1Q2016 Gross Domestic Product: First (Advance) Estimate

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In its first (“advance”) estimate of 1Q2016 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) pegged growth of the U.S. economy at a seasonally adjusted and annualized rate (SAAR) of +0.54%, down 0.84 percentage points (considerably more than half) from 4Q2015’s +1.38%. The 1Q rate was below consensus expectations of +0.7%. Moreover, 1Q2016’s year-over-year growth rate was +1.95%, marginally slower than 4Q2016’s +1.98%.

Overall, groupings of GDP components show that personal consumption expenditures (PCE) and government consumption expenditures (GCE) contributed to 1Q growth. Private domestic investment (PDI) and net exports (NetX) detracted from it.

The quarter-over-quarter (QoQ) deceleration was a broad-based one, with much lower contributions from both consumer expenditures for goods (0.33% below 4Q) and commercial fixed investment (-0.33%) having the greatest impact. Imports (-0.13%), inventories (-0.11%), consumer services (-0.06%), and exports (-0.06%) continued the QoQ declines in growth rates. Only governmental spending showed an improved contribution to the headline number (+0.20%). 

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Consumer Metrics Institute summarized the GDP report as follows:

Although the headline remained positive, this is not a report that shows a robust economy. Among the troubling aspects of the report --

-- The growth rate for consumer spending took another significant hit, dropping substantially for the third consecutive quarter. In fact, the growth rate for consumer spending on goods was barely positive, at a miserable +0.03%. And non-discretionary spending on health care and housing provided most of the remaining growth in consumer services spending.

-- Private investment contracted for the first time since 1Q2011.

-- Exports went deeper into the red.

Looking at the past three quarters as a group, we can see a slow-motion slide into either stagnation or contraction. It is truly sad when stagnation looks to be the better alternative.

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 2016 Residential Sales, Inventory and Prices

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Sales of new single-family houses in March 2016 were at a seasonally adjusted annual rate (SAAR) of 511,000 units, below expectations of 522,000. That level of activity was 1.5% (±15.0%)* below the revised February rate of 519,000 units (originally 512,000), but 5.4% (±16.0%)* below the year-earlier SAAR of 485,000; the not-seasonally adjusted year-over-year comparison (shown in the table above) was +4.3%.

For a longer perspective, March’s sales were roughly 63% below the “bubble” peak and about 8% below the long-term, pre-2000 average. Although single-family starts decreased more quickly than sales, the three-month average ratio of starts to sales rose to 1.53 -- above the average (1.41) since January 1995.

The median price of new houses sold in March slid by $9,400 (-3.2%), to $288,000; the average price, on the other hand, jumped by $14,100 (+4.1%), to $356,200. Starter homes (those priced below $200,000) made up 18.8% of the total sold in March, marginally higher than March 2015’s record low (going back to 2002) of 17.4%; prior to the Great Recession starter homes comprised as much as a 61% share of total sales. If there is anything positive to be gleaned from the sales data, it is that the proportion of total sales represented by the lowest “rung” (i.e., homes prices below $150,000) was near triple year-earlier levels (6.3% in March 2016 versus 2.2% in March 2015).

* 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 March, single-unit completions retreated by 2,000 units (-0.3%). Because the absolute decrease in sales exceeded that of completions, new-home inventory expanded in both absolute (+5,000 units) and months-of-inventory (0.2 month) terms. 

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Existing home sales rose in March (+260,000 units or 5.1%) to 5.33 million units (SAAR), exceeding expectations of 5.27 million. Inventory of existing homes expanded in both absolute (+100,000 units) and months-of-inventory (+0.1 month) terms. Because new home sales fell while existing sales rose, the share of total sales comprised of new homes retreated to 8.7%. The median price of previously owned homes sold in March jumped by $10,600 (+5.0%), to $222,700. 

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Housing affordability improved as the median price of existing homes for sale in February dropped by another $2,500 (-1.2%; +4.3% YoY) to $212,300. 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 +0.2% (+5.3% YoY).

