2Q2016 Gross Domestic Product: Third Estimate

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In its third (“final”) estimate of 2Q2016 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) revised growth of the U.S. economy to a seasonally adjusted and annualized rate (SAAR) of +1.42%, up +0.33 percentage point from the August report and +0.59% compared to 1Q2016. Despite the upward revision, 2Q2016’s year-over-year growth rate was +1.28%, slower than 1Q2016’s +1.57%. The headline number ended up slightly better than consensus expectations of 1.3%.

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.

Most of the improvement in the headline number came from a +0.24% change in commercial fixed investment; none of the other revisions were statistically significant. Despite the upward revision to commercial fixed investments, that line item remained in contraction at a -0.18% annualized rate. Inventories also contracted materially (-1.16% SAAR). Consumer spending growth continues to provide the vast majority of net growth, with spending on consumer goods contributing +1.51% and services +1.37% (a combined +2.88% contribution, more than twice the net headline number). 

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Consumer Metrics Institute again provided a fairly terse summary:

The only significant revision in this report involves a softening of the previously reported deep contraction in commercial fixed investment. The rest of the changes in this report were merely statistical noise. The key "big picture" items in this report include the following:

-- Most things not consumer related remained in contraction. It is a decently positive report that continues to mask commercial weakness.

-- Although consumer spending growth was relatively strong, most of that increased spending ultimately came from savings -- and not from improved disposable income (disposable income actually shrank in this report).

-- The majority of the reported growth disappears when a third party deflator (e.g., CPI) is applied to the nominal data.

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

August 2016 Residential Sales, Inventory and Prices

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Sales of new single-family houses in August 2016 were at a seasonally adjusted annual rate (SAAR) of 609,000 -- slightly above expectations of 598,000. This is 7.6 percent (±10.7%)* below the revised July rate of 659,000, but 20.6 percent (±14.8%) above the August 2015 SAAR of 505,000; the not-seasonally adjusted year-over-year comparison (shown in the table above) was +22.0%. For a longer-term perspective, August sales were 56% below the “bubble” peak and 4.4% below the long-term, pre-2000 average.

The median sales price of new houses sold in August 2016 fell by $9,100 to $284,000; the average sales price was $353,600 (+$1,600). Starter homes (those priced below $200,000) made up 18.0% of the total sold in August, the lowest proportion on record for that calendar month (going back to 2002); prior to the Great Recession starter homes comprised as much as 61% of total sales. Interestingly, however, homes prices below $150,000 made up 6% of those sold in August, an increase of nearly one-fifth compared to August 2015’s record low (for that calendar month) of 4.9%.

* 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 August, single-unit completions declined by 2,000 units (-0.3%). Because completions decreased more gradually than sales, new-home inventory expanded in both absolute (+4,000 units) and months of inventory (+0.4 month) terms. 

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Existing home sales fell by 50,000 units (-3.2%) in August to 5.33 million units (SAAR), well below expectations of 5.54 million. Inventory of existing homes shrank in both absolute (-70,000 units) and months-of-inventory (-0.1 month) terms. Because both new- and existing-home sales decreased by the same amount (-50,000 units), the share of total sales comprised of new homes retreated to 10.3% -- remaining above 10% for the second month after a nearly eight-year hiatus. The median price of previously owned homes sold in August fell by $3,100 (-1.3%), to $240,200. 

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Housing affordability marginally improved as the median price of existing homes for sale in July fell by $3,800 (-1.5%; but +5.4 YoY), to $246,000. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P CoreLogic Case-Shiller Home Price indices posted a not-seasonally adjusted monthly change of +0.7% (+5.1% YoY).

“Both the housing sector and the economy continue to expand with home prices continuing to rise at about a 5% annual rate,” says David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The statement issued last week by the Fed after its policy meeting confirms the central bank’s view that the economy will see further gains. Most analysts now expect the Fed to raise interest rates in December. After such Fed action, mortgage rates would still be at historically low levels and would not be a major negative for house prices,

“The S&P CoreLogic Case-Shiller National Index is within 0.6% of the record high set in July 2006. Seven of the 20 cities have already set new record highs. The 10-year, 20-year, and National indices have been rising at about 5% per year over the last 24 months. Eight of the cities are seeing prices up 6% or more in the last year. Given that the overall inflation is a bit below 2%, the pace is probably not sustainable over the long term. The run-up to the financial crisis was marked with both rising home prices and rapid growth in mortgage debt. Currently, outstanding mortgage debt on one-to-four family homes is 12.6% below the peak seen in the first quarter of 2008 and up less than 2% in the last four quarters. There is no reason to fear that another massive collapse is around the corner.” 

