1Q2017 Gross Domestic Product: Third Estimate

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In its third estimate of 1Q2017 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) boosted the growth rate of the U.S. economy to a seasonally adjusted and annualized rate (SAAR) of +1.42% (above consensus expectations of 1.2%); that is up by +0.26 percentage point (PP) from the previous 1Q2017 estimate, but still roughly two-thirds (-0.66 PP) 4Q2016’s +2.08%.

Although the latest SAAR was 0.26 PP higher than the second estimate, nominal (i.e., not inflation adjusted) GDP was actually $500 million lower than previously reported at the end of May. The BEA achieved its higher growth estimate by applying a lower GDP deflator (3^rd est: +1.94%) than the one used in May’s report (2^nd est: +2.21%).

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. Notable details follow:

* PCE: Upwardly revised expenditures for health care (including insurance) and housing utilities elevated PCE’s contribution to 1Q’s headline number in this revision.

* PDI: Downward revisions to nearly-stalled inventory growth overwhelmed improvements in fixed investment (especially nonresidential construction).

* NetX: Exports were revised higher while imports provided less of a drag on 1Q’s headline.

* GCE: Government spending contracted despite upwardly revised state and local outlays. 

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The notable takeaways from this report include: 

-- The largest upward revision was in consumer spending for healthcare and insurance.

-- The growth rate for consumer spending on goods remains anemic.

-- The inventory contraction worsened, possibly in anticipation of softer future consumer spending.

-- Foreign trade remained a bright spot and is not a drag on the headline number.

“The US consumer may be spending more, but that increased spending is not on discretionary ‘life-style’ goods,” concluded Consumer Metric Institute’s Rick Davis, “And as per usual, the Fed is once again projecting a return to ‘normalcy’ in the form of 3% growth in future quarters -- with consumer spending leading the way. But if this past quarter's pattern persists those consumers may continue to face a toxic mix of stagnant disposable income, rising insurance costs and shrinking savings -- not exactly a formula for happy campers.”

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

May 2017 Residential Sales, Inventory and Prices

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Sales of new single-family houses in May 2017 were at a seasonally adjusted annual rate (SAAR) of 610,000 units (590,000 expected). This is 2.9% (±13.0%)* above the revised April rate of 593,000 and 8.9% (±21.9%)* above the May 2016 SAAR of 560,000; the not-seasonally adjusted year-over-year comparison (shown in the table above) was +9.4%. For a longer-term perspective, April sales were 56.1% below the “bubble” peak but 10.9% above the long-term, pre-2000 average.

The median sales price of new houses sold in May 2017 was $345,800 (+$35,600 or 11.5% MoM). The average sales price was $406,400 (+$38,700 or 10.5% MoM). Starter homes (those priced below $200,000) comprised 13.8% of the total sold, down from May 2016’s 20.8%, and a new record low for the month of May (since 2002); prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 made up 3.5% of those sold in May, also a new record low for that month of the year.

* 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 May, single-unit completions rose by 38,000 units (+4.9%). Since the increase in completions outpaced that of sales, new-home inventory expanded in absolute terms (+4,000 units) but remained unchanged in months-of-inventory terms. 

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Existing home sales edged up by 60,000 units (+1.1%) in May, to a SAAR of 5.620 million units (5.550 million expected). Inventory of existing homes expanded in both absolute (+40,000 units) and months-of-inventory (+0.1 month) terms. With new-home sales increasing at a proportionately faster rate than existing-home sales, the share of total sales comprised of new homes rose to 9.8%. The median price of previously owned homes sold in May increased by $7,800 (+3.2% MoM), to $252,800. 

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Housing affordability deteriorated for a sixth month as the median price of existing homes for sale in April jumped by $8,100 (+3.4%; +6.1 YoY), to $246,100. 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 +0.9% (+5.5% YoY) -- marking the fifth consecutive all-time high for the index.

