1Q2017 Gross Domestic Product: Advance Estimate

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In its advance (first) estimate of 1Q2017 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) pegged growth of the U.S. economy at a seasonally adjusted and annualized rate (SAAR) of +0.69% (+1.1% expected), down by roughly two-thirds (-1.39 percentage points) from 4Q2016’s +2.08%. On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 1Q2017 was +1.92% relative to 1Q2016; that was marginally lower than 4Q2016’s +1.96% relative to 4Q2015.

Three of the four groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), and net exports (NetX) -- contributed to 1Q growth. Government consumption expenditures (GCE) detracted from it. 

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Broken down by components, the headline number reflected increases in business investment, exports, and housing investment that were partially offset by a big slowdown in consumer spending.

Positives:

* Business investment reflected increases in both structures and equipment, notably a significant rise in mining exploration, shafts, and wells. In fact, the contribution from commercial fixed investment was the strongest since 1Q2012

* Exports reflected an increase in nondurable industrial supplies and materials, especially petroleum. However, imports, which subtract from the headline number, also increased. On net, then, trade contributed a modest 0.1% to the 1Q headline.

Negatives:

* The biggest driver of the fall-off in GDP growth was a near stall-out in consumer spending, which rose at a SAAR of just 0.23%, the lowest increase since 2009 -- reflecting an increase in services offset by a decrease in motor vehicles and parts. Once again, the bulk of the PCE growth came from rising healthcare services, and recreational goods and vehicles.

* Growth in private inventory investment decelerated, along with federal, and state and local government spending.

Real final sales of domestic product (the BEA’s “bottom line” indicator of economic activity that excludes the influence of inventories) provided a slightly more positive perspective by growing +1.62%, up 0.55 percentage point from the 1.07% rate recorded in 4Q2016.

Also, the BEA used an inflation rate of 2.25% to arrive at its 1Q real GDP estimate. Concurrent inflation recorded by the Bureau of Labor Statistics (BLS) in its CPI-U index was 1.54%. Overestimating inflation results in correspondingly overly pessimistic growth rates; were the BEA’s “nominal” data deflated using the CPI-U, the headline GDP growth number would have been a more positive +1.41% annualized rate.

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

March 2017 Residential Sales, Inventory and Prices

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Sales of new single-family houses in March 2017 were at a seasonally adjusted annual rate (SAAR) of 621,000 units (584,000 expected). This is 5.8% (±15.5%)* above the revised February rate of 587,000 (originally 592,000) and 15.6% (±15.0%) above the March 2016 SAAR of 537,000; the not-seasonally adjusted year-over-year comparison (shown in the table above) was 16.0%. For a longer-term perspective, March sales were 55.3% below the “bubble” peak but 10.9% above the long-term, pre-2000 average.

The median sales price of new houses sold in March 2017 was $315,100 (+$22,000 or 7.5%). The average sales price was $388,200 (+$14,600 or 3.9%). Starter homes (those priced below $200,000) comprised 17.2% of the total sold, up from March 2016’s 14.0%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 made up 6.9% of those sold in March, a modest rise from March 2016’s 4.0%.

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

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As mentioned in our post about housing permits, starts and completions in March, single-unit completions rose by 60,000 units (+7.9%). Since the increase in completions outpaced that of sales, new-home inventory expanded in absolute (+3,000 units) terms; it shrank, however, in months-of-inventory (-0.2 month) terms. 

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Existing home sales jumped by 240,000 units (+4.4%) in March, to a SAAR of 5.710 million units (5.605 million expected). Inventory of existing homes expanded in absolute terms (+100,000 units) but was unchanged in months-of-inventory terms. With new-home sales increasing at a proportionately faster rate than existing-home sales, the share of total sales comprised of new homes inched up to 9.8%. The median price of previously owned homes sold in March increased by $8,200 (+3.6%), to $236,400. 