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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.

July 2016 International Trade (Pulp, Paper & Paperboard)

Month-over-Month (MoM), Year-over-Year (YoY), and Year-to-Date (YTD):

On a month-to-month basis, July’s net exports increased for the first time since April 2016, increasing 104.9 thousand tonnes (6.8%): 1,551 to 1,656 thousand tonnes. July’s net exports were the fourth highest level of the year. Details for July, the prior six months, year-over-year, and year-to-date performance are presented in the table below.

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Despite the MoM increase in net exports in July, both exports and imports decreased; exports declined by 8.1 thousand tonnes (-0.3%), and imports 113.0 thousand tonnes (-13.2%). Net exports increased because the decrease in exports was less than the decrease in imports.

July exports were down 188 thousand tonnes YoY and imports down 82 thousand tonnes, resulting in a YoY decrease in net exports of 106 thousand tonnes (-6.0%).

Exports are down 99 thousand tonnes YTD while imports are up 50 thousand tonnes, yielding an decrease in net exports of 149 thousand metric tonnes (-1.3%). On a YTD basis 2016 net exports (11,712 thousand tonnes) achieved the fourth highest level since 2006, 8.8% below the peak level of 12,847 thousand tonnes in 2011.

This year’s increase in imports and decrease in exports is consistent with a generally strong U.S. dollar (on trade-weighted basis 6.9% off peak level in 2002:02; for example see August 2016 Currency Exchange Rates). Further, the fact 2016’s YTD net exports are down 1.3% compared to 2015’s West Coast port strike/slowdown-impacted levels underscores a soft global economy. The graph below shows monthly, including a YTD monthly average (first data point of each line in graph below), from 2011 to 2016. 

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Six-month Cumulative Activity and Trends:

Cumulative activity over the six months ending July 2016 shows net exports are 6.0% below the pace seen over the same months in 2015. Cumulative six-month net exports are lower due principally to lower exports, down 188 thousand tonnes (-7.3%), compared to imports which are down 82 thousand tonnes (-10.0%).

Six-month trend-lines were fit to the data to study recent trends beyond simple cumulative activity.  Two of the three trend lines were negative for the six-month period ending in July with only the net export trend line flat. There was a notable slope change for imports from last month’s six-month trend where the trend ending in June was positively sloped but turned negative for the six-month trend ending in July. This could augur a downshift in U.S. economic activity if the trend continues. Meanwhile the net export six-month trend slope shifted from flat in June to slightly negative in July.

Apart from trend lines, thus far during 2016 May was the export peak for the year, June this year’s import peak, and April is 2016’s net export peak. July’s exports were 5.5% below May’s peak, July’s imports were 13.2% below June’s import peak, and July’s net exports were 7.2% below April’s net export peak. 

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Notable shifts in country-level details:

Pulp exports (15,896 thousand tonnes) are lower (-0.2%) compared to last year’s levels. Despite exports to China dropping by over 5%, it remains the chief destination of U.S. pulp by a wide margin in 2016, representing 56% of 2016 shipments; July 2015 YTD figures pegged exports to China at 58% of the U.S. total, indicating China’s share of U.S. pulp exports has declined in 2016 relative to 2015. Mexico continues to hold on as the second-ranked destination for U.S. pulp exports, representing 7.5% of 2015 exports compared to India’s 6.9% share. Pulp exports to both countries are up YTD: Mexico’s receipt of U.S. pulp exports has increased 10.4% and India’s are up 13.2%. Indonesia has pushed past Japan as claiming the sixth largest share of U.S. pulp exports by climbing nearly 21% thus far in 2016. 

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2016 pulp imports (3,656 thousand tonnes YTD) increased 3.8% compared to 2015’s comparable YTD levels. Canada and Brazil, the 1^st and 2^nd ranked pulp import sources, respectively, account for 94% of the pulp imported. Both have posted increases during 2016: Canada an increase of 4.8% and Brazil an increase of 3.3%. Chile, the number three ranked source of pulp imports into the U.S., has declined by 5.8%. Sweden has climbed from number five on the list in 2015 to number four on the list in 2016 on a 7.3% increase in imports while Mexico, which was number four in 2015, has seen imports decline by 12%. The Philippines are up by 89% YTD while continuing to hold onto the number six position. Finland’s imports have more than doubled, pushing it into the top 10 sources for pulp imports into the U.S. As a region Africa shows the largest percentage increase at 89.7%, followed closely by Asia at 60.7%. 

