November 2015 Residential Sales, Inventory and Prices

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Sales of new single-family homes in November added to October gains, rising by 20,000 units (+4.3%) to a seasonally adjusted and annualized rate (SAAR) of 490,000 units -- shy of the 503,000 expected. Moreover, October’s increase was trimmed by 42%, to just 28,000 units. Year-to-date (YTD), sales were 13.4% above the same months in 2014. For a longer perspective, November sales were roughly 65% below the “bubble” peak and about 35% below the long-term, pre-2000 average. Because sales increased more quickly than single-family starts, the three-month average ratio of starts to sales rose to 1.57 -- above the average (1.41) since January 1995. It is interesting to note that sales have been trending lower since February while starts have been trending upward.

Meanwhile, the median price of new homes sold jumped by $18,100 (+6.3%), to $305,000 in November; however, that is $5,400 short of September’s all-time nominal high of $310,400. The average price of homes sold rose by $16,800 (+4.7%), to $374,900; the equivalence between increases in the median and average prices might suggest a better balance between lower- and higher-priced homes, but that is not the case. In fact, the proportion of “starter” homes (those priced below $200,000) was the lowest (11.8%) of any November on record (going back to 2002); prior to the Great Recession starter homes comprised as much as a 61% share of total sales. 

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As mentioned in our post about housing permits, starts and completions in November, single-unit completions edged up by 2,000 units (+0.3%). Because of slower completions compared to sales, new-home inventory expanded in absolute terms (+5,000 units); interestingly, however, it shrank in months-of-inventory (-0.1 month) terms. 

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Existing home sales tumbled in November (-560,000 units or 10.5%) to 4.76 million units (SAAR); that result was considerably below expectations of 5.30 million. November’s activity was the slowest since April 2014, the largest month-to-month decline since July 2010, and the worst October-to-November retreat on record. Regulatory changes affecting real estate closings (known as the “Know before You Owe” rule) that went into effect in early October were blamed for the drop in sales; there may be a grain of truth to that claim, but one would think the rule change would have similarly dented new home sales. Inventory of existing homes contracted in absolute (-70,000 units) terms but expanded in months-of-inventory terms (+0.3 month). Because sales of new homes rose while existing homes fell, the share of total sales comprised of new homes increased to 9.3%. The median price of previously owned homes sold in November turned higher (+$1,200 or 0.5%), to $220,300. 

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Housing affordability improved again in October, as the median price of existing homes for sale retreated by $2,100 (-0.9%) to $221,200. 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 +0.1% (+5.2% compared to a year earlier).

“Generally good economic conditions continue to support gains in home prices,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Among the positive factors are consumers’ expectations of low inflation and further economic growth as well as recent increases in residential construction including single family housing starts. Inventories of existing homes have averaged around a five month supply for the past year, a level that suggests a fairly tight market with limited supplies. Sales of new single family homes, despite recent increases in construction, remain mixed to soft compared to the trend in existing home sales.

“The recent action by the Federal Reserve raising the Fed funds target rate by 0.25% and spreading expectations of further increases during 2016 are leading some to wonder if mortgage interest rate might rise. Typically, increases in short term interest rates lead to smaller increases in long term interest rates… From May 2004 to July 2007, the Fed funds rate moved up from 1.0% to 5.25%; over the same period, the mortgage rate rose from about 6% to 6.75% during a sustained tightening effort by the Federal Reserve. The latest economic projections published by the Fed following the recent rate increase suggest that the Fed funds rate will be around 2.6% in September 2017 compared to a current rate of about 0.5%. These data suggest that potential home buyers need not fear runaway mortgage interest rates.” 

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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 2015 Consumer and Producer Price Indices (incl. Forest Products)

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The seasonally adjusted consumer price index for all urban consumers (CPI-U) was unchanged in November (in line with expectations). The indexes for energy and food declined in November, offsetting an increase in the index for all items less food and energy. The energy index fell 1.3%, with all of the major component indexes declining except electricity. The food index fell 0.1%, as the index for food at home fell 0.3%, with five of the six major grocery store food group indexes declining.

