U.S. Growth Challenged as Prices, Sentiment Fall

Key indicators of falling aggregate demand throughout the United States rang alarm bells with investors, who sold stocks off in early morning trading.

Wholesale prices in the U.S. saw little change, with lower fuel costs dragging total producer prices lower. Producer prices stagnated in August after showing a 0.2% advance in July. Despite the worrying indication of a deflationary trap stirring, the results were better than expected. Analysts had expected a 0.1% decline in prices.

Key indicators of falling aggregate demand throughout the United States rang alarm bells with investors, who sold stocks off in early morning trading.

Wholesale prices in the U.S. saw little change, with lower fuel costs dragging total producer prices lower. Producer prices stagnated in August after showing a 0.2% advance in July. Despite the worrying indication of a deflationary trap stirring, the results were better than expected. Analysts had expected a 0.1% decline in prices.

Nonetheless, deflation remains a reality for producers, as producer prices fell 0.8% annually by August.

The fall in overall commodity prices, partly fueled by a strong and strengthening dollar, has also contributed to the annual slide in prices for producers. Commodities, which are a reliant source of income for many emerging markets, have seen prices fall at a strong pace throughout late 2014 and early 2015.

The most noticeable decline was in oil prices, which have fallen over 50% since their peak in mid-2014. Some analysts are predicting further price declines for oil, as an oversupply combines with a lack of demand both in the United States and in emerging markets. One investment bank wrote in a note published Friday that oil could see its price fall to $20 per barrel, roughly half of its current price. This low price would also make oil unsustainable to produce for many small oil companies, as well as uneconomical for some emerging markets with high production costs, such as Venezuela and Russia.

While energy is getting cheaper for producers, food is not. Food prices saw a 0.3% rise, according to the Labor Department’s report, released on Friday. Wholesale prices for all other goods excluding food and energy rose 0.3%, above expectations. The price of manufactured clothing drove the increase.

Consumer Sentiment

While goods are getting cheaper for manufacturers, consumers are expressing a sharp decline in sentiment. According to the University of Michigan’s preliminary Consumer Sentiment Index, consumers are less confident in the future of their employment and wage prospects, with the index falling to 85.7 from 91.9 during the prior month.

Additionally, 73% of respondents said they had heard news of negative economic developments. Behavioral economists worry about this indicator in particular, because a focus on negative economic news may curb consumer spending, which in turn lowers GDP and may result in a vicious cycle of lower consumption, lower production, and lower growth. This combined with deflationary pressures could yield a liquidity trap exacerbated by a lack of money supply growth.

Awaiting the Fed

With consumer sentiment weaker and deflationary headwinds remaining present in producer price data, many economists and analysts are urging the Federal Reserve to postpone an interest rate hike. Most notably, The Economist recently published an article urging Fed Chairwoman Janet Yellen to refrain from a rate hike in September, urging that a data-dependent increase in rates only when inflationary tailwinds have materialized is prudent. The Economist and other commentators have said raising rates too quickly could damage the frail and slow growth rate of the U.S. and other developed economies.

The International Monetary Fund has also warned that a rate hike could damage conditions in emerging markets, where yield-hungry investors have reallocated investments towards credit markets. An increase in Treasury yields, at least in theory, could cause a large capital outflow from emerging markets just when revenues from commodity production have weakened.