March 2015 Residential Sales, Inventory and Prices

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Sales of new single-family homes tumbled in March, falling by 62,000 units (-11.4%) relative to the previous month, to a seasonally adjusted and annualized rate (SAAR) of 481,000 (well below the 518,000 expected). Prior to 2015, sales had been essentially flat (averaging 435,000) since January 2013. Sales in March were 15.4% above year-earlier levels; year-to-date (YTD), sales were 20.6% above the same months in 2014.

Meanwhile, the median price of new homes sold fell by $4.200 (-1.5%) to $277,400. The average price of homes sold retreated by a more modest $2,200 (-0.6%). Because single-family starts increased while sales decreased, the three-month average ratio of starts to sales slumped to 1.24, significantly below the average (1.41) since January 1995. 

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As mentioned in our post on March’s housing permits, starts and completions, single-unit completions increased by 5,000 units (+0.8%). The drop in sales and rise in completions resulted in new-home inventory expanding in both absolute (+4,000 units) and months-of-inventory (+0.7 months) terms. 

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Existing home sales jumped in March (+300,000 units or 6.1%) to 5.19 million units (SAAR), an 18-month high; expectations were for an increase to 5.045 million. Because sales of existing homes increased while new homes fell, the share of total sales comprised of new homes dropped back to 8.5%. The median price of previously owned homes sold in March rose by $10,200 (+5.1%) to $212,100. Inventory of existing homes expanded in absolute terms (+1,000 units), but contracted in months of inventory terms (to 4.6 months). 

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Housing affordability was essentially unchanged in February although the median price of existing homes for sale rose by $5,600 (+2.8%) to $204,200. 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% in February (+4.2% relative to a year earlier).

“Home prices continue to rise and outpace both inflation and wage gains,” said David Blitzer, Managing Director and Chairman of the Index Committee for S&P Dow Jones Indices. “The S&P/Case-Shiller National Index has seen 34 consecutive months with positive year-over-year gains; all 20 cities have shown year-over-year gains every month since the end of 2012. While prices are certainly rebounding, only two cities -- Denver and Dallas -- have surpassed their housing boom peaks. Nationally, prices are almost 10% below the high set in July 2006. Las Vegas fell 61.7% peak to trough and has the farthest to go to set a new high; it is 41.5% below its high. If a complete recovery means new highs all around, we’re not there yet.

“A better sense of where home prices are can be seen by starting in January 2000, before the housing boom accelerated, and looking at real or inflation adjusted numbers. Based on the S&P/Case-Shiller National Home Price Index, prices rose 66.8% before adjusting for inflation from January 2000 to February 2015; adjusted for inflation, this is 27.9% or a 1.7% annual rate. The highest price gain over the last 15 years was in Los Angeles with a 4.3% real annual rate; the lowest was Detroit with a -3.6% real annual rate. While nationally, prices are recovering, new construction of single family homes remains very weak despite low vacancy rates among both renters and owner-occupied homes.” 

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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 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 March (in line with expectations). Increases in the energy and shelter indexes more than offset a decline in the food index and were the main factors in the rise of the seasonally adjusted all items index. The energy index rose 1.1% as advances in the gasoline and fuel oil indexes outweighed declines in the electricity and natural gas indexes. In contrast, the food index declined 0.2%, with the food at home index posting its largest decline since April 2009.  

The index for all items less food and energy rose 0.2% in March, the same increase as in January and February. Along with the shelter index, a broad array of indexes rose in March, including medical care, used cars and trucks, apparel, new vehicles, household furnishings and operations, and recreation. The index for airline fares, in contrast, declined for the fourth time in the last five months.  

The all items index declined 0.1% for the 12 months ending March. The energy index declined 18.3% during that time span, more than offsetting increases in the indexes for food (up 2.3%) and all items less food and energy (up 1.8%). 

The seasonally adjusted Producer Price Index for final demand (PPI) increased 0.2% in March. Final demand prices moved down 0.5% in February and 0.8% in January. On an unadjusted basis, the index for final demand decreased 0.8% for the 12 months ended in March.

In March, more than half of the rise in final demand prices can be attributed to a 0.3% advance in the index for final demand goods. Prices for final demand services moved up 0.1%.

Final demand goods:  The index for final demand goods moved up 0.3% in March (+0.2% expected) following eight consecutive decreases. A major factor in the advance was prices for final demand energy, which rose 1.5%. The index for final demand goods less foods and energy increased 0.2% in March. In contrast, prices for final demand foods fell 0.8%.

Product detail:  Leading the March advance in prices for final demand goods, the index for gasoline jumped 7.2%. Prices for motor vehicles, jet fuel, pharmaceutical preparations, basic organic chemicals, and beef and veal also moved higher. Conversely, the index for pork declined 5.1%. Prices for utility natural gas and for plastic resins and materials also fell.

