3Q2016 Gross Domestic Product: First (“Advance”) Estimate

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In its first (“advance”) estimate of 3Q2016 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 +2.91%, up +1.49 percentage points from 2Q2016, and much faster than consensus expectations of 2.5%.

All groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), net exports (NetX), and government consumption expenditures (GCE) -- contributed to 3Q growth.

Most of the reported improvement in the headline number came from a +1.77% quarter-over-quarter (QoQ) gain in inventories, a +0.96% rise in exports, and a +0.39% uptick in governmental spending. Offsetting those improvements was an aggregate -1.41% reduction in the headline number from softening consumer spending on both goods and services. Fixed investments remained in contraction at a -0.09% annualized rate.

As we have indicated in the past, the BEA’s treatment of inventories can introduce noise and seriously distort the headline number over short terms -- which the BEA admits by also publishing a secondary headline that excludes the impact of inventories. The BEA’s “bottom line” real final sales of domestic product was a +2.30% growth rate, down 0.28% from 2Q2016; based on real final sales, then, economic growth actually softened during 3Q. On the other hand, 3Q2016’s year-over-year GDP growth rate was +1.50%, slightly faster than 2Q2016’s +1.28%. 

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Consumer Metrics Institute noticed several cautionary items in the report: 

-- Consumer spending took a major hit (it was nearly halved) in 3Q. This finding is consistent with most consumer sentiment surveys, and it is plausibly a consequence of the continued weak growth in disposable income.

-- It is possible that the “fear, uncertainty and doubt” surrounding an especially uncivil election campaign contributed to consumer sentiments and the spending malaise. If so, that trend has almost undoubtedly extended into 4Q as well.

-- Federal fiscal year-end (“use it or lose it”) spending likely is responsible for the uptick in GCE and, if consistent with prior years, could be at least partially reversed in 4Q2016.

-- Most of the QoQ improvements in the contributions to the headline number came from two especially noisy line items: inventories and exports. These line items are susceptible to significant distortions/anomalies caused by commodity price and currency swings -- even as physical quantities of inventories or export transactions are relatively unchanged.

-- It could be argued that inventory growth after five consecutive quarters of contraction was simply an overdue reversion to a zero-sum trend line. Or, alternately, they are just another indication of weakening end-consumer demand.

-- The BEA's own “bottom line” real final-sales growth metric weakened QoQ.

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

September 2016 Residential Sales, Inventory and Prices

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Sales of new single-family houses in September 2016 were at a seasonally adjusted annual rate (SAAR) of 593,000 units (601,000 expected). This was 3.1 percent (±16.2%)* above the revised August rate of 575,000 (originally 609,000) and 29.8 percent (±23.4%) above the September 2015 SAAR of 457,000; the not-seasonally adjusted year-over-year comparison (shown in the table above) was +31.4%. For a longer-term perspective, September sales were 57.3% below the “bubble” peak and 12.0% below the long-term, pre-2000 average. Not only was August’s sales estimate revised down by 34,000 units, but July (-30,000) and June (-21,000) were also trimmed.

The median sales price of new houses sold in September jumped by $19,700 to $313,500; the average sales price rose even more: +$21,500 (to $377,700). Starter homes (those priced below $200,000) made up 15.2% of the total sold, 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. Homes priced below $150,000 made up 2.2% of those sold in September, a decline of nearly two-thirds from September 2015’s previous record-low proportion of 5.7%.

* 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 September, single-unit completions fell by 16,000 units (-8.8%). Because completions declined while sales increased, new-home inventory shrank in both absolute (-1,000 units) and months of inventory (-0.1 month) terms. 

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Existing home sales increased by 170,000 units (+3.2%) in September, to 5.47 million units (SAAR), well above expectations of 5.35 million. Inventory of existing homes expanded in absolute terms (+30,000 units) but shrank in months-of-inventory (-0.1 month) terms. Because both new- and existing-home sales increased by roughly the same percentage change (+3.2%), the share of total sales comprised of new homes remained at 9.8%. The median price of previously owned homes sold in September fell by $5,700 (-2.4%), to $234,200. 

