Consumer borrowing picked up in the month of May, according to the Federal Reserve. Total consumer credit increased $24.6 billion in May to a seasonally adjusted $3.9 trillion; for an annual growth rate of 7.6%, the fastest pace since November of last year. Economists predicted only a $12.4 billion gain. Credit grew a revised $10.3 billion in April, up from the prior estimate of $9.3 billion. Revolving credit, which includes credit cards, surged in May rising 11.4% after only a 1.3% gain in April. Non-revolving credit, which typically includes auto and student loans, rose 6.3% in May, up from 3.9% in the prior month. Mortgages are not included in this data. Much of the acceleration in economic growth in the second quarter, April through June, is due to consumer spending, as it broke away from its first quarter slump. It now appears that consumers are using their credit cards to fuel the growth in spending.
Americans quit their jobs in May at the fastest rate since 2001, showing that workers feel so good about the economy they are willing to leave one company for another. The percentage of people in the private sector who left their jobs by choice rose 2.7% from 2.5%. The quits rate among all workers edged up to 2.4% from 2.3%. Both of these levels are at their highest since 2001. Most workers who leave jobs voluntarily end up getting better pay or benefits elsewhere. More people are willing to make the with when the economy is booming. Job openings fell to 6.64 million in May from a record 6.84 million as companies filled more open positions. Approximately 5.75 million people were hired in May up 170,000 from the month prior, the biggest gain in hiring in 17 years. About 5.46 million people lost their jobs in May. Most of the decline in job openings was concentrated in the highly populated Northeast area of the country. Overall, the economy is surging, and companies are hiring rapidly to keep up with the strong demand in goods and services. It is predicted that soon the unemployment rate could possibly fall to levels not seen since the 1960’s. As the rising quits rate shows, more workers are striking out for better jobs or better paying jobs, confident they will succeed. If workers continue this trend, it could force companies to raise wages faster to retain their best employees or attract new ones. Better pay may be great for workers, but it would be a problem for the Federal Reserve. As members are watching closely to see if higher wages spur inflation, an outcome that would force them to raise interest rates more aggressively.
Producer Price Index
The wholesale cost of goods and services rose in June at the highest yearly rate in almost seven years, reflecting the broad inflationary pressures in a the fast growing US economy. The producer price index rose 0.3% in June, a tick above what was forecasted by economists. The 12- month rate of wholesale inflation climbed to 3.4% from the prior 3.1%, marking the highest point since the end of 2011. The yearly rate of core wholesale inflation, however, remained at 2.7% slightly below the recent high. The core rate does not measure the volatile components such as: food, energy, and trade, and is therefore seen as a better indicator of inflationary trends. The core rate rose 0.3% in June. The wholesale cost of services increased 0.4% while prices for goods increased just 0.1%. Energy prices only rose slightly after a series of sizable gains. Rising oil prices played a large part in pushing up wholesale inflation in the prior readings. The cost of transportation such as trucking, rail, and ocean bound shipping continued to increase; companies are paying more to ship goods with the strong economy and shortages of labor developing. Overall, inflation in the US has risen sharply in the past year due to rising oil prices, higher rents, and medical costs. The level of inflation is still relatively low historically and the PPI is not an exactly accurate predictor of future trends. However, if prices continue to rise the Federal Reserve will feel compelled to raise interest rates at a more aggressive pace. That in return would raise the cost of borrowing for both businesses and consumers. Costs are rising at the wholesale level and therefore will pressure prices given the robust demand.
Wholesale inventories in the US jumped 0.6% in May as companies boosted production to meet the growing demand. Sales shot up 2.5% I the month. The ratio of inventories to sales fell to 1.24 from a prior level of 1.27. This ratio reveals how many months it would take to sell all the inventory on hand. One year ago, the inventory to sales ratio was higher at a level of 1.31. An increase in inventories adds to the gross domestic product.
Weekly Jobless Claims
Initial jobless claims, a tracker of layoffs in the US, sank in the first week of July toward the lowest levels in almost 50 years. New claims fell by 18,000 to 214,000 in the seven days ending in July 7th. Economists predicted a higher reading of 226,000. The more stable measurement, the monthly average of claims, slipped by 1,750 to 223,000. The number of people already collecting unemployment benefits declined by 3,000 to 1.74 million, known as continuing claims. The number of claims last week was the third lowest of the current nine-year-old economic expansion that began in mid-2009. The last time jobless claims were consistently lower was in 1969. The number of people losing their jobs and seeking benefits has totaled fewer than 250,000 each week since last September. That is an unusually low number for an unusually long time, reflecting the healthiest US job market since at least the end of the 1990’s.
