Small Business Confidence & PPI Inflation Fall

Another Good Redbook Reading

We are currently in a state of uncertainty in terms of consumer spending because retail sales growth is improving, while consumption growth is falling. Their real growth rates were nearly the same in August, but they were heading in the opposite directions. 

PCE is wider in scope than retail sales. However, it’s a positive signal for retail sales growth to be above consumption growth because the retail sales reading is more cyclical and volatile. On the other hand, the PCE report signals GDP growth will be weak.

Without very strong consumption growth in Q3, GDP growth will be below 2%. That’s because business investment will be weak and net exports are expected to be a drag on GDP growth. Investors expect real residential investment growth to be positive. But it’s not a big enough factor yet. That could change in Q4, but we don’t have much data on Q4 to go by. Earnings season could tell us a lot about the economy in Q4 because firms have their sales data to start the quarter. Let’s see how guidance comes in.  

Weak PCE growth doesn’t imply weak retail sales growth is coming. In the week of October 5th, the Redbook same store sales reading fell from 5.8% growth to 5.7% growth. If you’re worried about September retail sales growth, the past few weeks of Redbook sales should reassure you that the results won’t be terrible. 

Let’s see if the worries about the trade war translate to weak retail sales growth. Costco had very strong same store sales growth. September retail sales report comes out next Wednesday. Consensus expectation hasn’t been published yet.

PPI Inflation Falls

September PPI report was very weak across the board. Monthly change in headline PPI was -0.3% which missed estimates for 0.1%. As you can see from the chart below, yearly PPI fell from 1.8% to 1.4% which missed estimates for 1.8%. The PPI reading was the weakest in 3 years on an absolute basis and versus expectations. PPI without food and energy was also -0.3% on a monthly basis which missed estimates for 0.2%. 

Yearly core PPI was 2% which fell from 2.3% which also was the consensus. Core PPI has been above 2% for 26 straight months. Monthly core PPI without trade services was 0% which fell from 0.4% which missed estimates for 0.2%. As the chart shows, core PPI without trade services fell from 1.9% to 1.7% which is tied for the lowest reading since 2016.

Food prices were up 0.3% monthly and 2.7% yearly. Consumer food inflation was 2.6%. Energy inflation was -2.5% monthly and -8.7% yearly. Trade services inflation was -1% and 3.1%. Monthly personal consumption expenditures inflation was -0.3% overall and -0.2% excluding energy and food. 

On the other hand, monthly healthcare services PPI was 0.4% which was the strongest monthly gain since October 2017. As you can see from the chart below, it’s highly correlated with PCE healthcare services inflation which is about 20% of core PCE inflation.

The all-important September CPI report comes out on Thursday. Consensus is for 1.8% headline CPI which would be a 0.1% increase from August. Core CPI is expected to be 2.4% which is the same as August’s reading. Last core CPI scared some investors and caused them to criticize the Fed’s rate cuts. Since the Fed reviews core PCE inflation, it won’t be concerned as it should still be below 2%. Estimates of PCE health services inflation are slightly concerning though.

September Small Business Confidence Index Falls Slightly

September small business confidence index fell from 103.1 to 101.8 which missed estimates for 102. It just beat the low end of the estimate range which was 101.5. As the chart below shows, the index is off its 2018 peak, but it’s still relatively high. None of the individual segments increased in this report. 3 stayed the same and 7 fell. 

Worst decline was in the net percentage saying now is a good time to expand. It fell 4 points to 22. That’s still positive compared to the survey showing CEO expectations for the economy in 6 months which was the weakest since Q4 2008.

In the small business report, the net percentage expecting the economy to improve and the net percentage with plans to increase employment fell 3 points. It’s interesting to see this weakness along with the Conference Board’s measurement of consumer confidence in the labor market falling even though jobless claims are low, the unemployment rate is the lowest since December 1969, and job cuts in September were the 2nd lowest in 2019.

As you can see from the chart below, 11% of small businesses stated cost of labor was the single most important problem. Usually, this percentage increases at the end of cycles. Obviously, it’s better for small businesses to plan to hire less workers because of high wages rather than weak demand. 

Average hourly earnings growth decline from 3.2% to 2.9% in the September BLS report isn’t consistent with this high reading. However, it is closer to wage growth for production and non-supervisory workers. Those workers are likely being hired by small businesses which explains the correlation. Personally, I’m more concerned with the weakness in demand growth than the tightness in the labor market which has caused high wage growth.


Redbook same store sales growth fell slightly in the first week of October, but this was still a good reading. The PPI report showed a decline in inflation. We will see if that coincides with weakness in CPI on Thursday. I don’t think the Fed will react to core CPI being above 2% because core PCE inflation will be below 2%. 

Small business confidence index fell slightly. I’m actually impressed it’s still this high given the huge decline in the CEO confidence index and the weakness in almost all the soft data reports. Cyclical slowdown and the trade war are drags on sentiment. 

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