3Q2017 Gross Domestic Product: Second Estimate

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In its second estimate of 3Q2017 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) lifted the growth rate of the U.S. economy to a seasonally adjusted and annualized rate (SAAR) of +3.30% (in line with consensus expectations), up +0.32 percentage point (PP) from the “advance” estimate and +0.24 PP from the prior quarter.

In the latest report, all four groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), net exports (NetX), and government consumption expenditures (GCE) -- contributed to 3Q growth. The changes from the prior 3Q estimate reflect higher commercial fixed investment, higher inventory growth, more government spending and improved foreign trade. Consumer spending was essentially neutral. As for details:

-- Consumers’ contribution to the headline number was +1.62%, down 0.62 PP from 2Q. Spending on goods was slightly weaker at +0.89% (down 0.27 PP from 2Q); spending on services was essentially static at +0.71% (down 0.38 PP from 2Q).

-- The headline contribution from commercial private fixed investments increased to +0.39%, up 0.14 PP from the previous estimate but still down -0.14% from the prior quarter. That continued to reflect a contraction in residential construction.

-- Inventory growth provided a material boost to the headline number (+0.80%) -- a 0.68 PP improvement from 2Q.

-- Governmental spending was revised to show a +0.07% growth rate; that was a +0.10 PP improvement from 2Q.

-- Trade added 0.44% to 3Q’s headline. Exports contributed 0.27% (-0.15 PP from 2Q); Imports added +0.17% (+0.39 PP from 2Q). 

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“The improved headline growth rate comes from upward revisions to commercial fixed investment and inventories. Consumer activity did not materially impact this revision,” concluded Consumer Metric Institute’s Rick Davis. “A happy headline number that results from inventory buildups and consumer spending from diminished savings merits at least some caution, particularly whilst listening to the ongoing ‘growing economy’ narrative that fully anticipates a banner holiday spending season.”

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

October 2017 Residential Sales, Inventory and Prices

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Sales of new single-family houses in October 2017 were at a seasonally adjusted annual rate (SAAR) of 685,000 units (620,000 expected). This is 6.2% (±18.0%)* above the revised September rate of 645,000 (originally 667,000 units) and 18.7% (±23.5%)* above the October 2016 SAAR of 577,000 units; the not-seasonally adjusted year-over-year comparison (shown in the table above) was +19.6%. For longer-term perspectives, sales were 50.7% below the “housing bubble” peak and 5.2% above the long-term, pre-2000 average.

The median sales price of new houses sold was $312,800 (-$12,100 or 3.7% MoM); meanwhile, the average sales price set a new record of $400,200 (+$19,100 or 5.0%). Declining median and rising average prices suggest much of the sales activity was at the upper end of the price spectrum; indeed, sales of homes priced at or above $400,000 were at their highest since August 2006. Starter homes (defined here as those priced below $200,000) comprised 12.7% of the total sold, down from the year-earlier 17.4%; 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 October, up from the year-earlier (2.2%).

* 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 October, single-unit completions rose by 20,000 units (+2.6%). The increase in completions was eclipsed by that of sales (+40,000 units; +6.2%); oddly, new-home inventory expanded in absolute terms (+4,000 units) while contracting in months-of-inventory terms (-0.3 month). 

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Existing home sales rose by 110,000 units (+2.0%) in October, to a SAAR of 5.480 million units (5.425 million expected). Inventory of existing homes shrank in both absolute (-60,000 units) and months-of-inventory (-0.3 month) terms. Because new-home sales increased proportionally more quickly than existing-home sales, the share of total sales comprised of new homes ticked higher, to 11.1%. The median price of previously owned homes sold in October decreased by $600 (-0.2% MoM). 

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Housing affordability improved marginally as the median price of existing homes for sale in September fell by $8,000 (-3.1%; +4.2 YoY), to $246,800. 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 +0.4% (+6.2% YoY) -- marking a new all-time high for the index.

“Home prices continued to rise across the country with the S&P CoreLogic Case-Shiller National Index rising at the fastest annual rate since June 2014,” says David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Home prices were higher in all 20 cities tracked by these indices compared to a year earlier; 16 cities saw annual price increases accelerate from last month. Strength continues to be concentrated in the west with Seattle, Las Vegas, San Diego and Portland seeing the largest gains. The smallest increases were in Atlanta, New York, Miami, Chicago and Washington. Eight cities have surpassed their pre-financial crisis peaks.”

