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Macro Pulse highlights recent activity and events expected to affect the U.S. economy over the next 24 months. While the review is of the entire U.S. economy its particular focus is on developments affecting the Forest Products industry. Everyone with a stake in any level of the sector can benefit from
Macro Pulse's timely yet in-depth coverage.


Friday, June 29, 2018

1Q2018 Gross Domestic Product: Third Estimate

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In its third and final estimate of 1Q2018 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) reported that the U.S. economy was growing at a +2.00% seasonally adjusted and annualized rate (+2.2% expected), down 0.17 percentage point (PP) from the previous estimate (“1Qv2”) and 0.88PP lower than 4Q2017.
Three of the four groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), and government consumption expenditures (GCE) -- contributed to 1Q growth. Net exports (NetX) detracted from it.
The lowering of the headline number resulted from downward revisions to contributions from consumer spending (-0.11PP; goods: +0.04 and services: -0.15PP) and net exports (-0.12PP; exports: -0.07PP and imports: -0.05PP). Nonresidential fixed investment (+0.18PP -- nearly half from intellectual property products) was almost offset by the change in private inventories (-0.14PP).
Real final sales of domestic product (which exclude inventories) were revised slightly lower (-0.03PP from 1Qv2, to +2.03%) and remained 1.40PP below 4Q2017’s estimate. On a brighter note, gross domestic income (GDI) -- an alternative measure of economic growth -- increased at a 3.6% rate, up from the 2.8% pace reported in 1Qv2. 
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Commentary from Consumer Metric Institute’s Rick Davis included:
-- Consumer spending for goods was still reported to be contracting during the quarter, and the reported growth in services spending weakened materially.
-- The overall annualized growth rate for consumer spending dropped -2.15% on a quarter-to-quarter basis.
-- Although household disposable income improved quarter-to-quarter (most likely due to the reduced withholding rates in the "Tax Cuts and Jobs Act of 2017"), most of that improvement went into increased savings.
“The headline from the report should have read: ‘Consumer spending on goods continued to contract, while consumer spending on services was revised downward yet again,’” Davis concluded. “If consumers are the driving force for the U.S. economy, a report like this should be raising major caution flags.”
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.

Tuesday, June 26, 2018

May 2018 Residential Sales, Inventory and Prices

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Sales of new single-family houses in May 2018 were at a seasonally adjusted annual rate (SAAR) of 689,000 units (665,000 expected). This is 6.7% (±14.1%)* above the revised April rate of 646,000 (originally 662,000 units) and 14.1% (±19.9%)* above the May 2017 SAAR of 604,000 units; the not-seasonally adjusted year-over-year comparison (shown in the table above) was +14.0%. For longer-term perspectives, not-seasonally adjusted sales were 50.4% below the “housing bubble” peak but 24.3% above the long-term, pre-2000 average.
The median sales price of new houses sold in May was $313,000 (-$5,500 or 1.7% MoM); meanwhile, the average sales price dropped to $368,500 (-$26,100 or 6.6%). Starter homes (defined here as those priced below $200,000) comprised 16.9% of the total sold, up from the year-earlier 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 3.1% of those sold in May, down from 3.5% a year earlier.
* 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 jumped by 88,000 units (+11.0%). Although completions outpaced sales (+43,000 units; 6.7%), inventory for sale expanded in absolute (+3,000 units) but contracted in months-of-inventory terms (-0.3 month). 
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Existing home sales fell by 20,000 units (-0.4%) in May, to a SAAR of 5.43 million units (5.520 million expected). Inventory of existing homes for sale expanded in absolute and months-of-inventory terms (+50,000 units; +0.1 month). Because new-home sales increased while existing-home sales declined, the share of total sales comprised of new homes advanced to 11.3%. The median price of previously owned homes sold in April rose to $264,800 (+$6,000 or 2.7% MoM). 
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Housing affordability degraded further as the median price of existing homes for sale in April jumped by $8,400 (+3.3%; +5.9 YoY), to $259,900. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices posted a not-seasonally adjusted monthly change of +1.0% (+6.4% YoY) -- marking a new all-time high for the index.
“Home prices continued their climb with the S&P CoreLogic Case-Shiller National Index up 6.4% in the past 12 months,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Cities west of the Rocky Mountains continue to lead price increases with Seattle, Las Vegas and San Francisco ranking 1-2-3 based on price movements in the trailing 12 months. The favorable economy and moderate mortgage rates both support recent gains in housing. One factor pushing prices up is the continued low supply of homes for sale. The months-supply is currently 4.3 months, up from levels below 4 months earlier in the year, but still low.
“Looking back to the peak of the boom in 2006, 10 of the 20 cities tracked by the indices are higher than their peaks; the other ten are below their high points. The National Index is also above its previous all-time high, the 20-city index slightly up versus its peak, and the 10-city is a bit below. However, if one adjusts the price movements for inflation since 2006, a very different picture emerges. Only three cities -- Dallas, Denver and Seattle -- are ahead in real, or inflation-adjusted, terms. The National Index is 14% below its boom-time peak and Las Vegas, the city with the longest road to a new high, is 47% below its peak when inflation is factored in.” 
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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.

