Another Bout of Deflation Ahead?
Transitory special factors have been keeping prices down, but signs suggest some deeper factors at work, too.
We had three important economic reports on Friday: more deflation news, poor retail sales data, and glacially improving industrial production. Markets seemed to take the poor numbers in stride, assuming that a lot of the issues, especially the deflation figures, were transitory. (U.S. Federal Reserve Chair Janet Yellen used that very word.) We agree that lots of funky things are happening with cellphone service pricing and the seasonal nature of healthcare price increases. Still, car prices are falling (both new and used), food prices are down again, and the price almost any physical good is still falling. Even some service categories are showing sustained deflation, including airline tickets. With soft retail sales data this week changing consumer tastes and the Amazon factor, low prices aren’t a total surprise. Pushing prices higher may be harder than the Fed believes. That may be a good thing given last week’s uninspiring wage growth data sets.
After the trifecta of lackluster reports, GDPNow of the Atlanta Fed has cut its estimate of second-quarter GDP down to 2.4% from 2.7%. That compares with the now silly- looking 4.3% estimate it put out on May 1. The new estimate could move lower in the weeks ahead until the first estimates of second-quarter GDP growth are released in early August (along with revisions). Of the major categories, only government has escaped the estimate hatchet, although that isn't saying much as government wasn't expected to contribute anything at the beginning of the quarter and is still expected to contribute nothing. It's eerie that business-fixed investment, net inventories, net exports, and residential investment have seen their individual contributions drop by 0.4% each for a total of 1.6%. Consumer spending fared only modestly better, falling just 0.3% for a grand total of a 1.9% reduction (now 2.4%). The consumer will account for 80% of the growth that GDP now is anticipating in the first quarter. Inventories and business investment account for the rest.