“Most economic indicators suggest that home prices can see further gains. Rental rates and home prices are climbing, the rent-to-buy ratio remains stable, the average rate on a 30-year mortgage is still under 4%, and at a 3.8-month supply, the inventory of homes for sale is still low. The overall economy is growing with the unemployment rate at 4.1%, inflation at 2% and wages rising at 3% or more. One dark cloud for housing is affordability -- rising prices mean that some people will be squeezed out of the market.” 

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

September 2017 International Trade (Softwood Lumber)

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Softwood lumber exports decreased (13 MMBF or -7.9%) in September, while imports rose (149 MMBF or +12.8%). Exports were 12 MMBF (+9.1%) above year-earlier levels; imports were 26 MMBF (-2.0%) lower. As a result, the year-over-year (YoY) net export deficit was 237 MMBF (-19.1%) lower. Moreover, the average net export deficit for the 12 months ending September 2017 was 9.5% smaller 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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Asia (especially China: 25.3%) and North America (of which Canada: 16.1%; Mexico: 18.2%) were the primary destinations for U.S. softwood lumber exports in September. Not surprisingly, the Caribbean ranked third with an 18.8% share. Year-to-date (YTD) exports to China were +19.6% relative to the same months in 2016. Meanwhile, Canada was the source of most (93.5%) of softwood lumber imports into the United States. Interestingly, imports from Canada are 14.5% lower YTD than the same months in 2016. Overall, YTD exports were up 4.6% compared to 2016, while imports were down 11.6%. 

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U.S. softwood lumber export activity through the Eastern customs region represented the largest proportion in September (38.4% of the U.S. total), followed by the West Coast (30.4%) and the Gulf (25.4%) regions. However, Seattle maintained a small lead (16.5% of the U.S. total) over Mobile (15.7%) and Savannah (14.0%) as the single most-active district. At the same time, Great Lakes customs region handled 64.8% of softwood lumber imports -- most notably the Duluth, MN district (24.9%) -- coming into the United States; interestingly, Seattle and Detroit were tied with 16.2% each. 

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Southern yellow pine comprised 33.7% of all softwood lumber exports in September, followed by treated lumber (13.0%) and Douglas-fir (15.1%). Southern pine exports were up 9.2% YTD relative to 2016, while treated: +28.4%; Doug-fir: +9.2%.

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.

October 2017 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in October at a seasonally adjusted annual rate (SAAR) of 1,290,000 units (1.188 million expected). That is 13.7% (±10.5%) above the revised September estimate of 1,135,000 (originally 1.127 million units), but 2.9% (±10.1%)* below the October 2016 SAAR of 1,328,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -1.9%.

Single-family housing starts in October were at a SAAR of 877,000; this is 5.3% (±12.1%)* above the revised September figure of 833,000 and +2.0% YoY. Multi-family starts: 413,000 units (+36.8% MoM; -9.0% 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 a SAAR of 1,232,000 units. That is 12.6% (±12.2%) above the revised September estimate of 1,094,000 and 15.5% (±11.7%) above the October 2016 SAAR of 1,067,000; the NSA comparison: +15.4% YoY.

Single-family housing completions were at a SAAR of 793,000; that is 2.6% (±11.1%)* above the revised September rate of 773,000 and +4.9% YoY. Multi-family completions: 439,000 units (+36.8% MoM; +43.1% YoY). 

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Total permits were at a SAAR of 1,297,000 units (1.245 million expected). That is 5.9% (±1.4%) above the revised September rate of 1,225,000 and 0.9% (±1.6%)* above the October 2016 SAAR of 1,285,000 units; the NSA comparison: +7.8 YoY.

Single-family authorizations were at a rate of 839,000; this is 1.9% (±1.7%) above the revised September figure of 823,000 and +13.3% YoY. Multi-family: 458,000 (+13.9% MoM; -0.2% YoY). 

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Builder confidence in the market for newly-built single-family homes rose two points to a level of 70 in November on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This was the highest report since March, and the second highest on record since July 2005.

“November’s builder confidence reading is close to a post-recession high -- a strong indicator that the housing market continues to grow steadily,” said NAHB Chairman Granger MacDonald. “However, our members still face supply-side constraints, such as lot and labor shortages and ongoing building material price increases.”