“Home prices continue to rise twice as fast as inflation, but the pace is easing off in the most recent numbers,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The year-over-year figures for the 10-City and 20-City Composites both slowed and 13 of the 20 cities saw slower year-over-year numbers compared to last month. The slower growth rate is evident in the monthly seasonally adjusted numbers: six cities experienced smaller monthly gains in February compared to January, when no city saw growth. Among the six were Seattle, Portland OR, and San Diego, all of which were very strong last time.

“Mortgage defaults are an important measure of the health of the housing market. Memories of the financial crisis are dominated by rising defaults as much as by falling home prices. Today as well, the mortgage default rate continues to mirror the path of home prices. Currently, the default rate on first mortgages is about three-quarters of one percent, a touch lower than in 2004. Moreover, the figure has drifted down in the last two years. While financing is not an issue for home buyers, rising prices are a concern in many parts of the country. The visible supply of homes on the market is low at 4.8 months in the last report. Homeowners looking to sell their house and trade up to a larger house or a more desirable location are concerned with finding that new house. Additionally, the pace of new single family home construction and sales has not completely recovered from the recession.” 

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

March 2016 Residential Permits, Starts and Completions

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Builders started 1.089 million residential units (SAAR) in March (1.167 million expected), 8.8 percent (±11.1%)* below the revised February estimate of 1.117 million (originally 1.178 million). Most of the MoM decrease in total starts occurred in the single-family component: -77,000 units, to 764,000 units; that was 9.2 percent (±10.3%)* below the revised February figure of 841,000. Multi-family starts declined by 28,000 units, to 325,000 (-7.9% 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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March’s SAAR was 14.2 percent (±11.7%) above the year-earlier SAAR of 954,000; the not-seasonally adjusted YoY change (shown in the table above) was +11.3%. Single-family starts were 19.1% higher YoY, while the multi-family component was 4.1% lower. Equally noteworthy, multi-family starts were unchanged on a year-to-date (YTD) basis compared to the same months in 2015. 

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Completions rose by 36,000 units, or 3.5 percent (±13.3%)* to 1.061 million units; that SAAR is 31.6 percent (±15.2%) above the year-earlier figure. The NSA comparison: +28.6% YoY.

All of the MoM increase in completions occurred in the multi-family component (+38,000 units, or 13.1%), to 327,000 units; that was also +41.4% YoY. Single-family completions inched down by 2,000 units, or 0.3 percent (±11.5%)* to 734,000 units. That SAAR is 23.2 percent (±14.3%) higher than the year-earlier level; the NSA comparison is +24.2% YoY. 

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Total permits in March tumbled by 91,000 units, or -7.7 percent (±1.2%) to 1.086 million (1.200 million expected); but that SAAR was 4.6 percent (±0.9%) above the year-earlier figure. The NSA comparison was +7.9% YoY.

Multi-family permits were responsible for most of the MoM drop; they fell by 82,000 units (-18.6%) to 359,000. Moreover, that was 8.9% below year-earlier levels. Single-family permits also fell, although by a more modest 9,000 units, or 1.2 percent (±1.1%) to 727,000. That SAAR was +13.2 percent (±1.1%) YoY; the NSA comparison was +17.7%. Again, it is worth noting that YTD multi-family permits were 3.1% below the same months a year earlier. 

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

“Builder confidence has held firm at 58 for three consecutive months, showing that the single-family housing sector continues to recover at a slow but consistent pace,” said NAHB Chairman Ed Brady.  “As we enter the spring home buying season, we should see the market move forward.”

“Builders remain cautiously optimistic about construction growth in 2016,” said NAHB Chief Economist Robert Dietz. “Solid job creation and low mortgage interest rates will sustain continued gains in the single-family housing market in the months ahead.” 

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 2016 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) decreased 0.6% in March for a second month in a row (-0.1% expected). For 1Q2016 as a whole, IP fell at an annual rate of 2.2%. A substantial portion of the overall March decrease resulted from declines in the indexes for mining and utilities, which fell 2.9% and 1.2%, respectively; in addition, manufacturing output fell 0.3%. The sizable decrease in mining production continued the industry's recent downward trajectory; the index has fallen in each of the past seven months, at an average pace of 1.6% per month. At 103.4% of its 2012 average, total IP in March was 2.0% below its year-earlier level.

