2Q2017 Gross Domestic Product: First (“Advance”) Estimate

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In its advance (first) estimate of 2Q2017 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 +2.56% (in line with expectations), up 1.14 percentage points (PP) from 1Q2017’s +1.24%. The 1Q rate was revised lower (from +1.42% reported in June) as part of annual revisions going back to 1Q2014.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 2Q2017 was +2.08% relative to 2Q2016; that was marginally higher than 1Q2017’s +2.00% relative to 1Q2016.

All four groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), net exports (NetX), and government consumption expenditures (GCE) -- contributed to 2Q growth. 

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Consumer spending accelerated in 2Q2017 (+1.93%), up 1.18 PP from 1Q and very similar to 4Q2016. The inventory contraction of 1Q essentially disappeared (-0.02%), but so too did much of the previous robust growth in commercial fixed investment (+0.36%, down from 1.27% in 1Q). Governmental spending rose slightly (+0.12%), reversing the prior quarter's contraction; and the growth rates for both exports (+0.48%) and imports (-0.31%) moderated.

At +2.58%, real final sales of domestic product -- the BEA's "bottom line" indicator that excludes the influence of inventories -- was nearly unchanged from the revised 1Q estimate.

For 2Q the BEA assumed an effective annualized deflator of 1.01%; inflation recorded concurrently by the Bureau of Labor Statistics (BLS) in its CPI-U index was only 0.06%. Overestimating inflation results in pessimistic growth rates; had the BEA's "nominal" data been deflated using CPI-U inflation information, the headline growth number would have been a materially higher +3.53%.

Although it is too soon to know for sure whether this somewhat more robust growth has any staying power, Consumer Metric Institute’s Rick Davis believes “this report should provide the Federal Reserve with the data needed to justify moving forward with their [monetary-policy] ‘normalization’ campaign.”

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

June 2017 Residential Sales, Inventory and Prices

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Sales of new single-family houses in June 2017 were at a seasonally adjusted annual rate (SAAR) of 610,000 (612,000 expected). This is 0.8% (±12.1%)* above the revised May rate of 605,000 (originally 610,000 units) and 9.1% (±14.4%)* above the June 2016 SAAR of 559,000; the not-seasonally adjusted year-over-year comparison (shown in the table above) was +10.0%. For a longer-term perspective, sales were 56.1% below the “housing bubble” peak but 10.0% above the long-term, pre-2000 average.

The median sales price of new houses sold in June 2017 was $310,800 (-$13,500 or 4.2% MoM). The average sales price was $379,500 (-$1,900 or 0.5% MoM). Starter homes (defined here as those priced below $200,000) comprised 14.6% of the total sold, up from June 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 3.6% of those sold in June, a proportion nearly double that of a year earlier (2.0%).

* 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 June, single-unit completions rose by 3,000 units (+0.4%). Although the increase in completions was eclipsed by that of sales, new-home inventory expanded in both absolute (+3,000 units) and months-of-inventory terms (+0.1 month). 

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Existing home sales fell by 100,000 units (-1.8%) in June, to a SAAR of 5.520 million units (5.580 million expected). Inventory of existing homes shrank in absolute terms (-10,000 units) but expanded in months-of-inventory (+0.1 month) terms. With new-home sales increasing and existing-home sales decreasing, the share of total sales comprised of new homes rose to 10.0%. The median price of previously owned homes sold in June increased by $11,300 (+4.5% MoM), to a new all-time high of $263,800. 

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Housing affordability deteriorated for a seventh month as the median price of existing homes for sale in May jumped by $8,300 (+3.4%; +6.0 YoY), to $254,600. 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 +1.0% (+5.6% YoY) -- marking the sixth consecutive all-time high for the index.

“Home prices continue to climb and outpace both inflation and wages,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Housing is not repeating the bubble period of 2000-2006: price increases vary across the country unlike the earlier period when rising prices were almost universal; the number of homes sold annually is 20% less today than in the earlier period and the months’ supply is declining, not surging. The small supply of homes for sale, at only about four months’ worth, is one cause of rising prices. New home construction, higher than during the recession but still low, is another factor in rising prices.

