February 2015 Residential Sales, Inventory and Prices

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Sales of new single-family homes in February climbed to their fastest pace in seven years, rising by 39,000 units (+7.8%) relative to the previous month, to a seasonally adjusted and annualized rate (SAAR) of 539,000 (well above the 462,000 expected). Prior to 2015, sales had been essentially flat (averaging 435,000) since January 2013. Sales in February were 25.7% above year-earlier levels; year-to-date (YTD), sales were 19.1% above the same months in 2014.

Meanwhile, the median price of new homes sold tumbled by $13,900 (-4.8%) to $275,600. The average price of homes sold retreated by a relatively negligible $3,100 (-0.9%). Because single-family starts decreased while sales increased, the three-month average ratio of starts to sales slumped to 1.34, back below the average (1.41) since January 1995. 

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As mentioned in our post on February’s housing permits, starts and completions, single-unit completions retreated by 82,000 units (-12.1%). The jump in sales and drop in completions resulted in new-home inventory shrinking in both absolute (-3,000 units) and months-of-inventory (-0.4 months) terms. 

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Existing home sales edged higher in February (+60,000 units or 1.2%) to 4.88 million units (SAAR); expectations were for an increase to 4.94 million. Because sales of new homes increased more quickly than existing homes, the share of total sales comprised of new homes jumped to 9.9% (the largest share since July 2008). The median price of previously owned homes sold in February rose by $5,000 (+2.5%) to $202,600. Inventory of existing homes expanded in absolute terms (+30,000 units), but months of inventory remained stable at 4.6 months. 

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Housing affordability jumped in January as the median price of existing homes for sale fell by $9,400 (-4.5%) to $199,800. 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% in January (+4.5% relative to a year earlier).

“The combination of low interest rates and strong consumer confidence based on solid job growth, cheap oil and low inflation continue to support further increases in home prices” said David Blitzer, Managing Director and Chairman of the Index Committee for S&P Dow Jones Indices. “Regional patterns in recent months continue: strength in the west and southwest paced by Denver and Dallas with results ahead of the national index in the California cities, the Pacific Northwest and Las Vegas. The northeast and Midwest are mostly weaker than the national index.

“Despite price gains, the housing market faces some difficulties. Home prices are rising roughly twice as fast as wages, putting pressure on potential homebuyers and heightening the risk that any uptick in interest rates could be a major setback. Moreover, the new home sector is weak; residential construction is still below its pre-crisis peak. Any time before 2008 that housing starts were as low as the current rate of one million, the economy was in a recession.” 

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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.

4Q2014 Gross Domestic Product: Third (Final) Estimate

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According to the “final” estimate by the Bureau of Economic Analysis (BEA), 4Q2014 growth in real U.S. gross domestic product (GDP) was pegged at a seasonally adjusted and annualized rate of 2.2% -- down nearly 0.5 percentage point from the initial (“advance”) 4Q estimate, and 2.8 percentage points lower than 3Q’s 5.0%. Analysts had expected a deeper revision to 2.1% (ranging from +2.1 to 2.6%). 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 growth rate in real GDP was the same as was estimated last month," the BEA reported, "primarily reflecting upward revisions to exports and to personal consumption expenditures (PCE) that were mostly offset by a downward revision to private inventory investment." 

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One finds some disturbing facts when looking behind the headline numbers (hat tip Zerohedge): Namely, that any savings consumers may have gleaned at the gas pump have been more than spent on mandatory health insurance. AAA estimates consumers saved $14 billion on gasoline during 2014 (roughly $12.7 billion in 2009 dollars).

“In the final revision of 4Q GDP,” wrote the ZH author, “while virtually every other category of household spending was largely unchanged or revised lower, it was [the healthcare category], of which Obamacare was the biggest contributor at the margin, that saw an unprecedented surge in total spending -- a bump of $13.9 billion (from $1.858 trillion to $1.871.9 trillion) -- just between the second and final estimates of 4Q GDP!” I.e., the revised cost of health insurance just in the final 4Q GDP estimate was greater than the savings consumers experienced at the gas pump.