“As home prices continue rising faster than inflation, two questions are being asked: why? And, could this be a bubble?” said David Blitzer Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Since demand is exceeding supply and financing is available, there is nothing right now to keep prices from going up. The increase in real, or inflation-adjusted, home prices in the last three years shows that demand is rising. At the same time, the supply of homes for sale has barely kept pace with demand and the inventory of new or existing homes for sale shrunk down to only a four- month supply. Adding to price pressures, mortgage rates remain close to 4% and affordability is not a significant issue.

“The question is not if home prices can climb without any limit; they can’t. Rather, will home price gains gently slow or will they crash and take the economy down with them? For the moment, conditions appear favorable for avoiding a crash. Housing starts are trending higher and rising prices may encourage some homeowners to sell. Moreover, mortgage default rates are low and household debt levels are manageable. Total mortgage debt outstanding is $14.4 trillion, about $400 billion below the record set in 2008. Any increase in mortgage interest rates would dampen demand. Household finances should be able to weather a fairly large price drop.” 

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

May 2017 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in May at a seasonally adjusted annual rate (SAAR) of 1,092,000 units (1.221 million expected). That was 5.5% (±11.9%)* below the revised April estimate of 1,156,000 (originally 1.172 million units) and 2.4% (±11.4%)* below the May 2016 SAAR of 1,119,000; the not-seasonally adjusted YoY change (shown in the table above) was -2.6%.

Single-family housing starts in May were at a SAAR of 794,000; that is 3.9% (±10.4%)* below the revised April figure of 826,000 but +9.4% YoY. Multi-family starts: 298,000 units (-9.7% MoM; -26.7% YoY).

* 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 completions amounted to 1,164,000 units. That was 5.6% (±9.2%)* above the revised April estimate of 1,102,000 and 14.6% (±10.9%) above the May 2016 SAAR of 1,016,000; the NSA comparison: +15.8% YoY.

Single-family completions were at a SAAR of 817,000; that was 4.9% (±11.6%)* above the revised April rate of 779,000 and +14.0% YoY. Multi-family completions: 347,000 units (+7.4% MoM; +20.6% YoY). 

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Total permits were at a SAAR of 1,168,000 (1.249 million expected). This is 4.9% (±0.9%) below the revised April rate of 1,228,000 (originally 1.229 million) and 0.8% (±1.1%)* below the May 2016 SAAR of 1,178,000; the NSA comparison: +2.4% YoY.

Single-family permits: 779,000; this is 1.9% (±1.0%) below the revised April figure of 794,000 but +10.9% YoY. Multi-family: 389,000 (-10.4% MoM; -14.6% YoY). 

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Builder confidence in the market for newly-built single-family homes weakened slightly in June, down two points to a level of 67 from a downwardly revised May reading of 69 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

“Builder confidence levels have remained consistently sound this year, reflecting the ongoing gradual recovery of the housing market,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, Texas. 

“As the housing market strengthens and more buyers enter the market, builders continue to express their frustration over an ongoing shortage of skilled labor and buildable lots that is impeding stronger growth in the single-family sector,” said NAHB Chief Economist Robert Dietz.

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

May 2017 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) was unchanged in May (+0.2% expected) following a large increase in April and smaller increases in February and March. Manufacturing output declined 0.4% in May (+0.2% expected); the index is little changed, on net, since February. The indexes for mining and utilities posted gains of 1.6% and 0.4%, respectively, in May. At 105.0% of its 2012 average, total industrial production in May was 2.2% above its year-earlier level. 

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Industry Groups

Manufacturing output decreased 0.4% in May following a strong gain in April. Factory production has increased 1.4% over the past 12 months. The index for durables fell 0.8% in May, while the index for nondurables edged up 0.1%; the output of other manufacturing (publishing and logging) moved up 0.3%. Almost all major industry groups within durables posted declines (e.g., wood products: -1.4%); within nondurables, a large gain in chemicals outweighed declines in most other industries (e.g., paper products: -0.7%).

Mining output rose 1.6% in May. Production has increased about 1.5% per month, on average, so far this year; the index in May was 8.3% higher than its year-earlier level. Even so, output in May was still 10.0% below its peak in December 2014. The index for utilities advanced 0.4%, as higher output for gas utilities more than offset a small decrease for electric utilities. 