“For the last 19 months, either Seattle or Portland OR was the city with fastest rising home prices based on 12-month gains. Since the national index bottomed in February 2012, San Francisco has the largest gain. Using Census Bureau data for 2011 to 2015, it is possible to compare these three cities to national averages. The proportion of owner-occupied homes is lower than the national average in all three cities with San Francisco being the lowest at 36%, Seattle at 46%, and Portland at 52%. Nationally, the figure is 64%. The key factor for the rise in home prices is population growth from 2010 to 2016: the national increase is 4.7%, but for these cities, it is 8.2% in San Francisco, 9.6% in Portland and 15.7% in Seattle. A larger population combined with more people working leads to higher home prices.” 

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

June 2017 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in June at a seasonally adjusted annual rate (SAAR) of 1,215,000 units (1.270 million expected). That is 8.3% (±15.8%)* above the revised May estimate of 1,122,000 (originally 1.092 million units) and 2.1% (±14.0%)* above the June 2016 SAAR of 1,190,000; the not-seasonally adjusted YoY change (shown in the table above) was +4.7%.

Single-family housing starts in June were at a SAAR of 849,000; that is 6.3% (±13.5%)* above the revised May figure of 799,000 and +10.8% YoY. Multi-family starts: 366,000 units (+13.3% MoM; -7.9% 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 1,203,000 units. That is 5.2% (±13.9%)* above the revised May estimate of 1,144,000 and 8.1% (±13.9%)* above the June 2016 SAAR of 1,113,000; the NSA comparison: +9.0% YoY.

Single-family housing completions were at a SAAR of 798,000; this is 0.4% (±11.0%)* above the revised May rate of 795,000 and +5.2% YoY. Multi-family completions: 405,000 units (+16.0% MoM; +16.9% YoY). 

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Total permits were at a SAAR of 1,254,000 (1.206 million expected). This is 7.4% (±1.1%) above the revised May rate of 1,168,000 and 5.1% (±1.4%) above the June 2016 rate of 1,193,000; the NSA comparison: +6.6% YoY.

Single-family authorizations were at a SAAR of 811,000; this is 4.1% (±0.8%) above the revised May figure of 779,000 and +8.9% YoY. Multi-family: 443,000 (+13.9% MoM; -2.6% YoY). 

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Builder confidence in the market for newly-built single-family homes slipped two points in July to a level of 64 from a downwardly revised June reading on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). It is the lowest reading since November 2016.

“Our members are telling us they are growing increasingly concerned over rising material prices, particularly lumber,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, Texas. “This is hurting housing affordability even as consumer interest in the new-home market remains strong.”

“The HMI measure of current sales conditions has been at 70 or higher for eight straight months, indicating strong demand for new homes,” said NAHB Chief Economist Robert Dietz. “However, builders will need to manage some increasing supply-side costs to keep home prices competitive.”

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 International Trade (Softwood Lumber)

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Softwood lumber exports increased (8 MMBF or +6.6%) in May, while imports fell (203 MMBF or -13.9%). Exports were 1 MMBF (+0.5) above year-earlier levels; imports were 351 MMBF (-21.9%) lower. As a result, the year-over-year (YoY) net export deficit was 352 MMBF (+23.9%) larger. Moreover, the average net export deficit for the 12 months ending May 2017 was just 0.8% 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: 21.8%; Mexico: 21.7%) and Asia (especially China: 17.8%) were the primary destinations for U.S. softwood lumber exports in May. Year-to-date (YTD) exports to China were somewhat higher (+6.3%) relative to the same months in 2016. Meanwhile, Canada was the source of most (92.5%) of softwood lumber imports into the United States. Interestingly, imports from Canada are 13.5% lower YTD than the same months in 2016. Overall, YTD exports were up 0.3% compared to 2016, while imports were down 10.8%. 

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U.S. softwood lumber export activity through Eastern customs region represented the largest proportion in May (34.6% of the U.S. total), followed by the West Coast (33.6%) and the Gulf (24.6%) regions. However, Seattle maintained a sizeable lead as the single most-active district (21.8% of the U.S. total). At the same time, Great Lakes customs region handled 64.8% of softwood lumber imports -- most notably the Duluth, MN district (28.9%) -- coming into the United States. 

