4Q2014 Gross Domestic Product: First (Advance) Estimate

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According to the Bureau of Economic Analysis’ (BEA) “advance” estimate, 3Q2014 growth in real U.S. gross domestic product (GDP) was pegged at a seasonally adjusted and annualized rate of 2.6% -- or 2.4 percentage points lower than 3Q’s 5.0%. Analysts had expected a more modest decline to 3.2% (ranging from +2.2 to 3.5%). Personal consumption expenditures (PCE) and private domestic investment (PDI) contributed to 4Q growth, while net exports (NetX), and government consumption expenditures (GCE) subtracted from it.

The 4Q headline was cut nearly in half relative to 3Q by imports (-1.55%), exports (-0.24%), government spending (-1.20%), and fixed investment (-0.84%). Inventory growth (+0.85%) and consumer spending (goods: +0.14%; services: +0.52%) were the only bright spots. As we have frequently pointed out in the past, however, “what inventories give now, they take away in the future” unless the economy is in the midst of sustained and robust growth. Also, a majority of consumer spending on services was concentrated in healthcare -- including insurance premiums, whose connection to the real economy is somewhat tenuous. 

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Consumer Metrics Institute made an interesting observation:

“As mentioned last quarter, plunging energy prices are likely playing havoc with many of the numbers in this report. U.S. at-the-pump gasoline prices fell 33% quarter-to-quarter -- pushing all consumer oriented inflation indexes firmly into negative territory. During 4Q (i.e., from October through December) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was solidly dis-inflationary at a -2.47% (annualized) rate, and the price index reported by the Billion Prices Project (BPP) was significantly more dis-inflationary, dropping [at] an astounding -8.30% annualized rate during the quarter.

“Yet for this report the BEA still assumed a very mildly dis-inflationary annualized deflator of only -0.09%. The disparity between the BEA’s and the BLS’s deflators raises some serious consistency issues. Over reported inflation (or underreported dis-inflation) will result in a more pessimistic growth data; if the BEA’s nominal numbers were corrected for inflation using the line-item appropriate BLS consumer and producer price indexes, the economy would be reported as growing at an implausibly high 7.17% annualized rate. Clearly the BEA’s deflator is troubling, but using the more reasonable deflators from the BLS generates nonsensical growth rates when applied to the BEA’s nominal data; this suggests the BEA's initial nominal data may be more overstated…than reasonable deflators can handle.”

We would observe that the BEA’s GDP deflator typically “travels” in the midrange of the BLS’s CPI, so it will be interesting to see if the CPI turns higher in subsequent quarters.

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

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

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Sales of new single-family homes jumped in December, by 50,000 units (+11.6%) relative to the previous month, to a seasonally adjusted and annualized rate (SAAR) of 481,000. Data for November was revised down from 438,000 to 431,000 units -- the seventh consecutive month of downward revisions. “This data series is suffering from methodology issues,” observed one analyst. “Not only does it cycle between good [and] bad months -- but the backward revisions continue to be moderate to significant” (e.g., August 2014 sales have been clipped -11.1% from the original estimate). Sales have been essentially flat (averaging 439,000) since January 2013. Sales in December were 9.7% above year-earlier levels, and 1.9% higher on a year-to-date (YTD) basis than the same months in 2013.

Meanwhile, the median price of new homes sold rose by $6,500 (+2.2%) to $298,100. The average price of homes sold escalated by an even greater $33,200 (+9.6%), implying that high-end homes comprised a larger share of new-home sales in December than in November. Because single-family starts increased faster than sales in December, the three-month average ratio of starts to sales jumped to 1.55; that ratio is near the upper end of the historical range, perhaps suggesting that starts may taper off unless sales pick up further. 

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As mentioned in our post on December’s housing permits, starts and completions, single-unit completions advanced by 58,000 units (+9.5%). New-home inventory expanded in absolute (+5,000 units) terms while months of inventory declined by 0.5 month. 

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Existing home sales increased in December (+120,000 units or 2.4%) to 5.04 million units (SAAR). Despite sales of new homes rising more slowly than existing homes, the share of total sales comprised of new homes rose to 8.7%. The median price of previously owned homes sold in December advanced by $2,300 (+1.1%) to $209,500. Inventory of existing homes declined in both absolute (-230,000 units) and months of inventory (4.4 months).

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Housing affordability improved slightly in November as the median price of existing homes for sale fell by $1,800 (-0.9%) to $206,200. 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 less than -0.1% in November (+4.7% relative to a year earlier).