“Demand for housing is increasing at a consistent pace, driven by job and economic growth, rising homeownership rates and limited housing inventory,” said NAHB Chief Economist Robert Dietz. “With these economic fundamentals in place, we should see continued upward movement of the single-family housing market as we close out 2017.” 

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

October 2017 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) rose 0.9% in October (+0.5% expected), and manufacturing increased 1.3% (+0.3% expected). The index for utilities rose 2.0%, but mining output fell 1.3%, as Hurricane Nate caused a sharp but short-lived decline in oil and gas drilling and extraction. Even so, industrial activity was boosted in October by a return to normal operations after Hurricanes Harvey and Irma suppressed production in August and September. Excluding the effects of the hurricanes, the index for total output advanced about 0.3% in October; manufacturing: +0.2%.

With modest upward revisions for July through September, total IP is now estimated to have only edged down 0.3% at an annual rate in 3Q; the previously published estimate showed a decrease of 1.5%. Total IP has risen 2.9% over the past 12 months; output in October was 106.1% of its 2012 average. 

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Industry Groups

Manufacturing output rose 1.3% in October, and upward revisions to previous months reduced the decrease estimated for 3Q to 1.2% at an annual rate. In October, the index for durables increased 0.4%, and the index for nondurables increased 2.3%. Most durable goods industries posted gains, with the largest advance, 1.0%, recorded by motor vehicles and parts (wood products: 0.0%). Gains were also widespread among nondurable goods producers; notably, the return to more normal levels of production following the hurricanes led to jumps of 5.8% for chemicals and 4.0% for petroleum and coal products (paper products: +0.8%).

In October, the decline of 1.3% in mining output reflected reductions in all of its major components. The index for utilities rose 2.0%; output in August was revised up from a drop of 4.9% to a decline of 1.3%, and the rate of change in September was revised down from an increase of 1.5% to a decrease of 1.0%. 

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Capacity utilization (CU) for the industrial sector rose 0.9% to 77.0%, a rate that is 2.9 percentage points below its long-run (1972–2016) average.

Capacity utilization for manufacturing was 76.4% in October, a rate that is 2.0 percentage points below its long-run average. Utilization for durables increased 0.2 percentage point to 75.7%, and the operating rate for nondurables rose 1.7 percentage points to 78.1% (wood products: 0.0%; paper products: +0.8%). The operating rate for mines fell 1.3 percentage points to 82.4%, and the rate for utilities rose 1.5 percentage points to 77.2%. 

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Capacity at the all-industries level nudged up 0.1% (+1.2% YoY) to 137.8% of 2012 output. Manufacturing (NAICS basis) inched up +0.1% (+0.8% YoY) to 137.6%. Wood products: +0.0% (+0.5% YoY) to 156.3%; paper products: 0.0% (-0.5% 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.

October 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) rose 0.1% in October (+0.1% expected). The shelter index increased 0.3% and was the main factor in the seasonally adjusted all-items increase. The energy index fell, as a decline in the gasoline index outweighed increases in other energy component indexes. The food index was unchanged over the month.

The index for all items less food and energy increased 0.2% in October. In addition to the shelter index, the indexes for medical care, used cars and trucks, tobacco, education, motor vehicle insurance, and personal care were among those that increased. The indexes for new vehicles, recreation, and apparel all declined.

The all-items index rose 2.0% for the 12 months ending October, a smaller increase than the 2.2% increase for the period ending September. The index for all items less food and energy rose 1.8% over the past year, a slightly larger increase compared to the 1.7% increase for the 12 months ending September. The energy index increased 6.4% over the last 12 months, and the index for food rose 1.3%. 

Producer Price Index

The seasonally adjusted producer price index for final demand (PPI) increased 0.4% in October (+0.1 expected). Final demand prices advanced 0.4% in September and 0.2% in August. On an unadjusted basis, the final demand index increased 2.8% for the 12 months ended in October, the largest rise since an advance of 2.8% for the 12 months ended February 2012.

Within final demand in October, prices for final demand services rose 0.5%, and the index for final demand goods moved up 0.3%.

Prices for final demand less foods, energy, and trade services rose 0.2% in October. For the 12 months ended in October, the index for final demand less foods, energy, and trade services advanced 2.3%.