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Capacity utilization (CU) for the industrial sector edged down 0.1 percentage point in May to 76.6%, a rate that is 3.3 percentage points below its long-run (1972–2016) average.

Manufacturing CU declined 0.3 percentage point (-0.4%) in May to 75.5%, a rate that is 2.9 percentage points below its long-run average. Durables recorded a decrease in utilization, while nondurables and other manufacturing (publishing and logging) each posted increases (wood products: -1.4%; paper products: -0.6%). The operating rate for each group remained below its respective long-run average; the greatest shortfall was for other manufacturing. Utilization for mining moved up 1.1 percentage points to 84.3% but remained below its long-run average. The operating rate for utilities rose 0.3 percentage point to 76.6%. 

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Capacity at the all-industries level nudged up 0.1% (+0.8% YoY) to 137.1% of 2012 output. Manufacturing (NAICS basis) inched up +0.1% (+0.8% YoY) to 137.1%. Wood products: +0.0% (+0.4% YoY) to 155.7%; paper products: 0.0% (-1.8% YoY) to 110.2%.

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

May 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 0.1% in May (0.0% expected). A decrease in the energy index was the main contributor to the monthly decrease in the all items index. The energy index fell 2.7%, led by a decline of 6.4% in the gasoline index. The food index rose 0.2%, due to increases in four of the six major grocery store food group indexes.

The index for all items less food and energy rose 0.1% in May, as it did in April. The shelter index increased 0.2% over the month. However, many indexes declined in May, including those for apparel, airline fares, communication, and medical care services.

The all items index rose 1.9% for the 12 months ending May, a smaller increase than the 2.2% rise for the 12 months ending April. This month’s increase is still a larger rise than the 1.6% average annual increase over the past 10 years. The index for all items less food and energy rose 1.7% over the previous 12 months; this compares to a 1.8% average annual increase over the past decade. The energy index rose 5.4% over the last year, while the food index increased 0.9%; rent: +3.8% and medical care services: +2.5%.

Producer Price Index

The seasonally adjusted producer price index for final demand (PPI) was unchanged in May (+0.1 expected). Final demand prices rose 0.5% in April and edged down 0.1% in March. Within final demand in May, a 0.3% increase in the index for final demand services offset a 0.5% decline in prices for final demand goods. Prices for final demand less foods, energy, and trade services fell 0.1% in May, the first decline since a similar 0.1% decrease in May 2016.

On an unadjusted basis, the final demand index increased 2.4% for the 12 months ended in May. By contrast, the index for final demand less foods, energy, and trade services moved up 2.1% YoY.

Final Demand

Final demand services: Prices for final demand services rose 0.3% in May following a 0.4% advance in April. The May increase can be attributed to the index for final demand trade services, which moved up 1.1%. (Trade indexes measure changes in margins received by wholesalers and retailers.) In contrast, prices for final demand services less trade, transportation, and warehousing fell 0.1%, and the index for final demand transportation and warehousing services declined 0.5%.

Product detail: About half of the May increase in the index for final demand services can be traced to margins for fuels and lubricants retailing, which rose 16.1%. The indexes for apparel, footwear, and accessories retailing; machinery and equipment wholesaling; residential real estate loans (partial); automobiles and automobile parts retailing; and food wholesaling also moved higher. Conversely, prices for guestroom rental decreased 5.2%. The indexes for airline passenger services and food retailing also moved lower.

Final demand goods: Prices for final demand goods moved down 0.5% in May, the largest decrease since a 0.6% drop in February 2016. Most of the May decline can be attributed to the index for final demand energy, which fell 3.0%. Prices for final demand foods decreased 0.2%. In contrast, the index for final demand goods less foods and energy edged up 0.1%.

Product detail: The May decrease in the index for final demand goods was led by an 11.2% drop in gasoline prices. The indexes for fresh and dry vegetables, jet fuel, fresh fruits and melons, motor vehicles, and home heating oil also fell. Conversely, the index for pharmaceutical preparations rose 0.6%. Prices for beef and veal and for electric power also increased. 

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With the exception of wood fiber all of the not-seasonally adjusted price indexes we track either 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.

