February 2016 Residential Sales, Inventory and Prices

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Sales of new single-family houses in February 2016 were at a seasonally adjusted annual rate (SAAR) of 512,000 units, roughly in line with expectations of 510,000. That level of activity was 2.0% (±18.8%)* above the revised January rate of 502,000 units (originally 494,000), but 6.1% (±17.9%)* below the year-earlier SAAR of 545,000; the not-seasonally adjusted year-over-year comparison (shown in the table above) was -2.2%.

For a longer perspective, February’s sales were roughly 63% below the “bubble” peak and about 16% below the long-term, pre-2000 average. Because single-family starts increased more quickly than sales, the three-month average ratio of starts to sales rose to 1.52 -- above the average (1.41) since January 1995.

The median price of new houses sold in February jumped by $17,500 (+6.2%), to $301,400; interestingly, the average price tumbled by $14,500 (-4.0%), to $348,900. Although the decline in the average might lead one to conclude more starter homes (those priced below $200,000) were sold in February, in fact the proportion of such homes was the lowest (13.6%) of any February on record (going back to 2002); prior to the Great Recession starter homes comprised as much as a 61% share of total sales.

* 90% confidence interval includes zero. The Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different from zero. 

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As mentioned in our post about housing permits, starts and completions in February, single-unit completions advanced by 42,000 units (+6.1%). Because the absolute increase in completions exceeded that of sales, new-home inventory expanded in absolute terms (+4,000 units) but was unchanged at 5.6 months of inventory. 

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Existing home sales dropped in February (-390,000 units or 7.1%) to 5.08 million units (SAAR), well below expectations of 5.3 million. Inventory of existing homes expanded in both absolute (+60,000 units) and months-of-inventory (+0.4 month) terms. Because new home sales increased while existing sales declined, the share of total sales comprised of new homes jumped to 9.2%. The median price of previously owned homes sold in February fell by $2,900 (-1.4%), to $210,800. 

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Housing affordability improved in January as the median price of existing homes for sale fell by $9,900 (-4.4%; +8.3% YoY) to $215,000. 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 -0.4% (+5.4% YoY).

“Home prices continue to climb at more than twice the rate of inflation,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The low inventory of homes for sale -- currently about a five month supply -- means that would-be sellers seeking to trade-up are having a hard time finding a new, larger home. The recovery of the sale and construction of new homes has lagged the gains seen in existing home sales. This may be starting to change: starts of single family homes in February were the highest since November 2007. The single-family-home share of total housing starts was 70% in February, up from a low of 57% in June 2015, and approaching the 75-80% range seen before the housing crisis.

“While low inventories and short supply are boosting prices, financing continues to be a concern for some potential purchasers, particularly young adults and first time home buyers. The issue is availability of credit for people with substantial student or credit card debt. While rising home prices are certainly a factor deterring home purchases, individual financial positions are more important than local housing market conditions. One hopeful sign is that the home ownership rate, at 63.7% in 4Q2015, may be turning around. It is up slightly from 63.5% in 2Q2015 but far below the 2004 high of 69.1%.” 

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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.

4Q2015 Gross Domestic Product: Third (Final) Estimate

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In its third (“final”) estimate of 4Q2015 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) adjusted the rate at which the U.S. economy grew -- from a +1.00% seasonally adjusted and annualized rate (SAAR) posted in February, to +1.38%. That +0.38 percentage point revision was somewhat of a surprise, as expectations were for no change; also, the published estimate was outside the upper bound of the consensus range. Despite the upward revision, 4Q’s GDP growth rate was still 0.61% below that of 3Q. Moreover, 4Q2015’s year-over-year growth rate was +1.98%, slower than 3Q’s +2.15%.

Groupings of GDP components show that personal consumption expenditures (PCE) contributed to 4Q growth whereas private domestic investment (PDI) and net exports (NetX) detracted from it. Government consumption expenditures (GCE) was essentially neutral.