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Housing affordability marginally improved as the median price of existing homes for sale in August fell by $2,900 (-1.2%; but +5.3 YoY), to $242,200. 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 +0.5% (+5.3% YoY), bringing home prices back essentially to 2006 levels.

“Supported by continued moderate economic growth, home prices extended recent gains,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “All 20 cities saw prices higher than a year earlier with 10 enjoying larger annual gains than last month. The seasonally adjusted month-over-month data showed that home prices in 14 cities were higher in August than in July. Other housing data including sales of existing single family homes, measures of housing affordability, and permits for new construction also point to a reasonably healthy housing market.

“With the national home price index almost surpassing the peak set 10 years ago, one question is how the housing recovery compares with the stock market recovery. Since the last recession ended in June 2009, the stock market as measured by the S&P 500 rose 136% to the end of August while home prices are up 23%. However, home prices did not reach bottom until February 2012, almost three years later. Using the 2012 date as the starting point, home prices are up 38% compared to 59% for stocks. While the stock market recovery has been greater than the rebound in home prices, the value of Americans’ homes at about $22.3 trillion is slightly larger than the value of stocks and mutual funds at $21.2 trillion.” 

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

September 2016 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in September at a seasonally adjusted annual rate (SAAR) of 1.047 million units (1.180 million expected). That was 9.0 percent (±9.2%)* below the revised August estimate of 1.150 (originally 1.142 million). The multi-family component led the decrease: -162,000 units (-38.0%), to 264,000 units. Single-family starts, by contrast, jumped by 59,000 units, or +8.1 percent (±7.4%), to 783,000 units.

* 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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September’s total SAAR was 11.9 percent (±11.9%) below the September 2015 SAAR of 1.189 million units; the not-seasonally adjusted YoY change (shown in the table above) was -15.1%. Single-family starts were 4.6% higher YoY, and the multi-family component was -42.5%. 

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Total completions fell by 87,000 units, or -8.4 percent (±10.3%)*, to a SAAR of 951,000 units. That was 5.8 percent (±13.4%)* below the September 2015 SAAR of 1.010 million; the NSA comparison: -6.5% YoY.

Single-family completions retreated by 66,000 units, or -8.8 percent (±9.8%)*, to 687,000 units -- but still +5.9% YoY. Multi-family completions dropped by 21,000 units (-7.4% MoM, and -27.2% YoY). 

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Total permits rose by 73,000 units, or 6.3 percent (±1.9%), to 1.225 million (1.165 million expected). That was 8.5 percent (±2.4%) above the September 2015 SAAR of 1.129 million; the non-seasonally adjusted YoY comparison was +8.9%.

Single-family authorizations edged up by 3,000 units, or +0.4 percent (±1.6%)*, to 739,000; multi-family permits jumped by 70,000 units (+16.8%) to 486,000. Single-family permits were 18.2% higher YoY; multi-family: -6.1% YoY. 

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Builder confidence in the market for newly built, single-family homes in September dropped two points (to 63) on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

“Even with this month’s drop, builder confidence stands at its second-highest level in 2016, a sign that the housing recovery continues to make solid progress,” said NAHB Chairman Ed Brady. “However, builders in many markets continue to express concerns about shortages of lots and labor.”

“The October reading represents a mild pullback from a jump in September, and indicates that the housing market continues to make slow and steady gains,” said NAHB Chief Economist Robert Dietz. “Moreover, mortgage rates remain low and the HMI index measuring future sales expectations has been over 70 for the past two months. These factors will sustain continued growth in the single-family 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.

October 2016 Macro Pulse -- Competing Narratives

The election season is in overdrive, and thus it seems any statement or event is interpreted in radically different ways to make it fit a desired narrative. So, too, the U.S. economy -- which is either in the midst of the fourth-longest post-WWII economic recovery (87 months) or experiencing the weakest post-WWII economic expansion (averaging just 2% annual growth). In a similar vein, the U.S. economy was on the cusp of reaching full employment (5% unemployment rate) in September, even while 94 million working-age people were not even included in the workforce.

Click here to read other examples of seemingly contradictory data in the October 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.

