March 2014 Currency Exchange Rates

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In March the monthly average value of the U.S. dollar appreciated relative to two of the three major currencies we track: 0.5 percent against Canada’s loonie and 0.2 percent against the yen; the greenback depreciated 1.2 percent against the euro. On a trade-weighted index basis, the dollar weakened by 0.1 percent against a basket of 26 currencies. 

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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.

4Q2013 Gross Domestic Product: Third (Final) Estimate

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The Bureau of Economic Analysis (BEA) nudged its “final” estimate of 4Q2013 growth in real U.S. gross domestic product (GDP) up slightly, from a seasonally adjusted and annualized rate of 2.4 percent (reported at the end of February) to 2.6 percent. Three of the four categories -- personal consumption expenditures (PCE), private domestic investment (PDI) and net exports (NetX) contributed to 4Q growth; government consumption expenditures (GCE) subtracted from growth.

The improvement in this revision’s headline growth came almost entirely from the BEA’s reassessment of consumer spending on services (+0.57 percentage point, mostly from increased spending on health care). Offsetting that increase were downward adjustments to consumer spending on goods (-0.06 percent), the growth rate for inventories (-0.16 percent and is now reported to be in slight contraction) and fixed investment (-0.15 percent). Exports and imports received only minor adjustments.

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For this report the BEA assumed annualized net aggregate inflation of 1.56 percent. By way of comparison, the growth rate of the Bureau of Labor Statistics’ seasonally adjusted CPI-U index was slightly lower (1.46 percent annualized rate); meanwhile, the price index reported by the Billion Prices Project (BPP) was substantially higher at 2.46 percent. Were the BEA’s numbers corrected for inflation using the BPP inflation rate, the 4Q real GDP growth rate would have been only 1.78 percent.

As mentioned above, one of the more noteworthy components of this revision is that inventories are now reported to be contracting at a marginal pace -- subtracting 0.02 percent from the headline growth rate (down -1.65 percent from 3Q). The prior three quarters saw substantial inventory expansion that had boosted the reported annualized growth rate by an average of 1 percent.

Looking forward to the 1Q2014 GDP report, Consumer Metrics Institute (CMI) made these observations:

• The year-long cycle of inventory building has apparently come to an end. Dating back to 1Q2006, the reported average real annualized growth rate of inventories has been a relatively neutral +0.04 percent. This is not surprising because over an extended time period inventories are mostly a cyclical zero-sum game, with excessive growth or contraction in any one period being corrected during subsequent periods. Moving forward we should expect that inventories will continue their cyclical transition from building to contraction, with negative consequences to the headline number.

• The federal government’s “shutdown” subtracted roughly 1 percent from 4Q2013’s reported growth rate. If federal spending simply reverts to the prior quarter’s level, we might expect a roughly 1 percent boost to the headline number. On the other hand, if the federal budget experienced a “catch-up” effect from sequestered spending that was merely pushed into 1Q2014, we could see yet another quarter’s report distorted by the “shutdown” -- this time with the 1Q2014 shoved firmly to the upside.

• The headline growth contribution from commercial fixed investment dropped over 2 percent from quarter to quarter, and it was sustained largely by spending on equipment (healthcare and transportation) -- with spending on structures actually contracting slightly. Residential housing construction flipped to significant contraction after 12 consecutive quarters of growth.

• Although the growth contribution from imports is at about the long term average, exports are currently growing at about twice their longer term average. Sustained long term growth in exports requires healthy and growing trading partners. Given softening growth in a number of our trading partners, this historically high growth rate for exports may not be sustainable.

• Household income shows no signs of recovery. Real per-capita income remains stagnant quarter to quarter, and down substantially year over year. It bears repeating that total real per-capita income growth since 2Q2008 has been 0.73 percent -- an average annualized growth rate of just 0.13 percent during the entire “recovery.” The household savings rate is down over 2.3 percent year over year, and it remains well below the historical long term savings rate.

• Ominously, the just reported upside revision to “growth” in consumer spending was caused by an increased real cost of household healthcare. And in 4Q2013 the ObamaCare launch was just sputtering, at best. We should expect consumer spending on services to continue to grow in 1Q2014, largely as a result of non-discretionary healthcare expenses. But given stagnant household income, all of that heavily promoted spending for new coverage through health care exchanges has got to come from somewhere -- with both household discretionary spending and savings taking it on the chin as net spending further transfers to the healthcare industries.