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Southern yellow pine comprised 26.9% of all softwood lumber exports in May, followed by treated lumber (14.9%) and Douglas-fir (15.7%). Southern pine exports were up 1.1% YTD relative to 2016, while Doug-fir exports were up 0.7%; treated: +38.9%.

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.

June 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) was unchanged in June (+0.1% expected). The energy index declined again in June, falling 1.6%; this offset an increase in the index for all items less food and energy. All the major energy component indexes declined, with the gasoline index falling 2.8%. The food index was unchanged in June, with the index for food at home declining slightly as five of the six major grocery store food group indexes decreased. 

The index for all items less food and energy rose 0.1% in June, its third straight such increase. The shelter index continued to rise, and the indexes for medical care, motor vehicle insurance, education, and personal care also increased. The indexes for airline fares, used cars and trucks, wireless telephone services, and new vehicles were among the indexes that declined in June. 

The all items index rose 1.6% for the 12 months ending June; this measure has been declining steadily since February, when it was 2.7%. The index for all items less food and energy rose 1.7% for the 12 months ending June, the same increase as for the 12 months ending May. The energy index rose 2.3% over the last year, while the food index increased 0.9%. Rent rose 3.9% YoY; health insurance: +1.7%.

Producer Price Index

The seasonally adjusted producer price index for final demand (PPI) increased 0.1% in June (0.0 expected). Final demand prices were unchanged in May and rose 0.5% in April. In June, almost 80% of the rise in the final demand index is attributable to prices for final demand services, which increased 0.2%. The index for final demand goods edged up 0.1%.

The final demand index advanced 2.0% for the 12 months ended in June. Prices for final demand less foods, energy, and trade services increased 0.2% in June. For the 12 months ended in June, the index for final demand less foods, energy, and trade services advanced 2.0%.

Final Demand

Final demand services: Prices for final demand services moved up 0.2% in June, the fourth consecutive increase. Most of the June rise can be attributed to a 0.3% advance in the index for final demand services less trade, transportation, and warehousing. Prices for final demand transportation and warehousing services edged up 0.1%. In contrast, the index for final demand trade services moved down 0.2%. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail: A major factor in the June increase in the index for final demand services was prices for securities brokerage, dealing, investment advice, and related services, which rose 4.0%. The indexes for machinery and equipment wholesaling, loan services (partial), insurance, inpatient care, and truck transportation of freight also advanced. Conversely, margins for apparel, footwear, and accessories retailing declined 3.7%. The indexes for motor vehicle maintenance and repair (partial) and for airline passenger services also fell.

Final demand goods: Prices for final demand goods edged up 0.1% in June, after falling 0.5% in the previous month. Most of the June advance can be attributed to the index for final demand foods, which climbed 0.6%. Prices for final demand goods less foods and energy inched up 0.1%. In contrast, the index for final demand energy declined 0.5%.

Product detail: Leading the June advance in the index for final demand goods, prices for meats increased 5.5%. The indexes for pharmaceutical preparations, light motor trucks, young chickens, potatoes, and butter also moved higher. Conversely, prices for gasoline moved down 1.1%. The indexes for fresh vegetables (except potatoes), plastic resins and materials, and unprocessed finfish also fell. 

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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.

June 2017 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) rose 0.4% in June (+0.3% expected) for its fifth consecutive monthly increase. Manufacturing output moved up 0.2% (+0.2% expected); although factory output has gone up and down in recent months, its level in June was little different from February. The index for mining posted a gain of 1.6% in June, just slightly below its pace in May. The index for utilities, however, remained unchanged. At 105.2% of its 2012 average, total IP in June was 2.0% above its year-earlier level.  

For 2Q as a whole, total IP advanced at an annual rate of 4.7%, primarily as a result of strong increases for mining and utilities. Manufacturing output rose at an annual rate of 1.4%, a slightly slower increase than in 1Q. 