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Housing affordability remained essentially unchanged as the median price of existing homes for sale in February advanced by $1,200 (+0.5%; +7.6 YoY), to $229,900. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices posted a not-seasonally adjusted monthly change of +0.2% (+5.8% YoY), bringing home prices to a fourth consecutive all-time high.

“Housing and home prices continue to advance,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The S&P Corelogic Case-Shiller National Home Price Index and the two composite indices accelerated since the national index set a new high four months ago. Other housing indicators are also advancing, but not accelerating the way prices are. As per National Association of Realtors sales of existing homes were up 5.6% in the year ended in March. There are still relatively few existing homes listed for sale and the small 3.8 month supply is supporting the recent price increases. Housing affordability has declined since 2012 as the pressure of higher prices has been a larger factor than stable to lower mortgage rates.

“Housing’s strength and home building are important contributors to the economic recovery. Housing starts bottomed in March 2009 and, with a few bumps, have advanced over the last eight years. New home construction is now close to a normal pace of about 1.2 million units annually, of which around 800,000 are single family homes. Most housing rebounds following a recession only last for a year or so. The notable exception was the boom that set the stage for the bubble. Housing starts bottomed in 1991, drove through the 2000-2001 recession, and peaked in 2005 after a 14-year run.” 

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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.

April 2017 Macro Pulse -- Are “Soft” Data Hitting a “Hard” Reality?

In the aftermath of last November’s election, and particularly since the start of 2017, a number of surveys (“soft” data) have shown consumers and businesses alike to be almost overwhelmingly upbeat. Examples include the University of Michigan’s U.S. consumer confidence index, which has risen to levels last seen prior to the Great Recession. Also, the Wells Fargo/Gallup Small Business Index survey (posted in mid-March) reported optimism among small-business owners “soaring” to its highest reading in a decade. Finally, a survey published by the National Association of Manufacturers at the end of March found that 93% of the 14,000 companies surveyed felt positive about their economic outlook. That is the highest percentage in the survey’s 20-year history, up from 56.6% one year ago and 77.8% in December.

The rub is that “soft” data rarely correspond to what eventually unfolds in the economy. For example, the correlation between consumer confidence and spending is weak at best. Comparing historical aggregates of consumer and business data also indicates that activity measured by “hard” data typically fluctuates much less than might be expected from the significant swings in “soft” data. Much as we would hope such optimism might provide a late-cycle “second wind,” a plethora of indicators suggest to us the economy will have to contend with tangible headwinds rather than tailwinds from ephemeral optimism. What follows are “hard” data metrics, published during the past month, which provide a mixed perspective regarding economic direction….

Click here to read the rest of the April 2017 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.

March 2017 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) increased 0.5% in March (+0.2% expected) after moving up 0.1% in February. The increase in March was more than accounted for by a jump of 8.6% in the output of utilities—the largest in the history of the index—as the demand for heating returned to seasonal norms after being suppressed by unusually warm weather in February.

Manufacturing output fell 0.4% (+0.3% expected), led by a large step-down in the production of motor vehicles and parts; factory output aside from motor vehicles and parts moved down 0.2%. The production at mines edged up 0.1%.

For 1Q2017 as a whole, total IP rose at an annual rate of 1.5%. At 104.1% of its 2012 average, total IP in March was 1.5% above its year-earlier level. 

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Industry Groups

Manufacturing output decreased 0.4% in March, and the gains in January and February are now reported to have been smaller than stated earlier. The decline in the manufacturing index in March was its first loss since August 2016; nevertheless, factory output increased at an annual rate of 2.7% in 1Q. The production of durables moved down 0.8% in March. Among its major components, only computer and electronic products registered an increase, about 1%, and motor vehicles and parts recorded the largest decrease, 3.0%; wood products: -0.4%.

The index for nondurables edged up, as gains in petroleum and coal products, in chemicals, and in paper products (+0.2%) offset losses elsewhere. The output of other manufacturing (publishing and logging) fell 0.4%.

