2Q2016 Gross Domestic Product: First (Advance) Estimate

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In its first (“advance”) estimate of 2Q2016 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 +1.21%, up 0.38 percentage point from a downwardly revised 1Q. That 2Q rate was below the bottom end of expectations (+2.2%; consensus: +2.6%). Moreover, 2Q2016’s year-over-year growth rate was +1.23%, slower than 1Q2016’s +1.57%.

Overall, groupings of GDP components show that personal consumption expenditures (PCE) and net exports (NetX) contributed to 2Q growth. Private domestic investment (PDI) and government consumption expenditures (GCE) detracted from it.

The most notable item in the report was the continued contraction of commercial fixed investment, which subtracted 0.52% from 2Q's headline growth rate (-0.37% from 1Q). This was the third consecutive quarterly decline for fixed investments. Inventories also contracted for a fifth consecutive quarter; inventory destocking subtracted 1.16% from the headline, a 0.75% deeper drag than in 1Q.

Positives in the report were concentrated almost entirely in consumer spending. Consumer spending on goods rebounded from a couple of soft quarters to boost the headline by 1.45 percentage points (+1.20% from 1Q). Spending on services also contributed 1.38% (+0.52% from 1Q), although over one-third of that was in health care. Combined spending on goods and services provided a gross 2.83% of the headline annualized growth rate. 

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Consumer Metrics Institute provided a fairly terse summary:

This report shows a U.S. economy moving forward with a lackluster 1.21% growth rate. It also contained downward revisions to the prior four quarters.

Recapping the key items in this report:

-- Private commercial investment contracted for the third consecutive quarter.

-- Improved consumer spending growth was the only redeeming part of the report.

-- Most of the increased consumer spending came from decreased household savings.

Although this report is net (and mildly) positive, the increased consumer spending masked considerable commercial weakness.

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.

June 2016 Residential Sales, Inventory and Prices

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Sales of new single-family houses in June 2016 were at a seasonally adjusted annual rate (SAAR) of 592,000 -- beating expectations of 562,000. That was 3.5 percent (±23.9%)* above the revised May rate of 572,000 (originally 551,000 units) and 25.4 percent (±27.9%)* above the June 2015 SAAR of 472,000; the not-seasonally adjusted year-over-year comparison (shown in the table above) was +22.7%. For a longer-term perspective, June’s sales were 57% below the “bubble” peak and only 3% above the long-term, pre-2000 average; one commentator pointed out that June’s sales rate was equivalent to that seen in January 1963 -- the first year sales data were collected.

Because single-family starts went essentially nowhere during 2Q while sales increased, the three-month average ratio of starts to sales dropped to 1.32 -- below above the average (1.41) since January 1995.

The median price of new houses sold in June 2016 rose ($17,900) to $306,700; the average sales price was $358,200 (+$6,800). Starter homes (those priced below $200,000) made up 14.8% of the total sold in June, the lowest proportion on record for that calendar month (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 June, single-unit completions rose by 27,000 units (+3.7%). Because completions increased at roughly the same rate as sales, new-home inventory expanded in absolute terms (+3,000 units) but shrank in terms of months of inventory (-0.2 month). 

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Existing home sales rose in June (+60,000 units or 1.1%) to 5.57 million units (SAAR), on par with expectations of 5.57 million. Inventory of existing homes shrank in both absolute (-20,000 units) and months-of-inventory (-0.1month) terms. Although new-home sales increased at a slower pace than existing-home sales, the share of total sales comprised of new homes rose to 9.6%. The median price of previously owned homes sold in June advanced by $8,800 (+3.7%), to a new all-time high of $247,700. 

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Housing affordability deteriorated as the median price of existing homes for sale in May increased by another $9,000 (+3.9%; +4.6% YoY) to a record $241,000. 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 +1.2% (+5.0% YoY).

“Home prices continue to appreciate across the country,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Overall, housing is doing quite well. In addition to strong prices, sales of existing homes reached the highest monthly level since 2007 as construction of new homes showed continuing gains. The SCE Housing Expectations Survey published by the New York Federal Reserve Bank shows that consumers expect home prices to continue rising, though at a somewhat slower pace.”

“Regional patterns seen in home prices are shifting. Over the last year, the Pacific Northwest has been quite strong while prices in the previously strong spots of San Diego, San Francisco and Los Angeles saw more modest increases. The two hottest areas during the housing boom were Florida and the Southwest. Miami and Tampa have recovered in the last few months while Las Vegas and Phoenix remain weak. When home prices began to recover, New York and Washington saw steady price growth; now both are among the weakest areas in the country.” 