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Industry Groups

Manufacturing output moved up 0.2% in June following a decline in May. The production of durables advanced 0.4%, while the indexes for nondurables and for other manufacturing (publishing and logging) were little changed. Nearly all major industry groups within durables posted gains (e.g., wood products: +1.4%). Within nondurables, plastic and rubber products registered an increase of more than 1%, and apparel and leather recorded a decrease of more than 1%; the other major components of nondurables posted gains or losses of 0.5% or less (e.g., paper products: +0.2%).

The index for mining recorded a second consecutive gain of more than 1.5% in June, with advances in oil and gas extraction, in coal mining, and in drilling and support activities. Although mining production was 9.9% higher than its year-earlier level, it was still 9.0% below its peak in December 2014. After jumping 14.1% at an annual rate in 1Q, the index for mining increased at the same pace in 2Q. The output of utilities was unchanged in June, as a decrease for gas utilities was offset by an increase for electric utilities. 

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Capacity utilization (CU) for the industrial sector increased 0.2 percentage point (+0.3%) in June to 76.6 percent, a rate that is 3.3 percentage points below its long-run (1972–2016) average.

Manufacturing CU rose 0.1 percentage point in June to 75.4%, a rate that is 3.0 percentage points below its long-run average. The operating rates for durables and for other manufacturing (publishing and logging) each advanced, while the rate for nondurables remained unchanged (wood products: +1.3%; paper products: +0.2%). Capacity utilization for all three of these major components of manufacturing remained below their respective long-run averages, with the deficit being the greatest for other manufacturing. Utilization for mining moved up 1.1 percentage points to 84.8% in June but remained below its long-run average. The operating rate for utilities was unchanged at 76.4%. 

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After revisions to estimates of 2017 capacity in June’s report, capacity at the all-industries level nudged up 0.1% (+1.0% YoY) to 137.3% of 2012 output. Manufacturing (NAICS basis) inched up +0.1% (+0.9% YoY) to 137.2%. Wood products: +0.0% (+0.6% YoY) to 156.1%; paper products: 0.0% (-1.4% YoY) to 110.4%.

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.

June 2017 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment added 222,000 jobs in June -- well above expectations of +177,000. In addition, combined April and May employment gains were revised up by 47,000 (April: +33,000; May: +14,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) edged up to 4.4% as expansion of the labor force (361,000) exceeded growth in the number of persons employed (+245,000). 

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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 June, there is little evidence pointing to such a conclusion. While imputed jobs from the CES (business birth/death model) adjustment were below the average of values for the month of June since 2000, the BLS also applied a slightly above-average seasonal adjustment to the base data of any June since 2000. Had average adjustments been used, June’s job gains might have been roughly +280,000. Moreover, the disparity between the household (+245,000) and establishment (+222,000) surveys was relatively minor for a change.

* As for industry details, Manufacturing gained 1,000 jobs in June. That result is reasonably consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded at a faster pace in June. Wood Products employment fell by 2,200 jobs; Paper and Paper Products: -2,800. Construction employment advanced by 16,000 -- which mirrors construction employment trends in ISM’s services report.

* Nearly 43% (80,100) of June’s private-sector job growth occurred in the sectors typically associated with the lowest-paid jobs -- Retail Trade: +8,100; Temporary Help Services: +13,400; Social Assistance: +22,600; and Leisure & Hospitality: +36,000. This is a persistent issue, as we have repeatedly highlighted: There are 1.35 million fewer manufacturing jobs today than at the start of the Great Recession in December 2007, but 2.03 million more Food Services & Drinking Places (i.e., wait staff and bartender) jobs. In fact, Manufacturing has gained 53,000 jobs YTD2017 while FS&D jobs have expanded by 154,900. 

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* The number of employment-age persons not in the labor force (NILF) retreated by 170,000 -- to 94.8 million. June’s NILF estimate is within 0.3% 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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* Given the number of people (re)entering the labor force, the labor force participation rate (LFPR) ticked up to 62.8% -- comparable to levels seen in the late-1970s. Average hourly earnings of all private employees increased by $0.04, to $26.25, resulting in a 2.5% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.04, to $22.03 (+2.3% YoY). Since the average workweek for all employees on private nonfarm payrolls inched up (+0.1 hour) to 34.5 hours, average weekly earnings increased by $4.01, to $905.63 (+2.8% YoY). With the consumer price index running at an annual rate of 1.9% in May, workers are – officially, at least -- holding steady in terms of purchasing power. 

