Indicators suggest the labor market rebound is on 'fragile footing'

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It was a mixed bag of economic indicators on Tuesday, as producer prices final demand doubled the consensus forecast, marking the biggest monthly leap in nearly two years and optimism in small businesses dipped.

“This morning’s data confirmed concerns that the labor market rebound is on fragile footing and that the economy is stabilizing,” said Ed Moya, senior market analyst at OANDA.

Final demand PPI rose 0.6% in July, while the core rate, which excludes food and energy, also gained 0.3%, data released by the Bureau of Labor Statistics Tuesday showed.

Economists polled by IFR Markets projected an increase of 0.3% for PPI and a slight gain of 0.1% for core PPI.

“Gains were broad-based with goods prices and services prices posting increase and producer price inflation is forecast to remain benign over the near term as producer demand slowly recovers from the short but sharp recession,” said Scott Anderson, chief economist at Bank of the West. “Worryingly, the percent of small business owners expecting better business conditions in the next six months fell 14 points to a net 25% as more small business owners expect the fallout from the COVID-19 crisis to worsen.”

Scott Anderson, chief economist at Bank of the West.

The gain in July comes after PPI fell 0.2% in June and increase of 0.4% in May. The July movement is the largest climb since a 0.7% rise back in October 2018.

Core PPI stayed steady month-over-month, as it was also up 0.3% in June.

“Business activity is showing signs of improving and that trend should continue now that the U.S. has both coronavirus new cases and hospitalizations trending lower,” Moya said. “If the U.S. continues to make progress in the war against COVID-19, the economic recovery will accelerate for the rest of the year.”

The final demand index fell 0.4% for the year ending in July.

Economists predicted that it would drop 0.7%.

“Services prices, which are nearly two-thirds of the index, advanced a more moderate 0.5% — this is the first rise in services prices since March 2020,” Anderson said. Producer price inflation is expected to remain in check over the near term as the economy gradually recovers from the short but painful recession.”

NFIB small business optimism survey
Small business optimism dropped to 98.8 in July from 100.6 in June, the National Federation of Independent Business’ (NFIB) Small Business Optimism Index showed.

“This summer has been challenging for many small business owners who are working hard to keep their doors open and remain in business,” said NFIB’s Chief Economist Bill Dunkelberg. “Small business represents nearly half of the GDP and this month we saw a dip in optimism. There is still plenty of work to be done to get businesses back to pre-crisis numbers.”

Four of the 10 index components saw month-over-month gains.

“U.S. small-business-optimism declined more than expected, which was also reflected in last week’s ADP reading which showed a significant drop off in small business jobs created (ADP July small business 63,000 jobs were created, much lower than the 937,000 increase in June),” Moya said. “The coronavirus spread hit the sunbelt hard last month and the reversal of reopenings damaged sentiment.”

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Economic indicators Small business COVID-19 Coronavirus