Final demand services:  The index for final demand services inched up 0.1% in March following a 0.5% decrease in February. The advance can be traced to prices for final demand services less trade, transportation, and warehousing, which rose 0.3%. In contrast, the indexes for final demand transportation and warehousing services and for final demand trade services both declined 0.2% in March. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail:  Over 60% of the March increase in the index for final demand services can be attributed to prices for portfolio management, which jumped 4.1%. The indexes for loan services (partial), food wholesaling, wireless telecommunication services, and gaming receipts (partial) also moved higher. Conversely, margins for machinery, equipment, parts, and supplies wholesaling decreased 0.7%. The indexes for apparel, jewelry, footwear, and accessories retailing; physician care; and rail transportation of freight and mail also declined. 

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The price indexes we track were mixed on both month-over-month and year-over-year bases in March. Only Intermediate Materials increased from February to March. 

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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 Residential Permits, Starts and Completions

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Total housing starts increased in March, to a seasonally adjusted and annualized rate (SAAR) of 926,000 units (1.048 million expected). That level was 18,000 units higher (+2.0%) than February’s 908,000 units (revised up from 897,000). All of the increase in total starts occurred in the single-family component (26,000 units or +4.4%); multi-family starts fell by 8,000 units (-2.5%). 

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The year-over-year percentage change in total starts slipped deeper into negative territory in March (-3.5%). Single-family starts were 3.8% below their year-earlier level, and -2.7% for the multi-family component. Not-seasonally adjusted year-to-date (YTD) comparisons to 2014 are still positive. 

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Completions also stumbled, falling by 33,000 units (-3.9%) in March, to 823,000 units SAAR. All of the decrease occurred in the multi-family component (38,000 units or -14.7%); the single-family component rose by 5,000 units (+0.8%). As was the case with starts, YTD completions are positive relative to 2014. 

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Total permits were a disappointment in March; they decreased by 63,000 units (-5.7%), to 1.039 million SAAR (1.085 million expected). All of the decrease occurred in the multi-family component (76,000 units or -15.9%); single-family permits rose (13,000 units or +2.1%). YTD total permits were 7.2% above the same months in 2014.

The latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) shrugged off the negative permits and starts data when jumping four points in April (to 56). An index value above 50 means more builders feel the market is good than feel it is poor. “As the spring buying season gets underway, home builders are confident that current low interest rates and continued job growth will draw consumers to the market,” said NAHB Chair Tom Woods.

“The HMI component index measuring future sales expectations rose five points in April to its highest level of the year,” said NAHB Chief Economist David Crowe. “This uptick shows builders are feeling optimistic that the housing market will continue to strengthen throughout 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.

March 2015 Industrial Production, Capacity Utilization and Capacity

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Industrial production (IP) decreased 0.6% (-0.3% expected) in March after increasing 0.1% in February. For 1Q2015 as a whole, IP declined at an annual rate of 1.0%, the first quarterly decrease since 2Q2009. The 1Q2015 decline resulted from a drop in oil and gas well drilling and servicing of more than 60% at an annual rate and from a decrease in manufacturing production of 1.2%. In March, manufacturing output moved up 0.1% for its first monthly gain since November; however, factory output in January is now estimated to have fallen 0.6%, about twice the magnitude of the previously reported decline. The index for mining decreased 0.7% in March. The output of utilities fell 5.9% to largely reverse a similarly sized increase in February, which was related to unseasonably cold temperatures. At 105.2% of its 2007 average, total industrial production in March was 2.0% above its level of a year earlier. Wood Products and Paper output dropped, respectively, by 1.0% and 0.6%. 

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Capacity utilization for the industrial sector decreased 0.6 percentage point (0.8%) in March to 78.4%, a rate that is 1.7 percentage points below its long-run (1972-2014) average. Wood Products CU slumped by 1.4% (to 68.2%, its lowest rate since December 2012) while Paper fell by 0.5% (to 82.0%). 

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Capacity at the all-industries and manufacturing levels moved higher, both by 0.2%, to 134.3% and 132.4%, respectively, of 2007 output. Wood Products extended its ongoing upward trend (since July 2013) when increasing by 0.4% (to 118.0%). Paper, by contrast, contracted by 0.1% to another new low (98.6%). Paper capacity was 2.5% lower in March than a year earlier.

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 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 March. The PMI retreated from February’s 52.9% to 51.5% in March -- below expectations of 52.5% and its lowest reading since May 2013. (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 panel refer to continuing challenges from the West Coast port issue,” said Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee, “lower oil prices having both positive and negative impacts depending upon the industry, residual effects of the harsh winter, higher costs of healthcare premiums, and challenges associated with the stronger dollar on international business.” 