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* Full-time jobs gained 355,000; there are now roughly 4.1 million more full-time jobs than the pre-recession high; for perspective, however, the non-institutional, working-age civilian population has risen by over 21.8 million. Those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- rose by 107,000. Those holding multiple jobs edged up by 50,000. 

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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 June fell by $1.9 billion, to $195.6 billion (-1.0% MoM, but +3.3% 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 June 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.

June 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 again in June, falling by $3.30 (-6.8%) to $45.18 per barrel. The decrease occurred despite a weaker U.S. dollar, the lagged impacts of a 506,000 barrel-per-day (BPD) drop in the amount of oil supplied/demanded in April (to 19.7 million BPD), and a continued decline in accumulated oil stocks (to 503 million barrels). 

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“While last week's U.S. stocks report showed a small increase in the total U.S. crude inventory, traders focused on a 900,000 barrel drop in U.S. gasoline inventories and what the EIA says was a 100,000 b/d drop in U.S. oil production the week before last,” wrote ASPO-USA’s Peak Oil Review Editor Tom Whipple on July 3. “Analysts say that a major storm in the Gulf that week and lower production in Alaska due to maintenance were likely to be the cause of any decline in U.S. oil production.

“With U.S. oil prices still in the mid-$40s, there are still questions as the how long the U.S. shale oil industry can continue to grow with oil selling for less than the cost for many drillers. Last week the U.S. oil-rig count dropped for the first time since January, even if it was only by two units.  Optimists concede that oil prices need to be above $50 a barrel for all but the most efficient shale oil operators or large companies that have other more profitable sources of revenue.” 

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Selected June 30 news items from Oilprice.com Editor Tom Kool include the following:

Goldman slashes oil price forecast by $7.50 per barrel. This week, Goldman Sachs lowered its three-month estimate for WTI prices from $55 per barrel to $47.50, citing higher production from Libya and Nigeria, as well as the ramp up in U.S. shale drilling. Nonetheless, the investment bank says that the oil market is still moving towards balance, even if slowly. Inventories are falling, demand is rising, and OPEC could do more to cut -- and Goldman says it should.

Libyan production approaches 1 million barrels per day. Libya's output has broken a new multi-year high, rising above 950,000 bpd, according to Reuters. That's up from 935,000 bpd last week. A Libyan source told Reuters that production is fluctuating and coming "close to" 1 million barrels per day. Rising Libyan output is undermining the effectiveness of the OPEC deal.

Keystone XL no longer needed. The Wall Street Journal reports that TransCanada is having trouble finding customers for the capacity in its proposed Keystone XL pipeline. TransCanada has already spent $3 billion on materials, land rights and legal fees, with little to show for it. The support from the Trump administration may not matter if it can't ink deals with customers. The 830,000 barrel-per-day pipeline would cost $8 billion and TransCanada says it wants to secure sales for 90 percent of the pipeline's capacity before it moves forward. But refiners along the Gulf Coast are not as desperate for high-cost Canadian crude anymore, particularly since the U.S. is awash in oil. Still, TransCanada says it is still confident it can find buyers.

Imbalance between heavy and light oil markets. OPEC produces a heavier and sourer form of oil while the U.S., Libya and Nigeria produce lighter and sweeter varieties. This difference is leading to tighter supply conditions in the medium sour market while a glut persists in the light sweet market, according to S&P Global Platts. The disparity presents a dilemma for OPEC. Deeper cuts will tighten the medium sour market further, but it would have a diminished effect on global oil prices, which are more closely linked to light oil. Also, global refiners are switching to lighter forms of oil to take advantage of abundant supply, meaning that OPEC risks losing more customers if it makes deeper cuts.

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

June 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 quickened in June. The PMI registered 57.8%, up 2.9 percentage points from May. (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. Only two (inventories and input prices) of the 11 sub-indexes 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 -- quickened modestly when advancing by 0.5 percentage point, to 57.4%. Three (employment, order backlogs, and inventory sentiment) of the 11 sub-indexes exhibited lower values. 