For this revision, the biggest upward change (relative to the report released in February) in nominal-dollar terms was in recreational services (+$10.0 billion). The biggest downward change was in health care services (-$7.3 billion); health care represents nearly 25% of all expenditures on services, however, nearly on par with housing and utilities as well as expenditures on non-durables goods (e.g., food, clothing, and gasoline). The change in inventories shrank by $3.7 billion (from +$90.6 to +$86.9 billion). Net exports exerted a slightly smaller drag on GDP growth. Overall, 4Q GDP was reported to have grown by an additional $16.4 billion compared to February’s estimate. 

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Consumer Metrics Institute summarized the GDP report as follows:

“At face value this report shows the U.S. to be the healthiest and fastest growing major developed economy -- which perhaps says much more about the global situation than it does about the domestic environment. Sadly, seven consecutive quarters of measurable growth and back-to-back quarters of slightly more than anemic growth (> +1%) does provide serious global bragging rights. And when ignoring inventories (which is highly recommended) that domestic growth becomes almost respectable at +1.60%.

“All of which frames nicely the dilemma faced by the Fed's FOMC -- a stable economy that appears to be neither contracting nor remotely in danger of overheating. Arguably a Goldilocks growth rate -- albeit obtained via unprecedented and sustained monetary stimulus that by all rights should have stimulated far more.

“Given the domestic economic situation outlined above, we understand the Fed's hesitancy to raise rates. And we understand the delicacy of the global economic environment, which clearly has the economists at the Fed concerned. We also understand the Fed's pride when acting the part of senior member at the central banks club. We simply wonder why the Fed now believes that helping sustain the global economy is part and parcel of their charter and/or congressional mandate.”

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 2016 Residential Permits, Starts and Completions

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Builders started 1.178 million residential units (SAAR) in February (1.146 million expected), 5.2 percent (±16.9%)* above the revised January estimate of 1.120 million (originally 1.099 million) and 30.9 percent (±16.3%) above the February 2015 SAAR of 900,000.

Virtually all of the MoM increase in total starts occurred in the single-family component: +55,000 units, to 822,000 units; that was 7.2 percent (±17.4%)* above the revised January figure of 767,000. Multi-family starts inched up by 3,000 units, to 356,000 (+0.8% MoM).

* 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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February’s SAAR was 30.9% (±16.3%) above the year-earlier SAAR of 900,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +31.0%. Single-family starts were 38.4% higher YoY, while the multi-family component was up 16.9%. 

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Completions fell by 44,000 units, or -4.2 percent (±9.5%)* to 1.016 million units, but that SAAR is 17.5 percent (±14.3%) above the year-earlier figure. The NSA comparison: +19.9% YoY.

All of the MoM decrease in completions occurred in the multi-family component (-86,000 units, or -23.5%), to 280,000 units; that was +10.9% YoY, however. Single-family completions rose by 42,000 units, or 6.1 percent (±12.7%)* to 736,000 units. That SAAR is 22.3% higher than the year-earlier level; the NSA comparison is +23.7% YoY. 

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Total permits in February fell by 37,000 units, or -3.1 percent (±0.8%) to 1.167 million; but that SAAR was 6.3 percent (±2.0%) above the year-earlier figure. The NSA comparison was +8.1% YoY.

Multi-family permits were responsible for the MoM drop; they fell by 40,000 units (-8.4%) to 436,000. Moreover, that was 8.5% below year-earlier levels. Single-family, by contrast, rose by 3,000 units, or +0.4 percent (±1.2%)* to 731,000; that was +21.1% YoY.

Builder confidence in the market for newly-built single-family homes was unchanged at 58 in March on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

“Confidence levels are hovering above the 50-point mid-range, indicating that the single-family market continues to make slow but steady progress,” said NAHB Chairman Ed Brady.  “However, builders continue to report problems regarding a shortage of lots and labor.”

