June 2014 Currency Exchange Rates

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In June the monthly average value of the U.S. dollar appreciated relative to two of the three major currencies we track: 1.1 percent against the euro and 0.3 percent against the yen; the greenback depreciated 0.5 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.

1Q2014 Gross Domestic Product: Third (Final) Estimate

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According to the Bureau of Economic Analysis (BEA), the “final” estimate of 1Q2014 growth in real U.S. gross domestic product (GDP) contracted at the fastest rate in five years -- at a seasonally adjusted and annualized rate of -2.9 percent. That pace of growth is down by 3.0 percentage points relative to the “advance” 1Q estimate, nearly 5.6 percentage points lower relative to 4Q2013 and 7.0 percentage points below 3Q2013. Only one of the four categories -- personal consumption expenditures (PCE) contributed to 1Q growth; the other categories -- private domestic investment (PDI), net exports (NetX), and government consumption expenditures (GCE) -- subtracted from growth.

Revisions to the headline number were concentrated in consumer services (down an additional 1.26 percentage point relative to the “preliminary” estimate) and exports (another -0.42 percent). Nearly all other categories were also revised downward: consumer spending on goods (-0.12 percent), inventories (-0.08 percent) and imports (-0.17 percent). Only governmental spending and fixed investments “avoided the knife” in this report.

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For this report the BEA assumed annualized net aggregate inflation of 1.27 percent. By way of comparison, the growth rate of the Bureau of Labor Statistics’ seasonally adjusted CPI-U index was more than 0.5 percentage point higher (1.8 percent annualized rate); meanwhile, the price index reported by the Billion Prices Project (BPP) was substantially higher at 3.91 percent. Were the BEA’s nominal estimates corrected for inflation using the BPP inflation rate, 1Q real GDP would have contracted by 5.6 percent.

The Consumer Metrics Institute highlighted two issues that call into question the popular hypothesis of harsh winter weather causing the 1Q downturn:

• The sharp downward revision to consumer services spending occurred almost exclusively in non-discretionary healthcare expenditures, which is difficult to blame on a harsh winter -- especially since discretionary recreational spending during that same storm-plagued time span was actually revised upward and remained essentially neutral.
• Adherents of that hypothesis need to explain how a harsh winter caused exports to plunge -- resulting in a roughly -2.5 percent change in the headline number relative to the prior quarter. The 1Q weather in the United States was not universally so bad that activity at all ports was impaired; similarly, global weather patterns were not extreme. Export growth had been one of the bright spots of 2013 -- even as the economies of many U.S. trading partners softened.

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.

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

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Sales of new single-family homes jumped by a seasonally adjusted and annualized rate (SAAR) of 79,000 units (18.6 percent) to 504,000 in May. Sales were 22.5 percent above year-earlier levels. Meanwhile, the median price of new homes sold rose (by $12,300 or 4.6 percent) to $282,000. That increase recouped a bit more than three-fourths of April’s price decline. Because single-family starts dropped while sales increased during May, the three-month average starts-to-sales ratio retreated to 1.45 (from 1.49). Click here for our post on May housing permits, starts and completions.

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Single-unit completions nudged higher (13,000 units or 2.1 percent) in May. Even so, new-home inventory remained unchanged in absolute terms but declined in months-of-inventory terms (-0.8 month). 

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Existing home sales also advanced in May, by 230,000 units (4.9 percent) to 4.89 million units (SAAR). The share of total sales comprised of new homes rose to 9.3 percent -- the highest proportion since November 2008. The median price of previously owned homes sold in May increased (by $11,900 or 5.9 percent), to $213,400. Inventory of existing homes jumped in absolute terms (+50,000 units) but shrank in months-of-inventory (-0.1 month) terms.

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Housing affordability dipped in March because the median price of existing homes for sale rose by $4,600 to $201,100. Concurrently, Standard & Poor’s reported that the 20-City Composite in the S&P/Case-Shiller Home Price indices posted a not-seasonally adjusted monthly change of +1.1 percent in April (+10.8 percent relative to a year earlier).

“Although home prices rose in April, the annual gains weakened,” observed David Blitzer, Chair of the Index Committee at S&P Dow Jones Indices. “Overall, prices are rising month-to-month but at a slower rate. Last year some Sunbelt cities were seeing year-over-year numbers close to 30 percent, now all are below 20 percent.... Other cities around the nation are also experiencing slower price increases.

