November 2014 U.S. Home Sales, Inventory and Prices

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Sales of new single-family homes in November declined for a second month, by 7,000 units (-1.6%) relative to the previous month, to a seasonally adjusted and annualized rate (SAAR) of 438,000. Data for October was revised down from 458,000 to 445,000 units. This data series has undergone significant revisions in recent months; post-revision sales since May are roughly 22% lower than initial estimates. Sales have been flat since early 2013, with June 2013 marking the fastest rate of 459,000 units. Sales in November were 3.1% below year-earlier levels.

Meanwhile, the median price of new homes sold retreated from October’s peak, down by $9,200 (-3.2%) to $280,900. The average price of homes sold fell by an even greater $53,400 (-14.2%). Although single-family starts dropped faster than sales in November, the three-month average ratio of starts to sales jumped to 1.54. 

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As mentioned in our post on November’s housing permits, starts and completions, single-unit completions declined by 18,000 units (-2.9%). Nonetheless, new-home inventory expanded in absolute (+3,000 units) terms while months of inventory were stable. 

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Existing home sales tumbled in November (-320,000 units or 6.1%) to 4.93 million units (SAAR). With sales of new homes falling more slowly than existing homes, the share of total sales comprised of new homes rose to 8.2%. The median price of previously owned homes sold in November slipped (-$2,200 or 1.1%) to $205,300. Inventory of existing homes declined in absolute (-150,000 units) terms, but months of inventory was unchanged at 5.1 months. 

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Housing affordability degraded in October despite the median price of existing homes for sale falling by $900 (-0.4%) to $208,700. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P/Case-Shiller Home Price indices posted a not-seasonally adjusted monthly change of -0.2% in October (+4.6% relative to a year earlier, the smallest annual gain since October 2012).

“After a long period when home prices rose, but at a slower pace with each passing month, we are seeing hints that prices could end 2014 on a strong note and accelerate into 2015,” said David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices. “Two months ago, all 20 cities were experiencing weakening annual price increases. Last month, 18 experienced weakness. This time, 12 cities had weaker annual price growth, but eight saw the pace of price gains pick up. Seasonally adjusted, all 20 cities had higher prices than a month ago.

“Most national economic statistics, other than those connected to housing, posted positive reports in November and early December. Third quarter GDP was revised to 5% real growth at annual rates, and unemployment was at 5.8% as payrolls added over 300,000 jobs in November.” However, Blitzer added, “Housing was somber: housing starts pulled back 1.6%, existing home sales were at 4.93 million, down 6.1%, and new home sales were 438,000, down 1.6%, all in November.” 

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

3Q2014 Gross Domestic Product: Third (Final) Estimate

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According to the Bureau of Economic Analysis’ (BEA) “final” estimate, 3Q2014 growth in real U.S. gross domestic product (GDP) was upwardly revised to an astounding seasonally adjusted and annualized rate of 5.0% -- roughly 1.04 percentage point above the second (“preliminary”) 3Q estimate and 0.4 percentage point higher than 2Q’s 4.6%. Analysts had expected a more modest revision to 4.3% (ranging from +4.0 to 4.5%). All four categories -- personal consumption expenditures (PCE), private domestic investment (PDI), net exports (NetX), and government consumption expenditures (GCE) -- contributed to 3Q growth. Consumer Metrics Institute provided in-depth analysis of the components of change in this report:  

* Consumers’ goods-and-services contribution to the headline number was 2.21%, +0.46% from 2Q. Consumer expenditures for goods added 1.06% (+0.09% from the previous estimate, but -0.27% from 2Q).

* The contribution made by consumer services spending to the headline surged to 1.15% (+0.61% from the previous report and +0.73% from 2Q’s 0.42%). Approximately two-thirds ($12.1 billion of $18.6 billion) of additional GDP from consumer spending in this revision can be traced back to health insurance premiums. 

* Commercial private fixed investments provided +1.21% of the headline number (-0.24% from 2Q’s 1.45%), and this continued positive growth is nearly all non-residential. The increases shown in this report came almost equally from spending on structures and the recently added intellectual property category.

* Inventories subtracted only -0.03% from the headline number (-1.45% from 2Q).

* Governmental spending added +0.80% to the headline. The growth in Federal spending was probably pulled forward from 4Q as a result of fiscal year-end budgetary maneuvers -- and is therefore also likely to reverse in 4Q2014.

* Exports are now reported to be adding 0.61% to the headline growth rate (-0.04% from the previous estimate and -0.82% from 2Q).

