Tom Moeller

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At today’s meeting of the Federal Open Market Committee, the target for the federal funds rate was raised to 5.25% - 5.50%. The increase from 5.00% - 5.25% followed no action at the last FOMC meeting. The rate has been lifted from near zero in March 2022. Each member of the FOMC voted in favor of today’s action.

In a statement accompanying today’s meeting, the Fed indicated “Recent indicators suggest that economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated. The Committee is strongly committed to returning inflation to its 2 percent objective.”

In addition, “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.”

The statement also indicated that “the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.”

The press release for today’s FOMC meeting can be found [here](https://www.federalreserve.gov/newsevents/pressreleases/monetary20230726a.htm).

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- Federal funds rate range raised to 5.25% - 5.50%.
- Rate is highest since March 2001.
- Fed’s focus remains on reducing inflation.

FOMC Increases Funds Rate As Expected

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The Producer Price Index for final demand increased 0.5% (2.2% y/y) during April after easing 0.1% in March, revised from a 0.2% increase, according to the Bureau of Labor Statistics. A 0.3% gain had been expected in the Action Economics Forecast Survey. The PPI excluding food and energy strengthened 0.5% (2.4% y/y) after easing 0.1% in March. It was the largest increase in three months. A 0.2% rise had been expected. Producer prices excluding food, energy & trade services rose 0.4% (3.1% y/y) in April following increases of 0.2% and 0.4% in the prior two months.

Final demand energy prices rose 2.0% last month (1.0% y/y) after a 1.3% decline. Gasoline prices rose 5.4% (-1.9% y/y) after falling 3.0% in March. Electric power prices rose 0.3% (4.5% y/y) following a 0.7% increase. Food prices were off 0.7% (+0.5% y/y) after increasing 0.4% in March. The gain reflected a 7.3% increase (-7.5% y/y) in fruit & melon prices as well as an 11.2% increase (21.7% y/y) in fresh egg prices. Offsetting these increases, beef & veal costs fell 5.9% (+10.8% y/y) and fresh & dried vegetable prices eased 18.7% (NSA, -23.9% y/y). Grain prices weakened 4.5% (-35.6% y/y).

Prices for goods less food & energy rose 0.3% (1.6% y/y) in April after holding steady in March. Finished consumer goods prices increased 0.1% (1.9% y/y) for a second straight month. Core nondurable goods prices rose 0.1% (2.4% y/y) after holding steady in March. Durable consumer goods prices also edged 0.1% higher (1.1% y/y) after rising 0.3% in March. Capital equipment prices rose 0.2% (2.8% y/y), the weakest increase in four months, while government purchased goods prices rose 0.3% (2.1% y/y).

Prices for final demand services increased 0.6% last month (2.7% y/y) after easing 0.1% in March. Trade services prices strengthened 0.8% (-0.3% y/y) after a 1.0% decline. Prices for final demand transportation and warehousing services fell 0.6% (+0.3% y/y) after a 0.2% increase. Services prices less these costs increased 0.6% (4.4% y/y) following two straight 0.3% increases. Prices of travel accommodation services strengthened 2.4% (-1.2% y/y).

Construction costs rose 0.1% in April (-0.8 y/y) for the second consecutive month.

Prices for intermediate demand processed goods increased 0.6% (-0.5% y/y) in April after falling 0.5% in March. Processed energy goods prices rose 1.6%, while food prices were off 0.2%. The index for intermediate demand unprocessed goods jumped 3.2% (-4.6% y/y).

The PPI data are published by the Bureau of Labor Statistics and can be found in Haver’s **USECON** database. Further detail is contained in **PPI** and **PPIR**. The expectations figures are available in the **AS1REPNA** database.

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- Core goods prices rise moderately.
- Services prices surge after a slight decline.
- Energy prices jump, but food prices decline.

U.S. Producer Price Strength in April is Pronounced; March Revised Lower

Winnie Tapasanun

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The NFIB Small Business Optimism Index rebounded to 89.7 in April, the first monthly increase since December, from 88.5 in March, according to the April 2024 Small Business Economic Trends survey conducted by the National Federation of Independent Business. The index, while slightly up from a low of 89.0 in April 2023, had been below the 50-year average of 98 for the 28th straight month; it was also down from a high of 102.5 in June 2021. Seven of the 10 index components rose, two fell, and one was unchanged. The NFIB Small Business Uncertainty Index increased to 78 in April, the highest level since September, from 77 in March; it was up from 72 in April 2023 and a low of 55 in June 2022.

