, retail sales, and inventories reports: 

PPI 

The Producer Price Index for Finished Goods advanced 1.7 percent in August, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This increase followed a 0.9-percent decline in July and a 1.8-percent advance in June. In August, at the earlier stages of processing, prices received by manufacturers of intermediate goods rose 1.8 percent and the crude goods index moved up 3.8 percent. On an unadjusted basis, prices for finished goods fell 4.3 percent from August 2008 to August 2009, following a record 6.8 percent 12-month decline in July.  A notable part of the report indicates that over 90 percent of the finished goods increase was the result of higher energy prices, which moved up 8.0 percent. The indexes for finished goods less foods and energy and for finished consumer foods also contributed to the advance in finished goods prices, rising 0.2 percent and 0.4 percent, respectively.

Please click on Inflation Measures on the menu bar above to view the full August 2009 PPI report (you will need to scroll down the page). 

Retail Sales 

Sales at U.S. retailers surged in August 2009 by the most in three years, showing unexpected strength in consumer demand that extended beyond auto purchases spurred by the government’s “cash-for-clunkers” program. The 2.7 percent increase exceeded economists’ forecasts and followed a 0.2 percent drop in July, Commerce Department figures showed on September 15, 2009. Purchases excluding automobiles climbed 1.1 percent, topping the highest forecast.

Please click on the following link to view the full August 2009 retail sales report: ADVANCE MONTHLY SALES FOR RETAIL TRADE AND FOOD SERVICES August 2009 

Business Inventories

 Manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,332.5 billion, down 1.0 percent (±0.1 percent) from June 2009 and down 11.8 percent (±0.4 percent) from July 2008.

Please click the following link to view the full business inventories report from the Census Bureau: Manufacturing and Trade Inventories and Sales, July 2009