“With the spring home buying season, and spring training, still a month or two away, the housing recovery is barely on first base,” said David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices. “Prospects for a home run in 2015 aren’t good. Strong price gains are limited to California, Florida, the Pacific Northwest, Denver, and Dallas. Most of the rest of the country is lagging the national index gains. Moreover, these price patterns have been in place since last spring. Existing home sales were lower in 2014 than 2013, confirming these trends.

“Difficulties facing the housing recovery include continued low inventory levels and stiff mortgage qualification standards. Distressed sales and investor purchases for buy-to-rent declined somewhat in the fourth quarter. The best hope for housing is the rest of the economy where the news is better. 2014 was a good year for job creation and weekly unemployment claims – good short term indicators – which continue to provide upbeat reports. Consumer confidence, helped by cheap gasoline prices, is strong, and a good GDP number is expected this week.” 

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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.

December 2014 Residential Permits, Starts and Completions

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Total housing starts advanced in December, to a seasonally adjusted and annualized rate (SAAR) of 1.089 million units. That level was 46,000 more (+4.4%) than November’s 1.043 million units (revised up from 1.028 million). All of the increase in total starts occurred in the single-family component (+49,000 units or 7.2%); multi-family starts fell by 3,000 units (-0.8%). 

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The year-over-year percentage change in total starts turned positive in December (+8.4%). Single-family starts were 12.9% above their year-earlier level; the multi-family component edged up +0.8%. On a year-to-date (YTD) basis all components were above levels seen during the same months in 2013. 

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Completions rose by 55,000 units (+6.3%) in December, to 927,000 units SAAR. All of the increase occurred in the single-family component (+58,000 units or 9.5%); the multi-family component shrank by 3,000 units (-1.1%). Total completions were 19.6% above their year-earlier level and 15.5% higher YTD than the same months in 2013. 

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Total permits declined again in November, decreasing by 20,000 units (-1.9%), to 1.032 million SAAR. All of the decrease occurred in the multi-family component (-49,000 units or 11.8%); single-family permits rose (+29,000 units or 4.5%). December total permits were 3.6% above year-earlier levels and 3.2% higher YTD than the same months in 2013.

The latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) shed one point in January (to 57), two points below September’s nine-year high. An index value above 50 means more builders feel the market is good than feel it is poor. This marks the third straight month that the index has hovered in the upper-50s range.

“After seven months above the key 50 benchmark, builder sentiment is reflecting the gradual improvement that is occurring in many markets throughout the nation,” said NAHB Chairman Kevin Kelly. “January’s HMI reading is in line with our forecast as we head into the new year,” added NAHB Chief Economist David Crowe. “Steady economic growth, rising consumer confidence and a growing labor market will help the housing market continue to move forward in 2015.” 

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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 2015 Macro Pulse -- Breakout or Breakdown?

Is the economic “party” ramping up or about to close down? If measured by the headlines, the U.S. economy is finally firing on all cylinders and picking up momentum. The final reading on 3Q2014 GDP pegged growth at a sizzling 5.0%; 2014 saw 2.95 million jobs created while unemployment dropped to 5.6%. The stock market rose to new all-time nominal highs. Inflation remained subdued, and mortgage rates were near historic lows.

Yet, beneath the headlines, the story takes on a different hue. The economy's growth was strongly influenced by a surge in healthcare-related spending; $12.1 billion of the $18.6 billion of additional GDP from consumer spending in the final 3Q revision can be traced back to health care (mainly insurance premiums). Despite employment gains, real wages remain stagnant and record numbers of working-age persons are not in the labor force. Housing starts and sales were sputtering at year’s end amid the low mortgage rates. And while the stock market indexes posted records, trading volume has been relatively light. So, the party continues, but is it really heating up or starting to close down? Perhaps the following will help readers make up their own minds:

Click here to read the rest of the January 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 summarizes the previous 30 days of commentary available on this website.

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

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) declined 0.4% (in line with expectations) in December. The gasoline index continued to fall sharply, declining 9.4% and leading to the decrease in the seasonally adjusted all-items index. The fuel oil index also fell sharply, and the energy index posted its largest one-month decline since December 2008, although the indexes for natural gas and for electricity both increased. The food index, in contrast, rose 0.3%, its largest increase since September. 