April 2017 International Trade (Softwood Lumber)

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Softwood lumber exports decreased (22 MMBF or -14.9%) in April, while imports rose (86 MMBF or +6.3%). Exports were 4 MMBF (-3.0) below year-earlier levels; imports were 6 MMBF (+0.4%) higher. As a result, the year-over-year (YoY) net export deficit was 10 MMBF (+0.7%) larger. Moreover, the average net export deficit for the 12 months ending April 2017 was 7.1% 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 Canada: 21.2%; Mexico: 20.8%) and Asia (especially China: 18.3%) were the primary destinations for U.S. softwood lumber exports in April. Year-to-date (YTD) exports to China were somewhat higher (+4.5%) relative to the same months in 2016. Meanwhile, Canada was the source of nearly all (95.0%) softwood lumber imports into the United States. Interestingly, imports from Canada are 11.8% lower YTD than the same months in 2016. Overall, YTD exports were up 0.3% compared to 2016, while imports were down 7.8%. 

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U.S. softwood lumber export activity through Eastern customs region represented the largest proportion in April (35.2% of the U.S. total); the West Coast (31.8%) and the Gulf (25.1%) regions followed close behind. However, Seattle maintained a sizeable lead as the single most-active district (20.3% of the U.S. total). At the same time, Great Lakes customs region handled 66.4% of softwood lumber imports -- most notably the Duluth, MN district (28.7%) -- coming into the United States. 

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Southern yellow pine comprised 28.3% of all softwood lumber exports in April, followed by treated lumber (15.9%) and Douglas-fir (13.4%). Southern pine exports were up 3.5% YTD relative to 2016, while Doug-fir exports were down 4.5%; treated: +39.5%.

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.

May 2017 ISM and Markit Surveys

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“Soft” data from the Institute for Supply Management’s (ISM) monthly opinion survey showed that the expansion in U.S. manufacturing was essentially stable in May. The PMI registered 54.9%, up 0.1 percentage point from April. (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. Four of the sub-indexes (new orders, employment, and both inventory categories) had higher values, while six had lower values. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- slowed modestly when retreating by 0.6 percentage point, to 56.9%. Four sub-indexes (employment, inventories, order backlogs, and inventory sentiment) exhibited higher values, while six were lower. 

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Of the industries we track, only Wood Products did not expand. “Our business is definitely paying attention to developments with the Canadian lumber tariff announcement,” wrote one Paper Products respondent. “The final outcome could change our fiber pricing.” A Construction commenter observed that “lumber tariff effects are beginning to show up.” A Public Administration respondent mentioned "continuing to feel [the] effect of overheated commercial construction market -- few bidders, higher prices. Scarce construction labor seems to be the driver."

Relevant commodities --
* Priced higher: Construction trades/subcontractors; corrugate and corrugated boxes; diesel; labor (including general, service, temporary, and construction); lumber; and oil.
* Priced lower: None.
* Prices mixed: Gasoline.
* In short supply: Labor (including general, service, skilled, and construction).

ISM’s and IHS Markit’s surveys diverged in May. Whereas ISM showed stable manufacturing growth, Markit’s manufacturing PMI slipped to and eight-month low. Also, whereas ISM’s NMI fell, Markit’s services PMI accelerated.

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

Manufacturing -- “Manufacturing growth momentum continued to ebb in May, down to its weakest since just before the presidential election.

“Manufacturing output, order books and employment all grew at only modest rates as sluggish sales prompted firms to scale back hiring. Exports sales remained especially lackluster, hampered in part by the relatively strong dollar. The survey also brought signs of companies becoming more cautious about holding inventory.

“Factories’ raw material prices meanwhile rose at a sharply reduced rate, which should at least help take pressure off profit margins and also feed through to weaker pressure on consumer price inflation.”

Services -- “Although service sector business activity picked up in May, the PMI surveys for manufacturing and services collectively indicate only a modest pace of economic growth so far in the second quarter.

“Historical comparisons with GDP indicate the PMI is signaling second quarter GDP growth of just over 2%, suggesting there may be some downside risks to IHS Markit’s current forecast of a GDP growth rebound to just over 3% in the second quarter.