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Paper and paperboard imports (1,847 thousand tonnes) have dropped by 4.2% in 2016 compared to 2015’s activity. Once again Canada leads the way, providing nearly 83% of the total import volume, while posting a 7.9% drop and accounting for 159.3% of the YTD decrease (130 of 82 thousand tonnes). Finland and China changed positions with one another for the number 2 and 3 rankings as China’s 41.7% increase added over 21 thousand tonnes while Finland’s 5.6% decline deducted nearly 4 thousand tonnes from each respective country’s YTD totals. Among the top 10 import sources, Australia posted a 49.2% gain, Sweden a 59.7% gain, and Chile a 212.6% gain. Among the top 20 countries Germany posted the largest loss at 32.3%. Chile and Taiwan both increased in their ranking among the top 10 while South Korea fell back from 8th to 10th place.  Regionally, Latin American imports grew by 67.6%, Oceania by 48.5%, and Asia by 24.9% while North America, by far the largest import source, fell by 7.3%. 

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Paper and paperboard exports (1,319 thousand tonnes) dropped by 4.7% YTD 2016. Canada, the number 1 ranked destination for U.S. paper and paperboard exports, holds a slim lead over Mexico, the number 2 ranked destination; exports to Canada have dropped by 0.4% in 2016 compared to 2015 YTD while Mexico has dropped by 4.8 percent. Among 2015’s Top 10 destinations, the “loss leader” in 2016 is India (-33 thousand tonnes, -53.2%, dropping from 4th ranked in 2015 to 10th ranked in 2016 ) followed by Taiwan (-3,602 tonnes, -9.7%, dropping from 5th to 8th). Bucking the general decline in paper and paperboard exports, the following countries showed strong growth thus far in 2016: Japan (+11.8%), Costa Rica (+44.3%), Guatemala (+13.8%), South Korea (+8.2%), Honduras (+44.3%), Colombia (+22.5%), United Kingdom (+15.3%), Hong Kong (+79.4%) and Ecuador (+44.5%). On a regional basis, only the Caribbean and Latin American regions posted increases U.S. paper and paperboard imports. 

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

August 2016 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in August at a seasonally adjusted annual rate (SAAR) of 1.142 million units (1.190 million expected). That was 5.8 percent (±9.7%)* below the revised July estimate of 1.212 million units (originally 1.211 million units). The single-family component led the decrease: -46,000 units, or -6.0 percent (±8.2%)*; multi-family starts declined by 24,000 (-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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August’s total SAAR was 0.9 percent (±12.5%)* above the August 2015 SAAR of 1.132 million; the not-seasonally adjusted YoY change (shown in the table above) was +1.5%. Single-family starts were 0.5% higher YoY, and the multi-family component was +3.7%. 

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Total completions fell by 37,000 units, or 3.4 percent (±10.9%)*, to a SAAR of 1.043 million. That was 8.3 percent (±11.8%)* above the August 2015 SAAR of 963,000; the NSA comparison: +6.7% YoY.

Single-family completions retreated by 2,000 units, or 0.3 percent (±10.2%)*, to 752,000 units -- but still +13.0% YoY. Multi-family completions slumped by 35,000 units (-10.7% MoM), and -4.2% YoY. 

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Total permits slipped by 5,000 units, or 0.4 percent (±1.6%)*, to 1.139 million units (1.167 million expected). That was 2.3 percent (±1.5%) below the August 2015 SAAR of 1.166 million. As an indication of the influence of seasonal adjustments on estimates and perceptions, the non-seasonally adjusted YoY comparison is a much more upbeat +8.7%.

Single-family authorizations were estimated at 737,000 units -- +26,000 units or 3.7 percent (±3.0%) above the July figure. Multi-family permits dropped by 31,000 units (-7.2%) to 370,000. On a YoY basis, single-family permits were 15.0% higher, and the multi-family component 4.2% lower. 

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Builder confidence in the market for newly built, single-family homes in September jumped six points to 65 from a downwardly revised August reading of 59 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This marks the highest HMI level since October 2015.