September 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 0.3% in September (+0.3% expected). Increases in the shelter and gasoline indexes were the main causes of the rise in the all-items index. The gasoline index rose 5.8% in September and accounted for more than half of the all items increase. The shelter index increased 0.4%, its largest increase since May.

The energy index increased 2.9%, its largest advance since April. Along with the gasoline index, other energy component indexes also rose. The index for food, in contrast, was unchanged for the third consecutive month, as the food at home index continued to decline.

The index for all items less food and energy rose 0.1% in September after a 0.3% increase in August. Along with the shelter index, the indexes for medical care, motor vehicle insurance, and personal care all increased in September, as did the indexes for education, alcoholic beverages, airline fares, and tobacco. The indexes for communication, apparel, used cars and trucks, recreation, and new vehicles all declined.  

The all items index rose 1.5% for the 12 months ending September, its largest 12-month increase since October 2014. The index for all items less food and energy rose 2.2% for the 12 months ending September. The food index declined 0.3% over the span, and the energy index fell 2.9%. Rent increased 3.7%, and medical services +4.8%.

Producer Price Index

The seasonally adjusted producer price index for final demand (PPI) rose 0.3% in September, (+0.2% expected). Final demand prices were unchanged in August and declined 0.4% in July. In September, over three-quarters of the advance in final demand prices can be traced to a 0.7% increase in the final demand goods index. Prices for final demand services inched up 0.1%. The index for final demand less foods, energy, and trade services moved up 0.3% in September, the same as in August.

The final demand index increased 0.7% for the 12 months ended in September, the largest 12-month rise since December 2014’s +0.9%. For the 12 months ended in September, prices for final demand less foods, energy, and trade services rose 1.5%, the largest increase since climbing 1.5% for the 12 months ended November 2014.

Final Demand

Final demand goods: The index for final demand goods advanced 0.7% in September following a 0.4% decline in August. Over 60% of the broad-based rise can be attributed to a 2.5% increase in prices for final demand energy. The index for final demand goods less foods and energy moved up 0.3%, and prices for final demand foods advanced 0.5%.

Product detail: Thirty percent of the September rise in the index for final demand goods can be traced to a 5.3% increase in gasoline prices. The indexes for pharmaceutical preparations, fresh and dry vegetables, diesel fuel, jet fuel, and residential natural gas also moved higher. In contrast, prices for beef and veal fell 3.7%. The indexes for carbon steel scrap and asphalt also declined.

Final demand services: In September, prices for final demand services inched up 0.1%, the same as in August. The September advance was led by the index for final demand services less trade, transportation, and warehousing, which rose 0.2%. Prices for final demand transportation and warehousing services increased 1.3%. Conversely, the final demand trade services index decreased 0.4%. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail: A major factor in the September rise in the index for final demand services was prices for securities brokerage, dealing, investment advice, and related services, which advanced 3.9%. The indexes for airline passenger services, machinery and equipment wholesaling, food and alcohol retailing, and hospital inpatient care also moved higher. In contrast, margins for apparel, jewelry, footwear, and accessories retailing fell 5.2%. The indexes for guestroom rental, machinery and equipment parts and supplies wholesaling, and apparel wholesaling also declined. 

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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 International Trade (Softwood Lumber)

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Softwood lumber exports increased (+6 MMBF or 5.0%) in August, while imports declined (-16 MMBF or 1.2%). Exports were 13 MMBF (10.3%) above year-earlier levels; imports were 175 MMBF (14.6%) 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 August 2016 was 32.9% 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 August (48.7%, of which Mexico: 26.3%; Canada: 22.4%). Asia (especially China: 18.4%) ranked second, with 34.3%. Year-to-date (YTD) exports to China were up 15.8% relative to the same months in 2015. Meanwhile, Canada was the source of nearly all (95.4%) softwood lumber imports into the United States. Overall, YTD exports were up 1.3% compared to 2015, while imports were up 34.5%. 

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U.S. softwood lumber export activity through West Coast customs districts represented the largest proportion in August (39.0% of the U.S. total), although the Eastern and Gulf districts were not far behind (28.4% and 24.7%, respectively); Seattle maintained its dominance as the most active export district (25.0% of the U.S. total). At the same time, Great Lakes customs districts handled 66.0% of the softwood lumber imports -- most notably Duluth, MN (30.8%) -- coming into the United States. 