The outlook for business conditions in the next six months remained deeply negative in the latest survey. The net balance of respondents expecting the economy to improve fell to -37% in April, the third monthly fall in four months, after increasing slightly to -36% in March, but it was up from a record-low -61% in June 2022. Expected real sales improved to a net -12% in April after falling 8 pts. to -18% in March, indicating continued pessimism at a less severe pace. The latest reading was up from a low of -21% in May 2023 and a low of -29% in July 2022. A net -13% of respondents reported higher nominal sales in the past three months, down from -10% reported in March; these numbers were up from a low of -17% in November.

Plans to make capital outlays rose to 22% in April, the first m/m rise in four months, from 20% in March. These readings were up slightly from a low of 19% in April 2023 but down from a high of 27% in July 2023 and a high of 31% in October 2021. Plans to expand the business registered at 4% in April and March, the lowest reading since May 2023. The latest figure, while slightly up from a low of 2% in March 2023, was below a high of 11% in December 2021 and a high of 15% in June 2021. Meanwhile, expected credit conditions declined to -9% in April, the lowest reading since November, after falling 2 pts. to -8% in March; the latest number was also down from a high of -4% in May 2022 and a high of -3% in November 2021.

Labor markets remained tight but seemed to ease slightly. Fifty-one percent of respondents reported that qualified workers to fill job openings were hard to find in April, following 48% in March and 51% in February. These figures, however, were below a high of 57% in September 2023, a high of 61% in May 2022, and a peak of 62% in September 2021. A net 12% planned to increase employment in April, slightly up from 11% in March, but it was down from a high of 26% in May 2022 and well below a high of 32% in August 2021. Notably, 40% reported positions not able to be filled in April, the highest reading since December, following 37% in March and February (37% was the lowest reading since January 2021). These figures were historically high; however, having remained below a high of 51% in May 2022. Overall earnings trends increased slightly to -27% in April, still a poor reading, from -29% in March; these numbers were below a high of -18% in March 2023.

On the pricing front, inflation pressures, while trending down, remained at an inflationary level. The net percent raising their average selling prices eased to 25% in April after rising 7 pts. to 28% in March; it was meaningfully down from 33% in April 2023 and a high of 66% in March 2022. The percentage planning to raise prices fell to 26% in April after a three-point increase to 33% in March, registering the lowest reading since April 2023’s 21%; these figures were well below a high of 52% in March 2022.

Wage inflation remained high as a net 38% of respondents raised compensation during the last three months, unchanged from 38% reported in the previous survey. Nevertheless, it was down from a high of 46% in February 2023 and a peak of 50% in January 2022. A net 21% of firms planned to raise worker compensation in the next three months, unchanged from 21% in the previous survey. However, it was down from a high of 30% in November and a high of 32% in October 2022.

Inflation continued to be an issue facing small businesses, as reported by 22% of NFIB members in April as the single most important problem. It was down from 25% in March and well below a peak of 37% in July 2022. The quality of labor was the second important concern with 19% in April, up from 18% in March. Other concerns (in April vs. March) included taxes (15% vs. 14%), the cost of labor (11% vs. 10%), and government requirements (8% vs. 6%).

According to the Small Business Administration, there are 33 million small businesses in the United States, which employ 62 million workers. The NFIB surveys anywhere from 500 to 2000 respondents each month and the typical firm employs 10 people and reports gross sales of about $500,000 a year. The NFIB figures can be found in Haver’s **SURVEYS** database.

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- Apr. NFIB Small Business Optimism Index inches up 1.2 pts. to 89.7, the first m/m gain since December.
- Expected real sales increase to -12% after falling to -18%, still indicating pessimism.
- Business conditions in the next six months decline to -37%, down for the third month in four.
- Inflation (22%) is top business problem, followed by Quality of Labor (19%).

U.S. NFIB Small Business Optimism Index Edges Up in April While Inflation Remains the Number One Problem

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Retail gasoline prices for all grades declined to $3.73 per gallon (+2.3 y/y) in the week ended May 13 from $3.77 in the prior week. It was the lowest price in five weeks and compare to a low of $3.18 in the middle of January. The recent high stands at $4.00 per gallon in the third week of September, and the all-time high was $5.11 in the week ended June 13, 2022. Retail prices for on-highway diesel fuel slipped to an average $3.85 per gallon (-1.3% y/y) last week from $3.89 in the prior week. A recent low of $3.77 per gallon occurred in the week ended July 3, 2023.

The average price of West Texas Intermediate crude oil declined to $79.32 per barrel (+10.1% y/y) in the week ended May 7 from an average $81.07 in the prior week. It remained well above its low of $69.37 per barrel in the week of June 30, 2023. The price remained below a high of $91.45 in the week of September 29, 2023. The all-time high was seen in the week of July 4, 2008 at $142.46 per barrel. Yesterday, the price of West Texas Intermediate crude oil was $79.12 per barrel. The price of European Brent crude oil declined to $83.36 per barrel (+9.9% y/y) in the week ended May 10 compared to $84.82 in the prior week. The price of Brent has recently ranged from a low of $73.55 in the week ended June 30, 2023 to a high of $127.40 in the week ended June 10, 2022. Yesterday, the price was $83.06 per barrel.