“The next GDP report (the first estimate for 1Q2014) will certainly be interesting,” CMI concluded. “It might well be distorted by the bounce-back in Federal spending, and it could reflect ongoing softening of commercial spending for inventories and fixed investments. It will also begin to display the impact of the new healthcare initiatives on household spending and the overall structure of the economy.”

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.

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

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Sales of new single-family homes fell by a seasonally adjusted and annualized rate (SAAR) of 15,000 units (3.3 percent) to 440,000 in February. Sales were 2.3 percent below year-earlier levels. Meanwhile, the median price of new homes sold rose (by $1,000 or 0.4 percent) to $261,800. Although starts increased while sales decreased during February, the three-month average starts-to-sales ratio dropped to 1.37 (from 1.46). Click here for our post on February housing permits, starts and completions.

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Single-unit completions rose (+24,000 units or 4.0 percent) while sales fell (-15,000 units or 3.3 percent) in February. Even so, new-home inventory barely budged in absolute terms but expanded by 0.2 month in months-of-inventory terms. 

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Existing home sales inched lower in February, falling by 20,000 units (-0.4 percent) to 4.60 million units (SAAR) -- the slowest rate since July 2012. Once again, the National Association of Realtors used a scatter-shot approach to assigning blame for the subdued activity, but remained hopeful for future improvement. The share of total sales comprised of new homes retreated below 9 percent. The median price of previously owned homes sold in February advanced (by $1,100 or 0.6 percent), to $189,000.

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Housing affordability improved slightly in January because the median price of existing homes for sale resumed its downward trend by falling $8,800 to $188,900. Concurrently, Standard & Poor’s reported that the 10- and 20-City Composites in the S&P/Case-Shiller Home Price indices posted not-seasonally adjusted monthly changes of 0.1 percent or less in January (respectively, +13.5 and +13.2 percent relative to a year earlier).

“The housing recovery may have taken a breather due to the cold weather,” observed David Blitzer, Chair of the Index Committee at S&P Dow Jones Indices. “Twelve cities reported declining prices in January vs. December; eight of those were worse than the month before. From the bottom in 2012, prices are up 23 percent and the housing market is showing signs of moving forward with more normal price increases.

“Expectations and recent data point to continued home price gains for 2014,” Blitzer continued, showing a bit more optimism than last month. “Although most analysts do not expect the same rapid increases we saw last year, the consensus is for moderating gains.” 

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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.

February 2014 Industrial Production, Capacity Utilization and Capacity

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Industrial production increased 0.6 percent in February after having declined 0.2 percent in January. Manufacturing output rose 0.8 percent in February, nearly reversing January’s decline of 0.9 percent that had resulted, in part, from extreme weather. The February gain in factory production was the largest since last August. The output of utilities edged down 0.2 percent following a jump of 3.8 percent in January. At 101.6 percent of its 2007 average, total industrial production in February was 2.8 percent above its level of a year earlier.

Wood Products output dropped by 1.2 percent (back to a level last seen in March 2013) while Paper grew by 0.8 percent. 

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The capacity utilization rate for total industry increased in February to 78.8 percent, a rate that is 1.3 percentage points below its long-run (1972-2013) average. Wood Products capacity utilization fell back by 1.4 percent (to a level on par with June 2013), while Paper rose by 0.9 percent. 

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Capacity at the all-industries and manufacturing levels both moved higher by 0.2 in February. Wood Products capacity nudged 0.2 percent higher while Paper contracted by 0.1 percent.

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.

February 2014 Residential Permits, Starts and Completions

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Total housing starts were nearly unchanged in February, inching down to a seasonally adjusted and annualized rate (SAAR) of 907,000 units. That was 2,000 fewer units (-0.2 percent) than January’s upwardly revised 909,000, and nearly 18 percent below November’s peak of 1.101 million units. The multi-family component contributed all of the decline (-4,000 units or -1.2 percent) since the single-family component increased by 2,000 units (0.3 percent).

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The year-over-year percentage change in total starts contracted for the first time since August 2011, dropping to -5.6 percent. Single-family starts were 9.3 percent below February 2012’s levels; the multi-family component was still “in the black” with +1.8 percent.

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Completions rose modestly (+37,000 units or 4.4 percent) in February, to 886,000 units SAAR. The increase was greater in the single-family component (24,000 units versus 13,000 multi-family units). Total completions were 22.9 percent above year-earlier levels.