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Wood Products expanded in March thanks to new and backlogged orders. Paper Products also expanded, with support among new orders, production and employment. “March business is improving over Jan-Feb,” wrote one Paper Products respondent, “thawing out of this crazy winter.”

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- edged lower in March. The NMI registered 56.5% (56.7% expected), 0.4 percentage point below February’s 56.9%. The business activity sub-index declined while new orders marginally improved -- with both remaining in territories associated with moderate expansion; also, exports and imports both jumped. “The majority of respondents’ comments reflect stability and are mostly positive about business conditions and the overall economy.” said Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee. 

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All three service industries we track reported expansion in March. The new orders sub-index was the most consistent source of strength.

Relevant commodities up in price included gasoline, paper. Oil and lumber were down in price. Some reported fuel (both gasoline and diesel) as cheaper, others as more expensive. No relevant commodities were in short supply.

ISM’s and Markit’s surveys diverged markedly in March. Whereas ISM’s PMI and NMI both reflected decelerating growth, Markit’s U.S. Manufacturing and Services PMIs both showed “sharp” improvements.

Comments from Tim Moore, Markit’s senior economist, are presented below:

Manufacturing -- “The U.S. manufacturing sector is clearly regaining momentum after a slow start to 2015. Stronger new order growth and rising input buying in March should help set the scene for improving production trends into the second quarter of the year. Moreover, job creation has remained resilient in recent months, and falling raw material costs continue to support operating margins.

“Improving domestic economic conditions remain the key growth driver for U.S. manufacturers, with consumer goods producers recording an especially robust upturn in March.

“Output growth was reasonably broad-based across the manufacturing sector in March, although some investment goods producers cited weaker spending patterns among clients in the energy sector. Meanwhile, export sales were again a drag on overall new business growth, in part reflecting the stronger dollar exchange rate.”

Services -- “The latest survey highlights a strong underlying pace of US economic growth moving into the second quarter of 2015. New business trends across the service sector have picked up especially sharply from the lows seen earlier in the year, and job hiring has strengthened as a result.

“However, service providers’ business confidence dipped in March and remained well below the peaks recorded in 2014, weighed down in part by the prospect of a Fed rate rise later this year. Meanwhile, subdued input price pressures were reported in March, although the overall rate of cost inflation has ticked up slightly from a recent five-year 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.

February 2015 International Trade (Softwood Lumber)

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Softwood lumber exports increased by 9 MMBF (7.9%) in February while imports fell by 13 MMBF (1.3%). Exports were 37 MMBF (23.2%) below year-earlier levels; imports were 105 MMBF (12.3%) higher. The net export deficit was 142 MMBF (20.2%) 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 (44.3%). Asia (especially China and Japan) was a distant second (35.2%). Canada was also the largest single-country destination (24.0%). Year-to-date (YTD) exports to China were down 60.3% relative to the same period in 2014. Meanwhile, Canada was the source of nearly all (97.4%) softwood lumber imports into the United States. Overall, YTD exports were down 24.5% compared to a year earlier, while imports were up 11.3%. 

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Despite the port slowdown, U.S. softwood lumber export activity through West Coast customs districts stayed relative stable in relation to the other districts during February (39.2% of the U.S. total); Seattle retained the title of most-active district, with 26.1% of the February total. At the same time, Great Lakes customs districts handled 69.8% of the softwood lumber imports (especially Duluth, MN with 29.0%) coming into the United States. 

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Southern yellow pine comprised 28.9% of all softwood lumber exports in February, followed by Douglas-fir with 16.6%. Southern pine exports were down 6.9% YTD relative to a year earlier, while Douglas-fir exports were down 37.8%.

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 International Trade (General)

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The goods and services deficit was $35.4 billion in February, down $7.2 billion from $42.7 billion in January. February exports were $186.2 billion, $3.0 billion less than January exports. February imports were $221.7 billion, $10.2 billion less than January imports.

The February decrease in the goods and services deficit reflected a decrease in the goods deficit of $7.4 billion to $55.2 billion and a decrease in the services surplus of $0.1 billion to $19.7 billion.

Exports to Canada and Mexico, the main U.S. trading partners, fell in February. Exports to China tumbled 8.9%, while those to the European Union were unchanged. Imports from China plunged 18.1%, pushing the politically sensitive U.S.-China trade deficit down 21.2% to $22.5 billion.

Year-to-date, the goods and services deficit decreased $2.6 billion (3.2%), from the same period in 2014. Exports decreased $5.3 billion (1.4%). Imports decreased $7.9 billion (1.7%). 