Tuesday, June 19, 2018

May 2018 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 1,350,000 units (1.320 million expected). This is 5.0% (±10.2%)* above the revised April estimate of 1,286,000 (originally 1.287 million units) and 20.3% (±14.4%) above the May 2017 SAAR of 1,122,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +17.8%.
Single-family housing starts in May were at a SAAR of 936,000; this is 3.9% (±10.6%)* above the revised April figure of 901,000 (+14.8% YoY). Multi-family starts: 414,000 units (+7.5% MoM; +25.8% 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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Completions in May were at a SAAR of 1,291,000 units. This is 1.9% (±13.7%)* above the revised April estimate of 1,267,000 and 10.4% (±12.1%)* above the May 2017 SAAR of 1,169,000 units; the NSA comparison: +11.1% YoY.
Single-family housing completions were at a SAAR of 890,000; this is 11.0% (±12.7%)* above the revised April rate of 802,000 (+12.4% YoY). Multi-family completions: 401,000 units (-13.8% MoM; +8.3% YoY). 
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Total permits in May were at a SAAR of 1,301,000 units (1.350 million expected). This is 4.6% (±1.4%) below the revised April rate of 1,364,000 (originally 1.352 million units), but 8.0% (±1.3%) above the May 2017 SAAR of 1,205,000 units; the NSA comparison: +8.3% YoY.
Single-family authorizations were at a SAAR of 844,000; this is 2.2% (±1.0%) below the revised April figure of 863,000 (+7.7% YoY). Multi-family: 457,000 (-8.8% MoM; +9.8% 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 May after a downwardly revised April reading on the National Association of Home Builders/Wells Fargo (HMI). This is the fourth time the HMI has reached 70 or higher this year.
Builder confidence in the market for newly-built single-family homes fell two points to 68 in June on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). The decline was due in large part to sharply elevated lumber prices, although sentiment remains on solid footing.
“Builders are optimistic about housing market conditions as consumer demand continues to grow,” said NAHB Chairman Randy Noel. “However, builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability. Record-high lumber prices have added nearly $9,000 to the price of a new single-family home since January 2017.”
“Improved economic growth, continued job creation and solid housing demand should spur additional single-family construction in the months ahead,” said NAHB Chief Economist Robert Dietz. “However, builders do need access to lumber and other construction materials at reasonable costs in order to provide homes at competitive price points, particularly for the entry-level market where inventory is most needed.”
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.

2018Q2 Macro Pulse -- A Yogi Berra Economy?


Lawrence “Yogi” Berra -- the late major-league baseball player, coach and manager legendary for his malapropisms and pithily paradoxical statements -- has been credited with the saying: “When you come to a fork in the road, take it.” Given the junctures at which the U.S. business and credit cycles find themselves, that imperative seems especially relevant; the all-important question, though, is what “fork” is the economy taking? Is it a path leading to stronger growth, or one leading to recession?
Click here to read the rest of the June 2018 Macro Pulse recap.
The Macro Pulse blog is a commentary about recent economic developments affecting the forest products industry. The quarterly Macro Pulse newsletter typically summarizes the previous 30 to 90 days of commentary available on this website.