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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.

June 2016 Residential Permits, Starts and Completions

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Builders initiated construction of privately-owned housing units at a seasonally adjusted and annualized rate (SAAR) of 1.189 million units in June (1.170 million expected). That was 4.8 percent (±13.5%)* above the revised May estimate of 1.135 million (down from the original 1.164 million units); had the May estimate been left unrevised, the MoM percentage change would have been only +2.1%. The single-family component led the increase: +33,000 units or 4.4 percent (±15.8%)* above the revised May figure of 745,000; multi-family starts rose by 21,000 units (+5.4%).

* 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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June’s total SAAR was 2.0 percent (±12.9%)* below the June 2015 rate of 1.213 million; the not-seasonally adjusted YoY change (shown in the table above) was -0.6%. Single-family starts were 10.5% higher YoY, while multi-family component was 18.6% lower. 

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Total completions rose by 126,000 units, or 12.3 percent (±10.7%), to 1.147 million. That was 18.7 percent (±14.9%) above the June 2015 SAAR of 966,000; the NSA comparison: +16.5% YoY.

Single-family housing completions were at a SAAR of 752,000 or 3.7 percent (±10.2%)* above the revised May rate of 725,000; multi-family completions rocketed up by 33.4% MoM. Single-family completions were 18.0% above their year-earlier level; multi-family: +13.8% YoY. 

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Total permits increased by 17,000 units or 1.5 percent (±1.3%), to 1.153 million units. That SAAR was 13.6 percent (±0.6%) below the June 2015 estimate of 1.334 million; the NSA comparison was -15.4% YoY.

The MoM rise was dominated by the multi-family component (+10,000 units or 2.5%). Single-family permits increased by 7,000 units or 1.0 percent (±1.5%)* to 736,000 units. On a YoY basis, single-family permits were 4.8% higher, but multi-family units were 37.9% lower; multi-family permits were also 19.7% lower YTD through June than the same months in 2015. 

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Builder confidence in the market for newly built, single-family homes fell one point in July, to 59, from a June reading of 60 on the National Association of Home Builders/Wells Fargo Housing Market Index.

“For the past six months, builder confidence has remained in a relatively narrow positive range that is consistent with the ongoing gradual housing recovery that is underway,” said NAHB Chairman Ed Brady. “However, we are still hearing reports from our members of scattered softness in some markets, due largely to regulatory constraints and shortages of lots and labor.”

“The economic fundamentals are in place for continued slow, steady growth in the housing market,” said NAHB Chief Economist Robert Dietz. “Job creation is solid, mortgage rates are at historic lows and household formations are rising. These factors should help to bring more buyers into the market as the year progresses.”

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.

June 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 0.2% in June (+0.3% expected). Over the last 12 months, the all items index rose 1.0% before seasonal adjustment.

For the second consecutive month, increases in the indexes for energy and all items less food and energy more than offset a decline in the food index to result in the seasonally adjusted all-items increase. The food index fell 0.1%, with the food at home index declining 0.3%. The energy index rose 1.3%, due mainly to a 3.3% increase in the gasoline index; the indexes for natural gas and electricity declined. 

The index for all items less food and energy increased 0.2% in June. The shelter index rose 0.3%, and a broad array of indexes also increased, including medical care (+0.2%), education, airline fares, motor vehicle insurance, and recreation. In contrast, the indexes for used cars and trucks, apparel, communication, and household furnishings and operations all declined in June.  

The all-items index rose 1.0% for the 12 months ending June. This is the same increase as for the 12 months ending May, but smaller than the 1.7% average annual increase over the past 10 years. The index for all items less food and energy rose 2.3% for the 12 months ending June, a larger increase than the 2.2% rise for the 12 months ending May, and above the average annual rate of 1.9% over the past 10 years. Rents rose by 3.8% YoY for a second consecutive month, the fastest pace since 2008; the medical care services index was also up 3.8% YoY.

Producer Price Index

The seasonally adjusted producer price index for final demand (PPI) increased 0.5% in June (+0.3% expected). Final demand prices rose 0.4% in May and 0.2% in April. On an unadjusted basis, the final demand index advanced 0.3% for the 12 months ended in June, the largest 12-month increase since moving up 0.9% in December 2014.

In June, the advance in the final demand index was led by prices for final demand services, which rose 0.4%. The index for final demand goods advanced 0.8%.

