Upbeat consumers buoy American companies

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Last week’s business news brought another sign that American companies are pinning their hopes for the near future directly on consumers rather than waiting for Congress and President Donald Trump to provide tax cuts and regulatory relief.

The primary gauge of the mood of U.S. small business owners took a distinct turn upward in July. The Small Business Optimism Index, issued monthly by the National Federation of Independent Business, rose 1.6 points, to 105.2, ending a five-month period in which it was flat or declining.

"Strong consumer demand is boosting small business optimism," Juanita Duggan, president of the federation, said in a statement that Reuters quoted in a story about the survey. "Small business owners are feeling better about the economy because their customers are feeling better about the economy."

“Main Street was buoyed by stronger customer demand despite the dysfunction in Washington, D.C.,” the federation said in a statement. “The economy (GDP) grew about 2 percent in the first half of the year, nothing special, but the second quarter was much stronger than the first, and consumer spending was a major contributor to growth.”

“Labor market indicators surged to near-record levels and owners reported strong net hiring over the past few months,” the federation added. “Reports of job openings hit a 16-year record high and reports of increases in compensation remained at historically high levels.”

One likely reason consumers remain optimistic is that inflation remains low. The Labor Department said Friday that the Consumer Price Index rose by a seasonally adjusted 0.1 percent in July. Core inflation also was tame. Food prices rose 0.2 percent; energy prices slipped 0.1 percent.

“It is a weak reading,” Ward McCarthy, chief financial economist at Jefferies LLC in New York, told Bloomberg. A December interest-rate hike from the Fed “is almost like a coin toss,” he said.

The Federal Reserve has said it may raise interest rates one more time this year, but the inflation rate has stayed below 2 percent, as measured by the Personal Consumption Expenditures Index — the inflation gauge the central bank prefers to use.

New York Fed President William Dudley said the day before the CPI report that “it’s going to take some time” for inflation to rise to the central bank’s 2 percent target, Bloomberg reported. The next PCE index reading will come at the end of this month.

Separately, but also bearing on inflation, the Labor Department said Thursday that the Producer Price Index fell 0.1 percent in July. It was the first decline since last August.

“With major moves in prices at the producer level necessary to spark significant shifts in prices at the consumer level, we do not believe there is any cause for concern whatsoever, in either direction, from recent PPI data,” Josh Shapiro, chief U.S. economist at MFR Inc. in New York, told MarketWatch.

The only cloud on last week’s horizon in terms of consumer spending is that consumer borrowing slowed in June, although the decline was from a revised $18.3 billion in May, the strongest rate in six months.

The Fed said total consumer credit increased $12.4 billion in June, to a record seasonally adjusted $3.86 trillion.

Overall, last week’s business calendar was thin, but economy watchers will have much to peruse this week. Today we will see the Commerce Department’s report on July retail sales. The median forecast of economists, according to MarketWatch, is for an increase of 0.3 percent.

Today we will see the Empire State Manufacturing Survey, a monthly gauge of manufacturers in New York state, and on Thursday the Philadelphia Fed Manufacturing Index, which measures the progress of manufacturing in the Mid-Atlantic, will be released. Both indexes will be August readings.

On Wednesday there will be reports for July on housing starts and building permits and the Fed will release the minutes of its July 25-26 meeting.

The Conference Board will release its report on leading economic indicators for July on Thursday, and on Friday the University of Michigan will release its preliminary Consumer Sentiment Index for August. The forecast is for a reading of 95, which would be an improvement from the final July index of 93.4.

Additional evidence of consumer optimism would further encourage the business community as it waits for Congress and Trump to deliver on the legislation the president has said he wants to see.

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