The index for all items less food and energy was unchanged in December, following a 0.2% increase in October and a 0.1% rise in November. This was only the second time since 2010 that it did not increase. The shelter index continued to rise, and the index for medical care posted its largest increase since August 2013. However, these increases were offset by declines in a broad array of indexes including apparel, airline fares, used cars and trucks, household furnishings and operations, and new vehicles.

The all-items index increased 0.8% over the last 12 months. This is notably lower than the 1.3% change for the 12 months ending November. The energy index has declined 10.6% over the span. In contrast, the 3.4% increase in the food index is its largest 12-month increase since February 2012. The index for all items less food and energy has increased 1.6% over the last 12 months, its smallest 12-month change since the 12 months ending February 2014.

The seasonally adjusted Producer Price Index for final demand (PPI) fell 0.3% in December (slightly less than expectations of -0.4%). Final demand prices decreased 0.2% in November and advanced 0.2% in October. On an unadjusted basis, the index for final demand increased 1.1% in 2014 after rising 1.2% in 2013.

In December, the 0.3% decline in the final demand index can be traced to a 1.2% drop in prices for final demand goods. In contrast, the index for final demand services moved up 0.2%.

Final demand goods: The index for final demand goods dropped 1.2% in December, the sixth consecutive decrease. Leading the December decline (i.e., 70% of which was attributable to prices for gasoline), prices for final demand energy fell 6.6%. The index for final demand foods moved down 0.4%. Conversely, prices for final demand goods less foods and energy increased 0.2%.

Final demand services: The index for final demand services increased 0.2% in December after inching up 0.1% in November. Over three-fourths of the December rise can be traced to margins for final demand trade services, which climbed 0.6%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand services less trade, transportation, and warehousing advanced 0.2%. Conversely, the index for final demand transportation and warehousing services edged down 0.1%. 

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All of the price indices we track fell in December (relative to November). However, only Intermediate Materials was lower compared to a year earlier. 

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

December 2014 Industrial Production, Capacity Utilization and Capacity

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Industrial production (IP) decreased 0.1% in December (in line with expectations) after rising 1.3% in November. The decrease in December reflected a sharp drop in the output of utilities (utilities make up 9.8% of the IP index), as warmer-than-usual temperatures reduced demand for heating; excluding utilities, IP rose 0.7%. Manufacturing (representing 74.3% of the IP index) posted a gain of 0.3% for its fourth consecutive monthly increase. The index for mining (15.9% of the IP index) increased 2.2% after falling in the previous two months. Wood Products output retreated by 1.2% while Paper rose 0.1%.

At 106.5% of its 2007 average, total IP in December was 4.9% above its level of a year earlier. For 4Q2014 as a whole, IP advanced at an annual rate of 5.6%, with widespread gains among the major market and industry groups. 

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Capacity utilization (CU) for the industrial sector decreased 0.3 percentage point in December to 79.7%, a rate that is 0.4 percentage point below its long-run (1972–2013) average. Wood Products CU fell by 1.6% while Paper rose 0.3%. 

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

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

November 2014 International Trade (Pulp, Paper & Paperboard)

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Month-over-Month, Year-over-Year (YoY), and Year-to-Date (YTD):

* On a month-over-month basis, November’s net exports posted a scant increase of 4 thousand tonnes, or 0.2%, after October net exports were up by 21% from September. Despite November essentially flat-lining, the marginal increase resulted in November posting the highest level of net exports since January 2014.

* While this performance seems to belie the well documented West Coast port slowdown, when viewed on the basis of total tonnes processed (imports plus exports), the slowdown is more apparent, dropping from 3.3 million tonnes in October to 3.1 million tonnes in November. November’s net exports grew marginally because imports fell by 106 thousand tonnes while exports fell by 102 thousand tonnes, resulting in a net increase of 4 thousand tonnes.

* On a YoY basis November exports were down 51 thousand tonnes and imports down 94 thousand tonnes, resulting in a YoY increase in net exports of 43 thousand tonnes. On a YTD basis, exports are down 182 thousand tonnes while imports are up 132 thousand tonnes, yielding a decline in net exports of 314 thousand metric tonnes (-1.8%). The YTD increase in imports and decline in exports is consistent with 2014’s emerging trends of slowing global growth and a strengthening U.S. dollar.

Six-month Cumulative Activity and Trends:

* Cumulative activity over the six months ending November 2014 shows net exports are 1.0% below the pace seen over the six months ending in November 2013. Cumulative six-month net exports are principally lower due to higher imports (up 61 thousand tonnes or 1.3%) compared to exports (down 29 thousand tonnes, or 0.2%).