“While builder sentiment has been relatively flat for the last few months, the March HMI reading correlates with NAHB’s forecast of a steady firming of the single-family sector in 2016,” said NAHB Chief Economist David Crowe. “Solid job growth, low mortgage rates and improving mortgage availability will help keep the housing market on a gradual upward trajectory in the coming months.” 

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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 2016 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) decreased 0.5% in February (-0.2% expected) after increasing 0.8% in January. Sizable declines in the indexes for both utilities and mining in February outweighed a gain of 0.2% for manufacturing. The output of utilities dropped 4.0%, as unseasonably warm weather curbed the demand for heating. Mining production fell 1.4% and has decreased nearly 1.3% per month, on average, over the past six months. At 106.3% of its 2012 average, total IP in February was 1.0% below its year-earlier level.

Industry Groups

Manufacturing output rose 0.2% in February (0.0% expected), as an increase of 0.4% for durable manufacturing more than offset a decrease of 0.1% for nondurable manufacturing; the output of other manufacturing (publishing and logging) was unchanged. The indexes for most major durable goods industries either advanced or were little changed: Machinery, primary metals, and miscellaneous manufacturing registered the largest gains, nearly 1% each, while Wood Products recorded the only notable decrease (-1.2%). Within nondurables, decreases for food, beverage, and tobacco products; for textile and product mills; and for chemicals slightly outweighed gains of 2.5% or more for apparel and leather manufacturing and for petroleum and coal products, as well as smaller increases for other industries. Paper rose by 0.4%.

The large drop in mining in February resulted from decreases in crude oil extraction, coal mining, and oil and gas well drilling and servicing. Since late 2014, the index for oil and gas well drilling and servicing has fallen more than 60%. 

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Capacity utilization (CU) for the industrial sector decreased 0.4 percentage point in February to 76.7% (76.9% expected), a rate that is 3.3 percentage points below its long-run (1972–2015) average.

Manufacturing CU was unchanged in February at 76.1%, a rate that is 2.4 percentage points below its long-run average. The operating rate for durables edged up (Wood Products: -1.5%), while the rate for nondurables edged down (Paper: +0.4%); the utilization rate for other manufacturing (publishing and logging) was unchanged. The operating rate for mining moved down 1.0 percentage point, and the rate for utilities dropped more than 3 percentage points; the rates for both sectors were below their long-run averages by nearly 10 percentage points or more.   

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Capacity at the all-industries level was unchanged (+1.3% YoY) at 138.7% of 2012 output. Manufacturing edged up +0.1% (+1.4% YoY) to 139.5%. Wood Products extended the upward trend that has been ongoing since November 2013 when increasing by 0.3% (+2.6% YoY) to 161.7%. Paper was unchanged (-0.2% YoY) to 116.7%.

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 2016 Consumer and Producer Price Indices (incl. Forest Products)

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Consumer Price Index

The seasonally adjusted consumer price index for all urban consumers (CPI-U) declined 0.2% in February (-0.3% expected). The energy index continued to decrease and was the major cause of the seasonally adjusted decline in the all items index, more than offsetting increases in the indexes for food (+0.2%) and for all items less food and energy. The gasoline index fell sharply, declining 13.0%, and the indexes for fuel oil and electricity also decreased, though the index for natural gas rose.

The index for all items less food and energy rose 0.3%. Increases in the indexes for shelter (rent: +0.3%; owner’s equivalent rent: +0.3%), apparel, and medical care (+0.5%) were the largest contributors to the rise, but almost all major components increased in February.

The all items index rose 1.0% over the last 12 months. The energy index fell 12.5% over the past year, with all of its major components declining. The food index advanced 0.9%, with the index for food at home declining but the food away from home index rising. The index for all items less food and energy rose 2.3%, its largest 12-month increase since May 2012. Shelter costs (rent: +3.7%; owner’s equivalent rent: +3.2%) contributed to the YoY rise, along with medical costs (+3.9%). 

