“Snakes…why did it have to be snakes?”
— Indiana Jones (Harrison Ford) in 1981’s Raiders of the Lost Ark
Unlike Indiana Jones, an ‘ophiophile’ is a person who loves snakes. If you’re partial to slithering, we hear ball pythons make good pets. Growing up to five feet in length, they’re generally well-mannered, easy to handle, (usually) don’t bite and are characteristically docile. A diet of small frozen feeder mice or rats will suffice (just be sure to thaw them first). According to the San Diego Zoo Wildlife Alliance, larger pythons in the wild are found in the ‘Old World’ – Africa, Asia and Australia. They’re drawn to rainforests, grasslands and savannas, woodlands, swamps, rocky outcrops, desert sand hills, and shrublands. Their diets differ a bit from the ball python variety you can keep at home. They constrict their prey which includes live (and unfrozen!) rodents, birds, lizards, and mammals like antelope, monkeys, wallabies or pigs.
‘Pig in a python’ is often used to describe the Baby Boom generation, created after World War II and with them, a demographic bulge that peaked in a U.S. population of 78.8 million in 1999. In the general sense, the phrase denotes a short-term increase. Yesterday’s U.S. Producer Price Index (PPI) report was a case in point.
The Bureau of Labor Statistics (BLS) explains: “Since tariffs and taxes are not retained by producers as revenue, they are explicitly excluded from the PPI. However, pricing decisions producers make in reaction to tariffs are included in the PPI. For example, if a domestic producer is manufacturing a product that is subject to import competition and tariffs are placed on those imports, the domestic producer may increase its own prices in order to maximize revenue. In this case, the price increase for the domestic producer would be included in the PPI.”
Upstream manufacturers have increased prices for core goods in a persistent manner for years. The PPI for final demand goods excluding food and energy has only registered declines on a seasonally adjusted month-over-month (MoM) basis in five months since January 2016. The tariff terror has manifested as an indirect uptick in the last four months. From February to May, the MoM run rate averaged 0.3%, up one-tenth from the previous 0.2% pace of the prior 12 months ended January.
The trend in upstream selling prices should travel downstream to distribution channels. The PPI for trade services measures the margins from wholesalers and retailers. Over time, the correlation of core goods inflation to trade services is a stout .90. Instead, the last four months have seen margins squeezed. The MoM profile reads: February -0.7%, March 0.6%, April -0.5% and May 0.4%. On a four-month annualized basis, that equates to a -0.4% decline (orange line), the first such drop since March 2024. The 3.7% four-month annualized gain for core goods, the largest since April 2023 (purple line), illustrates the pig stuck in the python. A lack of downstream pricing power has prevented the pig from being digested downstream.
This margin narrative augments the downside surprises from the PPI that gave Treasury bulls more to cheer about in yesterday’s session after the CPI got the party started Wednesday. Upside surprises in initial jobless claims (248,000 versus 242,000 consensus estimate) and continuing claims (1.956 million versus 1.910 consensus estimate) added to the bond rally. Continuing claims reaching a fresh cycle high further drove momentum (blue line) and mirrored the trend in permanent job losers. These unemployed characterize the scarring left by the bankruptcy cycle, which itself is gathering momentum. According to S&P Global, at 306, bankruptcies of companies with at least $2 million in liabilities in the five months through May outnumber by 16% the 264 filed over the same period in 2024, the highest tally since 2010.
Using continuing claims in the last week of May as a guide and aligning (monthly) permanent job losers to the employment survey week including the 12th of the month yields an obvious conclusion. ‘Bad’ unemployment will keep rising when June jobs data hit, piling onto the PPI’s disinflation.
The rising exhaustion rate, as a greater share of the unemployed loses its jobless benefit safety net, ties in consumer spending. At 39.6% on average in the 12 months ended March, the persistent updrift is a cyclical marker that’s accompanied recession since 1972 (red line).
And yet consensus recession probability is only 40% (lilac line). Wealth compression in 2025’s first quarter further challenged households. According to the Federal Reserve’s Flow of Funds, the change in household net worth registered a -$1.595 trillion contraction to start 2025 and the first step backward since 2023’s third quarter. Simultaneous declines in equities and real estate totaled $2.329 trillion and are a rarity (inverted green bars). Since the series 1952 inception, 13 quarters out of 293 have featured synchronous losses, landing 2025’s first quarter in the 4th percentile. Of the prior 12 occurrences, 8 happened during recession, for a 67% hit rate.
The surge in University of Michigan’s (UMich) higher unemployment expectations is another ‘pig in the python’. Thus far in the second quarter, it’s averaging 65% over April and May, a level well above the 50% threshold that’s consistently signaled recession since the 1960s. While today’s June UMich survey will provide an update, the current quarter-to-date performance already cast the die that the forecasting community is underestimating end-of-cycle pressure squarely centered on the U.S. consumer sector.