* Imports added +0.16% to the headline number (+0.04% from the previous estimate, and +1.93% from 2Q).

* The annualized growth rate for the "real final sales of domestic product" is now reported to be 4.99% (+0.98% from the previous report). This is the BEA's “bottom line” measurement of the economy, and it is slightly higher than the headline GDP number (+4.96%) because of the mildly shrinking inventories.

For this report the BEA estimated annualized net aggregate inflation at 1.39% (essentially unchanged from the last month’s 1.40%). By comparison, the growth rate of the Bureau of Labor Statistics’ concurrent seasonally adjusted CPI-U index was -0.10% (annualized); meanwhile, the price index reported by the Billion Prices Project (BPP) was -0.18%. Were the BEA’s nominal estimates corrected for inflation using the CPI-U, real 3Q GDP would have grown by 6.52%; if using the BPP inflation rate, growth would have been 6.60%. 

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CMI posed some points worth pondering:

* The puzzle in these numbers lies in the huge discrepancy between the reported face value of the economy's growth (nearly 5% per annum, sustained for at least two quarters) and the continued public proclamations from the Federal Reserve that the economy still requires further stimulus in the form of extraordinarily low interest rates.

* Is increased consumer spending on non-discretionary healthcare (apparently at the expense of household savings, which fell to the lowest rate in a year) good for the overall economy? Said another way, is this growth sustainable if real household disposable income continues to shrink ($373 less in real annualized per capita disposable income relative to 4Q2012)?

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

November 2014 Consumer and Producer Price Indices (incl. Forest Products)

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) declined 0.3% in November. Over the last 12 months, the all items index increased 1.3% before seasonal adjustment.

The gasoline index posted its sharpest decline since December 2008 and was the main cause of the decrease in the seasonally adjusted all items index. The indices for fuel oil and natural gas also declined, and the energy index fell 3.8%. The food index rose 0.2% with major grocery store food groups mixed.

The index for all items less food and energy increased 0.1% in November. The shelter index rose 0.3%, and the indexes for medical care, airline fares, and alcoholic beverages also rose. In contrast, the indexes for apparel, used cars and trucks, recreation, household furnishings and operations, personal care, and new vehicles all declined in November.

The all items index increased 1.3% over the last 12 months, a notable decline from the 1.7% figure from the 12 months ending October. The index for all items less food and energy has increased 1.7% over the last 12 months, compared to 1.8% for the 12 months ending October. The food index has risen 3.2% over the span. However, the energy index has declined 4.8% over the past 12 months, with the gasoline and fuel oil indexes both falling over 10%.

The seasonally adjusted Producer Price Index for final demand (PPI) fell 0.2% in November. This decrease followed a 0.2% rise in October and a 0.1% decline in September. On an unadjusted basis, the index for final demand advanced 1.4% for the 12 months ended in November, the smallest 12-month increase since a 1.2% rise in February 2014.

In November, the 0.2% decline in final demand prices can be traced to the index for final demand goods, which decreased 0.7%. In contrast, prices for final demand services advanced 0.1%.

Final demand goods:  The index for final demand goods fell 0.7% in November, the fifth consecutive decrease. The broad-based November decline was led by prices for final demand energy (especially gasoline: -6.3%), which dropped 3.1%. The index for final demand goods less foods and energy edged down 0.1%, and prices for final demand foods fell 0.2%. 

Final demand services:  The index for final demand services inched up 0.1% in November subsequent to a 0.5% rise in October. In November, prices for final demand services less trade, transportation, and warehousing, as well as margins for final demand trade services, rose 0.1%. (Trade indexes measure changes in margins received by wholesalers and retailers.) In contrast, the index for final demand transportation and warehousing services dropped 0.8%. 

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Of the price indices we track, only Pulp, Paper & Allied Products rose in November (relative to October). By contrast, Pulp, Paper & Allied Products and Intermediate Materials were lower compared to a year earlier. 

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

November 2014 Residential Permits, Starts and Completions

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Total housing starts retreated in November, to a seasonally adjusted and annualized rate (SAAR) of 1.028 million units. That level was 17,000 fewer (-1.6%) than October’s 1.045 million units (revised up from 1.009 million). All of the decrease in total starts occurred in the single-family component (-39,000 units or 5.4%); multi-family starts rose by 22,000 units (6.7%). 