Prices for final demand less foods, energy, and trade services rose 0.3% in June after declining 0.1% in May. For the 12 months ended in June, the index for final demand less foods, energy, and trade services increased 0.9%.

Final Demand

Final demand services: The index for final demand services advanced 0.4% in June, the third consecutive rise. The broad-based June increase was led by prices for final demand services less trade, transportation, and warehousing, which also moved up 0.4%. The indexes for final demand trade services and for final demand transportation and warehousing services rose 0.7% and 0.5%, respectively. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail: A major factor in the increase in prices for final demand services was the index for services related to securities brokerage and dealing, which rose 7.7%. The indexes for automotive fuels and lubricants retailing; machinery, equipment, parts, and supplies wholesaling; traveler accommodation services; airline passenger services; and health, beauty, and optical goods retailing also increased. In contrast, margins for apparel, footwear, and accessories retailing declined 2.6%. The indexes for long-distance motor carrying and residential real estate loans (partial) also fell.

Final demand goods: The index for final demand goods advanced 0.8% in June, the largest rise since a 1.2% jump in May 2015. Over three-quarters of the June increase can be traced to prices for final demand energy, which climbed 4.1%. The index for final demand foods moved up 0.9%. Prices for final demand goods less foods and energy were unchanged.

Product detail: Nearly half of the increase in the index for final demand goods is attributable to gasoline prices, which climbed 9.9%. Prices for meats, jet fuel, electric power, home heating oil, and cigarettes also moved higher. Conversely, the index for chicken eggs dropped 29.9%. Prices for carbon steel scrap and residential natural gas also decreased. 

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Wood Fiber was the only not-seasonally adjusted price index we track that fell on a MoM basis; YoY comparisons were mixed. 

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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.

June 2016 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) increased 0.6% in June (+0.4% expected) after declining 0.3% in May. For 2Q as a whole, IP fell at an annual rate of 1.0%, its third consecutive quarterly decline. Manufacturing output moved up 0.4% in June, a gain largely due to an increase in motor vehicle assemblies. The output of manufactured goods other than motor vehicles and parts was unchanged. The index for utilities rose 2.4% as a result of warmer weather than is typical for June boosting demand for air conditioning. The output of mining moved up 0.2% for its second consecutive small monthly increase following eight straight months of decline. At 104.1% of its 2012 average, total industrial production in June was 0.7% lower than its year-earlier level.

Industry Groups

Manufacturing output rose 0.4% in June; for 2Q, however, factory output decreased at an annual rate of 1.0%. The production of durables jumped 0.9% in June, the production of nondurables edged down 0.1%, and the production of other manufacturing (publishing and logging) fell 1.5%. Within durables, gains of greater than 1% were registered by machinery; electrical equipment, appliances, and components; and motor vehicles and parts. Wood Products was unchanged. Within nondurables, apparel and leather, paper (-0.4%), chemicals, and plastics and rubber products recorded declines that were largely offset by increases elsewhere; the largest gain was registered by printing and support.

The index for mining edged up 0.2% in June. A rise in the index for oil well drilling and servicing and a second consecutive large monthly increase in the index for coal more than offset declines in oil and gas extraction and in non-metallic mineral mining. 

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Capacity utilization (CU) for the industrial sector increased 0.5 percentage point in June to 75.4%, a rate that is 4.6 percentage points below its long-run (1972–2015) average.

Manufacturing CU increased 0.3 percentage point in June to 75.1%, a rate that is 3.4 percentage points below its long-run average; using the NAICS definition, manufacturing increased 0.4%. The operating rate for durables moved up 0.6 percentage point to 76.1% (Wood Products: -0.3%), while the rates for nondurables and other manufacturing (publishing and logging) fell to 74.8% and 62.5%, respectively (Paper: -0.2%). The operating rate for mining moved up 0.4 percentage point to 73.6%, and the rate for utilities jumped nearly 2 percentage points to 79.3%. 

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Capacity at the all-industries level was unchanged (+0.6% YoY) at 138.2% of 2012 output. Manufacturing edged up +0.1% (+0.8% YoY) to 137.6%. Wood Products extended the upward trend that has been ongoing since November 2013 when increasing by 0.4% (+4.7% YoY) to 166.9%. Paper edged down 0.1% (-0.8% YoY) to 116.8%.

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

July 2016 Macro Pulse -- Catching Up

A variety of factors conspired to keep us from publishing this newsletter since February, so we thought a review of what has occurred in the sectors of the economy that are relevant to the U.S. forest products sector during the intervening time might be appropriate for this issue. We briefly touch on GDP growth, exchange rates (along with their impacts on international trade), manufacturing and residential construction.