Mining output edged up 0.1% in March, with continuing gains in oil and gas extraction and in drilling and support activities slightly outweighing large decreases in coal mining and in nonmetallic mineral mining. After advancing 6.6% at an annual rate in 4Q2016, the index for mining jumped 12.1% in 1Q2017. 

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Capacity utilization (CU) for the industrial sector increased 0.4 percentage point in March to 76.1%, a rate that is 3.8 percentage points below its long-run (1972–2016) average.

Manufacturing CU fell 0.3 percentage point in March to 75.3%, a rate that is 3.1 percentage points below its long-run average. The operating rate for durables declined 0.7 percentage point, to 74.6%, and was 2.3 percentage points below its long-run average (wood products: -0.4%).

The rates for nondurables and for other manufacturing (publishing and logging), little changed in March at 77.0% and 63.6%, respectively, remained substantially below their long-run averages (paper products: +0.3%). Utilization for mining edged down 0.1 percentage point to 81.9%, and the rate for utilities jumped 6.0 percentage points to 75.7%. 

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Capacity at the all-industries level nudged up 0.1% (+0.6% YoY) to 136.9% of 2012 output. Manufacturing (NAICS basis) inched up +0.1% (+0.9% YoY) to 136.9%. Wood products: +0.0% (+0.5% YoY) to 155.8%; paper products: -0.1% (-2.2% YoY) to 110.3%.

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

March 2017 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in March at a seasonally adjusted annual rate (SAAR) of 1,215,000 units (1.262 million expected). This is 6.8% (±12.5%)* below the revised February estimate of 1,303,000 (originally 1.288 million units), and 9.2% (±9.1%) above the March 2016 SAAR of 1,113,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +8.6%.

Single-family housing starts in March were at a SAAR of 821,000; this is 6.2% (±10.0%)* below the revised February figure of 875,000. The March SAAR for multi-family starts was 394,000 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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Total housing completions in March were at a SAAR of 1,205,000 units. This is 3.2% (±13.5%)* above the revised February estimate of 1,168,000 and 13.4% (±16.2%)* above the March 2016 SAAR of 1,063,000; the NSA comparison: +17.9% YoY.

Single-family housing completions were at a SAAR of 819,000; this is 7.9% (±12.9%)* above the revised February rate of 759,000. Multi-family completions: 386,000 (-5.6% MoM). 

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Total building permits were at a SAAR of 1,260,000 units (1.250 million expected). This is 3.6% (±2.8%) above the revised February rate of 1,216,000 units (originally 1.213 million) and 17.0% (±1.2%) above the March 2016 SAAR of 1,077,000; the NSA comparison: +14.5% YoY.

Single-family authorizations in March were at a rate of 823,000; this is 1.1% (±1.9%)* below the revised February figure of 832,000. Multi-family: 437,000 (+13.8% MoM). 

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Builder confidence in the market for newly-built single-family homes remained solid in April, falling three points to a level of 68 on the National Association of Home Builders/Wells Fargo Housing Market Index after an unusually high March reading.

“Even with this month’s modest drop, builder confidence is on very firm ground, and builders are reporting strong interest among potential home buyers,” said NAHB Chairman Granger MacDonald.

“The fact that the HMI measure of current sales conditions has been over 70 for five consecutive months shows that there is continued demand for new construction,” said NAHB Chief Economist Robert Dietz. “However, builders are facing several challenges, such as hefty regulatory costs and ongoing increases in building material prices."

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

March 2017 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) decreased 0.3% (0.0% expected) in March, the first month-over-month (MoM) decrease in the seasonally adjusted all items index since February 2016. A 6.2% decline in the gasoline index was the largest factor, with a decrease in the index for wireless telephone services also contributing. The energy index declined 3.2%, with the gasoline index falling 6.2%, and other major energy component indexes decreasing as well. The food index rose 0.3%, with the index for food at home increasing 0.5%, its largest increase since May 2014.

The index for all items less food and energy fell 0.1% in March, its first decline since January 2010. The shelter index rose 0.1%, and the indexes for motor vehicle insurance, medical care, tobacco, airline fares, and alcoholic beverages also increased in March. These increases were more than offset by declines in several indexes, including those for wireless telephone services, used cars and trucks, new vehicles, and apparel.