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The year-over-year percentage change in total starts turned negative in November (-7.5%). Single-family starts were 6.3% below their year-earlier level; the more volatile multi-family component fell to -9.4%. On a year-to-date (YTD) basis, however, all components were above levels seen during the same months in 2013. 

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Completions decreased by 59,000 units (-6.4%) in November, to 863,000 units SAAR. Over two-thirds of the decrease occurred in the multi-family component (-41,000 units or 13.3%); the single-family component shrank by 18,000 units (-2.9%). Total completions were 1.0% above their year-earlier level and 15.1% higher YTD than the same months in 2013. 

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Total permits, which were the bright spot in October, dimmed a bit in November when decreasing by 57,000 units (-5.2%), to 1.035 million SAAR. The vast majority of the decrease occurred in the multi-family component (-49,000 units or 11.0%); single-family permits edged lower (-8,000 units or 1.2%). November total permits were 5.0% below year-earlier levels but 3.0% higher YTD than the same months in 2013.

The latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) shed one point in December (to 57), two points below September’s nine-year high. An index value above 50 means more builders feel the market is good than feel it is poor. “Members in many markets across the country have seen their businesses improve over the course of the year, and we expect builders to remain confident in 2015,” said NAHB Chairman Kevin Kelly. “After a sluggish start to 2014, the HMI has stabilized in the mid-to-high 50s index level trend for the past six months, which is consistent with our assessment that we are in a slow march back to normal,” added NAHB Chief Economist David Crowe. “As we head into 2015, the housing market should continue to recover at a steady, gradual pace.” 

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

November 2014 Industrial Production, Capacity Utilization and Capacity

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Industrial production increased 1.3% in November (the biggest month-to-month rise since May 2010, and well above expectations of +0.7%) after edging up in October; output is now reported to have risen at a faster pace over the period from June through October than previously published. In November, manufacturing output increased 1.1%, with widespread gains among industries. The rise in factory output was well above its average monthly pace of 0.3% over the previous five months and was its largest gain since February. In November, the output of utilities jumped 5.1%, as weather that was colder than usual for the month boosted demand for heating. The index for mining decreased 0.1%. At 106.7% of its 2007 average, total industrial production in November was 5.2% above its year-earlier level. Wood Products and Paper output rose by, respectively, 1.3 and 0.1%. 

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Capacity utilization for the industrial sector increased 0.8 percentage point in November to 80.1%, a rate equal to its long-run (1972-2013) average. Wood Products and Paper rose by, respectively, 0.9 and 0.4%. 

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Capacity at the all-industries and manufacturing levels moved higher by, respectively, 0.3 and 0.2%. Wood Products extended its ongoing upward trend (since July 2013) when increasing by 0.4%. Paper, on the other hand, contracted by 0.2% to another new low.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

December 2014 Macro Pulse -- When Oil Runs Red

Among the developments this past month, one that dominated economic news headlines involved the precipitous drop in crude oil prices. As of December 12, the spot price for West Texas Intermediate crude had fallen to around $59 -- the lowest since 1H2009 and well below many producers’ cost of production. OPEC’s decision to maintain output levels seems to be having the desired effect of knocking out weak shale oil competitors: Permits for new U.S. wells dropped by nearly 40% in November, and numerous bankruptcies are inevitable in the highly leveraged shale oil sector. Oil producing countries are not necessarily “sitting pretty,” however. Many of them have high fiscal break-even costs (e.g., Saudi Arabia: $98/barrel; Venezuela: $161) because of prodigious welfare spending, and thus falling prices are “playing havoc” with their budgets.

Click here to read the rest of the December 2014 Macro Pulse recap.

The Macro Pulse blog is a commentary about recent economic developments affecting the forest products industry. The monthly Macro Pulse newsletter summarizes the previous 30 days of commentary available on this website.

October 2014 International Trade (Softwood Lumber)

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Softwood lumber exports increased by 15 MMBF (10.6%) in October while imports rose by 84 MMBF (7.7%). Exports were 28 MMBF (15.8%) below year-earlier levels; imports were 223 MMBF (23.4%) higher. 

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The rest of North America (i.e., Canada and Mexico) was once again the primary destination for U.S. softwood lumber exports in October (40.9%), although Asia (especially China) was fairly close behind (36.4%); Canada was also the largest single-country destination (20.9%). Year to date (YTD), exports to China were flat relative to the same period in 2013 (down from roughly 11% YTD-over-YTD in September). Meanwhile, Canada was the source of nearly all (95.9%) softwood lumber imports into the United States. Overall, YTD exports were up 1.2% compared to the same period in 2013, while imports were up 11.6%. 