Natural gas prices strengthened to an average of $2.00/mmbtu (-4.8% y/y) in the week ended May 10 from $1.64/mmbtu in the prior week. These compare to a high of $3.20 averaged in the week of October 13, 2023. Yesterday, the natural gas price was $2.11/mmbtu.

Gasoline demand fell 4.0% y/y in the four weeks ended May 3 after declining 3.6% y/y in the four weeks ended April 26. Demand for all petroleum products was little changed y/y for the second consecutive four-week period. Crude oil input to refineries rose 0.3% y/y in the four weeks ended May 3, the same as during the previous four week period.

Gasoline inventories rose 3.8% y/y in the week of May 3 after rising 1.9% y/y in the prior week. Inventories of residual fuel oil fell 14.8% y/y in the week of May 3 after declining 9.8% y/y in the previous week. Crude oil inventories, including the Strategic Petroleum Reserve, improved 0.3% y/y in the week of May 3, the same as in the prior week.

Measured in days’ supply, gasoline inventories eased w/w to 26.4 days in the week of May 3. The recent low was 23.4 days in the week of June 30, 2023. Crude oil inventories fell to 29.0 days of supply in the week of May 3 from 29.2 days in the prior week. These compare to a recent high of 31.9 days in the week of March 3, 2023 and a low of 25.0 days in the week of September 1, 2023.

These data are reported by the Energy Information Administration of the U.S. Department of Energy. The price and supply/demand data can be found in Haver’s **WEEKLY** & **USENERGY** database.

- Gasoline prices fall for third straight week.
- Crude oil costs decline sharply.
- Natural gas prices strengthen.

U.S. Gasoline & Crude Oil Prices Decline in Latest Week

Robert Brusca

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The economic situation, surveyed by the ZEW's survey, showed improvement in the euro area to -38.6 in May from -48.8 in April. The German survey improved to -72.3 in May from -79.2 in April. However, the economic situation in the United States lost some of its luster, with its index falling to 40.9 in May from 48.5 in April.

The survey for expectations in Germany improved to 47.1 in May from 42.9 in April. For the U.S., macroeconomic expectations remained negative at -13 in May, weaker than the -0.7 reading in April.

Inflation expectations and showing moved away from the view is an inflation was continuing to fall as the euro area continued to post a negative value of -45.6 in May, but that was stronger than the -49.1 in April. Germany's reading rose to -41.0 in May from -47.8 in April. The reading for the U.S. was much less changed, at -41 in May compared to -42.6 in April.

On the back of those expectations, short-term interest rates in the euro area were less intensely forecasted to fall as the headline reading of -80.5 in May rose from -84.6 in April. In the U.S., the reading rose to -55.2 in May from -63.7 in April.

Long-term interest rate expectations continue to drop, however. In Germany, expectations for long-term rates fell to -33.5 in May from -26.9 in April. In the U.S., the reading edged lower to -28.3 in May from -26.5 in April. The outlook for lower long-term interest rates is still intact.

Stock market performance in May is stronger in the U.S., euro area, and Germany. This is despite some minor degradation in the assessment for current conditions and expectations in the U.S. Euro area stock market expectations showed its diffusion value of 23.3 in May, up from 7.2 in April. The German reading rose to 18.7 in May from 3.8 in April. The U.S. index in May rose to 21.5 from 9.9 in April. All-in-all, the ZEW survey participants are becoming much more constructive on the stock market as they become modestly and more constructive on the bond market.

Despite these various shifts in the survey, the percentile standings of most of these indicators remain extremely weak: for example, economic situation assessments stand in the 41st percentile for the euro area, the 17th percentile for Germany but manage to rise above the neutral mark of 50 to the 58.1 percentile in the U.S.  Economic expectations in Germany have crept up to a 68.8 percentile reading compared to only a 32.3 percentile reading in the U.S.  Inflation expectations everywhere remain low with the euro area and the U.S. having percentile standings below their 10th percentile, while in Germany they post a still-low value in its 14th percentile- all those are very low readings. Short-term interest rate expectations in the euro area have been lower only 4.1% of the time; in the U.S. they've been lower only 9.3% of the time. Long-term rate expectations have been lower in Germany only 2.2% of the time and in the U.S. only 1.9% of the time on the ZEW survey metric. Participants continue to look for extremely low long-term interest rates. The stock market expectations, while up sharply in the month, have only reached the 24th percentile for Germany, the 12th percentile for the euro area and the 38th percentile for the U.S.  On balance, stock market expectations haven’t reached their median values in any of these areas and although they've improved the outlook for their performance is still muted.

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ZEW Survey Shows Improvements in German Expectations and Conditions