The all items index rose 2.4% for the 12 months ending March (YoY), a smaller increase than the 2.7% rise for the period ending February. The index for all items less food and energy rose 2.0% over the last 12 months, the smallest 12-month increase since November 2015. The energy index rose 10.9% over the last year, while the food index increased 0.5%; rent: +3.9% and medical care services: +3.4%.

Producer Price Index

The seasonally adjusted producer price index for final demand (PPI) declined 0.1% (+0.0% expected) in March. Three-fourths of the decrease in the final demand index is attributable to prices for final demand services, which fell 0.1%. The index for final demand goods also inched down 0.1%.

On an unadjusted basis, the final demand index rose 2.3% for the 12 months ended March 2017, the largest increase since moving up 2.4% for the 12 months ended March 2012. Prices for final demand less foods, energy, and trade services edged up 0.1% in March, the tenth straight advance. For the 12 months ended in March, the index for final demand less foods, energy, and trade services climbed 1.7%.

Final Demand

Final demand services: The index for final demand services inched down 0.1% in March following a 0.4% increase in February. Over half of the broad-based decline can be traced to prices for final demand services less trade, transportation, and warehousing, which decreased 0.1%. Margins for final demand trade services also edged down 0.1%. (Trade indexes measure changes in margins received by wholesalers and retailers.) The index for final demand transportation and warehousing services fell 0.2%.

Product detail: A 4.1% drop in the index for loan services (partial) led the March decline in prices for final demand services. The indexes for apparel, footwear, and accessories retailing; securities brokerage, dealing, and investment advice; health, beauty, and optical goods retailing; and truck transportation of freight also moved lower. In contrast, margins for fuels and lubricants retailing jumped 13.8%. The indexes for food and alcohol retailing, machinery and equipment parts and supplies wholesaling, and insurance also advanced.

Final demand goods: The index for final demand goods inched down 0.1% in March following 6 straight increases. The decline can be traced to a 2.9% drop in prices for final demand energy. Conversely, the indexes for final demand goods less foods and energy and for final demand foods rose 0.4% and 0.9%, respectively.

Product detail: Leading the March decrease in prices for final demand goods, the gasoline index fell 8.3%. Prices for liquefied petroleum gas; jet fuel; hay, hayseeds, and oilseeds; and integrated microcircuits also moved lower. In contrast, the index for motor vehicles rose 0.9%. Prices for meats, processed poultry, and electric power also advanced. 

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All of the not-seasonally adjusted price indexes we track rose 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.

February 2017 International Trade (Softwood Lumber)

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Softwood lumber exports increased (less than 1 MMBF or 0.1%) in February, while imports rose (71 MMBF or 5.4%). Exports were 14 MMBF (10.0%) below year-earlier levels; imports were 241 MMBF (14.9%) lower. As a result, the year-over-year (YoY) net export deficit was 227 MMBF (15.4%) smaller. However, the average net export deficit for the 12 months ending February 2017 was 16.1% greater 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 (of which Mexico: 20.4%; Canada: 18.6%) and Asia (especially China, the top single-country destination with 22.0%) were essentially evenly split as primary destinations for U.S. softwood lumber exports in February -- each with 39.0%. Year-to-date (YTD) exports to China were up 6.9% relative to the same months in 2016. Meanwhile, Canada was the source of nearly all (80.1%) softwood lumber imports into the United States. Interestingly, imports from Canada are 16.4% lower YTD than the same months in 2016. Overall, YTD exports were down 3.6% compared to 2016, while imports were down 6.6%. 

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U.S. softwood lumber export activity through East Coast customs districts represented the largest proportion in February (38.8% of the U.S. total), the West Coast district came in a close second (35.4%) while the Gulf district lagged (20.0%); however, Seattle maintained a sizeable lead as the most active export district (22.2% of the U.S. total). At the same time, Great Lakes customs districts handled 57.8% of softwood lumber imports -- most notably Duluth, MN (26.13%) -- coming into the United States. 