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Southern yellow pine comprised 27.7% of all softwood lumber exports in August, followed by Douglas-fir with 14.1%. Southern pine exports were up 13.0% YTD relative to 2015, while Doug-fir exports were down 17.5%.

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

September 2016 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) edged up 0.1% in September (+0.2% expected) after falling 0.5% in August. For 3Q as a whole, IP rose at an annual rate of 1.8% -- its first quarterly increase since the 3Q2015. Manufacturing output increased 0.2% (3Q: +0.9% SAAR). The index for utilities declined 1.0% in September; mining posted a gain of 0.4%, which partially reversed its August decline. At 104.2% of its 2012 average, total IP in September was 1.0% lower than its year-earlier level.

Industry Groups

Manufacturing output rose 0.2% in September and was unchanged from its year-earlier level. In September, the production of durables remained unchanged, the production of nondurables increased 0.5%, and the production of other manufacturing (publishing and logging) fell 0.8%. Within durables, declines registered by primary metals, by machinery, and by aerospace and miscellaneous transportation equipment were offset by gains elsewhere (e.g., wood products: +0.8%). All of the major categories within nondurables posted increases; the largest gains, of about 1.5%, were recorded by printing and support and by petroleum and coal products; paper (+0.1%).

The index for mining moved up 0.4% in September. Gains for oil and gas well drilling and servicing, for coal mining, and for nonmetallic mineral mining and quarrying outweighed a drop in crude oil extraction. The output of mining increased at an annual rate of 3.7% in the third quarter following six consecutive quarterly decreases. 

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Capacity utilization (CU) for the industrial sector edged up 0.1 percentage point in September to 75.4%, a rate that is 4.6 percentage points below its long-run (1972–2015) average.

Manufacturing CU increased 0.1 percentage point in September to 74.9%, a rate that is 3.6 percentage points below its long-run average. The operating rate for nondurables advanced 0.3 percentage point to 74.7% (paper: +0.2%), while the rates for durables and other manufacturing (publishing and logging) fell to 75.8% and 62.2%, respectively; (wood products: +0.4%). The operating rate for mining moved up 0.5 percentage point to 75.5%, and the rate for utilities fell 0.9 percentage point to 79.1%. 

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Capacity at the all-industries level was unchanged (+0.4% YoY) at 138.3% of 2012 output. Manufacturing inched up +0.1% (+0.8% YoY) to 137.9%. Wood products extended the upward trend that has been ongoing since November 2013 when increasing by 0.4% (+4.6% YoY) to 168.7%. Paper edged down 0.1% (-1.0% YoY) to 116.4%.

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.

August 2016 International Trade (General)

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The goods and services deficit was $40.7 billion in August, up $1.2 billion from $39.5 billion in July, revised.  August exports were $187.9 billion, $1.5 billion more than July exports. August imports were $228.6 billion, $2.6 billion more than July imports.

The August increase in the goods and services deficit reflected a decrease in the goods deficit of less than $0.1 billion to $60.3 billion and a decrease in the services surplus of $1.2 billion to $19.6 billion.

Year-to-date, the goods and services deficit decreased $4.3 billion, or 1.3 percent, from the same period in 2015. Exports decreased $62.4 billion or 4.1 percent. Imports decreased $66.8 billion or 3.6 percent.

Goods by Selected Countries and Areas

The August figures show surpluses, in billions of dollars, with Hong Kong ($2.4), South and Central America ($1.7), Saudi Arabia ($0.8), Singapore ($0.7), United Kingdom ($0.4), and Brazil ($0.2). Deficits were recorded, in billions of dollars, with China ($29.2), European Union ($12.3), Japan ($5.7), Germany ($5.3), Mexico ($5.2), South Korea ($2.5), Italy ($2.4), France ($2.0), India ($1.9), Taiwan ($1.5), Canada ($1.1), and OPEC ($0.3).

* The surplus with Hong Kong increased $0.4 billion to $2.4 billion in August. Exports increased $0.4 billion to $3.0 billion and imports increased less than $0.1 billion to $0.7 billion.