Consumer Price Index & Core CPI
Consumer prices rose in June at the highest yearly rate since 2012, reflecting an economy that is running hotter than anytime since the Great Recession. The increase in the cost of living rose to a 12-month pace of 2.9% from 2.8%, marking the highest level in more than six years. A year ago, the 12-month rate was just at 1.6%. In June, the consumer price index increased 0.1%, economists had predicted a higher 0.2% gain. A more closely followed measure, the core CPI, strips out food and energy, advanced 0.2% last month. The yearly increase in the core rate edged up to a more modest reading of 2.3%, the highest benchmark in a year and a half. Core CPI hasn’t grown faster than 2.3% since the Great Recession. The cost of food rose by 0.2% last month, but the increase was more than offset by a 0.3% decline in the price of energy. Although gasoline prices rose again, the cost of both electricity and natural gas fell sharply. Rents and medical care, meanwhile, continued to rise in price and so did both new and used cars. Airline fares and clothing prices both fell. Inflation has shot up over the past year due to the rising oil prices, higher rents, more expensive medical care, and growing bottlenecks in the economy for skilled workers and certain key materials. Real or adjusted hourly pay rose 0.1% in June, but it was flat in past 12 months. Higher inflation is also pushing the Federal Reserve to raise US interest rates. The Fed members expect inflation to level off soon and fall back toward the 2% mark, but if this does not happen, the central bank may have to act even more aggressively when raising rates. Inflation isn’t surging but is continuing its steady upward climb.
Patrick Harker, Philadelphia Fed President
Philadelphia Fed President Patrick Harker, stated in an interview Thursday, that he still favors only one more interest rate hike this year, even with the recently released data showing consumer price inflation rising at the fastest pace in six years. Harker said he was open to supporting two interest rate hikes this year, but only if inflation continues to accelerate further. Consumer prices rose to a 12-month pace of 2.9% in June, for the highest level since February 2012. The core rate edged up at a more modest pace to a level of 2.3%. Harker believes the Fed should take increases slow and steady; if core inflation begins to accelerate past 2.5%, then, he believes the Fed should act. Absent that, he stated, there are lots of good reasons to hold off increases. The Fed has hiked interest rates twice this year so far. The latest meeting that took place last month shows that Fed members are divided over how many more times to raise rates this year. Eight members forecasted two or more interest rate hikes this year while the other seven projected one or none.
Import Price Index
The cost of import goods fell sharply in June marking the biggest drop in about a year and a half, though this decline may be short lived as trade tensions worsen between the Trump White House and other countries. The import price index decreased 0.4%, the biggest decline since February 2016. Excluding fuel, import priced dropped 0.3%. The import index import price index may not reflect the new tariff related price increases since they are not apart of the index. The added burden of tariffs will mainly show in the producer and consumer price index reports. The cost of imported oil and natural gas declined in June. Oil prices are likely to show an increase next month, but natural gas may not as they have been on the soft side recently. The cost of imported foods, consumer goods and autos all declined. This could be the result of foreign suppliers trying to ship lots of goods to the US before tariffs are implemented. They also may have lowered prices ahead of the pending tariff to keep costs down for end use customers. Another factor that may have helped to push import prices down is a stronger dollar. The stronger dollar makes it cheaper for Americans to buy foreign goods. A stronger dollar has a depressing effect on import goods especially for consumer goods. Overall, inflation has shot up over the past year due to rising oil prices, higher rents, and more expensive medical care, among other things. Higher labor costs and worker shortages are contributing also. The cost of imports has been adding upward pressure to inflation and the problem could worsen once tariffs go into effect on billions of dollars of Chinese and other foreign goods. Even prior to the tariffs taking effect the yearly rate of import inflation totaled 4.3% in June, close to the fastest pace in almost 7 years. While the tariffs are not actually included in the import price index, the threat of a trade war has pushed up the global cost of key materials like steel. The higher market prices for goods could end up in the index.
Consumer Sentiment Index
The consumer sentiment index fell in July to a reading of 97.1, below June’s level of 98.2 and economists’ forecasts of a reading or 98.9. This is the lowest the lowest the index has been since January. The biggest drop in the index came for the current conditions factor, which fell 113.9 in July from 116.5; expectations remained nearly unchanged at 86.4 vs. 86.3 in June. Negative concerns about the impact of tariffs have recently accelerated rising from 15% in May to 21% in June and 38% in July; these concerns are especially apparent among households at the top third of incomes. Among those who expressed negative views of the new tariffs, the expectations index was 30.5 points below those who did not mention tariffs. Inflation expectations ticked lower over both the one and five-year horizons. With unemployment near an 18-year low and job growth continuing, sentiment remains strong. It is near its average for the last 12 months of 97.7.