Industry Groups

Manufacturing output decreased 0.3% in March. The production of durables moved down 0.4% (Wood Products: -1.0%). The largest declines, about 1.5%, were registered both by motor vehicles and parts and by electrical equipment, appliances, and components. Several industries posted increases, with the largest, nearly 1%, for computer and electronic products. After increasing 0.9% in January and decreasing 0.5% in February, the output of nondurable manufacturing edged down in March (Paper: -0.6%), as gains in the production of petroleum and coal products and of chemicals nearly offset declines for most other industries. The output of other manufacturing (publishing and logging) fell almost 1%. For the first quarter, manufacturing output moved up at an annual rate of 0.6%, roughly reversing its small decrease in the fourth quarter of last year.

The drop of almost 3% in mining output was its largest monthly loss since September 2008, when production was curtailed because of hurricanes. The decline reflected substantial cutbacks in coal mining and in oil and gas well drilling and servicing, as well as decreases in oil and natural gas extraction. The index for mining has fallen nearly 13% over the past 12 months. The index for utilities moved down again, primarily because of a drop of 4.6% for natural gas utilities. 

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Capacity utilization (CU) for the industrial sector decreased 0.6% (to 74.8%), a rate that is 5.2 percentage points below its long-run (1972–2015) average.

Manufacturing CU fell 0.3% to 75.1%, a rate that is 3.4 percentage points below its long-run average. The operating rates for durables, nondurables, and other manufacturing (publishing and logging) each decreased. The operating rates for both mining and utilities dropped to 73.7%, the lowest rates over the histories of these series. Wood Products fell 1.3% and Paper -0.5%.Click image for larger version

Capacity utilization (CU) for the industrial sector decreased 0.6% (to 74.8%), a rate that is 5.2 percentage points below its long-run (1972–2015) average.

Manufacturing CU fell 0.3% to 75.1%, a rate that is 3.4 percentage points below its long-run average. The operating rates for durables, nondurables, and other manufacturing (publishing and logging) each decreased. The operating rates for both mining and utilities dropped to 73.7%, the lowest rates over the histories of these series. Wood Products fell 1.3% and Paper -0.5%. 

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Capacity at the all-industries level was unchanged (+1.2% YoY) at 138.1% of 2012 output. Manufacturing edged up +0.1% (+1.0% YoY) to 137.4%. Wood Products extended the upward trend that has been ongoing since November 2013 when increasing by 0.3% (+4.6% YoY) to 164.7%. Paper edged down 0.1% (-0.5% YoY) to 117.3%.

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

March 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) increased 0.1% in March (+0.2% expected). Over the last 12 months, the all items index rose 0.9% before seasonal adjustment.

The food index declined in March, while the indexes for energy and for all items less food and energy rose, leading to the slight seasonally adjusted increase in the all items index. The food index fell 0.2% after rising in February, as five of the six major grocery store food groups declined. The energy index rose for the first time since November, with all of its major components except natural gas increasing. 

While the index for all items less food and energy increased in March, the 0.1% advance was the smallest increase since August. Major component indexes were mixed in March. The indexes for shelter (rent: +0.3%; owners’ equivalent rent: +0.2%), recreation, medical care (+0.1%), education, tobacco, and personal care were among those that rose, while the indexes for apparel, airline fares, communication, household furnishings and operations, and used cars and trucks all declined. 

The all items index rose 0.9% over the last 12 months, a slightly smaller increase than the 1.0% change for the 12 months ending February. The index for all items less food and energy has risen 2.2% over the last 12 months, and the food index has increased 0.8%. Despite rising in March, the energy index has declined 12.6% over the last year. Rents rose by 3.7%; owners’ equivalent rent: +3.1%; medical care: +3.6%)

Producer Price Index

The seasonally adjusted producer price index for final demand (PPI) fell 0.1% in March (+0.3% expected). Final demand prices decreased 0.2% in February and advanced 0.1% in January. On an unadjusted basis, the final demand index moved down 0.1% for the 12 months ended in March. (See table A.)

