3Q2015 Gross Domestic Product: First (Advance) Estimate

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In its first (“advance”) estimate of 3Q2015 U.S. gross domestic product (GDP), the Bureau of Economic Analysis (BEA) reported that the economy was growing at a 1.49% seasonally adjusted and annualized rate, down 2.43 percentage points from 2Q. The consensus among economists was for a growth rate of +1.7%. A better metric involves comparing growth to the same quarter one year ago. For 3Q2015, the year-over-year growth was 2.0% -- down from 2Q's 2.7% YoY growth.

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

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As the graph above indicates, the most obvious quarter-over-quarter change occurred in inventories. The rate of private inventory accumulation shrank by nearly half relative to 2Q (rising by the smallest amount since 1Q2014), in the process subtracting 1.44% from the 3Q headline. As we have frequently mentioned, inventories can introduce noise and seriously distort the GDP headline number over the short run; because of this, the BEA also publishes real final sales of domestic product -- a secondary headline that excludes the impact of inventories. For 3Q, real final sales grew at a much more robust +2.93%.

Consumer activity once again contributed the bulk of the headline number (+2.19 percentage points), although that contribution was muted when compared to 2Q (0.24 percentage point lower); moreover, growth in health care spending was again the single largest line item, comprising one-fifth of the PCE total. Meanwhile, fixed commercial investments, governmental spending and exports weakened materially, while imports subtracted less from the headline than during the prior quarter.

In summary, then, the 3Q GDP report was “a mixed bag indeed.”

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.

September 2015 Residential Sales, Inventory and Prices

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Sales of new single-family homes turned lower in September, falling by 61,000 units (-11.5%), to a seasonally adjusted and annualized rate (SAAR) of 468,000 units -- well below the 549,000 expected. The drop was in addition to downward revisions to July and August data (combined -27,000 units), and resulted in the largest month-to-month retreat since July 2013 and the first year-over-year decline in not seasonally adjusted sales since November 2014. Year-to-date (YTD), sales were 16.7% above the same months in 2014. For perspective, September sales were roughly 66% below the “bubble” peak and about 31% below the long-term, pre-2000 average.

Meanwhile, the median price of new homes sold jumped by $7,800 (+2.7%) to $296,900. The average price of homes sold, by contrast, leapt by a more robust $21,100 (+6.2%) -- to $364,100 -- implying that a significant proportion of total sales were high-end homes. Because sales decreased while single-family starts increased, the three-month average ratio of starts to sales rose to 1.50 -- above the average (1.41) since January 1995. 

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As mentioned in our post about housing permits, starts and completions in September, single-unit completions fell by 12,000 units (-1.8%). Because completions retreated more slowly than sales, new-home inventory expanded in absolute terms (+10,000 units) and months of inventory (+0.9 month). 

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Existing home sales gained in September (+250,000 units or 4.7%) to 5.55 million units (SAAR); that result was above expectations of 5.35 million. Because sales of new homes fell while existing homes increased, the share of total sales comprised of new homes dropped to 7.8%. The median price of previously owned homes sold in September declined another $6,600 (-2.9%) to $221,900. Inventory of existing homes contracted in both absolute (-60,000 units) and months-of-inventory terms (-0.3 month). 

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Housing affordability marginally improved in August, as the median price of existing homes for sale retreated by $3,200 (-1.4%) to $230,200. 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 +0.3% (+4.7% compared to a year earlier).

“Home prices continue to climb at a 4% to 5% annual rate across the country,” said David Blitzer, Managing Director and Chairman of the Index Committee for S&P Dow Jones Indices. “Most other recent housing indicators also show strength. Housing starts topped an annual rate of 1.2 million units in the latest report with continuing strength in both single family homes and apartments. The National Association of Home Builders sentiment survey, reflecting current strength, reached the highest level since 2005, before the housing collapse. Sales of existing homes are running about 5.5 million units annually with inventories of about five months of sales. However, September new home sales took an unexpected and sharp drop as low inventories were cited as a possible cause.

