January 14, 2025

QuickTakes

Not Too Cold,

Not Too Hot

On the economic data front, today was mostly a Goldilocks day. December's PPI was lower than expected. The NFIB survey of small business owners showed rising optimism and animal spirits. However, the Treasury reported that the federal budget deficit totaled a record $711 billion in the October-December period, up 39% from $510 billion in the same period a year ago.

The bears were still growling in the bond market, and the stock market marked time awaiting tomorrow's December CPI report. The markets are likely to remain listless until Monday, Inauguration Day, when President Donald Trump is expected to issue numerous Executive Orders, which might muddy rather than clarify the economic outlook.

Let's review today's numbers:

(1) PPI. December's PPI rose 0.2% m/m, cooler than analysts expected. However, the PPI rose 3.3% y/y, its highest since February 2023. Both goods and services inflation rose, with the latter up to 4.0% y/y (chart).

The bond market may have been spooked by airline passenger services in the PPI, which rose 7.2% m/m and 5.0% y/y (chart). It is used to calculate the PCED air transportation index, though they can differ.

(2) NFIB survey. Small business owners continued to cheer Trump's election victory. December's optimism index reached its highest reading since October 2018 (chart). The two-month jump exceeds the comparable euphoria following his 2016 victory.

This optimism is reflected in increased plans to hire new workers, expand business operations, and raise wages (chart). While that's another good sign for the labor market and for the economy broadly, it likely added to the bond market's angst. 

(3) Federal deficit. While many people are against large federal deficits, most are all for the benefits they receive from the government. Among those benefits are higher interest income from Treasury securities. Federal net interest outlays rose to a record $908 billion over the past 12 months through December, exceeding defense spending. It's an outlay, so it has been stimulative.

During past business cycles, fiscal policy was contractionary, as outlays rose at a slower pace than revenues (chart). This time has been different, as outlays have grown faster than receipts. That's one of several reasons why the economy continued to grow despite the tightening of monetary policy from March 2022 through August 2024.

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