Click here to read the rest of the July 2016 Macro Pulse recap.

The Macro Pulse blog is a commentary about recent economic developments affecting the forest products industry. The monthly Macro Pulse newsletter typically summarizes the previous 30 days of commentary available on this website.

May 2016 International Trade (Softwood Lumber)

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Softwood lumber exports increased (+4 MMBF or 2.9%) in May while imports jumped more noticeably (+154 MMBF or 10.6%). Exports were 9 MMBF (6.5%) below year-earlier levels; imports were 515 MMBF (47.1%) higher. As a result, the year-over-year (YoY) net export deficit was 524 MMBF (55.1%) larger. The average net export deficit for the 12 months ending May 2016 was 28.5% 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 May (44.5%, of which Canada: 22.4%; Mexico: 22.1%). Asia (especially China: 15.6%) placed a close second, with 32.5%. Year-to-date (YTD) exports to China were up 10.6% relative to the same months in 2015. Meanwhile, Canada was the source of nearly all (90.6%) softwood lumber imports into the United States. Interestingly, France has rocketed to the #2 spot YTD, from #26 in 2015. Overall, YTD exports were down 1.5% compared to 2015, while imports were up 42.1%. 

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U.S. softwood lumber export activity through West Coast customs districts represented the largest proportion in May (37.1% of the U.S. total), although the Gulf and Eastern districts were not far behind (27.7% and 27.0%, respectively); Seattle maintained its dominance as the most active export district (22.9% of the U.S. total). At the same time, Great Lakes customs districts handled 66.2% of the softwood lumber imports -- most notably Duluth, MN (25.1%) -- coming into the United States. 

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Southern yellow pine comprised 29.5% of all softwood lumber exports in May, followed by Douglas-fir with 12.6%. Southern pine exports were up 4.5% YTD relative to 2015, while Doug-fir exports were down 14.4%.

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.

May 2016 International Trade (General)

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The goods and services deficit was $41.1 billion in May, up $3.8 billion from $37.4 billion in April, revised. May exports were $182.4 billion, $0.3 billion less than April exports. May imports were $223.5 billion, $3.4 billion more than April imports.

The May increase in the goods and services deficit reflected an increase in the goods deficit of $3.7 billion to $62.2 billion and a decrease in the services surplus of $0.1 billion to $21.1 billion.

Year-to-date, the goods and services deficit decreased $7.2 billion, or 3.5 percent, from the same period in 2015. Exports decreased $47.2 billion or 4.9 percent. Imports decreased $54.3 billion or 4.7 percent.

Goods by Selected Countries and Areas: Monthly

The May figures show surpluses, in billions of dollars, with South and Central America ($2.9), Hong Kong ($1.9), Singapore ($0.5), and Brazil ($0.5). Deficits were recorded, in billions of dollars, with China ($28.3), European Union ($11.9), Germany ($5.5), Mexico ($5.5), Japan ($5.0), Italy ($2.6), India ($2.1), South Korea ($2.0), Taiwan ($1.2), France ($1.1), Canada ($0.9), OPEC ($0.4), United Kingdom ($0.3), and Saudi Arabia ($0.2).
* The deficit with China increased $1.7 billion to $28.3 billion in May. Exports decreased $0.1 billion to $9.3 billion and imports increased $1.6 billion to $37.6 billion.
* The balance with the United Kingdom shifted from a surplus of $0.7 billion to a deficit of $0.3 billion in May. Exports decreased $1.2 billion to $4.0 billion and imports decreased $0.2 billion to $4.3 billion.
* The deficit with Japan decreased $0.9 billion to $5.0 billion in May. Exports increased $0.6 billion to $5.4 billion and imports decreased $0.3 billion to $10.4 billion. 

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On a global scale, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume increased 0.6% in April (+1.4% year-over-year) while prices rose by 1.8% (-5.3% YoY). April’s price index was 22.1% 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.

June 2016 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment “roared back” in June -- rising by 287,000 jobs, significantly more than even the upper end of expectations (+235,000; consensus: 180,000). Combined April and May employment gains were trimmed by 6,000 (April: +21,000; May: -27,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) rose 0.2 percentage point (to 4.9%) as only a fraction of those who entered/returned to the labor force (+414,000) found employment (+67,000). 