Producer Price Index

The seasonally adjusted producer price index for final demand (PPI) fell 0.2% in February (in line with expectations), thanks primarily to a 0.6% decline in final demand goods. The index for final demand services was unchanged. The index for final demand less foods, energy, and trade services inched up 0.1% in February after increasing 0.2% in both January and December.

For the 12 months ended in February, prices for final demand less foods, energy, and trade services rose 0.9%, the largest 12-month advance since a 0.9% increase in July 2015. 

Final demand goods: The index for final demand goods fell 0.6% in February, the third consecutive decline. Most of the February decrease can be traced to prices for final demand energy, which dropped 3.4%. The index for final demand foods moved down 0.3%. In contrast, prices for final demand goods less foods and energy advanced 0.1%.

Product detail: Leading the February decline in prices for final demand goods, the gasoline index fell 15.1%. Prices for fresh and dry vegetables, diesel fuel, beef and veal, passenger cars, and industrial chemicals also moved lower. Conversely, the index for pharmaceutical preparations climbed 1.2%. Prices for home heating oil and eggs for fresh use also increased.

Final demand services: The index for final demand services was unchanged in February following three consecutive advances. In February, a 0.3-percent rise in prices for final demand services less trade, transportation, and warehousing offset a 0.4-percent decrease in the index for final demand trade services and a 0.7-percent drop in prices for final demand transportation and warehousing services. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail: Among final demand services in February, prices for securities brokerage, dealing, investment advice, and related services moved up 4.8%. The indexes for machinery, equipment, parts, and supplies wholesaling; food retailing; guestroom rental; and outpatient care (partial) also increased. In contrast, the index for apparel, footwear, and accessories retailing declined 6.0%. The indexes for fuels and lubricants retailing, portfolio management, truck transportation of freight, and deposit services (partial) also fell. 

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Month-over-month changes in most of the not-seasonally adjusted price indexes we track were negative in February, 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.

January 2016 International Trade (Softwood Lumber)

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Softwood lumber exports retreated (-4 MMBF or 2.8%) in January while imports advanced (+71 MMBF or 6.0%). Exports were 11 MMBF (9.4%) above year-earlier levels; imports were 278 MMBF (28.4%) higher. As a result, the year-over-year (YoY) net export deficit was 267 MMBF (30.9%) larger. The average net export deficit for the 12 months ending January 2016 was 14.5% higher than the average of the same months a year earlier (the “YoY MA(12) % Chng” series shown in the graph above). 

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North America was the primary destination for U.S. softwood lumber exports in January (41.0%, of which Canada: 22.6%; Mexico: 18.4%). Asia (especially China: 19.1%) placed a close second, with 33.9%. Year-to-date (YTD) exports to China were up 62.9% relative to the same months in 2015. Meanwhile, Canada was the source of nearly all (95.1%) softwood lumber imports into the United States. Overall, YTD exports were up 9.4% compared to 2015, while imports were up 28.4%. 

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U.S. softwood lumber export activity through West Coast customs districts tapered off slightly in relation to the other districts during January (to 37.2% of the U.S. total, from 42.4% in December); Seattle maintained its dominance as the most active export district (21.0% of the U.S. total), leading second-place Mobile, AL (14.5%). At the same time, Great Lakes customs districts handled 67.0% of the softwood lumber imports (especially Duluth, MN with 26.9%) coming into the United States. 

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Southern yellow pine comprised 31.4% of all softwood lumber exports in January, followed by Douglas-fir with 17.6%. Southern pine exports were up 32.9% YTD relative to 2015, while Douglas-fir exports were up 5.4%.

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 2016 International Trade (General)

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The goods and services deficit was $45.7 billion in January, up $1.0 billion from $44.7 billion in December, revised.  January exports were $176.5 billion, $3.8 billion less than December exports. January imports were $222.1 billion, $2.8 billion less than December imports.