“It gets better,” continued ZH: “Of the $89.1 billion increase in chained-2009-dollar 4Q GDP [relative to 3Q], healthcare was $35.3 billion of that, or 40% of the total. Yes, healthcare spending accounted for 40% of GDP growth in 4Q!”

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

February 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) increased 0.2% in February (+0.2% expected). The increase in the all items index was broad-based, with contributions from shelter, energy, and food indexes. The energy index rose after a long series of declines, increasing 1.0% as the gasoline index turned up after falling in recent months; electricity rose to another all-time seasonally adjusted high. The food index, unchanged last month, also rose in February, though major grocery store food group indexes were mixed.

The index for all items less food and energy rose 0.2% in February, the same increase as in January. In addition to shelter, the indexes for used cars and trucks, apparel, new vehicles, tobacco, and airline fares were among those that increased. The medical care index was unchanged, while the personal care index declined.

The all items index was unchanged over the past 12 months, after showing a 0.1% decline for the 12 months ending January. Over the last 12 months the food index rose 3.0% (meats: +10.7%; beef: +15.2% year-over-year) and the index for all items less food and energy increased 1.7%. These increases were offset by an 18.8% decline in the energy index (although electricity was +3.2% higher YoY).  

The seasonally adjusted Producer Price Index for final demand (PPI) fell 0.5% in February (+0.3% expected). Final demand prices moved down 0.8% in January and 0.2% in December. On an unadjusted basis, the index for final demand decreased 0.6% for the 12 months ended in February. In February, about 70% of the decline in final demand prices can be attributed to a 0.5% decrease in the index for final demand services. Prices for final demand goods moved down 0.4%, thanks primarily to fresh and dry vegetables. 

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The price indexes we track were mixed on both month-over-month and year-over-year bases in January. The Wood Fiber index ticked marginally lower. 

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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.

March 2015 Macro Pulse -- Watching Paint Dry

That is what the markets seem to be doing while waiting for the outcome of the Federal Reserve meeting on March 18. Everything is on hold until its conclusion. Meanwhile, the economy appears to be going nowhere fast. Growth in gross domestic product (GDP) – heralded as proof the economy had finally achieved “escape velocity” when hitting a seasonally adjusted and annualized rate of 5.0% in 3Q2014 – has slumped back to a more typical post-Great Recession rate of 2.2% in 4Q2014. Moreover, the Atlanta Fed’s “nowcast” of 1Q2015 GDP was a mere +0.3% as of March 17. Factors contributing to that tepid growth rate include the following:

Click here to read the rest of the March 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.

February 2015 Residential Permits, Starts and Completions

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Total housing starts slumped in February, to a seasonally adjusted and annualized rate (SAAR) of 897,000 units (1.048 million expected). That level was 184,000 units lower (-17.0%) than January’s 1.081 million units (revised up from 1.065 million). The majority of the decrease in total starts occurred in the single-family component (-104,000 units or -14.9%); multi-family starts fell by 80,000 units (-20.8%). 

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The year-over-year percentage change in total starts slipped into negative territory in February (-4.1%). Single-family starts were 0.2% above their year-earlier level, but -11.4% for the multi-family component. Not-seasonally adjusted year-to-date (YTD) comparisons to 2014 are more upbeat. 

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Completions also stumbled, falling by 136,000 units (-13.8%) in February, to 850,000 units SAAR. Once again, most of the decrease occurred in the single-family component (-82,000 units or -12.1%); the multi-family component shrank by 54,000 units (-17.5%). As was the case with starts, however, completions’ YTD comparison with 2014 remains safely in positive territory. 

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Total permits were the bright spot in February; they increased by 32,000 units (+3.0%), to 1.092 million SAAR. All of the increase occurred in the multi-family component (+73,000 units or 18.3%); single-family permits fell (-41,000 units or -6.2%). YTD total permits were 6.5% above their year-earlier level.

The latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) shed two points in March (to 53). An index value above 50 means more builders feel the market is good than feel it is poor. “Even with this slight slip, the HMI remains in positive territory and we expect the market to improve as we enter the spring buying season,” said NAHB Chairman Tom Woods.

“The drop in builder confidence is largely attributable to supply chain issues, such as lot and labor shortages as well as tight underwriting standards,” said NAHB Chief Economist David Crowe. “These obstacles notwithstanding, we are expecting solid gains in the housing market this year, buoyed by sustained job growth, low mortgage interest rates and pent-up demand.” 

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

February 2015 Industrial Production, Capacity Utilization and Capacity

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Industrial production (IP) increased 0.1% (+0.3% expected) in February after decreasing 0.3% in January (revised from +0.2%). In February, manufacturing output moved down 0.2%, its third consecutive monthly decline. The rates of change for the total index in January and for manufacturing in both December and January are lower than previously reported. The index for mining fell 2.5% in February; drops in the indexes for coal mining and for oil and gas well drilling and servicing primarily accounted for the decrease. The output of utilities jumped 7.3%, as especially cold temperatures drove up demand for heating. At 105.8% of its 2007 average, total industrial production in February was 3.5% above its level of a year earlier. Wood Products output dipped by 0.5% while Paper was unchanged. 

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Capacity utilization (CU) for the industrial sector decreased to 78.9% in February, a rate that is 1.2 percentage points below its long-run (1972-2014) average. Wood Products CU slumped by 0.9% while Paper rose by 0.2%. 

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Capacity at the all-industries and manufacturing levels moved higher, both by 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.

January 2015 International Trade (Softwood Lumber)

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Softwood lumber exports decreased by 5 MMBF (-4.5%) in January while imports fell by 77 MMBF (-7.3%). Exports were 39 MMBF (25.7%) below year-earlier levels; imports were 91 MMBF (10.3%) higher. The net export deficit was 130 MMBF (17.7%) higher. 

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The rest of North America (i.e., Canada and Mexico) was once again the primary destination for U.S. softwood lumber exports in January (47.4%). Asia (especially China and Japan) was a distant second (33.8%). Canada was also the largest single-country destination (25.6%). Exports to China were down 63.9% relative to the same period in 2014. Meanwhile, Canada was the source of nearly all (93.8%) softwood lumber imports into the United States. Overall, exports were down 25.7% compared to a year earlier, while imports were up 10.3%. 

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Despite the port slowdown, U.S. softwood lumber export activity through West Coast customs districts stayed relatively stable in relation to the other districts during January (39.2% of the U.S. total); Seattle retained the title of most-active district, with 26.2% of the January total. At the same time, Great Lakes customs districts handled 67.3% of the softwood lumber imports (especially Duluth, MN with 27.1%) coming into the United States. 

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Southern yellow pine comprised 25.9% of all softwood lumber exports in January, followed by Douglas-fir with 18.3%. Southern pine exports were down 12.4% relative to a year earlier, while Douglas-fir exports were down 38.6%.

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.

January 2015 International Trade (General)

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The goods and services deficit was $41.8 billion in January, down $3.8 billion from $45.6 billion in December. January exports were $189.4 billion, down $5.6 billion from December. January imports were $231.2 billion, down $9.4 billion from December.

The January decrease in the goods and services deficit reflected a decrease in the goods deficit of $3.4 billion to $61.6 billion and an increase in the services surplus of $0.5 billion to $19.9 billion.

Year-over-year, the goods and services deficit increased $2.9 billion, or 7.5%, from January 2014. Exports decreased $3.3 billion or 1.7% while imports decreased $0.4 billion or 0.2%. 

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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 1.0% in December (from the prior month) while prices fell by 2.3%.