“While the annual numbers worsened, the monthly figures were seasonally strong. Five cities -- Atlanta, Boston, Chicago, San Francisco and Seattle -- reported monthly gains of 2 percent or more. Dallas and Denver gained 1.6 percent and continue to set new peaks. Boston and Charlotte are less than 10 percent away from their peaks.

“Near term economic factors favor further gains in housing: mortgage rates are lower than a year ago, the Fed is expected to keep interest rates steady until mid-2015 and the labor market is improving. However, housing is not back to normal: prices are being supported by cash sales, low inventories and declining foreclosure and REO sales. First time home buyers are not back in force and qualifying for a mortgage remains challenging. The question is whether housing will bounce back before the Fed begins to tighten sometime next year.”

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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.

June 2014 Macro Pulse – Anomaly Economy

The revision of 1Q2014 U.S. real GDP growth to a seasonally adjusted and annualized rate (SAAR) of -1.0 percent (the first contraction in three years) erupted in round of blame fixing. At present, the most popular scapegoat is harsh winter weather. 

Those subscribing to that hypothesis expect a strong 2Q rebound with spring’s arrival. “The good news is that 1Q is over,” said Ryan Sweet, senior economist at Moody’s Analytics. “I wouldn’t worry too much about the decline; it’s mostly driven by less construction spending and less inventory accumulation. [The second] quarter should be a good one.” Bloomberg’s May 29 median forecast called for a 3.5 percent gain, with Morgan Stanley’s 4.2 percent toward the upper end of the spectrum. Although the International Monetary Fund cut its 2014 U.S. growth estimate to 2 percent, from 2.8 percent in April, even that reduced expectation would require growth rates of 3+ percent during subsequent quarters.

But what if 2Q GDP growth fails to bounce back? Certainly weather depressed 1Q economic activity; yet, it seems the weather narrative masks fundamental issues in the U.S. economy. We note there is a growing list of potential “anomalies” should 2Q GDP not meet expectations….

Click here to read the rest of the June 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.

May 2014 Residential Permits, Starts and Completions

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Total housing starts rose retreated in May, to a seasonally adjusted and annualized rate (SAAR) of 1.001 million units. That was 70,000 fewer units (-6.5 percent) than April’s 1.071 million, and 9.4 percent below November’s peak of 1.105 million units. The decrease in starts was about evenly split -- single-family: -39,000 units (5.9 percent); multi-family: -31,000 units (7.6 percent).

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The year-over-year percentage change in total starts also slowed in May, falling to 8.0 percent. Single-family starts were 3.1 percent above year-earlier levels; the more volatile multi-family component shrank to +17.7 percent. 

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Completions edged higher (+57,000 units or 6.8 percent) in May, to 897,000 units SAAR. The multi-family component dominated the increase (+44,000 units or 18.7 percent); single-family completions: +13,000 units or 2.1 percent. Total completions were 25.6 percent above year-earlier levels. 

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Total permits retreated by 68,000 units (-6.4 percent) SAAR, to 991,000 in May. The decrease occurred entirely in the multi-family component (-90,000 units or 19.5 percent), more than offsetting the 62,000-unit gain in April. Single-family permits rose by 22,000 units (3.7 percent). Most troubling, total permits were 6.4 percent lower than year-earlier levels -- the single- and multi-family components were, respectively, 5.3 and 8.4 percent lower.

The rate of growth in total permits extended the slowing trend seen since late 2012. We find it interesting that builder behavior does not seem to reflect the improvement in confidence reported in the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI). The HMI rose four points in June, to 49. “Consumers are still hesitant, and are waiting for clear signals of full-fledged economic recovery before making a home purchase,” said NAHB Chief Economist David Crowe. “Builders are reacting accordingly, and are moving cautiously in adding inventory.” 

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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.

May 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 0.4 percent in May. The increase in the all-items index, which was the largest since February 2013, was broad-based. The indexes for shelter, electricity, food, airline fares, and gasoline were among those that contributed. The food index posted its largest increase since August 2011, with the index for food at home rising 0.7 percent. The increases in the electricity and gasoline indexes led to a 0.9 percent rise in the energy index

The index for all items less food and energy rose 0.3 percent in May, its largest increase since August 2011. Along with the indexes for shelter and airline fares, the medical care, apparel, and new vehicle indexes all increased in May. The indexes for household furnishings and operations and for used cars and trucks declined.