The January increase in the goods and services deficit reflected an increase in the goods deficit of $1.1 billion to $63.7 billion and an increase in the services surplus of $0.1 billion to $18.0 billion.

Year-over-year, the goods and services deficit increased $2.1 billion (4.8%), from January 2015. Exports decreased $12.5 billion (6.6%). Imports decreased $10.5 billion (4.5%).

Goods by Selected Countries and Areas
The January figures show surpluses (in billions of dollars) with South and Central America ($3.1) and Brazil ($0.6).  Deficits were recorded with China ($31.1), European Union ($12.6), Germany ($5.8), Japan ($5.6), Mexico ($5.6), South Korea ($2.9), Italy ($2.4), India ($2.3), France ($1.5), Canada ($0.5), Saudi Arabia ($0.2), OPEC ($0.2), and United Kingdom ($0.1).

* The deficit with China increased $1.4 billion to $31.1 billion. Exports increased less than $0.1 billion to $8.6 billion and imports increased $1.5 billion to $39.8 billion.

* The deficit with Mexico increased $0.8 billion to $5.6 billion. Exports decreased less than $0.1 billion to $19.5 billion and imports increased $0.8 billion to $25.1 billion. 

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On a global scale, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume were essentially unchanged in December (+0.6% year-over-year) while prices rose by 0.3% (-10.6% 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.

February 2016 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment jumped by 242,000 jobs in February -- crushing expectations of +190,000. In addition, combined December and January employment gains were boosted by 30,000 (December: +9,000; January: +21,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) was unchanged at 4.9% as the change in the number of people employed (+530,000) more than matched the increase in the civilian labor force (+374,000). 

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Observations from the employment reports include:

* Manufacturing lost 16,000 jobs in February. Those results are generally consistent with the behavior of the Institute for Supply Management’s manufacturing employment sub-index, which -- although it rose 2.6 percentage points in February -- declined in eight of the 12 months ending in February, and has been in outright contraction during the most recent three months. Wood Products: -600 jobs; Paper and Paper Products: -700.

* Mining and logging shed 18,000 jobs, with 15,900 coming from support activities for mining and another 1,800 from oil and gas extraction. Construction added 19,000 jobs.

* Over 92% (211,900) of February’s private-sector job growth occurred in the sectors typically associated with the lowest-paid jobs -- Retail Trade: +54,900; Professional & Business Services: +23,000 (although temp-help lost 9,800 jobs); Education & Health Services: +86,000; and Leisure & Hospitality: +48,000. This is a persistent issue, as we have repeatedly highlighted: There are 1.419 million fewer manufacturing jobs today than at the start of the Great Recession in December 2007, but 1.629 million more Food Services & Drinking Places (i.e., wait staff and bartender) jobs. If trends since 2015 continue, by the end of 2018 there will be as many wait staff and bartender jobs as manufacturing jobs in the United States. 

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* The employment-population ratio edged up to 59.8%; roughly speaking, for every five people added to the population, fewer than three are employed. Meanwhile, the number of employment-age persons not in the labor force retreated by 374,000 to 96.9 million. 

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* The labor force participation rate (LFPR) also rose to 62.9%, comparable to levels seen in late 1977. Average hourly earnings of all private employees fell by $0.03 (to $25.35), resulting in a 2.2% year-over-year increase. For all production and nonsupervisory employees (pictured above), however, hourly wages were unchanged at $21.32 (+2.4% YoY). With the CPI running at an official rate of +1.4% YoY, wages are technically rising in real (inflation-adjusted) terms. The average workweek for all employees on private nonfarm payrolls was shortened by 0.2 hour, to 34.4 hours. 

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* Finally, full-time jobs increased by 65,000 while part-time jobs jumped by 489,000. Full-time jobs have been trending higher since December 2009, and are now 1.331 million above the pre-recession high (although, for perspective, the non-institutional, working-age civilian population has risen by an estimated 19.4 million during that time period). Part-time jobs, by contrast, have been stuck in a channel between roughly 27 and 28 million. 