The index for all items less food and energy rose 0.2% in November, the same increase as in September and October. The indexes for shelter (rent: +0.2%; owners’ equivalent rent: +0.2%), medical care, airline fares, new vehicles, and tobacco were among the indexes that rose in November. In contrast, the indexes for recreation, apparel, household furnishings and operations, and used cars and trucks all declined. 

The all items index rose 0.5% over the last 12 months; this is the largest 12 month increase since the 12-month period ending December 2014. The food index rose 1.3% over the span, while the energy index declined 14.7%. The index for all items less food and energy rose 2.0%, its largest 12-month increase since the 12 months ending May 2014. Rent rose 3.6% YoY, while owners’ equivalent rent rose 3.1%.

The seasonally adjusted producer price index for final demand (PPI) increased 0.3% in November (0.0% expected), partially reversing declines of 0.4% in October and 0.5% in September. The November rise in the final demand index can be traced to prices for final demand services, which advanced 0.5%. In contrast, the index for final demand goods moved down 0.1%.

Final demand services: The index for final demand services advanced 0.5% in November following two consecutive decreases. Nearly 80% of the broad-based increase can be traced to margins for final demand trade services, which climbed 1.2%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand services less trade, transportation, and warehousing and for final demand transportation and warehousing services also moved higher, rising 0.1% and 0.3%, respectively.

Product detail: Over 40% of the November advance in prices for final demand services is attributable to a 6.2% increase in margins for apparel, jewelry, footwear, and accessories retailing. The indexes for machinery and equipment wholesaling, loan services (partial), fuels and lubricants retailing, portfolio management, and long-distance motor carrying also moved higher. Conversely, prices for securities brokerage, dealing, investment advice, and related services fell 3.9%. The indexes for food and alcohol retailing and for water transportation of freight also fell.

Final demand goods: The index for final demand goods inched down 0.1% in November, the fifth consecutive decrease. Over 90% of the November decline can be traced to prices for final demand energy, which fell 0.6%. The index for final demand goods less foods and energy edged down 0.1%. In contrast, prices for final demand foods rose 0.3%.

Product detail: Half of the November decrease in the index for final demand goods is attributable to prices for gasoline, which fell 1.3%. The indexes for residential natural gas, electric power, carbon steel scrap, and corn also moved lower. Conversely, prices for fresh fruits and melons jumped 11.6%. The indexes for eggs for fresh use, jet fuel, and pharmaceutical preparations also increased. 

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Month-over-month changes in the not-seasonally adjusted price indexes we track were mixed in November, but all fell on a year-over-year basis. 

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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.

3Q2015 Gross Domestic Product: Third (Final) Estimate

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Changes to the third (“final”) estimate of 3Q2015 U.S. gross domestic product (GDP) were minimal and likely statistically non-significant. The Bureau of Economic Analysis (BEA) reported that the economy grew at a seasonally adjusted and annualized rate of 1.99%, down 0.08 percentage point from the previous estimate of 2.07% released in November; that rate was also significantly slower than 2Q’s 3.92%. The revised 3Q growth rate was in line with consensus expectations. A better metric involves comparing growth to the same quarter one year earlier. For 3Q2015, the year-over-year growth was 2.15% -- down from 2Q's 2.72% YoY growth.

Groupings of GDP components show that personal consumption expenditures (PCE) and government consumption expenditures (GCE) contributed to 3Q growth whereas private domestic investment (PDI) and net exports (NetX) detracted from it.

The largest changes in this report again involved the typically noisy inventory data; most other line items were essentially unchanged. Inventories were reported to have been contracting at a -0.71% annualized rate, a 0.12 percentage point deterioration from the -0.59% reported in November. The BEA’s real final sales of domestic product, which excludes the impact of inventories, was actually revised upward by 0.04 percentage point for 3Q, to a +2.70% growth rate. 

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Consumer activity once again contributed the vast bulk of the headline number (providing +2.04% in total), although that contribution was minimally less than in the previous estimate (down -0.01% in aggregate). Fixed commercial investments and governmental spending were both slightly improved, while exports and imports both weakened slightly from the previous estimate.