“However, the key message from the PMI is that the economy is enjoying steady, albeit unspectacular, growth, and that the pace of expansion has been slowly lifting higher in recent months.

“Hiring meanwhile remains on a firm footing, with the survey’s employment indicators running at levels consistent with around 160,000 jobs added to the economy in May.

“In another sign of the economy’s underlying steady expansion, average prices charged for goods and services is running at the second highest in almost two years, indicating that rising demand is helping restore some pricing power.”

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 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 $470.8 billion in April. Shipments of durable goods decreased $0.9 billion or 0.4% to $232.8 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased $1.0 billion or 0.4% to $238.0 billion, led by food products. Shipments of Wood and Paper fell by 0.4% and 1.1%, respectively. 

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Inventories increased $0.5 billion or 0.1% to $649.7 billion. The inventories-to-shipments ratio was 1.38, unchanged from March. Inventories of durable goods increased $0.7 billion or 0.2% to $394.6 billion, led by primary metals. Nondurable goods inventories decreased $0.2 billion or 0.1% to $255.1 billion, led by beverage and tobacco products. Inventories of Wood and Paper expanded by 0.4% and 0.1%, respectively. 

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New orders decreased $0.8 billion or 0.2% to $469.0 billion. Excluding transportation, new orders ticked higher (+0.1% MoM; +4.9% YoY). Durable goods orders decreased $1.8 billion or 0.8% to $231.0 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- also rose fractionally (+0.1% MoM; +1.7% YoY). Business investment spending contracted on a YoY basis during all but three months since January 2015 (inclusive). New orders for nondurable goods increased $1.0 billion or 0.4% to $238.0 billion.

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 49% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders increased $2.4 billion or 0.2% to $1,123.0 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.84, up from 6.81 in March. 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 gradually declined; not only are they back below the December 2008 peak, but they are also diverging farther from 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.

May 2017 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment added 138,000 jobs in May -- well below expectations of +185,000. In addition, combined March and April employment gains were revised down by 66,000 (March: -29,000; April: -37,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) edged down to 4.3% as the number of persons leaving the labor force (429,000) also caused the number of unemployed to shrink (-195,000). 

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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 May, there is some evidence pointing to such a conclusion. Imputed jobs from the CES (business birth/death model) adjustment were the second-highest in the range of values for the month of May since 2000. However, the BLS also applied a slightly below-average seasonal adjustment to the base data of any May since 2000. Had average adjustments been used, May’s job gains might have been closer to just +84,000.

* The disparity between the household (-233,000) and establishment (+138,000) surveys was again quite wide. As analyst Steven Hansen often points out, “From a survey control point of view, the common element [between the two surveys] is jobs growth -- and if they do not match, your confidence in either survey is diminished.”

* As for industry details, Manufacturing lost 1,000 jobs in May. Wood Products employment fell by 2,400 jobs; Paper and Paper Products: -500. Construction employment advanced by 11,000.

* Nearly 58% (84,800) of May’s private-sector job growth occurred in the sectors typically associated with the lowest-paid jobs -- Retail Trade: -6,100; Temporary Help Services: +12,900; Education & Health Services: +47,000; and Leisure & Hospitality: +31,000. This is a persistent issue, as we have repeatedly highlighted: There are over 1.3 million fewer manufacturing jobs today than at the start of the Great Recession in December 2007, but 2.0 million more Food Services & Drinking Places (i.e., wait staff and bartender) jobs. In fact, Manufacturing has gained 55,000 jobs YTD2017 while FS&D jobs have expanded by 123,100. 

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* The number of employment-age persons not in the labor force (NILF) jumped up by 608,000 -- to 95.0 million. May’s NILF estimate is within 0.1% of December 2016’s record high. Meanwhile, the employment-population ratio (EPR) decreased to 60.0%; thus, for every five people being added to the population, only three are employed. 