Final Demand

Final demand services: The index for final demand services rose 0.5% in October, the largest increase since moving up 0.5% in April. Three-quarters of the October advance can be traced to a 1.1% rise in margins for final demand trade services. (Trade indexes measure changes in margins received by wholesalers and retailers.) The index for final demand transportation and warehousing services increased 0.8%. Prices for final demand services less trade, transportation, and warehousing edged up 0.1%.

Product detail: Nearly half of the increase in prices for final demand services can be attributed to margins for fuels and lubricants retailing, which surged 24.9%. The indexes for machinery and equipment wholesaling; transportation of passengers (partial); apparel, jewelry, footwear, and accessories retailing; chemicals and allied products wholesaling; and portfolio management also advanced. In contrast, margins for food retailing moved down 2.1%. The indexes for food and alcohol wholesaling and for loan services (partial) also decreased. (See table 4.)

Final demand goods: Prices for final demand goods moved up 0.3% in October, the third straight increase. Over two-thirds of the October rise can be traced to the index for final demand goods less foods and energy, which advanced 0.3%. Prices for final demand foods moved up 0.5%. The index for final demand energy was unchanged.

Product detail: Almost half of the rise in the final demand goods index was the result of higher prices for pharmaceutical preparations, which increased 2.1%. The indexes for industrial chemicals, fresh and dry vegetables, diesel fuel, beef and veal, and tobacco products also advanced. Conversely, prices for gasoline fell 4.6%. The indexes for light motor trucks and pork also moved lower. 

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Not-seasonally adjusted price indexes we track mostly rose on 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.

October 2017 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment rose by 261,000 jobs in October -- well below expectations of +323,000. In addition, August and September employment gains were revised up by 90,000 (August: +39,000; September: +51,000, which turned the previously reported loss into a small gain). Meanwhile, the unemployment rate (based upon the BLS’s household survey) edged down to 4.1% as contraction of the labor force (-765,000) greatly exceeded the drop in the number of persons employed (-484,000). 

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Observations from the employment reports include:

* The establishment (+261,000) and household (-484,000) survey results were extremely out of sync again in October.

* We have often been critical of the BLS’s seeming to “plump” the headline numbers with favorable adjustment factors; that may have been the case in October. Imputed jobs added by the CES (business birth/death model) adjustment were near the top of the range (91^st percentile) for the month of October (since 2000), but the BLS also tempered those gains with a very sizeable seasonal adjustment (94^th percentile) to the base data. Had average adjustments been used, October’s job gains might have been closer to 232,000. We become somewhat concerned about the accuracy of the headline number whenever the birth/death and/or seasonal adjustments are nearly the same magnitude as the initial value.

* As for industry details, Manufacturing expanded by 24,000 jobs. That result is reasonably consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded in October at its third-fastest pace since June 2011. Wood Products employment gained 2,800 jobs (ISM was unchanged); Paper and Paper Products: -2,300 (disagrees with ISM). Construction employment advanced by 11,000 (agrees with ISM). A sizeable proportion of October’s private-sector job growth occurred in the Leisure & Hospitality sector (+106,000) -- especially bars and restaurants (+88,500). 

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* The number of employment-age persons not in the labor force (NILF) jumped by 968,000 -- to a new record of 95.4 million. Meanwhile, the employment-population ratio (EPR) decreased slightly, to 60.2%; thus, for every five people being added to the population, only three are employed. 

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* Given the number of people exiting (or not entering) the labor force, the labor force participation rate (LFPR) tumbled by 0.4 percentage point, to 62.7% -- comparable to levels seen in the late-1970s. Perhaps as a result of the number of low-paid wait-staff jobs being rehired, average hourly earnings of all private employees declined by $0.01, to $26.53, resulting in a 2.4% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages ticked down by $0.01, to $22.22 (+2.3% YoY). Since the average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours, average weekly earnings decreased by $0.35, to $912.63 (+2.4% YoY). With the consumer price index running at an annual rate of 2.2% in September, workers are -- officially, at least -- holding steady in terms of purchasing power. 

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* Full-time jobs edged down by 23,000; there are now nearly 4.8 million more full-time jobs than the pre-recession high; for perspective, however, the non-institutional, working-age civilian population has risen by over 22.6 million. Those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- fell by 369,000. Those holding multiple jobs retreated by 178,000. 