“A notable part of today’s economy is the continuing low inflation rate; in the year to September, consumer prices were unchanged. Even excluding food and energy, the core inflation was 1.9%. One result is that a 5% price increase in the value of a house means more today than it did in 2005-2006, the peak of the housing boom when the inflation rate was higher. The rebound from the recent lows was faster than the 1997-2005 housing boom, and also much less driven by inflation.” 

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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.

September 2015 Residential Permits, Starts and Completions

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Total housing starts rose in September to a seasonally adjusted and annualized rate (SAAR) of 1.206 million units (1.14 million expected) -- comparable to activity previously seen (other than this past June) in October 2007. September’s level was 74,000 units above (+6.5% ± 16.4%*) August’s 1.132 million units (revised from 1.126 million). The increase in total starts was split as follows -- single-family: +3,000 units (+0.3% ± 9.6%*); multi-family: +72,000 units (+18.3%). September marks the fifth consecutive month in which there were more than 500,000 multi-family units under construction in structures with five or more units, the longest streak since the mid-1970s.

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

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Total starts were 17.8% above their not-seasonally adjusted year-earlier level (single-family: +11.1%; multi-family: +28.7%). Year-to-date (YTD) comparisons to 2014 were all in the 11 to 14% range. 

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Completions rose by 72,000 units (+7.5% ± 13.6%*) in September, to 1.028 million units SAAR. The increase was limited to the multi-family component (+84,000 units or 27.9%); single-family completions fell by 12,000 units (-1.8% ± 9.9%*). 

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Total permits retreated again in September, falling by 58,000 units (-5.0% ± 1.4%) to 1.103 million SAAR. The decrease fell more heavily on the multi-family component: -56,000 units (-12.1%); single-family: -2,000 units (-0.3% ± 1.9%*). YTD total permits were 11.2% above the same months in 2014, driven by the multi-family component (+18.3%).

The latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) gained 3 points (to 63) in October -- a level comparable to the end of the housing boom in late 2004. (An HMI value above 50 means more builders feel the market is good than feel it is poor.) “The fact that builder confidence has held in the 60s since June is proof that the single-family housing market is making lasting gains as more serious buyers come forward,” said NAHB Chairman Tom Woods. “However, our members continue to tell us there are still pockets of softness in some markets across the nation, and that they face challenges regarding the availability of lots and labor.”

“With October’s three-point uptick, builder confidence has been holding steady or increasing for five straight months. This upward momentum shows that our industry is strengthening at a gradual but consistent pace,” said NAHB Chief Economist David Crowe. “With firm job creation, economic growth and the release of pent-up demand, we expect housing to keep moving forward as we start to close out 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.

September 2015 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) decreased 0.2% in September (-0.3% expected) after edging down 0.1% in August (originally -0.4%). Manufacturing output moved down 0.1% (but +1.6% YoY) for a second consecutive monthly decrease; the index for mining fell 2.0% (with oil and gas drilling down 4%, to its lowest level this century), while the index for utilities rose 1.3%. For 3Q as a whole, total IP rose at an annual rate of 1.8%, and manufacturing output increased 2.5%. A strong gain for motor vehicles and parts contributed substantially to the quarterly increases.

At 107.1% of its 2012 average, total industrial production in September was 0.4% above its year-earlier level. Wood Products output fell 2.0% (-2.0% YoY) while Paper decreased 0.5% (-2.5% YoY). 

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Capacity utilization (CU) for the industrial sector fell 0.3% in September to 77.5%, a rate that is 2.6 percentage points below its long-run (1972–2014) average. Wood Products CU tumbled 2.1% (-4.3% YoY) to 68.2%; Paper retreated by 0.5% (-1.9% YoY) to 81.5%. 