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Southern yellow pine comprised 29.3% of all softwood lumber exports in February, followed by treated lumber (15.9%) and Douglas-fir (15.5%). Southern pine exports were up 0.5% YTD relative to 2016, while Doug-fir exports were down 9.9%.

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

March 2017 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment added just 98,000 jobs in March -- considerably below expectations of +178,000. Moreover, combined January and February 2017 employment gains were revised down by 38,000 (January: -22,000; February: -16,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) edged dropped to 4.5% as growth in the number of employed (+472,000) outpaced that of people (re)entering the labor force (+145,000).

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Observations from the employment reports include:

* We have often been critical of the BLS’s seeming to “plump” the headline numbers with favorable adjustment factors; for March, there is no clear evidence pointing to such a conclusion. Imputed jobs from the CES (business birth/death model) adjustment were near the bottom (6^th percentile) of the range of values for the month of March since 2000. However, the BLS also applied the least negative seasonal adjustment to the base data of any March since 2000; had average adjustments been applied, headline jobs gains could have been an even more measly 65,000.

* As for industry details, Manufacturing added 11,000 jobs in March. That result is reasonably consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded at a faster pace in March. Wood Products employment rose by 900 jobs; Paper and Paper Products: +300. Construction employment advanced by 6,000 -- which mirrors construction employment trends in ISM’s services report. 

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* The number of employment-age persons not in the labor force (NILF) ticked up by 23,000 -- to 94.2 million. March’s NILF estimate is within 1.0% of December 2016’s record high. Meanwhile, the employment-population ratio (EPR) increased fractionally to 60.1%; thus, for every five people being added to the population, only three are employed. 

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* With so few labor force (re)entrants, the labor force participation rate (LFPR) was unchanged at 63.0% -- comparable to levels seen in the late-1970s. Average hourly earnings of all private employees increased by $0.05, to $26.14, resulting in a 2.7% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.04, to $21.90 (+2.3% YoY). Since the average workweek for all employees on private nonfarm payrolls was unchanged at 34.3 hours, average weekly earnings increased by $1.71, to $896.60 (+2.4% YoY). With the consumer price index running at an annual rate of 2.7% in February, workers’ purchasing power keeps eroding. 

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* Full-time jobs jumped by 476,000. In addition, those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- fell by 151,000. There are now over 3.6 million more full-time jobs than the pre-recession high; for perspective, however, the non-institutional, working-age civilian population has risen by nearly 21.3 million). Those holding multiple jobs jumped to 8.0 million (+138,000), just shy of August 2008’s peak of 8.1 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 March soared by $31.1 billion, to a new record of $234.9 billion (+15.2% MoM and +8.4% 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 March was 6.7% above the year-earlier average, but 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.

March 2017 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil retreated ($4.14 or 7.7%) in March, to $49.33 per barrel. The decrease coincided with a weaker U.S. dollar, the lagged impacts of a 745,000 barrel-per-day (BPD) drop in the amount of oil supplied/demanded in January (to 20.0 million BPD), and a new record of nearly 540 million barrels of accumulated oil stocks. 

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Crude prices rebounded sharply during the last week of March, erasing nearly half the $7-8 selloff that began early in the month. “The March price drop came on the consensus that increasing crude inventories and ever higher rig counts would offset the 1.8 million production cut that OPEC was trying to orchestrate,” wrote Peak Oil Review Editor Tom Whipple.

The change in market sentiment was due to several factors, Whipple continued. “The dollar was somewhat weaker; the OPEC/NOPEC production cut seemed to be on course for complete implementation and extension for another six months; disruptions in Libya which cut oil production by about 250,000 BPD; and a U.S. stocks report showing a larger-than-expected decline in gasoline and distillate stocks. Even though U.S. crude inventories continued to climb in the week ended March 24th and the U.S. rig count continued to grow, the markets concluded that the various reports indicated higher oil prices ahead.