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Total permits jumped by 73,000 units (7.7 percent) SAAR, to 1.018 million in February -- more than making up for January’s decline. The increase occurred entirely in the multi-family component (84,000 units or 24.3 percent); single-family permits fell by 11,000 units (-1.8 percent). 

Despite February’s uptick in the year-over-year percentage change in total permits (7.3 percent), the rate of growth extended the slowing trend seen since late 2012. This trend is most readily apparent in the recent erosion of builder confidence. The National Association of Home Builders confidence index rose one point (to 47) in March after plummeting (by the largest monthly drop in the survey’s history) into negative sentiment territory during February. An index reading below 50 means more builders think market conditions are poor than think they are good.

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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.

February 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) increased 0.1 percent in February. Over the last 12 months, the all items index increased 1.1 percent before seasonal adjustment. An increase in the food index accounted for more than half of the all-items increase in February. The food index rose 0.4 percent in February, driven by a 0.5 percent increase in the index for food at home, with four of the six major grocery store food group indexes increasing. The energy index declined, with a decrease in the gasoline index more than offsetting sharp increases in the fuel oil and natural gas indexes. 

The seasonally adjusted Producer Price Index for final demand fell 0.1 percent in February. This decline followed advances of 0.2 percent in January and 0.1 percent in December. The index for final demand moved up 0.9 percent for the 12 months ended in February, the smallest 12-month rise since a 0.9 percent increase in May 2013. In February, the 0.1 percent decrease in final demand prices can be traced to the index for final demand services, which fell 0.3 percent. In contrast, prices for final demand goods advanced 0.4 percent. As the graph above indicates, the newly revamped PPI extends back only to November 2009. 

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All of the price indices we track increased relative to January. Compared to a year earlier, all indices were either unchanged or higher. The indices of Lumber & Wood Products, and Wood Fiber achieved new all-time highs.

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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.

January 2014 International Trade (Softwood Lumber)

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Softwood lumber exports increased by 5 MMBF (3.3 percent) in January while imports fell by 7 MMBF (0.1 percent). Exports were 18 MMBF (13.3 percent) above year-earlier levels; imports were 94 MMBF (11.9 percent) higher. 

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Asia (especially China and Japan) retained the “top spot” for U.S. softwood lumber exports in January. China was also the largest single-country destination by a wide margin; year to date (YTD), exports to China were up over 80 percent relative to the same period in 2013. Meanwhile, Canada was the overwhelming source of softwood lumber imports into the United States. Imports from Brazil, Honduras, Finland and Austria increased markedly. 

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Just over half of U.S. softwood lumber exports left the country through West Coast (primarily Seattle, WA) customs districts in January. At the same time, Great Lakes customs districts (especially Duluth, MN) handled two-thirds of the softwood lumber imports coming into the United States. 

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Douglas-fir comprised 22.1 percent of all softwood lumber exports in January, followed by Southern yellow pine with 21.9 percent.

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.

January 2014 International Trade (General)

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Total January exports of $192.5 billion and imports of $231.6 billion resulted in a goods and services deficit of $39.1 billion, up from $39.0 billion in December. January exports were $1.2 billion more than December exports of $191.3 billion. January imports were $1.3 billion more than December imports of $230.3 billion.

In January, the goods deficit increased $0.7 billion from December to $59.3 billion, and the services surplus increased $0.5 billion from December to $20.2 billion. Exports of goods increased $1.0 billion to $133.8 billion, and imports of goods increased $1.7 billion to $193.1 billion. Exports of services increased $0.2 billion to $58.7 billion, and imports of services decreased $0.4 billion to $38.5 billion.

The goods and services deficit decreased $3.0 billion from January 2013 to January 2014. Exports were up $5.7 billion, or 3.0 percent, and imports were up $2.6 billion, or 1.2 percent.

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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 0.4 percent in December while prices rose by 0.8 percent.

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.

January 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 $1.7 billion or 0.3 percent to $490.7 billion in January. Shipments of durable goods decreased $0.7 billion or 0.3 percent to $232.6 billion, led by machinery. Meanwhile, nondurable goods shipments decreased $0.9 billion or 0.4 percent to $258.1 billion, led by chemical products. Wood shipments rose by 0.7 percent while Paper shipments increased by 0.4 percent. 