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* Given the number of people exiting the labor force, the labor force participation rate (LFPR) ticked down to 62.7% -- comparable to levels seen in the late-1970s. Average hourly earnings of all private employees increased by $0.04, to $26.22, resulting in a 2.5% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.03, to $22.00 (+2.4% YoY). Since the average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours, average weekly earnings increased by $1.38, to $901.97 (+2.5% YoY). With the consumer price index running at an annual rate of 2.2% in April, workers are holding steady in terms of purchasing power. 

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* Full-time jobs tumbled by 367,000. 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 53,000. There are now over 3.7 million more full-time jobs than the pre-recession high; for perspective, however, the non-institutional, working-age civilian population has risen by over 21.6 million). Those holding multiple jobs dropped by 94,000. 

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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 May rose by $7.0 billion, to $197.6 billion (+3.7% MoM and +6.3% 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 May was 6.4% 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.

May 2017 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil fell back, by $2.57 or 5.0%, to $48.49 per barrel in May. The decrease occurred despite a weaker U.S. dollar, the lagged impacts of a 845,000 barrel-per-day (BPD) jump in the amount of oil supplied/demanded in March (to 20.0 million BPD), and a continued decline in accumulated oil stocks (to 510 million barrels). 

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“OPEC and non-OPEC members secured a nine-month extension of their [production-cut] deal,” wrote Oilprice.com Editor Tom Kool, “pushing the combined 1.8 million barrels per day in reductions through to the first quarter of 2018. The cohesion among the disparate members was notable, although the markets, hoping for a bullish surprise, were less than impressed. After hinting at deeper cuts or perhaps an extension through the middle of 2018, oil traders were left disappointed. There is evidence that hedge funds and other money managers built up a bullish position ahead of the meeting on the off chance that OPEC would surprise the market with more aggressive action. Once that was off the table, there was a selloff in crude positions. OPEC officials shrugged off the price drop, arguing that they can’t be concerned with daily price movements.”

Another contributing factor to the price decline was the Trump administration’s budget proposal to sell up to half of the U.S. strategic oil reserves during the next decade. 

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“Oil analysts expect that with the OPEC extension finalized, the drawdown in crude oil inventories will accelerate this year,” Kool continued. “The U.S. has already seen a drop off in storage, but the weekly declines could grow larger. Some traders, according to Reuters, predict that the drawdowns could jump as high as 10 million barrels per week, while those that are more cautious suggest declines on the order of 3 to 4 million barrels. ‘I think we'll easily get below 500 million barrels over the next six to eight weeks, or eight to 10 to be conservative,’ said Andrew Lebow, senior partner at Commodity Research Group. That would be down from the record high of 533 million barrels hit in March.”

On the other hand, argues Daniel Yergin, vice chairman of IHS Markit, the price drop between mid-2014 and the end of 2015 forced producers to become “more efficient, focused and innovative. A new well that might have cost $14 million in 2014 now costs $7 million. The gain in efficiency is so great that a dollar invested in U.S. shale today will produce about 2.5 times as much oil as a dollar invested in 2014.

“In 2014, many thought a drop in price to $70 a barrel from $100 would shut down U.S. production. It didn't. Today, new shale oil wells can be profitable at $40 to $50 a barrel, and some companies claim even lower. That makes possible a new surge in U.S. production -- as much as 900,000 additional barrels a day over the course of this year. By next year, the U.S. is likely to hit the highest level of oil production in its entire history.

“As drilling increases, tightness and bottlenecks are starting to become apparent in terms of manpower, supplies and equipment…[and] so oil prices will rise. But the entire business has been recalibrated to a lower price level. An industry that had become accustomed a few years ago to $100 oil now regards that as an aberration that will not recur absent an international crisis or a major disruption. The lessons about costs since the price collapse are not going to go away,” Yergin concluded. “They are too powerful to forget, and too painful.”

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

May 2017 Currency Exchange Rates

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In May the monthly average value of the U.S. dollar appreciated against two of the three major currencies we track: +1.3% against Canada’s “loonie” and 2.1% against the yen; it depreciated, however, against the euro (-2.9%). On a trade-weighted index basis, the dollar weakened by 0.3% against a basket of 26 currencies. 

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