“Despite trader enthusiasm, the Director of the IEA said last week that he does not expect a major increase in global oil prices despite the 1.8-million-barrel supply cut. The IEA bases its judgment on the extraordinary size of the global oil glut, and the likelihood that any substantial price increase would bring more oil from the United States, Canada, and Brazil to the market. The backlog of shale oil wells that have been drilled but not yet fracked continues to grow as oil producers hold wells out of production awaiting higher prices. Many of these wells have been drilled only to meet contractual obligations to drill within a specified time or lose the lease.”

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Oilprice.com Editor Tom Kool provided several forward-looking news items:

* Fracking techniques continue to improve. The Wall Street Journal reports that shale drillers such as EOG Resources continue to tweak their drilling techniques, finding ways to become more efficient. EOG is using software that gathers data while drilling a well, which can be used to make directional drilling much more precise. The upshot is that shale drillers could end up producing more oil at lower prices, and could do so for years to come. That would undermine the influence of OPEC over the long-term and make global supplies more flexible to marginal changes in prices and demand.

* Oil traders warn of oversupply. Even as some argue that shale could be a long-term phenomenon, some of the world's largest oil traders are cautioning against too much reliance on short-cycle projects in Texas. At the FT's Commodities Global Summit, two executives from Mercuria Energy Group and Trafigura Group said that the market could see a supply crunch towards the end of the decade because of a shortage of investment today. That echoes a warning from the IEA in early March. "The low-hanging fruit on the short-cycle projects are being used now so I am more in this camp that says we are starting to see potential issues three or four years down the track," co-head of group market risk and former head of crude trading at Trafigura Group Ltd., told the audience.

* IEA: price rally not significant even with OPEC extension. The head of the IEA cautioned investors against expectations of a substantial price rally even if OPEC extends its cuts for another six months. Huge inventories will weigh on the market and new non-OPEC supply would come online if prices moved too high.

* PetroChina to increase spending. One of China's oil giants will increase spending for the first time in five years. PetroChina said it would increase spending by 11 percent this year in a bid to boost production. China's state-owned oil companies have been hit hard by the oil price downturn, with a few of them posting record low levels of profit. China's oil production has declined as a result of the downturn in spending, with output down more than 5 percent last year.

* Russia to comply with OPEC agreement. Russia along with a handful of other non-OPEC countries, pledged to cut their output by nearly 600,000 bpd between January and June, with Russia accounting for about 300,000 bpd of cuts. Russia reiterated its intentions to meet those promises. "The decrease in production in January and February were ahead of tempo with regards our initial plans. Currently, in March we have already reached a reduction level of 200,000 barrels a day. We anticipate complying with the figure set forth in the agreement by the end of April," Russian energy minister Alexander Novak told CNBC. Meanwhile, the minister said that Russia's long-term production profile will increasing come from the Arctic - Russia gets 17 percent of its output from the Arctic, but that figure will rise to 26 percent in 20 years.

* Permian pipeline constraints. Output in the Permian Basin is rising so quickly that the region could bump against a shortage of pipeline capacity. As a result, the discount between Midland oil, a benchmark for oil from West Texas, and WTI, has widened. Permian production is expected to rise to 2.65 million BPD by the end of the year, but pipeline capacity might only reach 2.54 million BPD.

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

March 2017 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that the expansion in U.S. manufacturing decelerated slightly during March. The PMI registered 57.2%, down 0.5 percentage points from February. (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. Noteworthy changes included faster growth in employment, input prices (highest index since May 2011) and export orders. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- retreated more significantly when dropping by 4.7 percentage points, to 58.9%. NMI sub-indexes gave a mixed message, with rising export and import orders amid decelerating business activity, new orders and employment. 

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All industries we track reported expansion. “Overall, material inflation is now clearly upon us,” wrote one Paper Products respondent. “Growth on [a] number of projects has slowed a little, but revenue projections are steady,” observed a Construction respondent.