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Observations from the employment reports include:

* This disparity in job gains between the establishment (+287,000) and household (+67,000) surveys was notable.

* Manufacturing gained 14,000 jobs in June. That result is broadly consistent with the behavior of the Institute for Supply Management’s manufacturing employment sub-index, which expanded for the first time in seven months. Wood Products gained 2,100 jobs, but Paper and Paper Products employment dropped by 400.

* Mining and logging shed 5,000 jobs, with 3,500 coming from support activities for mining and another 2,200 from oil and gas extraction. Construction employment was unchanged.

* Over 70% (185,900) of May’s private-sector job growth occurred in the sectors typically associated with the lowest-paid jobs -- Retail Trade: +29,900; Professional & Business Services: +38,000 (of which Temp Help comprised 15,200); Education & Health Services: +59,000; and Leisure & Hospitality: +59,000. This is a persistent issue, as we have repeatedly highlighted: There are 1.450 million fewer manufacturing jobs today than at the start of the Great Recession in December 2007, but 1.653 million more Food Services & Drinking Places (i.e., wait staff and bartender) jobs. In fact, Manufacturing has gained only 2,000 jobs since 2014 while FS&D jobs have expanded by 465,200. 

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* The employment-population ratio edged down to 59.6 %; roughly speaking, for every five people added to the population, three are employed. Meanwhile, the number of employment-age persons not in the labor force fell by 191,000 to over 94.5 million. 

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* As a result of new and/or re-entrants to the labor force, the labor force participation rate (LFPR) also ticked up to 62.7%, comparable to levels seen in 1978. Average hourly earnings of all private employees increased by $0.02 (to $25.61), resulting in a 2.6% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.04, to $21.51 (+2.4% YoY). With the CPI running at an official rate of +1.0% YoY, in theory wages are rising in real (inflation-adjusted) terms. The average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours. 

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* Full-time jobs jumped by 451,000 while those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- fell by 587,000. There are now 1.7 million more full-time jobs than the pre-recession high; for perspective, however, the non-institutional, working-age civilian population has risen by 20.2 million). PTER employment, by contrast, stopped declining in October 2015 and in June once again fell below 6 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 June decreased by $5.3 billion, to $180.6 billion -- the highest amount on record for that calendar month, although barely higher than June 2015. 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 June was 4.2% 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.

June 2016 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil extended gains for a third month in June when rising by $2.06 (+4.4%), to $48.77 per barrel -- the highest price since July 2015. The price increase coincided with a slightly stronger U.S. dollar, the lagged impacts of a 352,000 barrel-per-day (BPD) decrease in the amount of oil supplied/demanded in April (to 19.3 million BPD), and a continued modest decline in accumulated oil stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI reversed in June -- i.e., WTI’s price was $0.42 per barrel higher than Brent. 

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Commentary from ASPO-USA’s Peak Oil Review editor Tom Whipple:

“In the wake of the Brexit vote, analysts are all over the board as to where prices will be by the end of the year. Some are talking about $85 a barrel while others are looking for a retreat to less than $30 again. Nearly all agree that the markets will "rebalance" with supply and demand coming together as demand increases and the supply continues to drop as the impact of the much lower investment levels during the last two years reduces supply.  For the next six months, however, there is uncertainty especially concerning the spate of unplanned outages that have taken place in the past few months. Oil worker strikes such as in France and Norway likely will be settled quickly, and Alberta tar sands production will soon be back to normal by the end of the summer. The outages in Libya, Nigeria, and Venezuela, however, are more uncertain and seem to be getting worse rather than better in the immediate future.” 

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News items from OilPrice Intelligence Report editor Evan Kelly:

Canada’s oil production to grow 42 percent by 2025. IHS Energy projects a 42 percent increase in Canadian oil sands production, bringing output up to 3.4 mb/d over the next decade. That would mean Canada’s oil sands, torn apart by fires in recent weeks, would add 1 mb/d in the coming years. However, most of those gains will come from projects that are already under construction and received final investment decisions before the collapse of oil prices. After 2018, when the backlog of these projects are completed, there will likely be no more greenfield projects in the pipeline. Any further gains will have to come from brownfield sites, IHS says.

New hiring in the Bakken. Oilfield service companies in the Bakken are beginning to hire again for completion services, a sign that oil producers could start to work through their backlog of drilled but uncompleted wells (DUCs). “We are starting to see a definite increase,” Cindy Sanford, a manager at the Williston office of Job Service North Dakota, told the Forum News Service. She said that companies are looking for workers for fracking crews and well completion. “It’s not as crazy as it was before, but we’re starting to see some activity.” If drillers are moving to complete old wells, that could bring new production online, a month after the Bakken reported a huge decline in output. It also suggests that companies can turn a profit at $50 per barrel, a threshold that could trigger well completions in other parts of the country.