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All of the industries we track expanded. “Labor continues to be constrained in the construction industry, driving cost increases," observed one Construction respondent.

Relevant commodities --
* Priced higher: Construction trades subcontractors; diesel; labor (construction and temporary); paper; linerboard; corrugate; corrugated boxes.
* Priced lower: Lumber and plywood (pine and spruce); crude oil; natural gas.
* Prices mixed: Gasoline.
* In short supply: Labor (general, construction, services, and temporary).

Consistency among ISM’s and IHS Markit’s surveys was mixed in June. Whereas ISM showed faster manufacturing growth, Markit’s manufacturing PMI eased to a nine-month low. Both ISM’s NMI and Markit’s services PMI accelerated, however.

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

Manufacturing -- “Manufacturers reported a disappointing end to the second quarter, with few signs of growth picking up any time soon.

“The PMI has been sliding lower since the peak seen in January and the June reading points to a stagnation -- at best -- in the official manufacturing output data.

“The survey’s employment index meanwhile suggests that factories will make little or no contribution to non-farm payroll growth in June.

“Forward looking indicators -- notably a further slowdown in inflows of new business to a nine-month low and a sharp drop in the new orders to inventory ratio -- suggest that the risks are weighted to the downside for coming months.

“Any good news was saved for inflation, with price pressures easing substantially in June on the back of waning global commodity prices.”

Services -- “The final PMI numbers came in higher than the initial flash reading and provide news of a welcome uptick in the pace of growth in the vast services economy at the end of the second quarter.

“The services data follow news from the sister manufacturing survey showing steady but unspectacular growth in US factories.

“Looking at the combined performance of manufacturing and services, output, order books and employment all gained momentum in June, and average prices charged for goods and services rose at the fastest rate for nearly three years.

“However, the average all-sector PMI reading for the second quarter is down slightly on the first quarter, suggesting that the underlying pace of economic growth remains somewhat subdued though still robust. The surveys are historically consistent with annualized GDP growth of just over 2%. Actual GDP data are expected to show a stronger rebound, though largely reflecting volatile quarterly seasonal variations in the official data.”

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

May 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 $0.6 billion or 0.1% to $471.5 billion in May. Shipments of durable goods increased $2.4 billion or 1.0% to $235.8 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $1.8 billion or 0.8% to $235.7 billion, led by petroleum and coal products. Shipments of wood products fell by 1.8% while paper rose 0.7%. 

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Inventories decreased $0.3 billion or 0.1% to $648.9 billion. The inventories-to-shipments ratio was 1.38, unchanged from April. Inventories of durable goods increased $0.9 billion or 0.2% to $395.8 billion, led by primary metals. Nondurable goods inventories decreased $1.3 billion or 0.5% to $253.1 billion, led by petroleum and coal products. Inventories of wood products expanded by 0.5% while paper contracted 0.4%. 

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New orders decreased $3.7 billion or 0.8% to $464.9 billion. Excluding transportation, new orders fell (-0.3% MoM; +6.8% YoY). Durable goods orders decreased $1.9 billion or 0.8% to $229.1 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- also rose modestly (+0.2% MoM; +6.9% YoY). Business investment spending has expanded for three consecutive months. New orders for nondurable goods decreased $1.8 billion or 0.8% to $235.7 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 47% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders decreased $2.3 billion or 0.2% to $1,120.2 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.75, down from 6.83 in April. Real unfilled orders, which had been a good litmus test for sector growth, show a much different picture; in real terms, unfilled orders in June 2014 were back to 97% of their December 2008 peak. Real unfilled orders jumped to 122% of the prior peak in July 2014, thanks to the largest-ever batch of aircraft orders. Since then, however, real unfilled orders have gradually declined; not only are they back below the December 2008 peak, but they continue to diverge 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.

June 2017 Currency Exchange Rates

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In June the monthly average value of the U.S. dollar depreciated “across the board” of the three major currencies we track: Canada’s “loonie” (-2.3%), euro (-1.6%) and yen (-1.2%). On a trade-weighted index basis, the dollar weakened by 1.3% 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.