Inflation, Jobs and Trade: Yawn!

If we are looking for gripping stories now that the epic Chilean mine rescue is successfully complete we should avoid the economy. Dull dominates the scene everywhere there.

There are three reports to note, none great.

First, producer prices rose at a 0.4% rate last month. That appears to be quite a jump at first sight, and potentially a portent of higher consumer prices down the road as businesses pass this jump along in the form of higher retail prices. Not so fast! The largest component of the increase was in the notoriously jumpy energy cost index where natural gas prices rose dramatically. Since energy prices are always volatile the September increase needs to be adjusted to look at the underlying trend if we want to predict the possible trajectory of consumer prices. There find a different story. Non-energy producer prices edged up only0.1%, which makes it 7 out of the last 10 months that we have seen that low an increase. Clearly there is no need to be worried about a burst of inflation around the corner.

This is important because the Fed is very close to launching a new round of quantitative easing and one of the sources of concern for the Fed has been the low level of price inflation which is now well below their target range. It is ironic that the Fed has to be worried about inflation being too low. For those of us who have followed the Fed for a while the persistent drum beat from policy makers has been the fear of rampant, not non-existent, inflation. Such is the jolt to normality this crisis has delivered that we find ourselves in this new, and strange, policy world.

The second report of note today was the weekly data on new claims for unemployment assistance. The markets all obsess over this data not just because it is issued weekly, but also because it gives us such a good insight into the employment, and hence, business conditions situation. So much for that. Today’s report was something of a shock: claims rose 13,000 on top of a 4,000 upwards revision to last week’s number. This is not good however you explain it. Clearly the economy is drifting without any clear momentum. But we knew that already. One of these days something will break. But without the political will to set a more urgent policy agenda, I strongly advise not holding your breath.

Lastly, trade. The latest figure we have is for August – trade numbers always take a while to collect – and it is not good. The trade gap widened sharply to $46.3 billion on the back of a surge of imports from China. That surge took Chinese exports to the US to a record of $28 billion for just one month. So there is no let up in the trade problem we have with China which will fuel anger in Washington, and could stoke even the supine Obama administration into action. Or more likely discussions about potential action. The significance of the trade gap widening in this way is that it could cause third quarter GDP to come in at an even lower pace than we all thought. Recall that one cause of the sluggish second quarter pace was that imports had grown strongly. Back then we all thought that the second quarter surge was a one time adjustment associated with inventory corrections. The July figures appeared to support that notion. Now, it seems, it is July we need to look at as the odd month, and thus we need to alter our view of the impact trade will have.

If this pace of imports keeps up we should downgrade our expectations for the third quarter GDP. Since I didn’t have high expectations to begin with I will stick with a 1.5% to 2.0% range as my estimate. But given the continued mediocrity of today’s data that may quickly become optimistic.

I hope not.