If there are any "take-aways" from this report, they might be the following:

-- In general, the economic growth provided by consumer spending is reported to be softening -- although the data on consumer spending for services has arguably become less reliable as a direct consequence of Obamacare.

-- The quarter-to-quarter increase in the household savings rate (to 5.2%) goes a long ways towards explaining the ongoing weak retail sales. Household monies no longer being spent at the gasoline pump are simply being saved. This implies that households are not particularly confident when looking forward.

-- Once again the contribution of exports to the headline number is a mere one-sixth what it was in the second quarter. The soaring dollar and plunging global economy have likely caught up with U.S. exporters. In coming quarters we may look favorably back on a time when exports provided any growth at all.

-- The core domestic economy seems to be transitioning to (at least) slower growth, with exports leading the way.

-- The arguably high deflators utilized for this report (GDP deflator of +1.30% versus 3Q CPI-U of -0.37%) may have skewed the headline number downward. For this reason alone it is possible that the real economy may have been performing better than these numbers would lead us to believe.

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 2015 Macro Pulse -- Seventy-eight Months and Counting….

Turning the calendar to 2016 will mark 6½ years since the end of the Great Recession (GR) in June 2009. As an illuminating graph by Lance Roberts indicates, that is nearly twice the average duration of expansions since the 1870s. That the expansion is the fourth longest since WWII is certainly heartening but, regrettably, it is also the weakest. Gross domestic product has grown since June 2009 at a compound annual growth rate (CAGR) of only about 2%, less than half the average CAGR of 4.5% among all previous post-WWII expansions. While current growth is above the median of the past 10 years, the trend is down. What can other indicators tell us about the strength of the economy?

Click here to find out and to read the rest of the December 2015 Macro Pulse recap.

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

November 2015 Residential Permits, Starts and Completions

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Total housing starts in November were at a seasonally adjusted annual rate (SAAR) of 1.173 million units (1.141 million expected). This is 10.5% (±8.6%) above the revised October estimate of 1.062 million (originally 1.060 million) and 16.5% (±10.3%) above the November 2014 SAAR of 1,007,000.

The increase was about evenly split on an absolute basis between the single- (+54,000 units) and multi-family (+57,000 units) components. Single-family starts were at a rate of 768,000, or 7.6% (±9.6%)* above the revised October figure of 714,000. Multi-family starts were at a rate of 405,000 units, an increase of 16.4%.

* 90% confidence interval (CI) is not statistically different from zero. The Census Bureau does not publish CIs for the entire multi-unit category. 

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Total starts were 18.5% above their not-seasonally adjusted year-earlier level (single-family: +17.4%; multi-family: +20.4%). Year-to-date (YTD) comparisons to 2014 were all in the 10-12% range. 

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Completions fell by 31,000 units in November, to a SAAR of 947,000. This is 3.2% (±8.7%)* below the revised October estimate of 978,000 (originally 965,000), but 9.2% (±9.9%)* above the November 2014 SAAR of 867,000. All of the decline occurred in the multi-family component (-33,000 or 9.5%), as the single-family component inched by up 2,000 units (0.3% ±9.7%*) to 632,000. On a not-seasonally adjusted basis, as shown in the table above, all YoY comparisons were positive; so, too, were YTD comparisons to 2014. 

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Total permits in November were at a SAAR of 1.289 million units (1.146 million expected). That was 11.0% (±1.6%) above the revised October rate of 1.161 million (originally 1.150 million) and 19.5% (±2.0%) above the November 2014 SAAR of 1.079 million. The not-seasonally adjusted YoY comparison was +24.7%; YTD comparisons to the same months in 2014 were +11.1%.

The increase in permits was concentrated almost entirely in the multi-family component (+120,000 units or +26.9%), as single-family authorizations rose up by only 8,000 units (+1.1% ±0.9%) to a SAAR of 723,000.

The latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) remained relatively flat in December, dropping one point to 61. (An HMI value above 50 means more builders feel the market is good than feel it is poor.) “Overall, builders are optimistic about the housing market, although they are reporting concerns with the high price of lots and labor,” said NAHB Chairman Tom Woods.