“As household incomes rise, builders in many markets across the nation are reporting they are seeing more serious buyers, a positive sign that the housing market continues to move forward,” said NAHB Chairman Ed Brady. “The single-family market continues to make gradual gains and we expect this upward momentum will build throughout the remainder of the year and into 2017.”

“With the inventory of new and existing homes remaining tight, builders are confident that if they can build more homes they can sell them,” said NAHB Chief Economist Robert Dietz. “Though solid job creation and low interest rates are also fueling demand, builders continue to be hampered by supply-side constraints that include shortages of labor and lots.”

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

August 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 August (+0.1% expected), mainly on a rise in the index for all items less food and energy. The all items less for and energy index increased 0.3%, as the indexes for shelter (rent: +0.3%) and medical care (+0.9%) advanced.

The energy and food indexes were both unchanged in August. Major energy component indexes were mixed, with increases in the indexes for natural gas and electricity offsetting declines in the gasoline and fuel oil indexes. The food at home index declined for the fourth month in a row, offsetting an increase in the index for food away from home.  

The 0.3% increase in the index for all items less food and energy was the largest rise since February 2016. Along with shelter and medical care, the indexes for motor vehicle insurance, apparel, communication, and tobacco all increased. In contrast, the indexes for used cars and trucks, household furnishings and operations, recreation, and airline fares all declined in August.

The all items index rose 1.1% for the 12 months ending August, a larger increase than the 0.8% rise for the 12 months ending July. The index for all items less food and energy rose 2.3% for the 12 months ending August. The food index was unchanged over the last year, while the energy index declined 9.2%; rent jumped 3.8% YoY, and medical care services +5.1%.

Producer Price Index

The seasonally adjusted producer price index for final demand (PPI) was unchanged in August (+0.1% expected) as a 0.1% advance in the index for final demand services offset a 0.4% decrease. Prices for final demand less foods, energy, and trade services increased 0.3% in August after no change in July.

On an unadjusted basis, the final demand index was unchanged for the 12 months ended in August. However, the index for final demand less foods, energy, and trade services moved up 1.2%, the largest rise since climbing 1.3% for the 12 months ended December 2014.

Final demand services: The index for final demand services edged up 0.1% in August following a 0.3% decline in July. The advance can be traced to prices for final demand services less trade, transportation, and warehousing, which increased 0.5%. In contrast, the index for final demand trade services fell 0.6%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand transportation and warehousing services moved down 0.4%.

Product detail: Within the index for final demand services in August, prices for outpatient care (partial) advanced 0.5%. The indexes for apparel, jewelry, footwear, and accessories retailing; guestroom rental; portfolio management; and residential real estate services (partial) also moved higher. Conversely, margins for machinery and equipment wholesaling decreased 2.9%. The indexes for chemicals and allied products wholesaling, services related to securities brokerage and dealing, and airline passenger services also declined.

Final demand goods: The index for final demand goods fell 0.4% in August, the same as in July. Eighty% of the August decrease can be traced to a 1.6% drop in prices for final demand foods. Also contributing to the decline in the index for final demand goods, prices for final demand energy moved down 0.8%. In contrast, the index for final demand goods less foods and energy inched up 0.1%.

Product detail: Thirty percent of the August decrease in the index for final demand goods is attributable to a 3.6% drop in prices for meats. The indexes for gasoline, fresh and dry vegetables, jet fuel, chicken eggs, and diesel fuel also fell. Conversely, prices for pharmaceutical preparations increased 1.0%. The indexes for electric power and natural, processed, and imitation cheese also rose. 

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The not-seasonally adjusted price indexes we track were mixed on both MoM and YoY bases. 

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

August 2016 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) decreased 0.4 percent in August (-0.2% expected) after rising 0.6 percent in July. Manufacturing output also declined 0.4 percent in August, reversing its increase in July; the level of the index in August is little changed from its level in March. Following two consecutive monthly increases, the index for utilities fell back 1.4 percent in August. Even so, the index was 1.7 percent above its year-earlier level, as hot temperatures this summer boosted the usage of air conditioning. The output of mining moved up 1.0 percent in August, its fourth consecutive monthly increase following an extended downturn; the index, however, was still about 9 percent below its year-ago level. At 104.4 percent of its 2012 average, total industrial production in August was 1.1 percent lower than its year-earlier level.

