A Healthy Economy With an Energy Problem

A Healthy Economy With an Energy Problem

Wholesale inflation came in well above expectations this morning, grabbing headlines. It arrived alongside retail sales, jobless claims, and two factory surveys, which together cover the areas we watch most closely. That makes today a useful snapshot of the economy. Our read: it remains healthy, but the energy spike is starting to spread, and it’s changing how households spend.

The job market is stable. Initial jobless claims (new unemployment filings) held steady at 199,000. That’s the fifth straight week below 200,000, the longest such run since 1969. Continuing claims (people still collecting unemployment) held at 1.71 million, near their lowest since April 2023. Companies aren’t laying people off, and that’s the foundation for everything else.

Consumers are still spending. Retail sales rose .8% in September vs. .3% expected, after a 1.3% gain in August. Together, those two months point to a strong third quarter for consumer spending. Restaurant sales, a good gauge of how comfortable people feel, rose 1.1% after a 1.4% gain in August. That’s not what a stretched consumer looks like.

But gasoline is crowding out other spending. Nearly all of September’s growth came from gas stations, where sales jumped 6.4%. That was higher prices, not more driving. Gas prices rose 9.1% in the CPI (consumer inflation), so households actually bought less fuel. Excluding autos & gas, retail sales were up only .2%. And statistically, .2% is essentially flat.

The slowdown showed up in everyday goods. Online sales, the largest category outside autos, slowed to .3% from 2.0% in August. Sales at building material & garden stores fell .6%. General merchandise stores, which include warehouse clubs and supercenters, slipped .1% after a .8% gain, and clothing sales were flat. One month doesn’t prove households are cutting back to pay for gas. But it’s the pattern you’d expect if they were.

Energy is spreading into other costs. PPI (wholesale inflation) rose 1.3% in September vs. .6% expected, the biggest monthly jump since March 2022. Energy drove most of it, led by a 20.3% surge in wholesale gasoline. What matters more is where it’s spreading. Transportation & warehousing services rose 3.4% as fuel costs passed through to freight and airfares. Excluding food & energy, PPI rose .7% vs. .3% expected.

This is where corporate profit margins come in. The materials businesses buy to make their products are up 14.1% over the past year, more than double the 6.3% rise in wholesale prices overall. When costs rise faster than selling prices, margins get squeezed. Gas stations are already feeling it: their margins fell 30% in September, which also means pump prices haven’t fully caught up.

Some companies are pushing back. The share of Philadelphia-area factories raising their selling prices rose to its highest since May 2025. That protects their margins, but it’s also how an energy spike turns into broader inflation. For now, most other prices are rising at a moderate pace. Goods excluding food & energy rose only .3% at the wholesale level, as did most services.

Where this leaves us. Some questions look settled. Layoffs are rare, and consumers had a strong summer. Others remain open. If energy prices stay high, households may keep trimming spending on everyday goods to pay for gas. And companies face a choice: absorb higher costs and accept thinner profit margins, or raise prices and keep inflation elevated. September’s data shows a little of both. We’ll keep watching the data and update you as it comes in.