“For the past seven months, builder confidence levels have averaged in the low 60s, which is in line with a gradual, consistent recovery,” said NAHB Chief Economist David Crowe. “With job creation, economic growth and growing household formations, we anticipate the housing market to continue to pick up traction as we head into 2016.” 

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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 2015 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) declined 0.6% (-0.2% expected) in November after decreasing 0.4% in October. In November, manufacturing production was unchanged from October. The index for utilities dropped 4.3%, as unusually warm weather held down the demand for heating. The index for mining fell 1.1%, largely attributable to sizable declines for coal mining and for oil and gas well drilling and servicing. At 106.5% of its 2012 average, total IP was 1.2% below its year-earlier level.

As mentioned above, manufacturing output was unchanged (+0.1% expected), as the output of nondurable goods gained 0.5%, but the production of durable goods declined 0.2% and the index for other manufacturing industries (publishing and logging) moved down 1.7%. Most nondurable goods industries recorded increases, with the largest gain posted by the food, beverage, and tobacco products category. Among durable goods industries, losses of 1.0% or more were recorded by primary metals; electrical equipment, appliances, and components; and motor vehicles and parts. Wood Products output was unchanged (+1.4% YoY) while Paper rose by 0.2% (-1.5% YoY).

The production of nonmetallic mineral products increased 1.2% for the largest gain among durables. Mining output declined 1.1% in November and was 8.2% below its year-earlier level, with the index for oil and gas well drilling and servicing at less than half of its year-earlier level. 

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Capacity utilization (CU) for the industrial sector declined 0.5 percentage point (-0.7%) in November to 77.0% (77.4% expected), a rate that is 3.1 percentage points below its long-run (1972–2014) average. Manufacturing CU edged down to 76.2%, a rate 2.3 percentage points below its long-run average. The operating rate for durable goods manufacturing moved down 0.3 percentage point, while the operating rate for nondurable goods manufacturing moved up 0.4 percentage point. Wood Products CU dipped 0.2% (-1.0% YoY) to 70.8%; Paper advanced 0.2% (-1.1% YoY) to 82.6%.

Utilization for other manufacturing (publishing and logging) decreased 0.9 percentage point. The operating rate for mines dropped 1.1 percentage points to 79.4%, while capacity utilization for utilities fell 3.4 percentage points to 74.5%. 

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Capacity at the all-industries and manufacturing levels moved higher -- All-industries: +0.1% (+1.5% YoY) to 138.4% of 2012 output; Manufacturing: +0.1% (+1.3% YoY) to 139.1%. Wood Products extended the upward trend that has been ongoing since November 2013 when increasing by 0.2% (+2.5% YoY) to 160.4%. Paper was unchanged (-0.3% YoY) at 116.9%.

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 2015 International Trade (Pulp, Paper & Paperboard)

Month-over-Month, Year-over-Year, and Year-to-Date:

On a month-over-month basis, October's net exports posted a slight decrease of 16.9 thousand tonnes (-1.0%): 1,625 to 1,608 thousand tonnes. October's net exports were the second lowest level of the year thus far, supplanting September for that title and pushing it third lowest for the year. While February was lower than both September and October net exports, both January and March, which were affected by the West Coast port slowdown, were higher. Details for October, the prior six months, year-over-year, and year-to-date performance are presented in the table below.

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Despite month-over-month net exports decreasing, October exports increased by 58.4 thousand tonnes (2.5%) from September's level. The reason net exports fell even though exports increased is because imports in October increased at a faster rate than exports, rising by 75.3 thousand tonnes (10.1%), resulting in the 16.9 thousand tonne decline in net exports.

On a year-over-year basis October exports were down 40.4 thousand tonnes and imports up 5.3 thousand tonnes, resulting in a year-over-year decrease in net exports of 45.7 thousand tonnes (-2.8%).

On a year-to-date basis exports are up 672 thousand tonnes while imports are down 449 thousand tonnes, yielding an increase in net exports of 1,121 thousand metric tonnes (7.1%). Net exports are on track to achieve the third highest level since 2005.