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Inventories increased $1.2 billion or 0.2 percent to $637.7 billion (the highest level since the series was first published on a NAICS basis). The inventories-to-shipments ratio was 1.30, up from 1.29 in December.

Inventories of durable goods increased $1.1 billion or 0.3 percent to $389.1 billion, led by transportation equipment. Nondurable goods inventories increased slightly to $248.6 billion, led by chemical products. Wood inventories rose by 0.7 percent, and Paper by 0.3 percent. 

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New orders decreased $3.3 billion or 0.7 percent to $483.0 billion; excluding transportation, new orders increased 0.2 percent. Durable goods orders decreased $2.3 billion or 1.0 percent to $225.0 billion, led by transportation equipment. New orders for nondurable goods decreased $0.9 billion or 0.4 percent to $258.1 billion.

As can be seen in the graph above, real (inflation-adjusted) new orders have been essentially flat since early 2011, and have recouped a little more than two-thirds the losses incurred since the beginning of the Great Recession. The very modest upward trend since mid-2012 is still in place, however. 

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Unfilled durable-goods orders increased $0.3 billion to a new nominal high of $1,059.9 billion, led by machinery. The unfilled orders-to-shipments ratio was 6.50, down from 6.52 in December. Real unfilled orders, a good litmus test for sector growth, show a much different picture; in real terms, unfilled orders have regained just 60 percent of the ground given up since the Great Recession began.

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.

February 2014 ISM Reports

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According to the Institute for Supply Management (ISM), expansion of economic activity in the U.S. manufacturing sector inched up in February. The PMI registered 53.2 percent, an increase of 1.9 percentage points from January's 51.3 percent (50 percent is the breakpoint between contraction and expansion). “As in January, several comments from the [respondent] panel mention adverse weather conditions as a factor impacting their businesses in February,” said Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee. “Other comments reflect optimism in terms of demand and growth in the near term.”

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Although overall manufacturing production shrank in February, inventories accumulated again. Growth in new and export orders, and order backlogs provides positive expectations for domestic manufacturers. Wood Products expanded again in February, thanks to additional employment and new and backlogged orders. Paper Products also grew, with nearly universal support among the sub-indices.

Whereas manufacturing growth nearly stalled in January, it was non-manufacturing’s turn in February. The NMI registered 51.6 percent, 2.4 percentage points lower than January’s 54.0 percent; that was the slowest reading since February 2010. Except for supplier deliveries and new and backlogged orders, service sub-indices either rose more slowly or contracted more quickly than in January. “The majority of respondents’ comments indicate a slowing in the rate of growth month over month of business activity,” said Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee. “Some of the respondents attribute this to weather conditions. Overall respondents’ comments reflect cautiousness regarding business conditions and the economy.”

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Among the individual service industries we track, only Ag & Forestry expanded. Construction contracted despite increases in employment and order backlogs. Real Estate also contracted as dips in new orders and employment more than offset a rise in order backlogs.

Commodities up in price included copier paper, diesel and gasoline, natural gas, pallets, lumber and wood. No relevant commodities were either down in price or in short supply.

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.

February 2014 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose by $5.70 (6.0 percent) in February, to $100.39 per barrel. That price increase coincided with a slightly stronger U.S. dollar, the lagged impacts of a fall-off in oil supplied -- 332,000 barrels per day (BPD), to 19.1 million BPD -- in December, and a modest accumulation of crude stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI narrowed by $4.95 in February, to $8.51 per barrel.

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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.

February 2014 Currency Exchange Rates

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In February the monthly average value of the U.S. dollar depreciated relative to two of the three major currencies we track: -1.6 percent against the yen and -0.3 percent against the euro; the greenback appreciated +1.0 percent against Canada’s loonie. On a trade-weighted index basis, the dollar strengthened by 0.2 percent against a basket of 26 currencies. 

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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.

January 2014 U.S. Construction Spending

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Overall construction spending in the United States increased by 0.1 percent during January, to a seasonally adjusted and annualized rate (SAAR) of $943.1 billion -- the highest level since March 2009. The increase derived entirely from a nearly $4.0 billion (1.1 percent) rise in private residential spending. Public construction spending declined by $2.1 billion (0.8 percent) while the private non-residential component fell by $0.6 billion (0.2 percent).

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Click here for a discussion of January’s new residential permits, starts and completions. Click here for a discussion of new and existing home sales, inventory and prices.

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.