Friday, June 15, 2018

May 2018 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) edged down 0.1% in May (+0.1% expected) after rising 0.9% in April. Manufacturing production fell 0.7% in May, largely because truck assemblies were disrupted by a major fire at a parts supplier. Excluding motor vehicles and parts, factory output moved down 0.2%. The index for mining rose 1.8%, its fourth consecutive month of growth; the output of utilities moved up 1.1%. At 107.3% of its 2012 average, total IP was 3.5% higher in May than it was a year earlier. 
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Industry Groups
Manufacturing output moved down 0.7% in May but was 1.7% higher than its year-earlier level. The indexes for durables and for other manufacturing industries (publishing and logging) each fell more than 1%, while the production of nondurable manufacturing was little changed. Within durables, the drop of 6.5% for motor vehicles and parts was accompanied by decreases of more than 1% for primary metals and for electrical equipment, appliances, and components (wood products: 0.0%). Within nondurable manufacturing, all industry groups other than chemicals and printing posted declines (paper products: -0.7%).
The output of mining rose in May for the fourth consecutive month and was more than 12% above its year-earlier level. The rise in the mining index in May reflected continued gains in the oil and gas sector. The index for utilities went up about 1%, as a gain for electric utilities outweighed a drop for gas utilities. 
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Capacity utilization (CU) for the industrial sector decreased 0.2 percentage point (PP) in May to 77.9%, a rate that is 1.9PP below its long-run (1972–2017) average.
Capacity utilization for manufacturing fell 0.6PP to 75.3% in May, a rate that is 3.0PP below its long-run average. The operating rate for durables decreased nearly 1PP, and the rate for nondurables edged down (wood products: -0.3%; paper products: -0.7%). The utilization rate for mining jumped to 92.4%, which is about 5.5PP higher than its long-run average. The rate for utilities rose about 0.5PP but was still nearly 6PP below its long-run average. 
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Capacity at the all-industries level nudged up 0.2% (+1.3 % YoY) to 137.8% of 2012 output. Manufacturing (NAICS basis) rose fractionally (+0.1% MoM; +1.1% YoY) to 137.8%. Wood products: +0.3% (+2.0% YoY) to 160.5%; paper products: 0.0% (0.0% YoY) to 111.3%.
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Wednesday, June 13, 2018

May 2018 Consumer and Producer Price Indices (incl. Forest Products)

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The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2% in May (+0.2% expected). The indexes for gasoline (+1.7% MoM) and shelter (+0.3%) were the largest factors in the seasonally adjusted increase in the all-items index, as they were in April. Combined, they more than offsett declines in some of the other energy component indexes and led to a 0.9% rise in the energy index. The medical care index rose 0.2%. The food index was unchanged over the month.
The index for all items less food and energy rose 0.2% in May. The indexes for new vehicles, education and communication, and tobacco increased in May, while the indexes for household furnishing and operations, and used cars and trucks fell. The indexes for apparel, recreation, and personal care were unchanged.
The all items index rose 2.8% for the 12 months ending May, continuing its upward trend since the beginning of the year; the index for all items less food and energy rose 2.2%. The food index increased 1.2%, and the energy index rose 11.7%.
The Producer Price Index for final demand (PPI) rose 0.5% in May (+0.3% expected), after having advanced 0.1% in April and 0.3% in March. In May, 60% of the rise in the index for final demand is attributable to a 1.0% advance in prices for final demand goods. The index for final demand services moved up 0.3%. Prices for final demand less foods, energy, and trade services edged up 0.1% in May, the same as in April.
The final demand index moved up 3.1% for the 12 months ended in May, the largest 12-month increase since climbing 3.1% in January 2012. For the 12 months ended in May, the index for final demand less foods, energy, and trade services climbed 2.6%.
Final Demand
Final demand goods: The index for final demand goods moved up 1.0% in May, the largest advance since a 1.1% rise in May 2015. In May 2018, over 80% of the broad-based increase in prices for final demand goods can be traced to the index for final demand energy, which jumped 4.6%. Prices for final demand goods less foods and energy and for final demand foods rose 0.3% and 0.1%, respectively.
Product detail: Half of the advance in the index for final demand goods is attributable to a 9.8% increase in gasoline prices. The indexes for jet fuel, fresh and dry vegetables, diesel fuel, beef and veal, and light motor trucks also moved higher. In contrast, prices for chicken eggs fell 31.2%. The indexes for residential natural gas and for plastic resins and materials also decreased.
Final demand services: Prices for final demand services moved up 0.3% in May, the fifth consecutive rise. In May, 80% of the advance in the index for final demand services can be traced to margins for final demand trade services, which climbed 0.9%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand transportation and warehousing services increased 0.7%. The index for final demand services less trade, transportation, and warehousing was unchanged.
Product detail: One-third of the May advance in prices for final demand services is attributable to a 1.5% rise in margins for machinery, equipment, parts, and supplies wholesaling. The indexes for chemicals and allied products wholesaling; outpatient care (partial); apparel, footwear, and accessories retailing; food retailing; and truck transportation of freight also moved higher. Conversely, prices for guestroom rental fell 4.4%. The indexes for fuels and lubricants retailing and for hospital inpatient care also moved lower. 
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Only the not-seasonally adjusted price indexes for Wood Fiber decreased on a MoM basis. All of the indexes rose YoY. 
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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.