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Nearly 43% of U.S. softwood lumber exports left the country through West Coast (primarily Seattle, WA with 27.6%) customs districts in October. At the same time, Great Lakes customs districts handled over 70% of the softwood lumber imports (especially Duluth, MN with 26.0%) coming into the United States. 

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Southern yellow pine comprised 24.9% of all softwood lumber exports in October, followed by Douglas-fir with 17.4%.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

October 2014 International Trade (General)

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The goods and services deficit was $43.4 billion in October, down $0.2 billion from $43.6 billion in September. October exports were $197.5 billion, $2.3 billion more than September exports. October imports were $241.0 billion, $2.1 billion more than September imports.

The October decrease in the goods and services deficit reflected a decrease in the goods deficit of less than $0.1 billion to $62.7 billion and an increase in the services surplus of $0.1 billion to $19.2 billion.

Year-to-date, the goods and services deficit increased $20.5 billion, or 5.1%, from the same period in 2013. Exports increased $57.8 billion or 3.1%. Imports increased $78.3 billion or 3.4%. 

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On a global scale, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume decreased by 1.9% in September (from the prior month) while prices fell by 1.6%. It is interesting to compare those data points against shipping container counts (which are a good metric for gauging economic activity). “Export container counts continue to weaken,” wrote analyst Steven Hansen, “which is a warning that the global economy is slowing. Export three month rolling averages continue to decelerate -- being in negative territory year-over-year. This is a headwind for 4Q2014 GDP."

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

October 2014 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments decreased $3.8 billion or 0.8% to $499.2 billion in October. Shipments of durable goods increased $0.1 billion or 0.1% to $246.5 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $3.9 billion or 1.5% to $252.7 billion, led by petroleum and coal products. Wood shipments fell by 0.6% while Paper increased 0.4%. 

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Inventories increased $0.5 billion or 0.1% to $655.6 billion (the highest level since the series was first published on a NAICS basis). The inventories-to-shipments ratio was 1.31, up from 1.30 in September.

Inventories of durable goods increased $1.8 billion or 0.5% to $406.6 billion, led by transportation equipment. Nondurable goods inventories decreased $1.3 billion or 0.5% to $249.0 billion, led by petroleum and coal products. Inventories of Wood and Paper expanded by 0.5 and 0.1%, respectively. 

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New orders decreased $3.3 billion or 0.7% to $496.6 billion. Excluding transportation, new orders decreased 1.4% -- the fifth drop in the last six months. Durable goods orders increased $0.6 billion or 0.3% to $243.8 billion, led by transportation equipment. New orders for nondurable goods decreased $3.9 billion or 1.5% to $252.7 billion.

Prior to July, as can be seen in the graph above, real (inflation-adjusted) new orders had been essentially flat since early 2012, recouping roughly 75% of the losses incurred since the beginning of the Great Recession. With July’s transportation-led spike now in the rearview mirror, new orders have dropped back to around 69% of their December 2007 high. 

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Unfilled durable-goods orders increased $4.9 billion or 0.4% to $1,174.2 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.73, up from 6.71 in September. Real unfilled orders, which had been a good litmus test for sector growth, show a much different picture; in real terms, unfilled orders in June were back to just 79% of their December 2008 peak. Real unfilled orders jumped to 102% of the prior peak in July, thanks to the largest-ever batch of aircraft orders, hence, this metric is likely to remain elevated for several years.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

November 2014 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment posted the biggest gain since January 2012 when increasing in November by 321,000 jobs -- smashing MarketWatch’s consensus expectations of 235,000. Data for the prior two months was also revised up by a combined 44,000 jobs. Meanwhile, the unemployment rate (based upon the BLS’s household survey) was unchanged at 5.8%. This month’s report internals (i.e., the comparison between household and establishment survey data) were extremely inconsistent, however: The household survey showed seasonally adjusted employment growth of only 4,000 versus the headline establishment number of 321,000. The glaring disparity prompted one analyst to beg, “Will the real job situation please stand up?”

Hiring last month was broad-based but the biggest beneficiaries were retail, temporary services and transportation and warehousing. Those increases likely reflect seasonal hiring for the holiday season. In addition, manufacturers added 28,000 jobs, the most in a year, and education and health services 38,000. Professional and business services, a category that includes temps but also higher-paying jobs in fields such as accounting and engineering, added the most jobs in four years. Construction added 20,000 jobs; construction employment is up 231,000 from a year earlier. 