Relevant commodities --
* Priced higher: Paper; caustic soda; corrugate (including boxes and packaging); diesel and gasoline; labor (including construction and temporary); lumber -- pine, plywood and spruce.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Labor (including construction and temporary).

ISM’s and IHS Markit’s surveys were directionally consistent, with both pairs exhibiting decelerating growth. Markit’s surveys were considerably less upbeat than ISM’s.

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

Manufacturing -- “The post-election resurgence of the manufacturing sector seen late last year is showing signs of losing steam. Output growth slowed to a six-month low in March, optimism about the outlook has waned and hiring has slowed accordingly.

“While the survey data suggest that the goods producing sector enjoyed a relatively good first quarter on the whole, the loss of momentum seen in February and March bodes ill for the second quarter.

“The survey data have acted as a reliable advance guide to official data in the past, and in March indicate a slowing of output growth to an annualized rate of around 2%. The survey’s employment index is meanwhile consistent with official manufacturing payroll numbers falling slightly.

“If the activity numbers send a dovish signal to policymakers, the survey’s price indices favor the hawks. Inflationary pressures have risen to a two and a half year high, despite the oil price easing during the month.”

Services -- “The March [manufacturing and service] PMI numbers add to the picture of a relatively modest opening quarter to 2017 for the U.S. economy. The surveys of manufacturing and services are running at levels consistent with GDP expanding by 1.7% in the first quarter.

“Growth of business activity appears to have peaked in January, sliding to a six-month low in March.

“The loss of momentum is linked to weaker inflows of new work, with the surveys providing some evidence that demand is being dented in part by higher prices.

“However, business confidence, although up in February, has failed to regain the levels seen at the start of the year, suggesting a less ebullient mood has developed among companies than seen in the immediate aftermath of the presidential election.

“This lower degree of business optimism has translated into weaker hiring, with the March surveys indicating the smallest net gain in private sector employment since last October.”

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

February 2017 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments increased $1.4 billion or 0.3% to $480.0 billion in February. Shipments of durable goods increased $0.8 billion or 0.3% to $239.4 billion, led by machinery. Meanwhile, nondurable goods shipments increased $0.6 billion or 0.2% to $240.5 billion, led by chemical products. Shipments of Wood and Paper rose by, respectively, 1.8 and 0.3%. 

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Inventories increased $1.2 billion or 0.2% to $630.0 billion. The inventories-to-shipments ratio was 1.31, unchanged from January. Inventories of durable goods increased $0.8 billion or 0.2% to $385.2 billion, led by primary metals. Nondurable goods inventories increased $0.3 billion or 0.1% to $244.8 billion, led by petroleum and coal products. Inventories of Wood and Paper shrank by, respectively, 0.8 and 0.5%. 

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New orders increased $4.8 billion or 1.0% to $476.5 billion. Excluding transportation, new orders rose by 0.4% (and +3.7% YoY -- the fifth month of year-over-year increases out of the past 24). Durable goods orders increased $4.2 billion or 1.8% to $236.0 billion, led by transportation equipment. New orders for nondurable goods increased $0.6 billion or 0.2% to $240.5 billion. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- edged down by 0.1% (and just +0.3% YoY). Business investment spending contracted on a YoY basis during all but five months since January 2015 (inclusive).

As can be seen in the graph above, real (inflation-adjusted) new orders were essentially flat between early 2012 and mid-2014, recouping on average 70% of the losses incurred since the beginning of the Great Recession. With July 2014’s transportation-led spike an increasingly distant memory, the recovery in new orders is back to just 55% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders increased $0.1 billion or virtually unchanged to $1,115.3 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.53, down from 6.57 in January. Real unfilled orders, which had been a good litmus test for sector growth, show a much different picture; in real terms, unfilled orders in June 2014 were back to 97% of their December 2008 peak. Real unfilled orders jumped to 122% of the prior peak in July 2014, thanks to the largest-ever batch of aircraft orders. Since then, however, real unfilled orders have moved mostly sideways; 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.