Comerica Economic Weekly

Weaker energy prices have kept a check on overall producer and consumer price indexes since March, but that check is starting to diminish as oil prices stabilize near $85 per barrel. The producer price index for finished goods increased by just 0.1 percent in June, the first increase since February. The energy price component of the PPI fell again in June, but not because of oil. The wholesale price for residential electricity fell, most likely due to very low natural gas prices earlier this spring. Wholesale food prices gained 0.5 percent in June, the biggest monthly increase since last November. Very poor growing conditions in the Midwest will significantly reduce yields for corn and soybeans and this is already pushing up food prices and will continue to do so in the months ahead. The core PPI for finished goods gained 0.2 percent in June, as it has in every month since March. Consumer sentiment, as measured by the University of Michigan index, fell in July to 72.0, after falling in May. The break in the index since May marks the end of an improving streak that began last September. Initial claims for unemployment insurance fell by an eye-catching 26,000 for the week ending July 7. Two special factors distorted the numbers. First is the July 4th holiday and the second is the shorter-than-normal summer shutdowns at many auto assembly plants.  U.S. international trade now looks like it will be a small drag on Q2 GDP, even though the nominal trade gap narrowed in May to -$48.7 billion. The real (price adjusted) trade balance for goods for April and May together averages above the Q1 average, meaning that trade will likely be a small drag on Q2 GDP, consistent with our expectation of a lackluster 1.7 percent annualized real GDP growth rate for Q2.  Consumer credit for May showed a larger than expected increase. Balances were up $17.1 billion as consumers added $8.0 billion to revolving balances, and $9.1 billion to non-revolving balances. The National Federation of Independent Business’s monthly survey for June showed a plunge in their small business optimism index of three points to 91.4, indicating soft economic conditions at mid-summer (see chart). Labor data from the survey indicate that the pace of small business hiring will be soft in July, noteworthy because small firms, of less than 50 employees, have accounted for over half of the private-sector payroll job gains so far in 2012. Inventory gains remain weak among small businesses, dragging on GDP. Also, capital spending plans remain in “maintenance” mode.

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