The year-to-date decline in imports and increase in exports is counterintuitive with reported stronger 2015 US growth compared to global growth and a strengthening U.S. dollar. As noted in prior repots, this trend has been consistently evident from April 2015's YTD through September 2015's YTD results; in the seven months of reported data since April four of the five have been the second highest month of net exports since 2005 and two have been the third highest month. However, this pattern was broken in October when October 2015's monthly result ranked as the seventh highest monthly total of eleven since 2005.

While the West Coast port slowdown may explain some of the early 2015 results, and 2Q results reflect some degree of "catch-up" from the port slowdown, the YTD results suggests other factors are responsible for the YTD performance.

In particular, the reduction in YTD imports might suggest US economic activity may not be as strong as is generally believed. With a strong U.S. dollar and active U.S. growth compared to global growth the expectation would be imports would increase to support U.S. domestic economic growth. Cheap oil should have made such an outcome even more likely. The most notable drop in imports is from Canada. The bulk of the YTD increase in exports was driven by exports to China, suggesting China's slowdown has not yet adversely impacted sectors consuming pulp. More country by country details are covered below.

Six-month Cumulative Activity and Trends:

Cumulative activity over the six months ending August 2015 shows net exports are 11.5% above the pace seen over the six months ending in August 2014. Cumulative six-month net exports are principally higher due to higher exports, up 766 thousand tonnes or 5.4 percent, compared to imports which are down 299 thousand tonnes, or 6.0 percent.

Six-month trend-lines were fit to the data to study recent trends beyond simple cumulative activity. All three trend lines remained negative although the import trend is barely negative for the six-month period ending in October.

Apart from trend lines, thus far in 2015 May was the export peak, June the import peak, and May the net export peak. October's exports were 7.7% below May's export peak, October's imports were 2.6% below June's import peak, and October's net exports were 14.8% below May's net export peak. 

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In terms of notable shifts in country-level details:

Pulp exports (22,614 thousand tonnes YTD) are higher (3.2%) compared to last year's YTD levels. China remains the chief destination of U.S. pulp by a wide margin, representing 58% of YTD shipments; October 2014 YTD figures pegged exports to China at 56% of the U.S. total, indicating China's share of US pulp exports has grown in 2015 relative to 2014. China's exports have increased by 8.5% YTD compared to the same period in 2014. Mexico leapfrogged India as the second-ranked destination for U.S. pulp exports, representing 6.7% of YTD exports compared to India's 6.2% share. Pulp exports to both countries are down YTD: Mexico's receipt of U.S. pulp export have fallen by over 5% and India's are down by nearly 14%. In addition to Mexico and India swapping spots in 2015, among 2014's top 10 destinations Japan and Indonesia also swapped, Japan moving up from number 7 to number 6 by purchasing 6.6% more pulp YTD while Indonesia has purchased 7.6% less pulp YTD. 

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Pulp imports (5,053 thousand tonnes YTD) decreased -5.1% compared to prior YTD levels. Canada and Brazil, the 1st and 2nd ranked pulp import sources, respectively, account for over 93% of the pulp imported. Despite their top ranking, Canada has logged a decline (-8.0%) in pulp imported while Brazil has barely increased (+0.6%) its imports compared to prior YTD levels. On the other hand, Chile, while maintaining its number three rank, has increased its imports YTD by nearly 6%. Norway has climbed from a 10th ranked place in 2014 to 8th in 2015 with an over 500% increase in pulp imports to the U.S., the Philippines from 12th ranked in 2014 to 7th ranked in 2015 with an increase over 260%, and Germany from 13th ranked to 10th ranked. On a YTD basis China (9th in 2014, 11th in 2015) and Finland (8th in 2014, 12th in 2015) have fallen out of the 10 ten importers of pulp into the US. As a region Europe shows the largest percentage increase in imports into the U.S. at 56.7% while Caribbean nations collectively posted the largest percentage decline at 87.3%. 