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Capacity at the all-industries and manufacturing levels moved higher -- All-industries: +0.1% (+1.6% YoY) to 138.1% of 2012 output; Manufacturing: +0.1% (+1.3% YoY) to 138.7%. Wood Products extended the upward trend that has been ongoing since November 2013 when increasing by 0.2% (+2.5% YoY) to 159.8%. Paper was unchanged (-0.6% YoY) at 116.9%.

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

September 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) decreased 0.2% in September – in line with expectations. The energy index fell 4.7% in September, with all major component indexes declining. The gasoline index continued to fall sharply and was again the main cause of the seasonally adjusted all items decrease. The indexes for fuel oil, electricity, and natural gas declined as well.

In contrast to the energy declines, the indexes for food and for all items less food and energy both accelerated in September. The food index rose 0.4%, its largest increase since May 2014. The index for all items less food and energy rose 0.2% in September. The indexes for shelter (rent: +0.4% MoM; owners’ equivalent rent: +0.3% MoM), medical care, household furnishings and operations, and personal care all increased; the indexes for apparel, used cars and trucks, new vehicles, and airline fares were among those that declined.

The all items index was essentially unchanged for the 12 months ending September after posting a 0.2% increase for the 12 months ending August. The 18.4% decline in the energy index over the past year offset increases in the indexes for food (up 1.6%) and all items less food and energy (up 1.9%). Rent increased 3.7% YoY; owners’ equivalent rent: +3.1% YoY.

The seasonally adjusted producer price index for final demand (PPI) declined 0.5% in September (-0.2% expected). Final demand prices fell 1.1% for the 12 months ended in September, the eighth straight 12-month decline.

In September, two-thirds of the decrease in the final demand index is attributable to prices for final demand goods, which fell 1.2%. The index for final demand services moved down 0.4%.

Final demand goods: The index for final demand goods moved down 1.2% in September, the largest decrease since a 1.9% drop in January. In September, over 80% of the decline can be traced to prices for final demand energy, which fell 5.9%. The index for final demand foods decreased 0.8%. Prices for final demand goods less foods and energy were unchanged.

Product detail: Over two-thirds of the September decline in the final demand goods index is attributable to prices for gasoline, which fell 16.6%. The indexes for beef and veal, diesel fuel, industrial chemicals, chicken eggs, and residual fuel also moved lower. In contrast, motor vehicle prices rose 0.5%. The indexes for fresh and dry vegetables and for pharmaceutical preparations also advanced.

Final demand services: The index for final demand services decreased 0.4% in September, the largest decline since falling 0.5% in February. In September, almost half of the drop can be traced to prices for final demand services less trade, transportation, and warehousing, which decreased 0.3%. The indexes for final demand trade services and for final demand transportation and warehousing services also moved lower, falling 0.4% and 0.7%, respectively. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail: Over a quarter of the September decline in the index for final demand services is attributable to prices for securities brokerage, dealing, investment advice, and related services, which dropped 4.3%. The indexes for machinery and equipment wholesaling; loan services (partial); apparel, footwear, and accessories retailing; portfolio management; and airline passenger services also moved lower. Conversely, margins for automotive fuels and lubricants retailing climbed 12.4%. The indexes for deposit services (partial) and water transportation of freight also increased. 

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Almost all of the price indexes we track declined month-over-month in September, and all fell on a year-over-year basis. 

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

October 2015 Macro Pulse -- The Day After?

Those of a certain age may recall the 1983 TV movie The Day After that explored possible effects of nuclear war on the United States. Although hardly on the same level, some of the hyperbole surrounding the proverbial “wall of cheap Canadian wood” -- allegedly poised to flow south after the Softwood Lumber Agreement (SLA) between the United States and Canada expired on October 12 -- suggested a catastrophe-in-the-making for U.S. lumber producers. Interestingly, however, whereas many market watchers expected lumber prices to collapse, that has not happened (so far at least). In fact, lumber futures prices have actually rebounded smartly from late-September lows; as of mid-October, futures prices of several near-term contract dates had recouped roughly half of the ground lost since June. One source attributed the price jump to traders covering short positions after observing U.S. imports of Canadian timber in October “were on pace to be the smallest monthly volumes in at least two years.” The market can turn on a dime, of course, but we conclude from these observations that most “fallout” from the SLA’s expiration may have already occurred.