Industry Groups

Manufacturing output declined 0.4 percent in August; the index was also 0.4 percent below its level of a year earlier. In August, the production of nondurables moved down 0.2 percent, and the indexes for durables and for other manufacturing (publishing and logging) fell 0.6 percent and 0.7 percent, respectively. Many durable goods industries posted declines of nearly 1 percent or more, with the largest drop, 1.9 percent, recorded by machinery; wood products (-1.6%). Within nondurables, gains for food, beverage, and tobacco products and for paper (+0.8%) were more than offset by declines elsewhere; the largest decrease, 2.1 percent, was recorded by textile and product mills.

The index for mining moved up 1.0 percent in August, with a decline in coal mining outweighed by increases in the indexes for oil and gas extraction, for oil well drilling and servicing, and for metal ore and nonmetallic mineral mining. 

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Capacity utilization (CU) for the industrial sector decreased 0.4 percentage point in August to 75.5 percent, a rate that is 4.5 percentage points below its long-run (1972–2015) average.

Manufacturing CU decreased 0.4 percentage point in August to 74.8 percent, a rate that is 3.7 percentage points below its long-run average. The operating rate for nondurables moved down 0.2 percentage point; (paper: +0.9%). The rates for durables and for other manufacturing (publishing and logging) each declined 0.5 percentage point; (wood products: -1.9%). The operating rate for mining moved up 1.0 percentage point to 76.2 percent, while the rate for utilities decreased 1.3 percentage points to 80.4 percent. 

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Capacity at the all-industries level was unchanged (+0.4% YoY) at 138.2% of 2012 output. Manufacturing inched up +0.1% (+0.8% YoY) to 137.8%. Wood products extended the upward trend that has been ongoing since November 2013 when increasing by 0.4% (+4.7% YoY) to 168.1%. Paper edged down 0.1% (-1.0% YoY) to 116.6%.

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 International Trade (Softwood Lumber)

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Softwood lumber exports decreased (-14 MMBF or 9.4%) in July, along with imports (-37 MMBF or 2.6%). Exports were 2 MMBF (1.6%) above year-earlier levels; imports were 363 MMBF (35.3%) higher. As a result, the year-over-year (YoY) net export deficit was 361 MMBF (40.1%) larger. The average net export deficit for the 12 months ending July 2016 was 33.7% 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 July (41.8%, of which Canada: 20.2%; Mexico: 21.6%). Asia (especially China: 18.6%) ranked second, with 33.5%. Year-to-date (YTD) exports to China were up 14.2% relative to the same months in 2015. Meanwhile, Canada was the source of nearly all (96.5%) softwood lumber imports into the United States. Overall, YTD exports were up 0.1% compared to 2015, while imports were up 37.6%. 

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U.S. softwood lumber export activity through West Coast customs districts represented the largest proportion in July (35.2% of the U.S. total), although the Eastern and Gulf districts were not far behind (29.0% and 28.1%, respectively); Seattle maintained its dominance as the most active export district (22.4% of the U.S. total). At the same time, Great Lakes customs districts handled 66.8% of the softwood lumber imports -- most notably Duluth, MN (28.3%) -- coming into the United States. 

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Southern yellow pine comprised 32.6% of all softwood lumber exports in July, followed by Douglas-fir with 11.7%. Southern pine exports were up 14.2% YTD relative to 2015, while Doug-fir exports were down 18.0%.

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.

July 2016 International Trade (General)

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The goods and services deficit was $39.5 billion in July, down $5.2 billion from $44.7 billion in June. July exports were $186.3 billion, $3.4 billion more than June exports. July imports were $225.8 billion, $1.8 billion less than June imports.

The July decrease in the goods and services deficit reflected a decrease in the goods deficit of $5.3 billion to $60.3 billion and a decrease in the services surplus of $0.1 billion to $20.9 billion.

Year-to-date, the goods and services deficit decreased $0.5 billion, or 0.2%, from the same period in 2015. Exports decreased $63.7 billion or 4.8%. Imports decreased $64.2 billion or 4.0%.