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Paper and paperboard imports (2,691 thousand tonnes YTD) have dropped by over 6% year-to-date compared to prior YTD activity. Once again Canada leads the way, accounting for 86% of the total import volume and 113.6% of the YTD decrease (201 of177 thousand tonnes). Finland and China held onto their number 2 and 3 rankings despite posting 1.9% and 7.0% decreases YTD, respectively. One notable development on a percentage basis is Australia, which has vaulted from being the 7th ranked supplier during the first ten months of 2014 to the 4th ranked supplier during the first ten months of 2015, posting an increase of 143.6%. Mexico slipped from the 4th to 5th place ranking despite importing 14.3% more into the U.S. YTD. In other top 10 changes from 2014, Sweden has dropped from 5th in 2014 to 6th in 2015 with a 16.1% drop in paper and paperboard imports into the U.S and South Korea slipped from 6th to 8th with pulp and paperboard imports declining by nearly 53%. Meanwhile Taiwan vaulted to the 9th ranked spot from 12th ranked in 2014 with an increase of 190.8% in imports shipped to the U.S. 

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Paper and paperboard exports (2,000 thousand tonnes) dropped by 1.6% on a YTD basis. Mexico and Canada swapped places as the number 1 destination for U.S. paper and paperboard exports, with Mexico growing by 18.3 percent YTD over same period in 2014, while Canada's purchases of U.S. paper and paperboard declined by 0.9 percent. Among 2014's Top 10 destinations, the "loss leader" in 2015 is India (-29 thousand tonnes, -25.5% from prior YTD) followed by Costa Rica (-19 thousand, -29.1% from prior YTD), and Japan (-18 thousand tonnes, -12.1% from prior YTD). Bucking the general decline in paper and paperboard exports, as already noted, Mexico's receipts of U.S. paper and paperboard exports is up. South Korea (+10.3%) and China (+6.2%) are both receiving more U.S. exports of paper and paperboard as well. 

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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.

October 2015 International Trade (Softwood Lumber)

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Softwood lumber exports rose by 9 MMBF (+7.1%) in October while imports increased by 40 MMBF (+3.2%). Exports were 18 MMBF (12.2%) below year-earlier levels; imports were 123 MMBF (10.5%) higher. The year-over-year (YoY) net export deficit was 142 MMBF (13.9%) larger. 

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North America was the primary destination for U.S. softwood lumber exports in October (39.3%, of which Mexico: 21.7%; Canada: 17.6%). Asia (especially China: 15.7%) placed second with 31.2%. Year-to-date (YTD) exports to China were down 34.6% relative to the same months in 2014. Meanwhile, Canada was the source of nearly all (96.8%) softwood lumber imports into the United States. Overall, YTD exports were down 12.8% compared to 2014, while imports were up 7.7%. 

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U.S. softwood lumber export activity through West Coast customs districts declined in relation to the other districts during October (to 33.3% of the U.S. total, from 36.9% in September); Mobile, AL (19.1%) overtook Seattle, WA (17.8%) as the most active export district. At the same time, Great Lakes customs districts handled 71.9% of the softwood lumber imports (especially Duluth, MN with 32.5%) coming into the United States. 

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Southern yellow pine comprised 33.3% of all softwood lumber exports in October, followed by Douglas-fir with 14.9%. Southern pine exports were up 9.4% YTD relative to 2014, while Douglas-fir exports were down 30.6%.

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 2015 International Trade (General)

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The goods and services deficit was $43.9 billion in October, up $1.4 billion from $42.5 billion in September (revised from $40.8 billion). October exports were $184.1 billion, $2.7 billion less than September exports. October imports were $228.0 billion, $1.3 billion less than September imports.

The October increase in the goods and services deficit reflected an increase in the goods deficit of $2.1 billion to $63.1 billion and an increase in the services surplus of $0.6 billion to $19.2 billion.

Year-to-date, the goods and services deficit increased $22.2 billion, or 5.3%, from the same period in 2014. Exports decreased $84.7 billion or 4.3%. Imports decreased $62.5 billion or 2.6%.