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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 rebounded in October, by $8.6 billion, to a record $195.2 billion for that month of the year (+4.6% MoM; +6.8% 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 October was 3.3% above the year-earlier average -- well off the peak of +13.8% set back in September 2013.

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

October 2017 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey suggested that the expansion in U.S. manufacturing decelerated in October. The PMI registered 58.7%, down 2.1 percentage points. (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 the customer-inventory sub-index value was higher in October than in September. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- accelerated (+0.3 percentage points) to 60.1%, the highest NMI reading since that index was created in 2008. Sub-indexes with lower values in October included new orders, input prices and order backlogs. 

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All of the industries we track expanded. Respondent comments included the following --
* Construction: "The current hurricane damage will result in a shortage of some building materials and draw labor forces away from our area."
* Real Estate, Rental & Leasing: "Business levels increased due to hurricane recovery efforts."

Relevant commodities --
* Priced higher: Corrugate and corrugated boxes; paper; lumber; fuel (diesel, and gasoline); labor (general and construction); and construction contractors and services.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Labor (general, construction and temporary); construction contractors.

ISM’s and IHS Markit’s October surveys were consistent insofar as both pairs reported expansion of their respective sectors; rates of (de)acceleration differed, however, as is customary. Key findings from Markit’s surveys include the following:

Manufacturing --
* Production and new orders both increase at steeper rates
* Supplier performance deteriorates at quickest pace since February 2014
* Growth in employment picks up to 28-month record

Services --
* Output growth in line with that seen in September
* Upturn in new business softens to six-month low
* Input price inflation eases to seven-month low

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

Manufacturing: “US manufacturing stepped up a gear at the start of the fourth quarter, boding well for higher factory production to support robust economic growth in the closing months of 2017.

“Production volumes jumped higher on the back of a substantial improvement in order book inflows, in part due to supply chains returning to normal after the hurricanes but also reflecting a combination of strong underlying demand.

“Factory jobs growth has also picked up to one of the strongest since the global financial crisis, underscoring the improvement in optimism about future trading among manufacturers.

“An important change in October was the broadening out of the expansion to smaller firms, which have lagged behind the strong growth reported by larger rivals throughout much of the year to date but under-performed to a lesser extent in October.”

Services: “The services PMI survey highlights the dilemma facing the Fed as it seeks to determine the right policy course amid signs of solid growth but soft inflation.

“Together with the manufacturing PMI, which rose higher in October as hurricane-related supply chain disruptions eased, the latest services survey is consistent with underlying growth in the economy of approximately 3%, as well as buoyant jobs growth.

“With the data for October setting the scene for another robust GDP increase in the fourth quarter, a December rate hike is very much on the cards.

“However, a drop in inflationary pressures adds an element [of] uncertainty to the picture. Having been buoyed by supply chain disruptions in prior months, input cost pressures eased at the start of the fourth quarter, and the rate of increase of average prices charged for goods and services dropped markedly.

“While the Fed may likely tilt towards hiking in December on the back of robust economic growth, much may depend on the data flow in coming weeks for signs that stronger growth is feeding through to higher 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.

September 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 $3.9 billion or 0.8% to $480.4 billion in September. Durable goods shipments increased $2.1 billion or 0.9% to $240.3 billion led by transportation equipment. Meanwhile, nondurable goods shipments increased $1.8 billion or 0.8% to $240.1 billion, led by petroleum and coal products. Shipments of wood products rose by 1.5%; paper: -0.4%. 

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Inventories increased $4.4 billion or 0.7% to $660.8 billion. The inventories-to-shipments ratio was 1.38, unchanged from August. Inventories of durable goods increased $2.6 billion or 0.6% to $403.9 billion, led by transportation equipment. Nondurable goods inventories increased $1.8 billion or 0.7% to $256.8 billion, led by petroleum and coal products. Inventories of wood products edged up by 0.1%; paper: -0.2%. 

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New orders increased $6.5 billion or 1.4% to $478.5 billion. Excluding transportation, new orders rose (+0.7% MoM; +5.5% YoY). Durable goods orders increased $4.7 billion or 2.0% to $238.4 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- jumped by 1.7% (+7.7% YoY). New orders for nondurable goods increased $1.8 billion or 0.8% to $240.1 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. Even with June 2017’s transportation-led jump, the recovery in real new orders is back to just 53% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders increased $2.7 billion or 0.2% to $1,135.0 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.70, down from 6.76 in August. 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 then jumped to 102% 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 generally diverging 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.