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

February 2015 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment increased by 295,000 jobs in February -- besting expectations of 230,000. Meanwhile, the unemployment rate (based upon the BLS’s household survey) dropped by 0.2 percentage point (to 5.5%) thanks to a combination of job gains (96,000) and individuals dropping out of the workforce (354,000). Observations from the employment report include:

• The disparity between the establishment survey (+295,000 jobs) and the household survey (+96,000 jobs) was noticeable again in February.
• We are somewhat skeptical of the employment report accuracy -- especially when the seasonal adjustment is practically equal to the initial value, as was the case in February (see table above).
• The oil-sector downturn is beginning to be reflected in the employment report; the Mining & Logging category (which includes oil extraction) was the only super-sector to exhibit seasonally adjusted contraction.
• Nearly 60% (171,000) of private-sector job growth occurred in the three super-sectors typically associated with the lowest-paid jobs: Profession & Business Services; Education & Health Services, and Leisure & Hospitality.
• The ongoing narrowing in the number of Manufacturing versus Food Service & Drinking Places (FS&DP) jobs continued in February. Interestingly, in January 2000, there were 9.2 million more U.S. manufacturing jobs than FS&DP jobs. In February 2015, the gap had shrunk to 1.3 million. Although the number of manufacturing jobs was 208,000 higher than February 2014, the concurrent growth rate in FS&DP jobs was more than double that (+449,500). 

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• The employment-population ratio was stable at 59.3%, but the number of employment-age persons not in the labor force jumped (+354,000) back to 92.9 million -- equal to the record high set back December 2014. 

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• The labor force participation rate ticked lower by 0.1 percentage point (to 62.8%), near its multi-decade low of 62.7%. Average hourly earnings of all private employees crept up by $0.03, resulting in a 2.0% year-over-year increase. For all production and nonsupervisory employees (pictured above), wages were unchanged (+1.6% YOY). With the CPI running at an official annual rate of -0.1%, wages are technically rising in real (inflation-adjusted) terms. 

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• Finally, full-time jobs increased (+123,000) while part-time jobs fell (-75,000). Full-time jobs have been trending higher since December 2009, but are still 1.04 million short of 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.

January 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 $9.8 billion or 2.0% to $479.1 billion in January. Shipments of durable goods decreased $2.5 billion or 1.0% to $245.4 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $7.4 billion or 3.1% to $233.7 billion, led by petroleum and coal products. Wood shipments rose by 0.3% while Paper fell 0.3%. 

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Inventories decreased $2.5 billion or 0.4% to $650.5 billion. The inventories-to-shipments ratio was 1.36, up from 1.34 in December.

Inventories of durable goods increased $1.7 billion or 0.4% to $412.4 billion, led by transportation equipment. Nondurable goods inventories decreased $4.2 billion or 1.7% to $238.1 billion, led by petroleum and coal products. Inventories of Wood and Paper expanded by, respectively, 1.1 and 0.5%. 

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New orders decreased $0.9 billion or 0.2% to $470.0 billion; expectations had been +0.2%. Excluding transportation, new orders decreased 1.8% -- the eighth drop in the last nine months. Durable goods orders increased $6.5 billion or 2.8% to $236.3 billion, led by transportation equipment. New orders for nondurable goods decreased $7.4 billion or 3.1% to $233.7 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 at around 57% of their December 2007 high. 

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Unfilled durable-goods orders decreased $2.2 billion or 0.2% to $1,163.4 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.68, up from 6.65 in December. 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, 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.

February 2015 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil took a breather from its seven-month plunge when edging up $3.36 to $50.58 per barrel in February. The price drop coincided with a strengthening U.S. dollar, the lagged impacts of a 311,000 barrel-per-day (BPD) increase in the amount of oil supplied/demanded in December (to 19.5 million BPD), and a seemingly unstoppable accumulation of crude oil stocks (to the highest levels since 1982). The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI widened by $6.98 in February, to $7.52 per barrel. 