The decrease in the final demand index in March can be traced to prices for final demand services, which declined 0.2%. In contrast, prices for final demand goods rose 0.2%.

The index for final demand less foods, energy, and trade services was unchanged in March after four consecutive advances. For the 12 months ended in March, prices for final demand less foods, energy, and trade services rose 0.9%. 

Final demand services: The index for final demand services fell 0.2% in March, the first decline since October 2015. In March, a 0.5-percent decrease in margins for final demand trade services accounted for over 80% of the broad-based decline in prices for final demand services. (Trade indexes measure changes in margins received by wholesalers and retailers.) The indexes for final demand transportation and warehousing services and for final demand services less trade, transportation, and warehousing fell 0.3% and 0.1%, respectively.

Product detail: Three-quarters of the March decrease in prices for final demand services can be attributed to margins for machinery, equipment, parts, and supplies wholesaling, which moved down 1.9%. The indexes for chemicals and allied products wholesaling, consumer loans (partial), physician care, fuels and lubricants retailing, and truck transportation of freight also decreased. Conversely, margins for food and alcohol retailing increased 2.3%. Prices for traveler accommodation services and airline passenger services also rose. (See table 4.)

Final demand goods: The index for final demand goods moved up 0.2% in March following eight straight declines. Most of the increase can be traced to prices for final demand energy, which rose 1.8%. The index for final demand goods less foods and energy inched up 0.1%. In contrast, prices for final demand foods declined 0.9%.

Product detail: Leading the March rise in prices for final demand goods, the gasoline index jumped 7.1%. Prices for carbonated soft drinks in bottles and cans, home heating oil, jet fuel, iron and steel scrap, and pharmaceutical preparations also moved higher. Conversely, the index for fresh and dry vegetables dropped 12.0%. Prices for electric power and motor vehicles also decreased. 

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Month-over-month changes in the not-seasonally adjusted price indexes we track were mixed, 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.

February 2016 International Trade (Softwood Lumber)

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Softwood lumber exports increased (+19 MMBF or 15.4%) in February while imports jumped more noticeably (+365 MMBF or 29.1%). Exports were 21 MMBF (17.0%) above year-earlier levels; imports were 655 MMBF (68.0%) higher. As a result, the year-over-year (YoY) net export deficit was 635 MMBF (75.3%) larger. The average net export deficit for the 12 months ending February 2016 was 18.7% 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 February (35.3%, of which Canada: 17.3%; Mexico: 18.1%). Asia (especially China: 18.7%) placed a close second, with 33.0%. Year-to-date (YTD) exports to China were up 53.4% relative to the same months in 2015. Meanwhile, Canada was the source of nearly all (97.6%) softwood lumber imports into the United States. Overall, YTD exports were up 13.3% compared to 2015, while imports were up 48.1%. 

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U.S. softwood lumber export activity through West Coast customs districts expanded when compared to the other districts during February (to 44.0% of the U.S. total, from 37.2% in January); Seattle maintained its dominance as the most active export district (30.8% of the U.S. total), widening its lead over second-place Mobile, AL (11.2%). At the same time, Great Lakes customs districts handled 70.3% of the softwood lumber imports -- most notably Detroit, MI (24.8%) overtaking typical frontrunner Duluth, MN (23.8%) -- coming into the United States. 

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Southern yellow pine comprised 26.6% of all softwood lumber exports in February, followed by spruce with 12.4%. Southern pine exports were up 19.0% YTD relative to 2015, while spruce exports were up 353.0%.

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 International Trade (General)

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The goods and services deficit was $47.1 billion in February, up $1.2 billion from $45.9 billion in January, revised.  February exports were $178.1 billion, $1.8 billion more than January exports. February imports were $225.1 billion, $3.0 billion more than January imports.