Click here to read the rest of the October 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.

August 2015 International Trade (Pulp, Paper & Paperboard)

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

* On a month-to-month basis, August's net exports posted a slight increase of 12.9 thousand tonnes. Details for August, the prior six months, year-over-year, and year-to-date performance are presented in the table below.

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* Despite month-to-month net exports growing, August exports declined by 92.7 thousand tonnes (3.6%) from July.  The reason net exports increased even though exports declined is because imports declined even more, dropping by 105.6 thousand tonnes (12.8%).  

* On a year-over-year basis August exports were up 74.4 thousand tonnes and imports down 94.7 thousand tonnes, resulting in a year-over-year increase in net exports of 169.1 thousand tonnes.  

* On a year-to-date basis exports are up 545 thousand tonnes while imports are down 363 thousand tonnes, yielding an increase in net exports of 908 thousand metric tonnes (7.1%).  Net exports are on track to achieve the third highest level since 2005.  The year-to-date decline in imports and increase in exports is counterintuitive with reported stronger 2015 US growth compared to global growth and a strengthening U.S. dollar.  However, this trend has been consistently evident and expanding in this series since April 2015's YTD; in the five months of reported data since April four of the five have been the second highest month of net exports since 2005 and one has been the third highest month.  

While the West Coast port slowdown may explain some of the early 2015 results, the continuing expansion in exports (145 thousand tonnes YTD increase through May2015 compared to YTD May 2014 to 545 thousand tonnes YTD increase through August 2015 compared to YTD August 2014) and continuing decline in imports (121 thousand tonnes YTD decrease through Feb 2015 compared to Feb 2014 YTD to 363 thousand tonnes through August 2015 compared to August 2014 YTD) suggests other factors are responsible for the YTD performance through August.

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

Six-month Cumulative Activity and Trends: 

* Cumulative activity over the six months ending August 2015 shows net exports are 11.1% above the pace seen over the six months ending in August 2014.  Cumulative six-month net exports are principally higher due to higher exports, up 808 thousand tonnes or 5.6 percent, compared to imports which are down 243 thousand tonnes, or 4.8 percent.  

* Six-month trend-lines were fit to the data to study recent trends beyond simple cumulative activity.   Two of the three trend lines (exports and imports) switched from being strongly positive on the six month trend ending in July (16.43% and 12.58% for exports and imports, respectively) to negative on the six month trend ending in August.  In both cases the principal cause for the switch in slope was dropping early 2015 months, which had been affected by the West Coast Port slowdown, from the six-month trend line calculation.    Because the rate of decline on imports is greater than the rate of decline on exports in the latest six month trend, the net export trend declined but remains on a positive slope (18.28% in six months ending July to 2.29% in six months ending August).

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Notable shifts in country-level details:

* Pulp exports (18,223 thousand tonnes YTD) are higher (3.3%) compared to last year's YTD levels.  China remains the chief destination of U.S. pulp by a wide margin, representing 58% of YTD shipments; August 2014 YTD figures pegged exports to China at 56% of the U.S. total.  China's exports have increased by 8.3% YTD compared to the same period in 2013.  Mexico leapfrogged India as the second-ranked destination for U.S. pulp exports, representing 6.8% of YTD exports compared to India's 6.1% share.  Pulp exports to both countries are down YTD: Mexico's receipt of U.S. pulp export have fallen by over 3% and India's are down by over 13%.  In addition to Mexico and India swapping spots in 2015, among 2014's top 10 destinations Japan and Indonesia also swapped, Japn moving up from number 7 to number 6 by purchasing 4.4% more pulp YTD while Indonesia has purchased 7.2% less pulp YTD.  