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With futures prices in “contango” (i.e., near-term contracts are priced lower than later-term contracts), we do not expect significant additional fallout in spot oil prices. 

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

February 2015 ISM and Markit 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 again in February. The PMI retreated from January’s 53.5% to 52.9% in February -- in line with expectations of 53.0%, but the lowest reading since January 2014. (50% is the breakpoint between contraction and expansion.) ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. The key new-orders sub-index slipped again but remained in expansion.

“Comments from the respondent panel express a growing level of concern over the West Coast dock slowdown,” said Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee, which is “negatively impacting exports and imports, and requiring workarounds and added costs.” 

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Wood Products was unchanged in February; movement in the sub-indices was limited to declining input prices and new export orders. Paper Products expanded again, with broad support among most sub-indices. 

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- eked out another small gain in February. The NMI registered 56.9%, 0.2 percentage point above January’s 56.7%; the markets were expecting 56.5%. Important internals weakened (e.g., business activity and new orders) but remained solidly in expansion; all other sub-indices were higher than in January. “Comments from respondents have increased in regards to the effects of the reduction in fuel costs and the impact of the West Coast port labor issues on the continuity of supply,” said Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee. “Overall, supply managers feel mostly positive about the direction of the economy.” 

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Construction was the only service industry we track to report contraction in February. The drop-off in new orders more than offset the countervailing impacts of other sub-indices. “Less money [is] being spent on capital projects by the major oil companies,” commented one Construction respondent.

Relevant commodities down in price included oil, natural gas, and lumber: pine, plywood, spruce, treated. Some reported fuel (both gasoline and diesel) as cheaper, others as more expensive. No relevant commodities were in short supply.

Agreement among ISM’s and Markit’s surveys was mixed in February. Whereas ISM’s PMI reflected decelerating growth, Markit’s U.S. Manufacturing PMI showed greater momentum; ISM’s NMI and Markit’s U.S. Services PMI both showed accelerating activity.

Comments from Chris Williamson, Markit’s chief economist, are presented below:

Manufacturing -- “Manufacturing braved the cold weather in February, reporting an upturn in the pace of growth. A flurry of activity towards the month end helped raise production to a greater extent than signaled by the earlier flash reading. The upbeat survey points to minimal impact from the adverse weather that affected many parts of the country during the month.

“While growth of manufacturing output remained below the peaks seen last year, the survey is broadly consistent with production rising at an annualized rate approaching 4%.

“Employment continued to rise, albeit with the rate of job creation slipping as many companies cited increased uncertainty about the outlook, especially with the strong dollar hitting competitiveness.

“Lower oil prices meanwhile once again helped reduce firms’ costs slightly for a second month running, but average selling prices rose at the fastest rate since November, suggesting core inflationary pressures are in fact rising.

“The combination of strong production growth, ongoing job creation and rising factory prices will keep alive the possibility that the Fed could be encouraged

Services -- “The pace of U.S. economic growth jumped to a four-month high in February, according to Markit’s PMI survey data. Business picked up especially towards the end of the month, when the impact of bad weather on the East Coast and port delays on the West Coast began to clear, which suggests this may be a temporary upturn.

“Even with the strong growth recorded in February, the average reading across the manufacturing and services surveys for the first quarter so far is up only slightly compared to the fourth quarter of last year, meaning growth this year is running at a rate similar to the 2.2% annualized pace seen late last year.

“That’s certainly not a pace of expansion that will worry the Fed into hiking interest rates any time soon. However, the ongoing resilience of the U.S. economy, and in particular the sustained robust job creation signaled in February, adds to the sense that policymakers will continue to prepare the ground for a rate rise later this year.”

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

February 2015 Currency Exchange Rates

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In February the monthly average value of the U.S. dollar appreciated against all three major currencies we track: 1.1% against Canada’s loonie and 2.3% relative to the euro, and 0.4% against the yen. On a trade-weighted index basis, the dollar strengthened by 1.4% 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.