Friday, June 8, 2018

April 2018 International Trade (Softwood Lumber)

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Softwood lumber exports edged lower (3 MMBF or -1.6%) in April, but imports rose (93 MMBF or +7.5%). Exports were 43 MMBF (+35.0%) above year-earlier levels; imports were 123 MMBF (-8.4%) lower. As a result, the year-over-year (YoY) net export deficit was 166 MMBF (12.5%) smaller. Moreover, the average net export deficit for the 12 months ending April 2018 was 13.3% 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: 24.1%) and North America (of which Canada: 22.7%; Mexico: 14.1%) were the primary destinations for U.S. softwood lumber exports in April; the Caribbean ranked third with a 19.4% share. Year-to-date (YTD) exports to China were +54.6% relative to the same months in 2017. Meanwhile, Canada was the source of most (90.2%) of softwood lumber imports into the United States. Imports from Canada are 14.8% lower YTD than the same months in 2017. Overall, YTD exports were up 18.1% compared to 2017, while imports were down 14.0%. 
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U.S. softwood lumber export activity through the Eastern customs region represented the largest proportion in April (37.2% of the U.S. total), followed by the West Coast (29.5%) and the Gulf (23.3%) regions. However, Seattle maintained its lead (18.5% of the U.S. total) over Mobile (16.3%) and Savannah (11.3%) as the single most-active district. At the same time, Great Lakes customs region handled 63.5% of softwood lumber imports -- most notably the Duluth, MN district (27.1%) -- coming into the United States. 
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Southern yellow pine comprised 33.3% of all softwood lumber exports in April, Douglas-fir (11.5%) and treated lumber (12.5%). Southern pine exports were up 39.8% YTD relative to 2017, while treated: +3.5%; Doug-fir: -1.8%.
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.