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* Pulp imports (3,987 thousand tonnes YTD) decreased -6.3% compared to prior YTD levels.  Canada and Brazil, the 1st and 2nd ranked pulp import sources, respectively, account for over 93% of the pulp imported.  Despite their top ranking, 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 18%.  Norway has climbed from a 10th ranked place in 2014 to 7th in 2015 with a nearly 550% increase in pulp imports to the U.S., the Philippines from 12th ranked in 2014 to 9th ranked in 2015, and Germany from 13th ranked to 9th ranked.  As a region Europe shows the largest percentage increase in imports into the U.S. at 63.2% while Caribbean nations collectively posted the largest percentage decline at 91.4%.

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* Paper and paperboard imports (2,185 thousand tonnes YTD) have dropped by over 4% year-to-date compared to prior YTD activity.  Once again Canada leads the way, accounting for 86% of the total import volume and 139.4% of the YTD decrease (131 of 94 thousand tonnes).  Finland easily held onto its number 2 rank on a 10.5% increase in imports to the U.S. while China maintained its hold as the 3rd ranked source of paper and paperboard imports despite a drop of 8% YTD.  One notable development on a percentage basis is Australia, which has vaulted from being the 7th ranked supplier during the first eight months of 2014 to the 4th ranked supplier during the first eight months of 2015, posting an increase of 288%.  Mexico slipped from the 4th to 5th place ranking despite importing 16.8% more into the U.S. YTD.  In other top 10 changes from 2014, Swedan has dropped from 5th in 2014 to 7th in 2015 with a 17.1% drop in paper and paperboard imports into the U.S and South Korea slipped from 6th to 9th with pulp and paperboard imports declining by nearly 53%.   Meanwhile Taiwan vaulted to the 8th ranked spot from 12th ranked in 2014 with an increase of 247.2% in imports shipped to the U.S.

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* Paper and paperboard exports (1,586 thousand tonnes) dropped by 2.0% on a YTD basis.  Mexico and Canada swapped places as the number 1 destination for U.S. paper and paperboard exports, with Mexico growing by 20.1 percent YTD over same period in 2014, while Canada's purchases of U.S. paper and paperboard declined by 1.3 percent.  Among 2014's Top 10 destinations, the "loss leader" is India (-22 thousand tonnes, -24.2% from prior YTD) followed by Japan (-19 thousand tonnes, -16.0% from prior YTD), and Costa Rica (-16 thousand, -30.0% from prior YTD).  Bucking the general decline in paper and paperboard exports, as already noted, Mexico's receipts of U.S. paper and paperboard exports is up.  South Korea (+7.0%) and China (+7.1%) are both receiving more U.S. exports of paper and paperboard as well.  Guatemala (+0.4%) and Honduras (-0.3%) are essentially level with 2014's activity thus far 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.

August 2015 International Trade (Softwood Lumber)

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Softwood lumber exports decreased by 4 MMBF (3.3%) in August while imports rose by 172 MMBF (+16.7%). Exports were 17 MMBF (12.1%) below year-earlier levels; imports were 171 MMBF (16.6%) higher. The year-over-year (YoY) net export deficit was 188 MMBF (21.1%) larger. 

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North America (Mexico: 21.6%; Canada: 20.7%) was the primary destination for U.S. softwood lumber exports in August (42.3%). Asia (especially China: 16.1%) placed second (34.8%). Year-to-date (YTD) exports to China were down over 38.6% relative to the same months in 2014. Meanwhile, Canada was the source of nearly all (95.5%) softwood lumber imports into the United States. Overall, YTD exports were down 13.2% compared to 2014, while imports were up 6.3%. 

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U.S. softwood lumber export activity through West Coast customs districts inched up slightly in relation to the other districts during August: 40.1% of the U.S. total; Seattle retained the title of most-active district, with 22.2% of the August total. At the same time, Great Lakes customs districts handled 67.0% of the softwood lumber imports (especially Duluth, MN with 31.1%) coming into the United States. 

