Investors tread water, surprised by retail sales and inflation

MANHATTAN (CN) — Major U.S. indices did not move much from last week, despite some good news creeping through the usual soup of economic data.

By the week’s end, the Dow Jones Industrial Average closed only 24 points lower than last Friday. The S&P 500 and Nasdaq fared similarly, gaining some early in the week only to shed those points later on; they ended down 26 points and 72 points, respectively.

A couple of surprising reports offered some hope for an improving economy but failed to move the needle for investors.

On Thursday, the U.S. Census Bureau reported a boost in retail and food service sales, from $614 billion in July to $618 billion last month, destroying the consensus forecast of a 1.1% decrease. The gains caught experts by surprise, as they had expected the delta variant of the pandemic-sparking coronavirus to have taken a bigger toll on consumer spending.

The impact of delta did play a part, however, as most of the gain was due to a huge 5.3% month-over-month gain in online spending. Spending at restaurants and bars has flatlined, though, while motor vehicle and parts sales fell by about $4 billion.

Another pleasant revelation was the meager 0.3% increase in inflation in August, the third-straight month inflation increases have shrunk and only one-third of the increase seen in June. Headline inflation remain relatively unchanged, hovering at 5.3% higher year over year, according to the Bureau of Labor Statistics.

The small increase was owed largely to a 1.5% decrease in the prices of used cars and trucks, which had seen a massive 10.5% price increase earlier this year. Transportation services and fuel oil also saw big price drops, of 2.3% and 2.1%, respectively, while gas prices continued marching upward with a 2.8% month-over-month price increase in August. Hotel prices also predictably decreased by 2.9% due to concerns about Covid-19, while airfare prices plummeted by 9.1%.

Inflation hawks still warn the data has not fully captured the increase in prices. “Bottom line, this report still is not capturing the sharp increase in rents where Apartment List said rents were up 2.1% in August rather than the 0.3% the BLS calculated,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group. “I remain strongly in the belief that sticky and persistent inflation will continue, that we have entered a stagflationary environment, and we are not going back to a pre-Covid trend for a while to come.”

The “unprecedented surge” in rent prices and the worsening supply-chain issues in Southeast Asia could soon make their way further into the inflation data, Paul Ashworth, chief U.S. economist at Capital Economics, wrote in an investor’s note.

“We expect further declines over the coming months, as the reopening inflationary pressure fades – and maybe even reverses a little,” Ashworth wrote. “But look under the hood and what we see is cyclical inflation pressure continuing to build.”

The rise of delta also has small business owners are increasingly cautious about hiring and investing, according to a poll by the U.S. Chamber of Commerce released earlier this week. Nearly half those surveyed — the poll was taken of about 750 small businesses in mid- and late-July — say they do not plan to expand business investments over the next 12 months, while 62% of respondents say they plan to do not plan on keep staffing flat during that period.

Fortunately, 1 in 3 respondents say the U.S. economy is in good health, the highest point since the pandemic began in early 2020. Tom Sullivan, vice president of small business policy at the Chamber, said that “economic momentum has cooled off this quarter as a rise in Covid-19 cases, workforce shortages, and supply chain woes led to caution among small businesses.”

Persistent supply chain woes have been one of the major obstacles for businesses. According to the U.S. Chamber poll, 62% of small businesses say their supply chains have been significantly disrupted during the pandemic.

“Global supply problems could put some further upward pressure on inflation in the near term, but the increase in inflation experienced in the immediate wake of the Covid crisis is close to peaking and we expect headline inflation to fall back in every major advanced economy in 2022,” wrote Jack Allen-Reynolds, a senior economist at Capital Economics.

He noted that Covid has clogged the ports, causing shortages of key items such as semiconductors. He estimates that supply-chain issues are responsible for about one-fifth of the increase in headline inflation among the United States and other advanced economies this year, but that supply problems will abate during the first half of 2022.

“Supply chain disruptions and the staffing shortage have become substantial issues for small businesses across the country,” said Holly Wade, head researcher at the National Federation of Independent Business, noting in the group’s recent survey that half of small businesses reported blows to their bottom line from supply-chain disruptions. Back in July, about one-third of businesses said the same.

In the face of the persistent supply-chain obstacles, the NFIB also found that small business optimism is growing but so, too, is uncertainty. The group’s optimism index increased slightly last month, while the NFIB uncertainty index fell 7 points to its lowest level since January 2016.

Unemployment claims edged up slightly from last week, when they hit a new pandemic-era low of 312,000 initial claims. For the week ending September 11, the Labor Department reported 332,000 new unemployment claims were filed. The uptick is likely due to the impact of Hurricane Ida, as Louisiana posted the biggest monthly increase in claims.

Coupled with Friday’s state employment summary, which showed the jobs landscape stabilizing as unemployment rates dropped in 15 states and remained stable in the others, analysts are becoming increasingly optimistic even if non-farm payrolls increased in only 11 states.

“The summer Covid surge and softer economic data have raised concerns about a renewed slump, but we believe subnational labor markets will stay solid,” Oren Klachkin at Oxford Economics wrote. “The recovery will avoid going into reverse, assuming case rates don’t jump again and vaccine uptake gradually ticks higher.”

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