The February increase in the goods and services deficit reflected an increase in the goods deficit of $0.9 billion to $64.7 billion and a decrease in the services surplus of $0.3 billion to $17.7 billion.

Year-to-date, the goods and services deficit increased $10.8 billion, or 13.1 percent, from the same period in 2015. Exports decreased $20.5 billion or 5.5 percent. Imports decreased $9.7 billion or 2.1 percent.

Goods by Selected Countries and Areas: Monthly

The February figures show surpluses, in billions of dollars, with South and Central America ($2.7), OPEC ($1.9), Saudi Arabia ($1.3), and Brazil ($0.4).  Deficits were recorded, in billions of dollars, with China ($32.1), European Union ($10.6), Japan ($5.4), Germany ($5.2), Mexico ($5.1), South Korea ($2.8), India ($2.4), Italy ($2.4), France ($1.5), Canada ($1.0), and United Kingdom ($0.5).

* The deficit with China increased $1.0 billion to $32.1 billion in February. Exports decreased $0.3 billion to $8.4 billion and imports increased $0.8 billion to $40.5 billion.

* The balance with Saudi Arabia shifted from a deficit of $0.2 billion to a surplus of $1.3 billion in February. Exports increased $0.9 billion to $2.3 billion and imports decreased $0.6 billion to $1.0 billion. 

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On a global scale, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume decreased 0.4% in January (+1.1% year-over-year) while prices tumbled by 3.9% (-12.16% YoY). January’s price index was 25.9% below the August 2011 peak; price index changes are almost perfectly correlated with changes in the value of the U.S. dollar.

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 2016 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil jumped in March, rising by $7.23 (+23.8%), to $38.21 per barrel. The price increase coincided with a noticeably weaker U.S. dollar, the lagged impacts of a 489,000 barrel-per-day (BPD) decrease in the amount of oil supplied/demanded in January (to 19.4 million BPD), and an apparent plateau in the accumulation of oil stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI narrowed to $0.66 per barrel. 

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Commentary from ASPO-USA’s Peak Oil Review editor Tom Whipple: “The six-week long surge in oil prices which pushed the price of crude up by roughly 50% seems to be coming to an end with prices down 6% last week. Looming behind the price increase was the notion that the world’s major crude exporters would to get together and sign an agreement to freeze production at current levels. Supporting the price jump was an increase in U.S. gasoline consumption as prices fell to levels not seen in decades and the never ending hope that the U.S. economy was about to get better. Much of the surge was caused by the liquidation of the unprecedented short futures positions that hedge funds and other speculators had built up during the nearly two-year slide of oil prices. When oil fell below $30 a barrel, many speculators figured that the long price slide was over and that oil was unlikely to go much lower. The resulting liquidation of positions which pushed up prices was the largest on record.

“Last week the Saudi deputy crown prince said his country would not be agreeing to any production freeze as long as its dire enemy, Iran, continued to increase its production. This assertion threw into doubt whether the Doha meeting which is to take place on April 17th will actually occur and even if it does, whether an agreement on a production freeze will be signed. This fear that there will not be an agreement was reinforced by Kuwait’s announcement that it is about to reactivate a 300,000 BPD oil field – adding still more oil to the glut.

“Among the pressures tending to push prices lower is the continuing buildup in global crude stockpiles.  The slower-than-expected decline in U.S. oil production despite a large drop in the number of active drilling rigs is weighing on the markets as is a substantial increase in U.S. oil imports and an unexpected drop in U.S. oil exports in the last few months. Last Friday, these forces came together to cause the worst price drop in a month.  New York futures closed out last week at $36.79 and London closed at $38.67. This was a drop of 6% last week and 11% for New York futures since the high for this year’s rally was touched on March 22nd.

“U.S. production still is forecast to continue dropping this year, and output from several of the weaker oil exporting states continues to slip slowly.  However, Iran’s drive to increase exports and the massive oversupply which is filling storage depots around the world that continues to grow suggests that a fundamentals-supported price rebound is still some months away.