The October figures show surpluses, in billions of dollars, with South and Central America ($2.8), United Kingdom ($0.6), and OPEC ($0.4).  Deficits were recorded, in billions of dollars, with China ($30.2), European Union ($13.3), Mexico ($6.3), Germany ($6.2), Japan ($5.3), Italy ($2.3), South Korea ($2.3), India ($2.0), France ($1.7), Canada ($0.2), Brazil ($0.2), and Saudi Arabia (less than $0.1).

   * The surplus with members of OPEC decreased $1.3 billion to $0.4 billion in October. Exports decreased $1.6 billion to $5.1 billion and imports decreased $0.3 billion to $4.7 billion.

   * The deficit with Mexico increased $0.9 billion to $6.3 billion in October. Exports increased $0.1 billion to $19.7 billion and imports increased $1.0 billion to $26.0 billion.

   * The balance with the United Kingdom shifted from a deficit of $1.2 billion to a surplus of $0.6 billion in October. Exports increased $0.4 billion to $5.2 billion and imports decreased $1.4 billion to $4.5 billion. 

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On a global scale, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume expanded by 0.5% in September (-0.3% year-over-year) while prices fell by 0.9% (-13.2% YoY).

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 2015 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment rose by 211,000 jobs in November -- besting consensus expectations of 190,000. Moreover, combined September and October employment gains were revised up by 35,000 (September: +8,000; October: +27,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) remained unchanged at 5.0% as the change in the number of people employed (+244,000) nearly matched the increase in the civilian labor force (+273,000). 

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Observations from the employment reports include:

* The disparity in job gains between the establishment (+211,000) and household (+244,000) surveys was negligible.

* Workers aged 45-54 accounted for the majority (+221,000) of “gross” jobs gained. By contrast, workers aged 16-24 actually declined by 109,000; note that age-cohort-based estimates are not additive, as each cohort is assigned a different seasonal adjustment.

* Manufacturing employment edged lower in November. Year-to-date, manufacturing has gained a net 17,000 jobs; during August and September, however, manufacturing surrendered 27,000 of the 44,000 jobs gained earlier in 2015. Wood Products added 2,400 jobs in November; Paper and Paper Products gained 100.

* Construction added 46,000 jobs, while oil and gas extraction shed 2,400 jobs.

* Over 63% (136,700 jobs) of November’s private-sector job growth occurred in the sectors typically associated with the lowest-paid jobs -- Retail Trade: +30,700; Professional & Business Services: +27,000; Education & Health Services: +40,000; and Leisure & Hospitality: +39,000. This is a persistent issue, as we have repeatedly highlighted: There are 1.428 million fewer manufacturing jobs today than at the start of the Great Recession in December 2007, but 1.564 million more Food Services & Drinking Places (i.e., wait staff and bartender) jobs. 

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* The employment-population ratio remained at 59.3%; roughly speaking, for every five people added to the population, fewer than three are employed. Meanwhile, the number of employment-age persons not in the labor force retreated by 67,000 to just over 94.4 million. 

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* The labor force participation rate (LFPR) inched up to 62.5%, comparable to October 1977. Average hourly earnings of all private employees rose by $0.04 (to $25.25), resulting in a 2.3% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages also rose by $0.01, to $21.19 (+2.0% YoY). With the CPI running at an official rate of +0.2% YoY, wages are technically rising in real (inflation-adjusted) terms. The average workweek for all employees on private nonfarm payrolls shrank by 0.1 hour, to 34.5 hours. 

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* Finally, full-time jobs increased by 3,000 while part-time jobs rose by 137,000. Full-time jobs have been trending higher since December 2009, and are now 152,000 above the pre-recession high (even while the non-institutional, working-age civilian population has risen by an estimated 18.6 million). Part-time jobs, by contrast, have been stuck in a channel between roughly 27 and 28 million.

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 2015 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that the U.S. manufacturing contracted during November for the first time in 36 months. The PMI registered 48.6% (50.5% expected), a decrease of 1.5 percentage points from the October reading of 50.1%, and the lowest reading since June 2009. (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. About the only positive aspect of the survey was an increase in employment; declining manufacturer inventories could perhaps be considered positive as well. 