Goods by Selected Countries and Areas

The July figures show surpluses, in billions of dollars, with South and Central America ($2.6), Hong Kong ($2.0), Singapore ($0.9), Brazil ($0.6), and United Kingdom ($0.5). Deficits were recorded, in billions of dollars, with China ($29.4), European Union ($11.8), Japan ($6.0), Germany ($5.3), Mexico ($5.2), South Korea ($2.3), India ($2.2), Italy ($1.8), Taiwan ($1.2), France ($1.0), OPEC ($0.9), Canada ($0.4), and Saudi Arabia ($0.2).

* The balance with the United Kingdom shifted from a deficit of $0.2 billion in June to a surplus of $0.5 billion in July. Exports increased $0.1 billion to $4.7 billion and imports decreased $0.6 billion to $4.2 billion.

* The deficit with France decreased $0.6 billion to $1.0 billion in July. Exports increased $0.5 billion to $2.9 billion and imports decreased $0.2 billion to $3.9 billion.

* The deficit with China increased $1.4 billion to $29.4 billion in July. Exports increased $0.4 billion to $9.8 billion and imports increased $1.8 billion to $39.2 billion. 

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On a global scale, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume increased 0.7% in June (less than +0.1% year-over-year) while prices rose by 0.1% (-5.2% YoY). June’s price index was 21.0% below the August 2011 peak; price index changes are almost perfectly (but inversely) 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.

August 2016 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that U.S. manufacturing contracted in August. The PMI registered 49.4%, a decrease of 3.2 percentage points from the July reading of 52.6%. (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. All sub-index values were either unchanged or lower in August than in July. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- abruptly decelerated in August. The NMI registered 51.4%, a drop of 4.1 percentage points from the July reading. The only sub-indexes with higher August values were slow supplier deliveries and inventory sentiment. 

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Wood Products was unchanged while Paper Products contracted. Two of the three service sectors we track (Real Estate and Construction) expanded. “Overall, the oil and gas industry remain in [a] ‘wait and watch’ mode. The price of oil has impacted investment considerably,” wrote one Construction respondent.

Relevant commodities --
* Priced higher: Lumber and construction labor.
* Priced lower: Gasoline and corrugate.
* Prices mixed: Diesel.
* In short supply: Construction labor.

ISM’s and Markit’s surveys were consistent with each other in August insofar as both of Markit’s surveys showed deceleration.

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

Manufacturing -- “Despite the PMI falling in August, the survey suggests the third quarter is shaping up to be the best quarter so far this year for manufacturing, with output growth picking up compared to the first half of the year on the back of improved export sales.

“The overall rate of expansion remains only modest, however, and the upturn fragile. Weak domestic demand remains a drag on order books. Concerns about the outlook have also resulted in a marked reduction in the rate of job creation.

“There’s anecdotal evidence to suggest that this at least in part reflects a slowing in the economy in the lead up to the presidential election, meaning there’s scope for growth to revive later in the year. In the meantime, the overall sluggish pace of expansion signaled by the survey, and the slacking of inflationary pressures, provides support to those arguing that interest rates should remain on hold.”

Services -- “The weak PMI readings send a downbeat note on economic growth in the third quarter. Taken together, the manufacturing and services PMIs are pointing to an annualized GDP growth rate of a mere 1%, similar to the subdued pace signaled by the surveys throughout the year to date, suggesting that those looking for a strengthening in the rate of economic growth will be disappointed once again.

“With non-farm payroll growth also showing signs of waning in line with the surveys’ employment indicators in August and inflationary pressures remaining subdued, the data flow is leaning towards the Fed staying in “wait and see” mode at its September meeting.

“The slow pace of growth and weak hiring was in turn often linked by companies to growing uncertainty about the economic outlook as the presidential election approaches, suggesting growth could pick up again later in the year.”

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

August 2016 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil was unchanged at $44.65 per barrel in August. The price stability occurred despite a slightly weaker U.S. dollar, the lagged impacts of a 631,000 barrel-per-day (BPD) increase in the amount of oil supplied/demanded in June (to 19.8 million BPD), and a slight increase in accumulated oil stocks. 

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

“The markets have become volatile of late with traders reacting to nearly every API or EIA report and every utterance from the Saudi or Iranian oil ministers. Last week the markets were pressured by numerous comments pro and con the possibility of an oil production freeze; a jump in Chinese diesel exports; comments by Federal Reserve Chair Janet Yellen that there could be a price-depressing rate increase sooner-rather-than-later; increased exports from Iraq via Kurdistan; the possibility of a ceasefire in Nigeria; sluggish U.S. and Chinese economies; and a jump in U.S. crude and oil product inventories.