The all items index increased 2.1 percent over the last 12 months; this compares to a 2.0 percent increase for the 12 months ending April, and is the largest 12-month increase since October 2012. The index for all items less food and energy has increased 2.0 percent over the last 12 months. The food index has advanced 2.5 percent over the span, its largest 12-month increase since June 2012.

The seasonally adjusted Producer Price Index for final demand fell 0.2 percent in May. This decline followed increases of 0.6 percent in April and 0.5 percent in March. On an unadjusted basis, the index for final demand advanced 2.0 percent for the 12 months ended in May.

In May, the 0.2-percent decrease in final demand prices can be traced to the indexes for final demand services and final demand goods, both of which also declined 0.2 percent.

Within intermediate demand, prices for processed goods edged down 0.1 percent, the index for unprocessed goods was unchanged, and prices for services fell 0.4 percent.

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The price indexes we track were either unchanged or higher relative to April. Compared to a year earlier, all indices were higher. The indexes for both Pulp, Paper & Allied Products and Lumber & Wood Products set new highs in May. 

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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.

May 2014 Industrial Production, Capacity Utilization and Capacity

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Industrial production rose 0.6 percent in May after having declined 0.3 percent in April. The decrease in April was previously reported to have been 0.6 percent. Manufacturing output increased 0.6 percent in May after having moved down 0.1 percent in the previous month. At 103.7 percent of its 2007 average, total industrial production in May was 4.3 percent above its level of a year earlier.

Wood Products output rose by 1.7 percent while Paper declined by 0.5 percent. 

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The capacity utilization rate for total industry increased 0.2 percentage point in May to 79.1 percent, a rate that is 1.0 percentage point below its long-run (1972-2013) average. Wood Products capacity utilization increased by 1.3 percent, but Paper fell by 0.3 percent. 

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Capacity at the all-industries and manufacturing levels both moved higher by 0.3 in May. Wood Products extended its nearly year-long trend when increasing by 0.4 percent. Paper, on the other hand, contracted by 0.1 percent 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.

April 2014 International Trade (Softwood Lumber)

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Softwood lumber exports increased by 4 MMBF (2.4 percent) in April while imports rose by 52 MMBF (5.1 percent). Exports were 18 MMBF (12.3 percent) above year-earlier levels; imports were 19 MMBF (1.8 percent) lower. 

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Asia (especially China and Japan) retained the “top spot” for U.S. softwood lumber exports in April. China was also the largest single-country destination; year to date (YTD), exports to China were up over 75 percent relative to the same period in 2013. Meanwhile, Canada was the overwhelming source of softwood lumber imports into the United States. Imports from Germany, Honduras, and Latvia increased markedly on a percentage basis. Imports from Austria and Sweden have substantially decreased.

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

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Douglas-fir comprised 22.0 percent of all softwood lumber exports in April, followed by Southern yellow pine with 20.8 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.

April 2014 International Trade (General)

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Total April exports of $193.3 billion and imports of $240.6 billion resulted in a goods and services deficit of $47.2 billion, up from $44.2 billion in March. April exports were $0.3 billion less than March exports of $193.7 billion. April imports were $2.7 billion more than March imports of $237.8 billion.

In April, the goods deficit increased $3.3 billion from March to $65.8 billion, and the services surplus increased $0.2 billion from March to $18.6 billion. Exports of goods decreased $0.6 billion to $135.1 billion, and imports of goods increased $2.7 billion to $200.9 billion. Exports of services increased $0.3 billion to $58.2 billion, and imports of services increased $0.1 billion to $39.7 billion.

The goods and services deficit increased $6.8 billion from April 2013 to April 2014. Exports were up $5.6 billion, or 3.0 percent, and imports were up $12.4 billion, or 5.4 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 0.5 percent in March while prices rose by 0.2 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.