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.

June 2016 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that U.S. manufacturing’s pace of expansion quickened during June. The PMI registered 53.2%, an increase of 1.9 percentage point from the May reading of 51.3%. (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. With the exception of input prices, all sub-index values were higher in June than in May. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- also accelerated in June. The NMI registered 56.6%, a jump of 3.6 percentage points above the May reading. The only sub-indexes with lower June values were input prices and order backlogs. 

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Wood Products was unchanged while Paper Products expanded. All three service sectors we track reported expansion. “Business is strong in the private sector; bidding a lot of commercial buildings,” observed one Construction respondent.

Relevant commodities --
* Priced higher: Construction labor, all grades of diesel, gasoline, oil, corrugate and paper.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Construction labor.

ISM’s and Markit’s June surveys were in general agreement, with both of Markit’s surveys showing at least modest increases in activity.

Commenting on the data, Markit’s chief economist Chris Williamson said:

Manufacturing -- “Although the manufacturing PMI ticked higher in June, the latest reading rounds off the worst quarter for goods producers for six years.

“The lackluster performance of the manufacturing economy adds to signs from the flash services PMI surveys that the underlying pace of economic growth in the second quarter remained subdued after a disappointing start to the year.

“The upturn in the employment index suggests that firms may be expecting the recent bout of weak demand to be temporary, though hiring clearly remains subdued amid fragile business confidence.

“Producers are struggling in the face of the strong dollar, the energy sector decline and presidential election jitters. With companies craving certainty, heightened tensions between the UK and the European Union are likely to unsettle the global business environment further in coming months, and therefore risk dampening growth in the United States and export markets. The data flow in the next two months will therefore be critical to policymakers in gauging the appropriate outlook for interest rates.”

Services -- “Rebound, what rebound? The final PMI numbers confirm the earlier flash PMI signal that the pace of U.S. economic growth remained subdued in the second quarter. While volatile official GDP numbers are widely expected to show a rebound from a lackluster start to the year, the PMIs suggest the underlying malaise has not gone away. The surveys point to an annualized pace of economic growth of just 1% in the second quarter.

“Service sector confidence has slumped to the lowest since 2009 alongside ongoing woes in the energy and manufacturing sectors, as well as worries about the outlook amid presidential election uncertainty.

“Hiring has also slowed, though remains surprisingly upbeat. The surveys signal non-farm payroll growth of 150,000 in June, suggesting many companies expect the slowdown to be short-lived.”

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.

June 2016 Currency Exchange Rates

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In June the monthly average value of the U.S. dollar lost ground against two of the three major currencies we track. The greenback depreciated by 0.4% against Canada’s “loonie” and 3.2% against the yen, but gained 0.7% against the euro. On a trade-weighted index basis, the dollar strengthened by 0.3% 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.

May 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 $0.2 billion or virtually unchanged to $456.5 billion in May. Shipments of durable goods decreased $0.6 billion or 0.2% to $231.6 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased $0.8 billion or 0.3% to $224.9 billion, led by petroleum and coal products. Shipments of both Wood (+0.1%) and Paper (+0.3%) rose. 

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Inventories decreased $0.8 billion or 0.1% to $619.7 billion. The inventories-to-shipments ratio was 1.36, unchanged from April. Inventories of durable goods decreased $1.1 billion or 0.3% to $382.6 billion, led by machinery. Nondurable goods inventories increased $0.3 billion or 0.1% to $237.1 billion, led by chemical products. Inventories of Wood expanded +0.5% while Paper contracted -0.3%. 

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New orders decreased $4.6 billion or 1.0% to $455.2 billion. Excluding transportation, new orders increased 0.1% (but -2.6% YoY -- the 19^th consecutive month of year-over-year contractions). Durable goods orders decreased $5.4 billion or 2.3% to $230.4 billion, led by transportation equipment. New orders for nondurable goods increased $0.8 billion or 0.3% to $224.9 billion. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- dropped by 0.4% (-2.9% YoY). Business investment spending has contracted on a YoY basis during all but two months since January 2015.

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 47% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders increased $1.7 billion or 0.2% to $1,138.9 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.90, down from 6.94 in April. 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 penetrating further 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.