* Six-month trend lines were fit to the data to study recent trends beyond simple cumulative activity. November’s six month trend line on net exports switched to positive compared to October’s negative six month trend line. As noted previously, the reason for the change from negative to positive is more about the decline in imports than the increase in exports. Exports’ six-month trend did tick up from slightly negative in October to flat for the six months ending in November. On the other hand, the six-month import trend line became negative for November after being flat in October. 

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In terms of notable shifts in country-level details:

* Pulp exports (24,096 thousand tonnes YTD) are down slightly (-0.1%) compared to last year’s YTD levels. China remains the chief destination of U.S. pulp by a wide margin, representing 56% of YTD shipments. Nevertheless China’s exports have declined by 4.2% YTD compared to the same period in 2013. India surpassed Mexico as the second-ranked destination for U.S. pulp exports, representing 7.3% of YTD exports compared to Mexico’s 7.2% share. While Mexico’s receipt of U.S. pulp export are up nearly 10% YTD and India’s are up by 25%. Among 2013’s top 10 destinations, the most significant change is Indonesia where U.S. pulp exports are 43% higher than prior YTD levels, causing it to jump from the ninth-ranked 2013 YTD destination to the sixth-ranked 2014 YTD destination. In terms of declines among 2013’s top 10 destinations, Italy posted the most notable drop on a percentage basis (nearly -25%). 

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* Paper and paperboard exports (2,215 thousand tonnes) dropped by 6.6% on a YTD basis. Canada has leapfrogged Mexico as the top destination for U.S. paper and paperboard exports, growing by 15.8% YTD over same period in 2013, while Mexico’s purchases of U.S. paper and paperboard declined by 6.2%. Among 2013’s Top 10 destinations, the “loss leader” is India (102 thousand tonnes, -45.0% from prior YTD) followed by Mexico (32 thousand tonnes, -6.2% from prior YTD), Japan (22 thousand, -12.5% from prior YTD) and China (16 thousand tonnes, -25.1% from prior YTD). Canada’s receipt of U.S. paper and paperboard exports bucks the general decline. Costa Rica and Guatemala are also receiving higher levels of U.S. paper and paperboard exports; Costa Rica’s YTD receipts are up by over 21 thousand tonnes (+4.1%) and Guatemala is up over 7 thousand tonnes (+16.1%). 

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* Pulp imports (5,778 thousand tonnes YTD) decreased -1.3% compared to prior YTD levels. Canada and Brazil -- the first- and second-ranked pulp import sources, respectively -- account for nearly 94% of the pulp imported. Despite their top ranking, both have logged declines in pulp imported compared to prior YTD levels. On the other hand, Chile, while maintaining its number three rank, has increased its imports YTD by nearly 85%. Likewise Mexico has increased its pulp imports by over one-third compared to prior YTD levels. As a supply source, Uruguay has climbed to the sixth-ranked source for imported pulp in 2014 after not recording any shipments through the first 11 months of 2013. Among 2013’s YTD top-ten sources for pulp, Germany (ranked tenth YTD  in 2013) posted the largest percentage drop (nearly 28%), dropping to the 12^th-ranked source for 2014 YTD. 

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* Paper and paperboard imports (3,126 thousand tonnes YTD) have expanded by over 7% YTD compared to prior YTD activity. Once again Canada leads the way, accounting for nearly 88% of the total import volume and 67% of the YTD increase (139 of 208 thousand tonnes). One notable development on a percentage basis is Australia, which has vaulted from being the 29^th ranked supplier during the first 11 months of 2013 to the 7^th ranked supplier during the first 11 months of 2014, posting an eye-popping increase of 13,293% (from 164 tonnes YTD through November 2013 to 21,925 tonnes YTD through November 2014). In other top-ten changes from 2013, Sweden dropped from number four to number five, with pulp and paperboard imports declining by over 18%, Germany dropped from number six to number eight on a 15% decrease, and Indonesia dropped from eight to number nine on a 29% decline.

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

December 2014 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment increased by 252,000 jobs in December -- better than expectations of 230,000. Data for the prior two months was also revised up by a combined 50,000 jobs. Employers created 2.95 million new jobs in 2014, the fastest annual growth rate since 1999’s 3.2 million increase. Meanwhile, the unemployment rate (based upon the BLS’s household survey) dropped 0.2 percentage point, to a 6½ year low of 5.6%; regrettably, once again that piece of seemingly good news was more a function of 456,000 people dropping out of the labor force than workers finding employment.

