Economic Update for 7-17

We have had two key measures of inflation released this week. Interestingly, the two indices were viewed as being totally opposite in how we should view inflation within the economy. I'm not in that mode and believe we are continuing to see inflation generally at a lower rate and should allow interest rates to continue to fall through year-end.

On Tuesday, we saw various releases as they pertain to the direct consumer related CPI. The Consumer Price Index was up 0.3% during the month of June. While this is obviously above the 0.1% level of May, it is well below the 0.5% rise in January to begin the year. It was also in line with forecasted rates. The largest contributor to the rise was shelter costs. This has been a fairly consistent sector related to cost increases and can be traced to stubbornly high mortgage costs. As interest rates fall, mortgage levels will decline and housing costs should decrease. The Core CPI level of 0.2% (ex-food and energy) for June was slightly above the 0.1% gain in May but below the forecasted rate of 0.3%. There were only two months lower than June in the past twelve months. On a year-over-year basis, the CPI was up 2.7% as of June and matched the forecasted level. While it was up from the 2.4% rate in May, it remains well below the 3.0% level in January to begin the year. Primary contributors for the rise were food and energy. On the energy-side, natural gas prices have risen over 14% during this period. We are seeing a push to increase natural gas production and a reversal in prices should be coming soon.

Today, Wednesday, we saw the release of the Producer Price Index (PPI) for June as unchanged. This flat reading was well below the May gain of 0.3% and the forecasted expectation of a rise of 0.2%. It also compares favorably to the January level of 0.7% to begin the year. Wholesale prices fell for automobiles, food, and alcohol and were primary contributors to the lower levels for comparison. The annual rise in Producer Prices was 2.3% and again compared favorably to the 2.7% level in May. The June release was the lowest since September of last year. The Core PPI rise of 2.6% during the past twelve months, as of June, was a fairly sharp decline from the 3.2% level of May. This was the lowest gain since July of 2024. 

In terms of inflation, the PPI is a good gauge of future inflation pricing when compared to today's consumer prices. Consumer prices are an immediate price level while producer prices are a reliable gauge of future pricing as they relate to manufacturing and other production formats of goods and services. The decline in the PPI levels released today give a very positive indication that inflation is coming down. I think the reduced inflation levels should give the Fed the necessary background to lower the Fed Funds rate in their meeting later this month. 

On another positive aspect of the economy, we are continuing to see U.S. Manufacturing move in a mostly upward direction. The New York Empire State Manufacturing Index rose to a reading of 5.5 this month. This was a sharp rebound from the weak level of -16 for June. New orders and actual shipments followed the stronger number. Manufacturing Production in the U.S. for June gained 0.8% on a year-over-year basis. This was the second highest rise over the past twelve months and above the 0.6% increase during May. Bringing manufacturing back into the U.S. has been a key economic goal of the Trump Administration and it seems we are beginning to see this occur. This alone, will have a major positive impact on lowering inflation.

I think we are seeing many economic factors moving in a positive direction. However, we still need to see the renewed tariffs being implemented by Trump to continue to result in trading advantages for the United States. For the most part, trade negotiations between the U.S. and our trading partners have resulted in a more favorable bottom line domestically. We are getting closer to putting more monies into our equity holdings as these trends can be seen to be favorable from a trading standpoint. However, we are remaining cautious as of now. On the other hand, our view of lower inflation and Fed Rate cuts does make it an attractive time to add to our fixed-income holdings.

Hope you all are enjoying your summer and are getting outdoors to take advantage of the warmer weather and sunshine. Did I hear someone say....GOLF!