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Both Wood Products and Paper Products were unchanged in November; in fact, Wood Products was not even mentioned in the report. For Paper Products, employment growth was apparently offset by declines in new and backlogged domestic orders, and new export orders.

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- slowed in November. The NMI registered 55.9% (58.2% expected), 3.2 percentage points lower than the October reading of 59.1%. Important internals weakened essentially “across the board,” but remained in expansion. 

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Real Estate and Construction reported increases in activity, whereas Ag & Forestry was unchanged.

Lumber prices were higher; but diesel fuel, gasoline and natural gas prices were lower. No relevant commodity was in short supply.

ISM’s and Markit’s surveys diverged again in November: ISM’s PMI fell into outright contraction while Markit’s Manufacturing PMI slowed but remained in expansion. ISM’s NMI decelerated while Markit’s Services PMI accelerated to a three-month high.

Comments from Markit Chief Economist Chris Williamson are presented below:

Manufacturing -- “While the pace of manufacturing growth appears to have slowed in November, it remains encouragingly resilient, which is all the more impressive once headwinds such as the strength of the dollar and malaise in overseas markets are taken into account.

“The PMI results are indicative of the manufacturing sector growing at an annualized rate of around 2% in the fourth quarter so far.

“Growth is being driven by domestic demand, with exports falling back into decline. The uncertain global picture and strong currency are key areas of worry to manufacturers, which led to a more cautious approach to hiring during the month. However, there’s nothing new that will overly concern policymakers, leaving the door open for rates to rise later in the month.”

Services -- “The PMI surveys indicate that US economic growth hit a six-month high in November, indicating 0.5% (2.0% annualized) GDP growth so far in the fourth quarter. The upturn points to the economy enjoying a strong performance as we head towards the end of the year.

“Growth is being fueled by rising domestic demand, which propelled growth in the vast service economy higher and more than offset an export-led weakening of manufacturing growth.

“The survey also signals robust employment growth, consistent with non-farm payrolls rising by around 180,000.

“Cost pressures are muted but prices appear to be on the rise, with average rates charged for goods and services showing the largest monthly gain since June.

“As such, the data add further fuel to arguments that the economy is in a healthy enough state to cope with higher interest rates.”

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 2015 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 $2.5 billion or 0.5% to $475.2 billion in October. Shipments of durable goods decreased $2.5 billion or 1.0% to $240.1 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased less than $0.1 billion or virtually unchanged to $235.1 billion, led by Paper products (1.2%). Shipments of Wood products rose 0.5%. 

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Inventories decreased $0.6 billion or 0.1% to $643.6 billion. The inventories-to-shipments ratio was 1.35, unchanged from September. Inventories of durable goods decreased $1.0 billion or 0.3% to $397.0 billion, led by primary metals. Nondurable goods inventories increased $0.4 billion or 0.2% to $246.5 billion, led by petroleum and coal products. Inventories of Wood expanded by 0.6% while Paper was unchanged. 

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New orders increased $6.8 billion or 1.5% to $473.9 billion. Excluding transportation, new orders increased 0.2% (but -7.7% YoY -- the 12^th consecutive month of year-over-year contractions). Durable goods orders increased $6.8 billion or 2.9% to $238.8 billion, led by transportation equipment. New orders for nondurable goods increased less than $0.1 billion or virtually unchanged to $235.1 billion. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- jumped by 1.3% in October (-1.1% YoY).

Prior to July 2014, as can be seen in the graph above, real (inflation-adjusted) new orders had been essentially flat since early 2012, recouping on average 70% of the losses incurred since the beginning of the Great Recession. With July 2014’s transportation-led spike gradually receding in the rearview mirror, new orders are back to 61% of their December 2007 high. 

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Unfilled durable-goods orders increased $3.4 billion or 0.3% to $1,191.8 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.94, up from 6.86 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 2014 were back to 97% of their December 2008 peak. Real unfilled orders jumped to 122% of the prior peak in July 2014, thanks to the largest-ever batch of aircraft orders, but have since moved mostly sideways and are now on the cusp of falling below the January 2010-to-June 2014 trend 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.