October 2017 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil edged higher for a fourth consecutive month in October, increasing by $1.63 (+3.3%), to $51.45 per barrel. The advance coincided with a stronger U.S. dollar, the lagged impacts of a 141,000 barrel-per-day (BPD) drop in the amount of oil supplied/demanded during August (to 20.2 million BPD), and a gradual decline in accumulated oil stocks (to 455 million barrels). 

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According to ASPO-USA’s Peak Oil Review Editor Tom Whipple, the main impetus for the price rise was “comments by Saudi Crown Prince bin Salman that he backs an extension of the OPEC production freeze until the end of next year. Coupled with the Prince's statement were upbeat OPEC pronouncements about the increasing demand for its oil and the dubious proposition that compliance with the production cut was now at 120% of the agreed numbers. Beyond the hype, however, are real concerns that the Iraqi, Iranian, and Venezuelan situations could deteriorate and lead to lower exports.

Despite four months of sustained price increases, “many are skeptical that this bump will last for long,” Whipple continued. “These skeptics cite increasing U.S. shale oil production, and the possibility that even higher U.S. exports will cut into the price of Brent oil as U.S. oil is now so much more attractive. Some are saying that exports of U.S. shale oil and condensates could move closer to 3 million BPD shortly. There now seems to be an agreement between the Iraqis and the Kurds to keep oil flowing through the Kurd-controlled pipeline to Turkey, reducing concerns that the 300,000 BPD of Kirkuk oil would remain shut in for an indefinite period.” 

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Oilprice.com Editor Tom Kool also mentioned that OPEC is increasingly looking at extending production cuts through 2018:

The Wall Street Journal reported that Saudi Arabia and Russia are leaning towards agreeing to extend their production limits through the end of 2018, a move that could be finalized at the upcoming meeting in Vienna on November 30. With those two countries on board, it would be likely that the rest would fall in line. Russian energy minister Alexander Novak warned earlier this week that Russia would boost output by 100,000 bpd next year if the agreement lapsed, while top Russian and Saudi officials also reassured the market about their intentions. “We don't want to do anything that will shock the market…and we won't stop our efforts halfway," Saudi energy minister Khalid al-Falih told reporters. Separately, al-Falih assured an orderly exit from the deal. "When we get closer to that (five-year average) we will decide how we smoothly exit the current arrangement, maybe go to a different arrangement to keep supply and demand closely balanced so we don't have a return to higher inventories," he told reporters. An extension through the end of next year is rapidly becoming the baseline assumption for the November meeting.

Kool highlighted an article by Reuters arguing that “falling U.S. oil inventories are a sign of a shift towards backwardation for WTI, a state in which near-term oil contracts trade at a premium to longer-dated oil futures. With Brent already in a state of backwardation, the downward sloping futures curve for WTI would be another signal that the oil market is tightening. Backwardation tends to appear during periods of market tightening and would suggest higher oil prices are possible.”

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

September 2017 Construction Spending

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Construction spending during September 2017 was estimated at a seasonally adjusted annual rate (SAAR) of $1,219.5 billion, 0.3% (±1.3%)* above the revised August estimate of $1,216.0 billion (originally $1,218.3 billion); consensus expectations were for +0.1%. The September figure is 2.0% (±1.6%) above the September 2016 SAAR of $1,195.6 billion; the not-seasonally adjusted YoY change (shown in the table below) was +1.1%. During the first nine months of this year, seasonally adjusted construction spending amounted to $917.0 billion, 4.3% (±1.2%) above the $879.6 billion for the same period in 2016.

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

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Private Construction

Spending on private construction was at a SAAR of $942.7 billion, 0.4% (±1.0%)* below the revised August estimate of $946.2 billion.
- Residential: $515.4 billion, nearly unchanged (±1.3%)*;
- Nonresidential: $427.3 billion, -0.8% (± 1.0%)*.

Public Construction

Public construction spending was $276.8 billion, 2.6% (±2.3%) above the revised August estimate of $269.8 billion.
- Educational: $71.9 billion, +5.2% (±2.8%);
- Highway: $84.3 billion, +1.1% (±5.6%)*. 

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Click here for a discussion of September’s new residential permits, starts and completions. Click here for a discussion of new and existing home sales, inventories and 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.