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On a global scale, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume decreased by 1.4% in January (but +2.3% year-over-year) while prices fell by 1.8% (-16.1% 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.

March 2015 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment increased by 126,000 jobs in March -- only about half the expected 247,000. Moreover, combined January and February employment gains were revised downward by 69,000. Meanwhile, the unemployment rate (based upon the BLS’s household survey) remained stable at 5.5% -- more a result of individuals dropping out of the workforce (277,000) than workers finding jobs (34,000). 

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Observations from the employment report include:

* The disparity in jobs gains between the establishment (+126,000) and household (+34,000) surveys was noticeable again in March.

* The downturn in oil-sector (part of the Mining & Logging category) employment continued in this report.

* Roughly 70% (91,000) 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 March. Interestingly, in January 2000, there were 9.168 million more U.S. manufacturing jobs than FS&DP jobs. As of March 2015, the gap has shrunk to 1.302 million. Although the number of manufacturing jobs was 188,000 higher than March 2014, the concurrent growth rate in FS&DP jobs was more than double that (+415,100). 

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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 277,000 to a new record of 93.2 million. 

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* The labor force participation rate ticked lower by 0.1 percentage point, tying its multi-decade low of 62.7%. Average hourly earnings of all private employees rose up by $0.07, resulting in a 2.1% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose $0.04 (+1.8% YOY). With the CPI running at an official annual rate of 0.0%, wages are technically rising in real (inflation-adjusted) terms. The amount of time people worked each week, meanwhile, slipped 0.1 hours to 34.5 hours after hovering at a post-recession high for months. 

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* Finally, full-time jobs increased (+190,000) while part-time jobs fell (-170,000). Full-time jobs have been trending higher since December 2009, but are still 851,000 short of the pre-recession high. Part-time jobs, by contrast, have been stuck in a channel between roughly 27 and 28 million.

New York Post columnist John Crudele is the latest to expose the methodological problems that underlie the employment reports. Those issues include “rogue” seasonal adjustments that make the numbers look stronger, to outright lying and data fabrication. Crudele’s advice: Take the employment report with a “giant grain of salt” because it is “unreliable to the point of being nearly useless at best and fraudulent at worst.” Unfortunately, it is the best information available.

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 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments increased $3.6 billion or 0.7% to $481.3 billion in February. Shipments of durable goods decreased $0.5 billion or 0.2% to $244.0 billion, led by primary metals. Meanwhile, nondurable goods shipments increased $4.1 billion or 1.8% to $237.4 billion, led by petroleum and coal products. Wood shipments rose by 0.8% while Paper fell 0.6%. 

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Inventories increased $0.9 billion or 0.1% to $651.0 billion. The inventories-to-shipments ratio was 1.35, down from 1.36 in January.

Inventories of durable goods increased $1.2 billion or 0.3% to $413.0 billion (the highest level since the series was first published on a NAICS basis in 1992), led by transportation equipment. Nondurable goods inventories decreased $0.3 billion or 0.1% to $238.0 billion, led by chemical products. Inventories of Wood expanded by 0.8% while Paper contracted 0.2%. 

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New orders increased $0.8 billion or 0.2% to $468.3 billion (0.0% expected). Excluding transportation, new orders increased 0.8%. Durable goods orders decreased $3.3 billion or 1.4% to $230.9 billion, led by transportation equipment. New orders for nondurable goods increased $4.1 billion or 1.8% to $237.4 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 fallen back to around 57% of their December 2007 high. 

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Unfilled durable-goods orders decreased $5.9 billion or 0.5% to $1,156.3 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.71, unchanged from January. 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.

March 2015 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil hovered near its lowest price in six years, edging down $2.75 to $47.83 per barrel in March. The price drop coincided with a strengthening U.S. dollar, the lagged impacts of a 268,000 barrel-per-day (BPD) decrease in the amount of oil supplied/demanded in January (to 19.2 million BPD), and a seemingly unstoppable accumulation of crude oil stocks (to the highest levels in about 80 years). The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI widened by $0.64 in March, to $8.16 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.

March 2015 Currency Exchange Rates

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In March the monthly average value of the U.S. dollar appreciated against all three major currencies we track: 0.9% against Canada’s loonie, 4.9% relative to the euro, and 1.4% against the yen. On a trade-weighted index basis, the dollar strengthened by 1.8% 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.

February 2015 Construction Spending

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Overall construction spending in the United States nudged lower (-0.1%) during February (+0.2% expected), to a seasonally adjusted and annualized rate (SAAR) of $967.2 billion. Private construction spending rose 0.2%. Outlays on residential projects shrank by 0.2% while non-residential expanded by 0.5%. Spending on public construction projects decreased 0.8%. 

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

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