May 2014 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil was essentially flat in May, down $0.08 to $102.09 per barrel. That price decrease occurred despite a slightly weaker U.S. dollar; but it coincided with the lagged impacts of another notable drop in the amount of oil supplied in March -- 468,000 barrels per day (BPD), to 18.5 million BPD -- which, in turn, caused crude stocks to contract. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI widened by $1.80 in May, to $7.47 per barrel.

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The increase in oil futures prices appears to be primarily a response to news that perhaps only 4 percent of the previously estimated 13.7 billion barrels of oil in California’s Monterey Shale formation may actually be recoverable. 

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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.

May 2014 ISM Reports

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After two corrections, the Institute for Supply Management’s (ISM) monthly opinion survey showed that expansion of economic activity in the U.S. manufacturing sector quickened again in May. The PMI registered 55.4 percent, an increase of 0.5 percentage point from April's 54.9 percent (50 percent is the breakpoint between contraction and expansion). ISM’s manufacturing survey represents under 10 percent of U.S. employment and about 20 percent of the overall economy. Jumps in the production and prices-paid sub-indices were the main sources of support for the expansion.

Comments from the [respondent] panel reflect generally steady growth,” said Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee, “but note some areas of concern regarding raw materials pricing and supply tightness and shortages.”

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Wood Products and Paper Products expanded in May, thanks to gains in production, and new and export orders. Paper Products also exhibited expansion in the inventories and backlogged-order sub-indices.

The non-manufacturing sector, which accounts for 80 percent of the economy and 90 percent of employment, picked up the pace of expansion in May. The NMI registered 56.3 percent, 1.1 percentage points higher than April’s 55.2 percent. Two sub-indexes in the NMI – the Business Activity Index (“Overall activity” in the table below) and the New Orders Index – have good correlations to the economy; both grew faster.

“The majority of respondents' comments indicate that that there is steady incremental growth and project a positive outlook on business conditions,” said Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee.

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All three of the individual service industries we track expanded in May; moreover, all of the respective sub-indices were either unchanged or showed growth.

Commodities up in price included gasoline and diesel, various grades of lumber, paper, natural gas, sulfuric acid, and wood pallets. No relevant commodities were down in price. Wood pallets were 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.

April 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 increased $1.7 billion or 0.3 percent to $497.6 billion in April. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.4 percent March increase. Shipments of durable goods decreased $0.2 billion or 0.1 percent to $237.8 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased $1.9 billion or 0.7 percent to $259.9 billion, led by petroleum and coal products. Wood shipments rose by 4.9 percent while Paper shipments nudged up by 0.9 percent.

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Inventories increased $2.4 billion or 0.4 percent to $645.8 billion (the highest level since the series was first published on a NAICS basis). The inventories-to-shipments ratio was 1.30, unchanged from March.

Inventories of durable goods increased $0.7 billion or 0.2 percent to $393.7 billion, led by transportation equipment. Nondurable goods inventories increased $1.7 billion or 0.7 percent to $252.1 billion, led by petroleum and coal products. Wood inventories rose by 0.8 percent, while Paper fell by 0.8 percent. 

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New orders increased $3.4 billion or 0.7 percent to $499.8 billion; excluding transportation, new orders increased 0.5 percent. Durable goods orders increased $1.5 billion or 0.6 percent to $239.9 billion, led by transportation equipment. New orders for nondurable goods increased $1.9 billion or 0.7 percent to $259.9 billion.

As can be seen in the graph above, real (inflation-adjusted) new orders have been essentially flat since early 2012, and have recouped a little more than two-thirds the losses incurred since the beginning of the Great Recession. 

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Unfilled durable-goods orders increased $9.8 billion or 0.9 percent to a new nominal high of $1,080.6 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.48, up from 6.42 in March. Real unfilled orders, a good litmus test for sector growth, show a much different picture; in real terms, unfilled orders have regained just over 70 percent of the ground given up during the Great Recession.

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.

April 2014 U.S. Construction Spending

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Overall construction spending in the United States increased by 0.2 percent during April, to a seasonally adjusted and annualized rate (SAAR) of $953.5 billion -- the highest level since March 2009. The increase derived primarily from a $2.2 billion (0.8 percent) rise in public spending. Private residential spending ticked up by $0.2 billion (0.1 percent) while the private non-residential construction component fell by $0.5 billion (0.1 percent).

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Click here for a discussion of April’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.