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For a “sanity check” of the employment numbers, we consult employment withholding taxes published by the U.S. Treasury. Although highly seasonal, the data show the amount withheld in February increased by $16.2 billion, to $207.3 billion -- the highest amount on record for that calendar month. To reduce some of the volatility and determine broader trends, we average the most recent three months of data and estimate a percentage change from the same months in the previous year. The average of the three months ending February were 4.9% above the year-earlier average, well off the peak of +13.8% set back in September 2013.

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 2016 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that the contraction in U.S. manufacturing slowed further in February. The PMI registered 49.5%, an increase of 1.3 percentage points from the January reading of 48.2%. (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. Changes to key internal sub-indexes included a pick-up in production, a smaller reduction in employment, slower input price erosion, and contractions in both exports and imports. 

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Wood Products expanded on new orders and production. "Market is beginning to trend up with spring season on its way," commented one Wood Products respondent. For Paper Products, increases in employment and inventories apparently trumped all other sub-indexes.

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment – slowed marginally in February. The NMI registered 53.4%, 0.1 percentage point lower than the January reading of 53.5%, and the weakest level since February 2014. Changes in the sub-indexes were mixed, with notable increases in business activity, and export and import orders. 

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All three service sectors we track reported expansion.

Paper was the only relevant commodity higher in price. Corrugated boxes, oil and oil-based products, diesel fuel, gasoline, natural gas, and lumber products were cheaper. Labor was the only relevant commodity in short supply.

ISM’s and Markit’s surveys were somewhat at odds with each other in February: ISM’s PMI contracted more slowly while Markit’s Manufacturing PMI expanded more slowly. The pace of growth decelerated in ISM’s NMI while Markit’s Services PMI fell into outright contraction.

Comments from Markit Chief Economist Chris Williamson are presented below:

Manufacturing -- “The February data add to signs of distress in the U.S. manufacturing economy. Production and order book growth continues to worsen, led by falling exports. Jobs are being added at a slower pace and output prices are dropping at a rate not seen since mid-2012.

“The deterioration in the manufacturing sector’s performance since mid-2014 has broadly tracked the dollar’s rise, which makes U.S. goods more expensive in overseas markets and leads U.S. consumers to favor cheaper imported goods.

“With other headwinds including the downturn in the oil sector, heightened uncertainty due to financial market volatility, global growth worries and growing concerns about the presidential election, it’s no surprise that the manufacturing sector is facing its toughest period since the global financial crisis.”

Services -- “Business activity stagnated in February as malaise spread from the manufacturing sector to services. The Markit PMIs are signaling a stagnation of the economy in February, suggesting growth has deteriorated further since late last year.

“Prices pressures are waning again in line with faltering demand. Average prices charged for goods and services are dropping once again, down for the first time in five months, as firms compete to win new business

“Worse may be to come, as inflows of new business have slowed sharply, causing backlogs of work across both sectors to fall at the fastest rate seen since the 2008-9 financial crisis. Such weak demand suggests that business activity and price discounting look set to continue.

“However, perhaps the brightest warning light is the downturn in business optimism to the joint-lowest recorded by the survey, suggesting firms are bracing themselves for trouble ahead.

“The only positive note in the PMI report is the sustained robust rate of job creation in the services sector, though it seems inevitable that firms will take a more cautious approach to hiring if demand continues to wane in coming months.”

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 2016 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 $1.4 billion or 0.3% to $468.4 billion in January. Shipments of durable goods increased $4.7 billion or 2.0% to $241.6 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $3.3 billion or 1.4% to $226.8 billion, led by petroleum and coal products. Shipments of Wood fell by 1.9% while Paper edged up by 0.2%. 