“Concerns are growing about five of the weakest oil exporters, known as the fragile five, which could easily suffer a political collapse and cease to export oil in the foreseeable future. These countries – Algeria, Iraq, Libya, Nigeria, and Venezuela – suffer from a variety of economic and geopolitical ills which could easily turn one or more into failed states unable to export much oil. These five countries are producing total of about 10 million of oil per day; have little in the way of other revenues; with the exception of Libya, do not have the large sovereign wealth funds that other oil exporters have accumulated in the last decade; and are currently selling much of their oil below the cost of production. Should one or more of these exporters collapse within the next two or three years, the global glut of stored crude could quickly be eliminated. If this is coupled with the coming impact of the massive reduction in capital expenditures by oil companies to find and produce more oil that is currently underway, oil prices could be at record levels before we are very far into the next decade.

“In the meantime, the situation in the U.S. oil industry continues to deteriorate. The latest concern is for the wellbeing of the banks that have loaned the billions of dollars to shale oil drillers in the last decade. Some foresee that the regional banks that have too much invested in oil could be in trouble before the year is out. It seems reasonably certain that many banks are going to cut the lines of credit for many smaller shale oil drillers in the next few weeks which could drive them into bankruptcy. Some 50 North American oil and gas producers have declared bankruptcy since early 2015.  However, these are mostly small firms that had accounted for only a tiny share of U.S. production and are having little impact on production. Many companies have continued to produce oil in the midst of bankruptcies as there is little marginal cost to keeping the oil flowing as compared to the expense of drilling and fracking new wells.

“The EIA reported last week that the costs of drilling new shale oil wells last year were 25-30% lower than in 2012. While some of this came from efficiencies such as drilling multiple wells from a single pad, much of the cost has come from major reductions in pay scales in what has become a buyers’ market.” 

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News items from OilPrice Intelligence Report editor Evan Kelly:

4/1: Bankrupt shale companies still producing. More than 50 oil and gas companies in North America have declared bankruptcy since early 2015, a figure that is expected to continue to climb. But according to a Reuters analysis, drillers that have already gone into the bankruptcy process have not slowed down their oil and gas production. Magnum Hunter Resources is one example. The company increased production over the course of 2014 and 2015, right up to the point of bankruptcy in December. Since then, its 3,000 or so wells continue to produce. Bankruptcy may even provide the company with more resources by allowing it to shed its debt load. The phenomenon makes sense given that creditors want to be paid as much as they possibly can, meaning that they want drillers to continue to produce even while in bankruptcy. At the macro level, however, zombie producers could result in a protracted rebalancing for the oil markets.

4/5: Rising oil prices could be good for the U.S. economy. Goldman Sachs published a new study that found that the prospect of rising oil prices could provide a boost to U.S. GDP through several avenues, including increased capex from the oil and gas industry as well as an improved trade deficit. The contrarian argument goes like this: oil production is more elastic than oil demand, meaning that when prices fall, the industry curtails production by more than consumers increase their demand. The effect is that a dip in production is made up through higher imports, which hurts the U.S. trade balance. Consumers still win, but the overall U.S. economy takes a hit. The counterintuitive conclusion suggests that the U.S. economy may actually prefer higher oil 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.

March 2016 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that U.S. manufacturing popped back into expansion during March. The PMI registered 51.8%, an increase of 2.3 percentage points from the February reading of 49.5%. (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 new orders and production, and increasing input prices. 

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Wood Products was unchanged. Paper Products expanded as more new orders and production apparently outweighed decreases in employment, backlogged and new export orders, and imports.

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- gained a bit of ground in March. The NMI registered 54.5%, 1.1 percentage points higher than the February reading of 53.4%. Except for backlogged orders and imports, all sub-index values were higher in March than February. 

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All three service sectors we track reported no change in overall activity.

Relevant commodities --
* Priced higher: Labor; lumber products; paper.
* Priced lower: Corrugate.
* Prices mixed: Fuel (gasoline and diesel); labor.
* In short supply: Labor.

ISM’s and Markit’s surveys were in general agreement during March insofar as the headlines of both pairs showed expansion, although commentary in the Markit surveys paints a somewhat darker outlook than is the case for ISM.