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Southern yellow pine comprised 29.2% of all softwood lumber exports in August, followed by Douglas-fir with 18.0%. Southern pine exports were up 6.4% YTD relative to 2014, while Douglas-fir exports were down 31.9%.

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

August 2015 International Trade (General)

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The goods and services deficit was $48.3 billion in August, up $6.5 billion from $41.8 billion in July. August exports were $185.1 billion, $3.7 billion less than July exports. August imports were $233.4 billion, $2.8 billion more than July imports.

The August increase in the goods and services deficit reflected an increase in the goods deficit of $6.6 billion to $67.9 billion and an increase in the services surplus of $0.1 billion to $19.6 billion.

Year-to-date, the goods and services deficit increased $17.6 billion, or 5.2 percent, from the same period in 2014. Exports decreased $58.9 billion or 3.8 percent. Imports decreased $41.3 billion or 2.2 percent.

The August figures show surpluses, in billions of dollars, with South and Central America ($3.3) and OPEC ($1.0). Deficits were recorded, in billions of dollars, with China ($32.9), European Union ($14.5), Germany ($6.8), Mexico ($5.3), Japan ($5.2), South Korea ($2.7), Canada ($2.2), Italy ($2.1), France ($2.0), India ($1.9), United Kingdom ($0.3), Brazil ($0.2), and Saudi Arabia (less than $0.1).

Of particular interest:
   * The deficit with China increased $4.2 billion to $32.9 billion. Exports decreased $0.6 billion to $9.8 billion and imports increased $3.6 billion to $42.8 billion.
   * The deficit with the European Union increased $2.1 billion to $14.5 billion. Exports decreased $0.7 billion to $21.7 billion and imports increased $1.4 billion to $36.2 billion. 

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On a global scale, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume contracted by 0.4% in July (+0.8% year-over-year) while prices fell by 1.1% (-13.7% 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.

September 2015 Currency Exchange Rates

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In September the monthly average value of the U.S. dollar depreciated against two of the three major currencies we track: 0.8% against the euro and 2.3% against the yen. The greenback gained 0.9% relative to Canada’s loonie. On a trade-weighted index basis, the dollar strengthened by 0.8% 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.

September 2015 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil ticked higher in September ($2.64), to $47.64 per barrel. The price increase coincided with a stronger U.S. dollar, the lagged impacts of a 388,000 barrel-per-day (BPD) increase in the amount of oil supplied/demanded in July (to 20.0 million BPD), and modest retreat in oil stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI narrowed by $1.53 in September, to $2.13 per barrel. 

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The latest data shows futures prices dipping lower, but investor Jim Rogers thinks a rebound may be “around the corner.” Despite OPEC pumping near record amounts of oil, China’s imports slowing and U.S. crude stockpiles remaining roughly 100 million barrels above the five-year seasonal average, U.S. benchmark prices have held steady for more than four weeks since plunging to a six-year low at the end of August.

“When there’s bad news and something doesn’t decline, it usually means it’s at a bottom and will be turning,” Rogers said, while admitting, “Whether we’re at a turning point or not, I don’t know yet….” 

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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.

September 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 nearly stalled in September. The PMI registered 50.2% (50.5% expected), a decrease of 0.9 percentage point below the August reading of 51.1%, and the lowest reading since April 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. Except for customer inventories, sub-index values were either lower or unchanged compared to August. 

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Wood Products contracted in September, thanks to erosion among the most important sub-indexes. Paper Products expanded as usual, with only backlogged and new export orders serving as headwinds.

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- tumbled in September. The NMI registered 56.9% (58.0% expected), 2.1 percentage points lower than the August reading of 59.0%. Here, too, the sub-indexes were mostly lower (seven out of 11). 

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Two of the three service industries we track (Real Estate and Construction) reported expansion. Ag & Forestry was unchanged.