The disparity between the establishment survey (+252,000 jobs) and the household survey (+111,000 jobs) continued in December, but the two reports were not as wildly inconsistent as had been the case in November (originally reported as ES:+321,000; HS: +4,000). Still, “once again we are in a situation in which the establishment survey and the household survey are at odds,” wrote analyst Mike Shedlock. “Over time these fluctuations tend to smooth out. The question, as always, is ‘in which direction?’”

All sectors of the economy saw employment gains last month, although those gains were concentrated in low-paying industries. On a more encouraging note, construction employment rose by 48,000 (the largest gain since January) while manufacturers added 17,000 workers (down from +29,000 in November). 

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Other internals of the report were mixed. For example, the employment-population ratio remained stable at 0.592 for a third month. As mentioned above, the number of employment-age persons not in the labor force jumped by 456,000 to a new peak just shy of 92.9 million. We should point out that those leaving the labor force are not entirely (perhaps not even predominantly) retiring Baby Boomers, as the ranks of the employed in the 55-and-over age cohort edged up to an all-time high of almost 32.9 million in December. 

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The labor force participation rate dropped 0.2 percentage point, matching its multi-decade low of 62.7%. Average hourly earnings of all private employees fell by $0.05 (the biggest drop since 2006), resulting in a 1.7% year-over-year increase (the smallest 12-month gain since October 2012). For all production and nonsupervisory employees (pictured above), wages rose by $0.06/hour (+1.6% YOY). With the CPI running at an official annual rate of 1.3%, wages are technically keeping up with price inflation.

The retreat in hourly earnings is puzzling. Some wonder whether last month's broad-based fall, which was led by a record 1.2% plunge in the retail trade sector, was a seasonal fluke that will be revised away. “There is no obvious fundamental economic factor that would contribute to today's number,” said JPMorgan economist Michael Feroli. “We are disposed to view this decline as a one-off.” 

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Finally, full-time jobs increased (+427,000) while part-time jobs decreased (-269,000). Full-time jobs have been trending higher since December 2009, but have yet to recapture the pre-recession high. 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 2014 International Trade (Softwood Lumber)

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Softwood lumber exports decreased by 32 MMBF (21.2%) in November while imports fell by 180 MMBF (15.3%). Exports were 37 MMBF (23.8%) below year-earlier levels; imports were 2 MMBF (0.2%) lower. 

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The rest of North America (i.e., Canada and Mexico) was once again the primary destination for U.S. softwood lumber exports in November (41.8%). Asia (especially China and Japan) was a distant second (32.1%). Canada was also the largest single-country destination (21.7%). Year to date (YTD), exports to China were -7.5% relative to the same period in 2013 (down from roughly +11% YOY as recently as September). Meanwhile, Canada was the source of nearly all (97.2%) softwood lumber imports into the United States. Overall, YTD exports were down 1.2% compared to the same period in 2013, while imports were up 10.5%. 

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U.S. softwood lumber export activity through West Coast customs districts dropped noticeably in November (to roughly 35% of the U.S. total, from 43% in October); Seattle retained the title of most-active district, with 21.7% of the November total. At the same time, Great Lakes customs districts handled over 71% of the softwood lumber imports (especially Duluth, MN with 27.2%) coming into the United States. 

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Southern yellow pine comprised 31.6% of all softwood lumber exports in November (up from 24.9% in October), followed by Douglas-fir with 14.8%. YTD, southern pine exports were up 28.8% relative to the same months in 2013, while Douglas-fir exports were down 19.1%.

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

November 2014 International Trade (General)

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The goods and services deficit was $39.0 billion in November (below the consensus expectation of $41.5 billion), down $3.2 billion from $42.2 billion in October. November exports were $196.4 billion, $2.0 billion less than October exports. November imports were $235.4 billion, $5.2 billion less than October imports.

The November decrease in the goods and services deficit reflected a decrease in the goods deficit of $3.3 billion to $58.3 billion and a decrease in the services surplus of $0.1 billion to $19.3 billion.

The decrease in exports was primarily due to aircraft. The decline in imports was widespread, except for consumer goods (which grew). Oil imports were down 35 million barrels from last month, and down 24 million barrels from one year ago. On an inflation-adjusted basis, the ex-oil trade deficit was near recent records.