* The balance with Saudi Arabia shifted from a deficit of $0.2 billion to a surplus of $0.8 billion in August. Exports increased $1.3 billion to $2.5 billion and imports increased $0.4 billion to $1.7 billion.

* The deficit with France increased $1.0 billion to $2.0 billion in August. Exports decreased $0.6 billion to $2.3 billion and imports increased $0.4 billion to $4.3 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 1.1% in July (-0.9% year-over-year) while prices fell by 1.0% (-4.1% YoY). July’s price index was 21.4% 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.

September 2016 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment kept treading water with 156,000 jobs added -- below expectations of +168,000. Also, combined July and August employment gains were revised down by 7,000 (July: -23,000; August: +16,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) edged up to 5.0% as growth in the labor force (+444,000) once again outpaced the change in the number of people who found employment (+354,000). 

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Observations from the employment reports include:

* For a change, employment gains were not primarily functions of either imputed jobs from the CES (birth/death model) adjustment or seasonal adjustment. In fact, the BLS applied the most negative CES adjustment and the smallest seasonal adjustment to the base data of any September since 2000; had the average adjustments been applied, headline jobs gains might have exceeded 300,000.

* Manufacturing lost 13,000 jobs in September. That result is somewhat consistent with the behavior of the Institute for Supply Management’s manufacturing employment sub-index, which contracted at a slower pace. Wood Products lost 1,600 jobs and Paper and Paper Products employment declined by 500.

* The “bleeding” that occurred in mining and logging employment during the past year appears to finally have been largely staunched. Construction employment jumped by 23,000 -- paralleling behavior of ISM’s construction employment sub-index.

* Nearly 80% (133,000) of September’s private-sector job growth occurred in the sectors typically associated with the lowest-paid jobs -- Retail Trade: +22,000; Professional & Business Services: +67,000; Education & Health Services: +29,000; and Leisure & Hospitality: +15,000. This is a persistent issue, as we have repeatedly highlighted: There are nearly 1.5 million fewer manufacturing jobs today than at the start of the Great Recession in December 2007, but over 1.7 million more Food Services & Drinking Places (i.e., wait staff and bartender) jobs. In fact, Manufacturing has lost 32,000 jobs since 2014 while FS&D jobs have expanded by 546,600. 

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* The employment-population ratio ticked up to 59.8 %; roughly speaking, for every five people added to the population, only three are employed. Meanwhile, the number of employment-age persons not in the labor force fell by 207,000 -- to 94.2 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 nudged up to 62.9%, comparable to levels seen in the late-1970s. Average hourly earnings of all private employees increased by $0.06 (to $25.79), resulting in a 2.6% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.05, to $21.68 (+2.7% YoY). However, the average workweek for all employees on private nonfarm payrolls increased by 0.1 hour (to 34.4 hours), which caused average weekly earnings to rise from $882.54 to $887.18. 

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* Full-time jobs were essentially unchanged while those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- decreased by 159,000. There are now 2.4 million more full-time jobs than the pre-recession high; for perspective, however, the non-institutional, working-age civilian population has risen by over 20.9 million). PTER employment, by contrast, stopped declining in October 2015 and has since been oscillating around 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 “noisy” and highly seasonal, the data show the amount withheld in September fell by $14.2 billion, to $178.7 billion (still, a record for the month of September); that is also +4.4% YoY. 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 September was 4.3% 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.

August 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 $0.1 billion or virtually unchanged to $458.1 billion in August. Shipments of durable goods decreased $0.4 billion or 0.2% to $232.2 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased $0.4 billion or 0.2% to $225.9 billion, led by beverage and tobacco products. Shipments of Wood and Paper rose, respectively, 0.3% and 0.2%. 

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Inventories increased $1.0 billion or 0.2% to $622.0 billion. The inventories-to-shipments ratio was 1.36, unchanged from July. Inventories of durable goods increased $0.6 billion or 0.2% to $383.8 billion, led by machinery. Nondurable goods inventories increased $0.4 billion or 0.2% to $238.1 billion, led by petroleum and coal products. Inventories of Wood expanded (+1.2%) but Paper contracted (-0.5%). 