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Inventories decreased $2.7 billion or 0.4% to $637.5 billion. The inventories-to-shipments ratio was 1.36, down from 1.37 in December. Inventories of durable goods decreased $0.6 billion or 0.1% to $395.7 billion, led by primary metals. Nondurable goods inventories decreased $2.1 billion or 0.9% to $241.7 billion, led by petroleum and coal products. Inventories of both Wood (-0.1%) and Paper (-0.6%) declined. 

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New orders increased $7.5 billion or 1.6% to $463.9 billion. Excluding transportation, new orders decreased 0.2% (and -5.1% YoY -- the 15^th consecutive month of year-over-year contractions). Durable goods orders increased $10.7 billion or 4.7% to $237.1 billion, led by transportation equipment. New orders for nondurable goods decreased $3.3 billion or 1.4% to $226.8 billion. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- rose by 3.4% in January (-4.9% YoY). Business investment spending contracted on a YoY basis during every month of 2015, but is starting 2016 on a more positive note.

Prior to July 2014, as can be seen in the graph above, real (inflation-adjusted) new orders had been essentially flat since early 2012, recouping on average 70% of the losses incurred since the beginning of the Great Recession. With July 2014’s transportation-led spike gradually receding in the rearview mirror, the recovery in new orders is back to just 54% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders increased $0.6 billion or 0.1% to $1,188.1 billion, led by computers and electronic products. The unfilled orders-to-shipments ratio was 6.93, down from 7.08 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 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. Since then, however, real unfilled orders have moved mostly sideways and are now below the January 2010-to-June 2014 trend line.

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

February 2016 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil edged lower in February, retreating by $1.36 (-4.3%), to $30.32 per barrel -- its lowest point since September 2003. The price decline coincided with a slightly weaker U.S. dollar, the lagged impacts of a 356,000 barrel-per-day (BPD) increase in the amount of oil supplied/demanded in December (to 19.5 million BPD), and another jump in the accumulation of oil stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI widened to $1.86 per barrel. 

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Commentary from ASPO-USA’s Peak Oil Review editor Tom Whipple: “Despite [supply outages in Kurdistan and Nigeria], the global market is still oversupplied and many traders are looking for the Saudi-Russian production 'freeze' to morph into an actual production cut that will rebalance the markets. However, at the IHS-CERA oil conference in Houston last week (late February), Saudi Arabia’s oil minister made it clear that a production cut was not going to happen despite all the hype and optimism. The Iranians seconded the sentiment saying they were not going to freeze or cut anything until their production was back to the pre-sanctions 4 million BPD. Moscow chimed in with the claim that even with a freeze its oil production could set a new post-Soviet record this year.

“Amidst all the gloom and doom about low prices at the Houston conference, the IEA rolled out its most recent thoughts about the future of oil. The Agency naturally is concerned about the major cutbacks in capital investment that are underway and believes the industry will be hard pressed to recover after prices rebound later in the decade. The executive director of the IEA says he expects prices to climb back up to $80 a barrel by 2020. He also believes there will be a second leg to the U.S. shale oil boom which will be quick to recover when prices rise and will send U.S. domestic oil production to new highs by 2021.

“In the meantime, the U.S. oil industry is going through a major contraction with numerous bankruptcies and much selling off of assets. During the Houston conference, it was noted that the reason there are so few mergers is that many company debts become due the minute the company comes under new ownership. Few companies are willing to bear the upfront costs of paying off the debt of new acquisitions, even at bargain prices.

“For the immediate future, it looks as if U.S. shale oil production will be falling as the number of active drilling rigs continues to fall steadily. The week before last the rig count fell by 13 to 400. However, there still remains a backlog of hundreds of wells that have been drilled and are awaiting fracking before they can start producing. This backlog and increasing production from large offshore projects nearing completion in the Gulf of Mexico may be enough to keep U.S. domestic production from falling as fast as many foresee.  Even the Saudis noted in Houston last week that the U.S. shale oil industry is very light on its feet. Once having established itself in an area with drill sites, permits, and the logistic infrastructure already in place, shale oil production can be increased very rapidly in comparison to what would be required to increase OPEC members’ production. The problem in increasing shale oil production will come when the most productive 'sweet spots' are all drilled.  Some knowledgeable observers believe this will come circa 2020.