Year-to-date, the goods and services deficit increased $22.3 billion, or 5.1%, from the same period in 2013. Exports increased $60.0 billion or 2.9%. Imports increased $82.4 billion or 3.3%. 

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On a global scale, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume increased by 0.1% in October (from the prior month) while prices fell by 1.6%.

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.

November 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 $2.8 billion or 0.6% to $495.7 billion in November. Shipments of durable goods decreased $1.6 billion or 0.6% to $244.5 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $1.3 billion or 0.5% to $251.2 billion, led by food products. Wood shipments fell by 0.9% while Paper decreased 0.8%. 

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Inventories increased $0.7 billion or 0.1% to $656.3 billion (the highest level since the series was first published on a NAICS basis). The inventories-to-shipments ratio was 1.32, unchanged from October.

Inventories of durable goods increased $1.8 billion or 0.4% to $408.4 billion, led by transportation equipment. Nondurable goods inventories decreased $1.1 billion or 0.4% to $247.9 billion, led by petroleum and coal products. Inventories of Wood expanded by 1.7% while Paper was unchanged. 

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New orders decreased $3.5 billion or 0.7% to $492.7 billion. Excluding transportation, new orders decreased 0.6% -- the sixth drop in the last seven months. Durable goods orders decreased $2.3 billion or 0.9% to $241.6 billion, led by transportation equipment. New orders for nondurable goods decreased $1.3 billion or 0.5% to $251.2 billion.

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 roughly 75% of the losses incurred since the beginning of the Great Recession. With July’s transportation-led spike now in the rearview mirror, new orders have dropped back to around 67% of their December 2007 high. 

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Unfilled durable-goods orders increased $4.5 billion or 0.4% to $1,179.1 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.81, up from 6.75 in October. 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 just 79% of their December 2008 peak. Real unfilled orders jumped to 102% of the prior peak in July 2014, thanks to the largest-ever batch of aircraft orders, hence, this metric is likely to remain elevated for several years.

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

December 2014 ISM Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that growth of economic activity in the U.S. manufacturing sector slowed markedly in December, missing expectations (consensus was 57.5%) by the most since January. The PMI tumbled from November’s 58.7% to 55.5% in December -- its lowest since June (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. All sub-indices except employment and slow supplier deliveries (implying suppliers may be having difficulty keeping up with orders) were lower in December.

“Comments from the panel are mixed,” said Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee, “with some indicating that falling oil prices have an upside while others indicate a downside. Other comments mention the negative impact on imported materials shipment due to the West Coast dock slowdown.” 

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Wood Products contracted in December, as virtually all reported changes in the sub-indices pointed to slower activity. Paper Products’ expansion, by contrast, was tarnished only slightly by falling export orders. 

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment – also slowed in December. The NMI registered 56.2%, 3.1 percentage points below November’s 59.3%. It was the biggest miss to expectations (consensus was 58.0%) since September 2013, and the lowest value since June. The sub-indices were lower “across the board” in December. Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee, was upbeat nonetheless. “Comments from respondents are mostly positive about business conditions and the overall economy for year-end.” 

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Two of the three service industries we track (Construction and Ag & Forestry) reported expansion in December, although supporting evidence was fairly thin. Apparently the increase in backlogged orders was not enough to move Real Estate’s overall activity “meter.”

Natural gas was the only relevant commodity up in price. Lumber, cardboard and fuel (both gasoline and diesel) were down in price. No relevant commodities were in short supply.

For once, ISM’s and Markit’s surveys were in agreement. ISM’s PMI and Markit’s U.S. Manufacturing PMI paralleled each other in December (i.e., both showed slower expansion); so, too, did ISM’s NMI and Markit’s U.S. Services PMI.

“[Manufacturers] are citing greater uncertainty about the outlook, especially in export markets,” said Chris Williamson, Markit’s chief economist, “leading to some scaling back of expansion plans and a greater reluctance for customers to place orders compared to earlier in the year, which suggests a slowdown could become more entrenched unless demand revives.” Capping off 4Q2014, Williamson said, “[Markit’s] PMI surveys act as good leading indicators of GDP data, and suggest that the pace of U.S. economic growth will have slowed in the fourth quarter. According to the PMIs, fourth quarter growth is looking more like 2.0% rather than the 5.0% annualized rate of expansion enjoyed in the third quarter.

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.