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New orders increased $0.7 billion or 0.2% to $453.1 billion. Excluding transportation, new orders were unchanged (but -1.6% YoY -- the 22^nd consecutive month of seasonally adjusted year-over-year contractions); interestingly, YoY comparisons of not-seasonally adjusted estimates shows a 0.7% increase. Durable goods orders increased $0.3 billion or 0.1% to $227.3 billion, led by transportation equipment. New orders for nondurable goods increased $0.4 billion or 0.2% to $225.9 billion. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- rose by 0.9% (-0.9% 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 45% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders decreased $1.6 billion or 0.1% to $1,123.2 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.81, up from 6.79 in July. Real unfilled orders, which had been a good litmus test for sector growth, show a much different picture; in real terms, unfilled orders in June 2014 were back to 97% of their December 2008 peak. Real unfilled orders jumped to 122% of the prior peak in July 2014, thanks to the largest-ever batch of aircraft orders. 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.

September 2016 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil edged up by $0.46 in September, to $45.18 per barrel. The increase coincided with a slightly stronger U.S. dollar, the lagged impacts of a 44,000 barrel-per-day (BPD) decrease in the amount of oil supplied/demanded in July (to 19.7 million BPD), and a continued drawdown in accumulated oil stocks. 

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Shale companies are moving to secure hedges for their 2017 oil production, protecting themselves from any renewed downturn in oil prices and guaranteeing them a certain price for their output. The 6% jump in oil prices after the late-September OPEC deal provided a lifeline to shale companies, and they are reportedly hedging their output "in droves." The spike in hedges suggests that a substantial slice of the shale industry will keep production steady or even increase oil flows, potentially prolonging the price slump. 

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

September 2016 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that U.S. manufacturing edged back into expansion during September. The PMI registered 51.5%, an increase of 2.1 percentage points from the August reading of 49.4%. (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. Slow supplier deliveries and new export orders were the only sub-indexes with lower values in September than in August. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- jumped in September. The NMI registered 57.1%, 5.7 percentage points higher than the August reading. Slow supplier deliveries was the only sub-index with a lower September value. 

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Wood Products contracted while Paper Products expanded. Two of the three service sectors we track (Construction and Ag & Forestry) expanded.

Relevant commodities --
* Priced higher: Petroleum; diesel; packaging; paper.
* Priced lower: Lumber -- pine, plywood and spruce.
* Prices mixed: Diesel.
* In short supply: Construction labor.

Consistency between ISM’s and Markit’s surveys was mixed in September; Markit’s manufacturing survey showed deceleration, but acceleration in services.

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

Manufacturing -- “Manufacturing growth slowed to a crawl in September, suggesting the economy is stuck in a soft patch amid widespread uncertainty in the lead-up to the presidential election.

“The survey saw firms pulling back on expanding production and focusing instead on cost-cutting, as inflows of new business slowed to the weakest seen so far this year.

“Any growth is largely being driven by the consumer, in turn helped by tailwinds of low interest rates, low inflation and a solid labor market.

“Business spending, in contrast, is being subdued by the headwinds of uncertainty about the economic outlook, cost-driven inventory reduction and the strong dollar, the latter linked to yet another drop in exports.”

Services -- “Coming hard on the heels of the IMF’s downgrade to the U.S. economic outlook, the upturn in the PMI is a welcome development and suggests that the pace of economic growth gained some momentum in September. However, take a longer look and it’s clear that this is by no means a robust upturn.

“Even with the latest increase the surveys are indicating that the economy is growing at an annualized rate of only 1%.

“The survey responses reveal that a heightened degree of political uncertainty is subduing the economy, manifesting itself in particular in a marked slowdown in corporate hiring. Across both manufacturing and services the surveys point to the smallest monthly gain in jobs since April 2010, consistent with a mere 115,000 rise in non-farm payrolls.

“Business optimism about the year ahead is at one of the lowest levels seen since the global financial crisis. The surveys therefore add ammunition to those arguing for the Fed to hold off with hiking interest rates again, at least until the dust settles after the election.”

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.