“All this nets out to nobody-knows-where-prices-are-going, but several analysts say that prices will trade in the $42-$50 range for a while. Some forecasters see a risk to the downside for a while, but everybody believes 2017 will be much better as the effects of massive cuts in capital spending take hold. The U.S. Commerce Department cites reduced spending by the energy industry as one of the reasons that the U.S. economic growth was lower than forecast in the first half.

“With a month to go before the Algiers meeting that is to consider a production freeze, we are likely to see continued posturing from the various oil exporters. All would like to see higher prices, but none seem willing to give up customers and market share to achieve this goal, preferring that the cuts be left to others.  In the meantime, the political situation in the Middle East continues to get worse…and the Chinese economy that has been the world's major growth engine for several decades continues to sputter.” 

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News items from OilPrice Intelligence Report editor Evan Kelly follow:

Oil price volatility "here to stay." Top oil executives do not see an end to the volatility in the oil markets for the foreseeable future.  "The volatility is here to stay," ConocoPhillips CEO Ryan Lance said. The ongoing process of adjustment to oil supply and demand "will extend into 2017. The inventory levels are still quite high." Other oil executives agree. Martin Bachmann, the top official from Wintershall AG's exploration and production unit for Europe and the Middle East, said that "[t]here will be a rebalancing. Over what timeframe is the big question." He went on to add, "[b]asically, volatility is the word."

A return to sub-$40 oil? "While we see high probability of some 80 to 90 percent of a return to $39 WTI, we also feel that achievement of this objective could still be some four to five weeks away," said Jim Ritterbusch of the oil consultancy Ritterbusch & Associates.

Strong rebound next year. While some analysts are concerned that oil could dip again in the short run, Bank of America Merrill Lynch says that oil is set for strong gains in 2017, expecting WTI and Brent to rise to $70 per barrel. BofA Merrill Lynch says that the oil market will flip from glut to deficit next year, with demand outstripping supply by as much as 800,000 barrels per day. Francisco Blanch, head of global commodities research at BofA Merrill Lynch drew a parallel with the 2010 rally, which saw strong price gains amid a supply deficit. In 2010 oil surged to the mid-$90s per barrel because of the supply shortfall, but Blanch says that the potential for tighter monetary policy could keep oil prices from reaching that level this time around.

Oil discoveries continue to plummet. In 2015 the oil industry logged new discoveries that represented just one tenth of the annual average dating back to 1960, Bloomberg reports. This year could be even worse as the industry slashes spending on exploration. The figures come from a new Wood Mackenzie report, which found that only 2.7 billion barrels of new oil was discovered in 2015, and only 736 million barrels have been discovered so far this year. The poor results raise questions about the industry's ability to bring enough supply online to meet future demand.

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 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 $0.9 billion or 0.2% to $458.9 billion in July. Shipments of durable goods increased $0.3 billion or 0.1% to $232.7 billion, led by computers and electronic products. Meanwhile, nondurable goods shipments decreased $1.1 billion or 0.5% to $226.1 billion, led by petroleum and coal products. Shipments of Wood rose (+1.5%) but Paper fell (-0.9%). 

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Inventories increased $0.9 billion or 0.1% to $620.3 billion. The inventories-to-shipments ratio was 1.35, unchanged from June. Inventories of durable goods increased $1.4 billion or 0.4% to $383.1 billion, led by transportation equipment. Nondurable goods inventories decreased $0.5 billion or 0.2% to $237.2 billion, led by petroleum and coal products. Inventories of Wood and Paper expanded, respectively, +0.8% and 0.4%. 

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New orders increased $8.4 billion or 1.9% to $454.8 billion. Excluding transportation, new orders increased 0.2% (but -4.7% YoY -- the 21^st consecutive month of year-over-year contractions). Durable goods orders increased $9.6 billion or 4.4% to $228.6 billion, led by transportation equipment. New orders for nondurable goods decreased $1.1 billion or 0.5% to $226.1 billion. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- rose by 1.5% (-7.2% YoY). Business investment spending has contracted on a YoY basis during all but two months since December 2014.

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 46% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders decreased $1.0 billion or 0.1% to $1,126.3 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.79, down from 6.81 in June. 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; not only are they back below the December 2008 peak, but they are also diverging further below the January 2010-to-June 2014 trend-growth 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.