No relevant commodity was more expensive. Diesel and gasoline prices were lower. Construction labor was the only relevant commodity in short supply.

ISM’s and Markit’s manufacturing surveys diverged somewhat as ISM’s PMI decreased while Markit’s Manufacturing PMI increased.

Comments on Markit’s reports are presented below:

Manufacturing -- “The U.S. manufacturing sector has seen a distinct loss of growth momentum in recent months,” wrote Chris Williamson, chief economist at Markit, “and endured the worst performance for two years during the third quarter. Headwinds include the rising dollar, weak demand in global markets, a downturn in business investment and financial market jitters.

“We must remember, however, that the manufacturing sector only accounts for around one-tenth of the economy, and robust service sector data -- as indicated by last week’s flash PMI results -- indicate that the wider economy remains in good health, albeit with signs that businesses have become more worried about the outlook. The survey data suggest that the economy continued to grow at a 2.2% annualized rate in the third quarter and added 207,000 jobs in September.

“The manufacturing slowdown therefore will be insufficient on its own to deter the Fed from hiking rates later this year, but adds a warning light that the pace of economic growth is set to slow as we move into the final quarter of the year. The Fed is therefore likely to keep an open mind as to whether tighter policy is appropriate given current economic conditions and await a clearer idea of the health of the economy in the fourth quarter.”

Services -- “The U.S. economic growth slowed in the third quarter according the PMI surveys, down to around 2.2%,” wrote Williamson. “But this largely represents a payback after growth rebounded in the second quarter, suggesting that the economy is settling down to a moderate rate of growth in line with its long term average.

“Hiring also remains relatively robust, albeit down from earlier in the year, again suggesting that the economy has shifted down a gear but remains in good health.

“At the moment it remains unclear as to whether growth will weaken further as we move into the fourth quarter. However, with inflationary pressures waning, policymakers may have some breathing space to gauge the extent of any slowdown. Lower fuel costs helped push average prices charged for goods and services dropping at steepest rate for nearly five 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.

August 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 $3.2 billion or 0.7% to $480.1 billion in August. Shipments of durable goods decreased $0.5 billion or 0.2% to $242.7 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $2.7 billion or 1.1% to $237.5 billion, led by petroleum and coal products. Shipments of Wood and Paper rose, respectively, 0.6% and 0.3%. 

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Inventories decreased $1.6 billion or 0.3% to $648.4 billion. The inventories-to-shipments ratio was 1.35, up from 1.34 in July. Inventories of durable goods decreased $0.1 billion or virtually unchanged to $401.2 billion, led by primary metals. Nondurable goods inventories decreased $1.5 billion or 0.6% to $247.2 billion, led by petroleum and coal products. Inventories of Wood contracted by 0.4% while Paper was unchanged. 

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New orders decreased $8.2 billion or 1.7% to $473.0 billion (-1.3% expected). Excluding transportation, new orders decreased 0.8% (-6.7% YoY -- the tenth consecutive month of year-over-year contraction). Durable goods orders decreased $5.5 billion or 2.3% to $235.5 billion, led by transportation equipment. New orders for nondurable goods decreased $2.7 billion or 1.1% to $237.5 billion. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- fell by 0.3% in August (-3.6% YoY).

Prior to July 2014, as can be seen in the graph above, real (inflation-adjusted) new orders had been essentially flat since early 2012, recouping roughly 78% of the losses incurred since the beginning of the Great Recession. With July 2014’s transportation-led spike gradually receding in the rearview mirror, new orders are back to 57% of their December 2007 high. 

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Unfilled durable-goods orders decreased $2.4 billion or 0.2% to $1,195.0 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.87, down from 6.89 in July. Real unfilled orders, which had been a good litmus test for sector growth, show a much different picture; in real terms, unfilled orders in June 2014 were back to 97% of their December 2008 peak. Real unfilled orders jumped to 122% of the prior peak in July 2014, thanks to the largest-ever batch of aircraft orders, 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.