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Other internals of the report were mixed. For example, the employment-population ratio remained stable at 0.592, just one percentage point above the post-recession low. At the same time, the number of employment-age persons not in the labor force edged up by 69,000 (to 92.4 million), just shy of its recent peak of 92.6 million. 

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The labor force participation rate was unchanged at 62.8, near its multi-decade low. Average hourly earnings of all private employees rose by $0.09, resulting in a 2.1% year-over-year increase. For all production and nonsupervisory employees (pictured above), wages rose by $0.04/hour (+2.1% YOY). With the CPI running at an official annual rate of 1.7%, wages are technically keeping up with price inflation. 

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Finally, full-time jobs decreased while part-time jobs increased. 

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The U.S. recovery still has far to go to fully rebound from the Great Recession, given that many people without jobs have stopped looking and thus are no longer counted as unemployed. "At this rate, we won't return to pre-recession labor market health until October 2016 -- nearly nine years since the recession began," said Elise Gould, a senior economist at the Economic Policy Institute. We think Gould's prediction is too optimistic. The figure above presents a variety of forecasts related to when employment might converge with the number of jobs that likely would exist had the recession not occurred (gray line).

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

November 2014 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil extended its retreat for a fifth month, tumbling $8.61 to $75.79 per barrel; that is the lowest price since October 2010. The price drop coincided with a strengthening U.S. dollar, the lagged impacts of a 237,000 barrel-per-day (BPD) decrease in the amount of oil supplied in September (to 19.0 million BPD), and a slower accumulation of crude oil stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI widened by $0.63 in November, to $3.65 per barrel. 

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OPEC’s decision to maintain production levels seems to be having the desired effect of knocking out shale oil producers: Permits for new U.S. wells dropped by nearly 40% in November. Oil producing countries are not necessarily “in the driver’s seat,” however; many of them have high fiscal break-even costs (e.g., Saudi Arabia: $98/barrel; Venezuela: $161) because of generous welfare spending, and thus falling prices are “playing havoc” with their budgets.

Given the present downward momentum in futures prices, we expect further erosion in spot oil prices. 

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

November 2014 ISM Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that economic activity in the U.S. manufacturing sector expanded at roughly the same pace in November as it had in October. The PMI edged down to 58.7%, a decrease of 0.3 percentage point from October’s 59.0% (50% is the breakpoint between contraction and expansion). ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. The expansion was supported by increased new and backlogged orders, imports and exports, and slower supplier delivery times (implying suppliers may be having difficulty keeping up with orders).

Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee said comments from the respondent panel “are upbeat about strong demand and new orders, with some expressing concerns about West Coast port slowdowns and the threat of a potential dock strike.” 

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Wood Products was unchanged again in November, as increased export orders were offset by declines in backlogged orders; the “market has remained strong going into year-end,” one respondent indicated, however. Paper Products’ expansion, by contrast, exhibited widespread support among the sub-indices. 

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- quickened in November, nearly recapturing the high set back in August. The NMI registered 59.3%, 2.2 percentage points above October’s 57.1%; only the employment and imports sub-indices were lower in November than in October. “Comments from the majority of respondents indicate that business conditions are on track for continued growth,” said Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee. “The respondents have also stated that there is some strain on capacity due to the month-over-month increase in activity.” 

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Two of the three service industries we track (Construction and Ag & Forestry) reported expansion in November. Apparently the increases in imports and backlogged orders were not enough to move Real Estate’s overall activity “meter.”

Paper products was the only relevant commodity up in price. Some respondents indicated paying more for gasoline, others less. Lumber and diesel were down in price. No relevant commodities were in short supply.

It is interesting to note that while ISM’s PMI and Markit’s U.S. Manufacturing PMI paralleled each other in November (i.e., both showed slower expansion), ISM’s NMI and Markit’s U.S. Services PMI moved in opposite directions (i.e., ISM expanded more quickly, Markit more slowly).

Although ISM’s reports are useful as attitudinal barometers, they should not be substituted for “hard” data. For example, ISM has reported Paper Products expanded during 22 of the past 24 months. That does not square with Federal Reserve data, which shows paper industrial production 2.1% and capacity 3.6% lower than in November 2012. ISM’s results for Wood Products (expansion during 16 of 24 months) are consistent with Fed data (IP: +17.0%; capacity: +4.0%), however.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.