Comments from Markit are presented below:

Manufacturing -- “March’s survey highlights sustained weakness across the U.S. manufacturing sector, meaning that overall growth through 1Q slowed to its lowest since late-2012. Subdued client spending patterns within the energy sector, ongoing pressure from the strong dollar, and general uncertainty about the business outlook were cited as factors weighing on new order flows in March.

“Meanwhile, price discounting strategies resulted in the first back-to-back drop in factory gate charges for around 3½ years, suggesting another squeeze on margins despite lower materials costs across the manufacturing sector” (Tim Moore, senior economist).

Services -- “The welcome news of sustained robust hiring in March, as indicated by both the PMI surveys and non-farm payroll numbers, masks a more worrying picture of a further slowing in economic growth so far this year.

“The survey data, which have historically provided a reliable guide to official GDP numbers, suggest the annualized pace of economic growth weakened to 0.7% in 1Q.

“Demand is growing at the slowest rate since late-2009 and, with business optimism also sliding to its weakest since the recession, firms clearly expect worse to come. Firms are worried about a potential weakening of demand both at home and abroad in the face of various headwinds. As such, the data support the cautious approach to policy tightening currently advocated by Fed Chair Janet Yellen” (Chris Williamson, chief economist).

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 2016 Currency Exchange Rates

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In March the monthly average value of the U.S. dollar once again declined against the three major currencies we track. The greenback depreciated by 4.1% against Canada’s “loonie,” 0.4% against the euro, and 1.5% against the yen. On a trade-weighted index basis, the dollar weakened by 2.1% 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 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 decreased $3.4 billion or 0.7% to $462.8 billion in February. Shipments of durable goods decreased $2.4 billion or 1.0% to $238.0 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $1.0 billion or 0.4% to $224.8 billion, led by petroleum and coal products. Shipments of Wood rose by 1.6% while Paper declined 0.6%. 

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Inventories decreased $2.6 billion or 0.4% to $634.3 billion. The inventories-to-shipments ratio was 1.37, unchanged from January. Inventories of durable goods decreased $1.3 billion or 0.3% to $394.1 billion, led by primary metals. Nondurable goods inventories decreased $1.3 billion or 0.5% to $240.2 billion, led by petroleum and coal products. Inventories of both Wood (-0.8%) and Paper (-0.2%) declined. 

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New orders decreased $8.0 billion or 1.7% to $454.0 billion. Excluding transportation, new orders decreased 0.8% (and -1.4% YoY -- the 16^th consecutive month of year-over-year contractions). Durable goods orders decreased $7.0 billion or 3.0% to $229.1 billion, led by transportation equipment. New orders for nondurable goods decreased $1.0 billion or 0.4% to $224.8 billion. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- fell by 2.5% (but +2.2% YoY). Business investment spending contracted on a YoY basis during every month of 2015, and revisions for January 2016 turned an uptick into a contraction.

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 48% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders decreased $4.1 billion or 0.3% to $1,184.0 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 7.02, up from 6.96 in 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 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 Construction Spending

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Construction spending during February 2016 was estimated at a seasonally adjusted annual rate (SAAR) of $1,144.0 billion, 0.5 percent (±1.6%)* below the revised January estimate of $1,150.1 billion (originally $1,140.8 billion); expectations were for a 0.2% increase. The February figure is 10.3 percent (±2.1%) above the February 2015 estimate of $1,037.5 billion.

During the first two months of this year, construction spending amounted to $157.1 billion, 11.2 percent (±1.8%) above the $141.3 billion for the same period in 2015.

PRIVATE CONSTRUCTION

Spending on private construction decreased by 0.1 percent (±1.0%)* --
- Residential construction: +0.9 percent (±1.3%)*
- Nonresidential construction: -1.3 percent (±1.0%)

PUBLIC CONSTRUCTION

Public construction spending fell by 1.7 percent (±3.1%)* --
- Educational construction: -4.2 percent (±2.6%)
- Highway construction: -2.1 percent (±11.5%)*

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

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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.