“Concerns once again are increasing that a shortage of oil and oil product storage capacity in the U.S. could drive oil prices considerably lower within the next few months. The main U.S. storage facility and futures delivery point at Cushing, Okla. is already 80 percent full, is turning away some types of business, and at the current rate of filling will be completely filled in another four months. The same problem is occurring in other facilities along the Gulf Coast and in the mid-west. Refiners in the mid-west are already cutting back gasoline production as the demand is simply not there despite the very low prices ($1.11 in parts of Minnesota) and the much-ballyhooed economic recovery.  Some analysts are convinced that another major down leg to the oil markets is virtually certain to occur before supply and demand come back into balance.” 

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News items from OilPrice Intelligence Report editor Evan Kelly:

U.S. oil production falling. More and more U.S. shale companies have conceded that their production levels are set to fall this year, which brings cuts in U.S. output into clearer focus. Last year, although all companies were hurting from the crash in prices, there was also a sense of triumphalism in the face of the bust, a confidence in the fact that OPEC was unable to break American shale. However, while the magnitude of cost cutting and resilience was impressive, reality is setting in this year. Several companies have already announced that production would fall amid a sharp reduction in upstream spending this year, including Continental Resources (NYSE: CLR), Devon Energy (NYSE: DVN), and Marathon Oil Corp. (NYSE: MRO). Last week, EOG Resources (NYSE: EOG) joined the growing number of companies seeing declines when it said its 2016 production levels would fall. The EIA released its most up to date monthly production figures, which showed that overall U.S. oil production fell to 9.26 million barrels per day in December, a decline of 50,000 barrels per day from the month before. Output is now more than 400,000 barrels per day lower than the April 2015 peak.

Oil prices inch up. The declines are starting to create a little bit of bullishness in the oil markets, with prices surging to the mid-$30s per barrel, up dramatically from their January lows. Investors are starting to become more confident that the worst is over. With U.S. output now solidly in decline - a trend that will likely accelerate in the months ahead as drilling slows even further - the supply glut will start to ease, albeit slowly. Hedge funds and other major investors are starting to reduce their short positions and take stronger net-long positions, an indication that speculators think that oil prices have bottomed out. It is not hard to imagine $40 oil just around the corner. 

Rail cars for oil storage. Production is slowing but storage is still at a premium. The glut in oil supply and the shrinking availability of storage is leading to the growing practice of storing oil in rail cars. The Wall Street Journal reported that delivering crude by rail is starting to decline because it is no longer profitable with oil prices down in the mid-$30s per barrel. But with rail cars sitting idle, many are starting to be used to store oil, a practice that the industry has dubbed "rolling storage." The practice will likely remain limited on a permanent basis, however, as storing oil on railcars is subject to safety regulations, liability concerns and a need for track space.

ExxonMobil's record bond sale. ExxonMobil (NYSE: XOM) made a big move with a $12 billion bond sale, its largest on record. The world's largest publically-traded oil company could use the cash to buy up assets on the cheap. Exxon held its cards close to the vest, saying that the proceeds would be used for "funding for working capital, acquisitions, capital expenditures, refinancing a portion of our existing commercial paper borrowings and other business opportunities." ExxonMobil still has a AAA credit rating, one of the few companies in existence to have the highest rating possible, but S&P issued a "negative" rating in early February.

Saudi cash reserves fall. Saudi foreign reserves continue to dwindle as the OPEC nation tries to shore up its finances and maintain its currency peg. In January, Saudi Arabia's foreign exchange dipped below $600 billion for the first time in four years, according to the latest estimates. The government is burning through cash reserves at a rate of about $14.3 billion per month.

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.