Wednesday, June 6, 2018

May 2018 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose again in May, increasing by $3.72 (+5.6%), to $69.98 per barrel. The advance occurred within an environment of a much stronger U.S. dollar, the lagged impacts of a 954,000 barrel-per-day (BPD) jump in the amount of oil supplied/demanded during March (to 20.6 million BPD), and a very modest increase in accumulated oil stocks (monthly average: 435 million barrels). 
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From the 4 June 2018 issue of Peak Oil Review:
In a short trading week, oil prices closed mixed with London futures holding steady but New York declining on higher US oil output.  US oil prices continue to fall well behind world prices, as booming shale oil production deals with pipeline constraints, leading to the biggest discount to North Sea Brent in three years. On Thursday, the discount climbed to over $11 a barrel. The weekly US stocks report showed that while oil production grew by 44,000 b/d, a drop in US imports and a surge in exports to 2.1 million b/d resulted in a decline in US commercial crude inventories of 3.6 million barrels from the week before last.
The regional discount problem is not confined to Permian Basin oil production.  Western Canada Select consistently trades at a substantial discount to US futures prices. Last week the Canadian heavy crude was trading at only $41 per barrel or $25 below New York futures. These discounts are good for refiners and exporters but are causing problems for the drillers who are struggling to break even.
Although the recent decline in prices is based on the possibility the OPEC production freeze will be modified or lifted and steadily increasing US oil production, many authoritative voices are saying that these developments will not be enough to prevent much higher oil prices later this year. It currently appears that Saudi Arabia and Russia are talking about adding somewhere between 300,000 and 1 million b/d to the world’s oil supply which should hold down prices. However, Goldman Sachs is arguing that inventories are already back down to the five-year average and that demand is being underestimated. Venezuela is losing production and infrastructure bottlenecks in the Permian Basin could foretell that US shale production for the rest of the year will not be as high as expected. Without OPEC and Russia increasing supply from current levels, inventories would fall “to historically low levels by the first quarter of next year”. In addition to the Venezuelan meltdown, growing tension surrounding the new US sanctions on Iran have led to Iranian threats to resume enriching uranium in the next few months. The impact of the growing US trade war with China is unknown, but some are suggesting this alone could force all prices towards $100 a barrel this summer.
The fundamental principle underlying the future of oil prices is that worldwide we are not finding as much oil as is being demanded at current prices and reserves are depleting faster than ever before. A supply crunch is coming. The only issue is when not if.  In the US, we’ve been drawing down inventories steadily February of 2017, because our net imports are not sufficient to meet demand.
The OPEC Production Cut: The cartel’s oil production dropped in May by 70,000 b/d to 32.00 million b/d largely due to militant attacks in Nigeria and the ongoing decline in Venezuela that dragged total production to the lowest level since April 2017. The decision that will emerge from the OPEC plus meeting to set new oil productions levels will depend on policy decisions in Moscow, Riyadh, and Washington. These three countries, each of which can produce over 10 million b/d or one-third of the world’s oil supply, have differing price objectives that will determine where the oil markets go in the immediate future. Russia and the Saudis would like much higher prices to help their lagging economies while President Trump is already demanding that OPEC increase production to keep prices lower before the US mid-term elections.
Washington is saying that there is so much oil in the world that its new Iranian sanctions, which kick in this fall, would not be significant. Tehran is saying that OPEC members at their meeting later this month should protect members targeted by US sanctions. The Iranian government is busy courting European, Russian and Chinese leaders for continued support of the nuclear agreement and is threatening to resume nuclear enrichment if Washington’s new initiative hurts its exports.
US Shale Oil Production: Drillers added two oil rigs in the week to June 1, bringing the total count to 861, the highest level since March 2015. The US rig count, an early indicator of future output, is much higher than a year ago when 733 rigs were active. However, decisions to activate or mothball rigs have to be taken at least several weeks in advance; we could be seeing a carryover from steadily rising prices last spring.
The surge in shale oil production continues to run into bottlenecks. From West Texas pipelines to Oklahoma storage centers and Gulf Coast export terminals, the delivery system for American crude is straining to keep up with production, limiting the industry’s ability to take full advantage of growing demand.  Last week Barclays analysts predicted, “a new shock" for energy markets as a lack of pipeline capacity near the Cushing, Okla. storage hub threatened the flow of oil. Pipeline shortages in the Permian basin, meanwhile, may not be overcome by new construction for another 18 months. These problems are undercutting the conventional wisdom that US shale oil production will stabilize global prices as crude exports from Venezuela and probably from Iran seem likely to decline.
The recent increase in oil prices to above $60 a barrel is helping oil companies refinance some $138 billion in debt due this year and a total of $400 billion is coming due before the end of 2019. Between 2012 and 2014 there was an “an irrational exuberance” going on when oil prices were high, and interest rates were low resulting in a surge of borrowing that must be paid back.  Conventional wisdom on Wall Street says that shale oil is profitable above $60 a barrel, but this may not be the case. As bottlenecks grow, many drillers are being forced to accept large discounts for their oil and the industry as a whole is far from profitable.
The Wall Street Journal recently reported that only five of the Top 20 US oil companies that focused on hydraulic fracking generated more cash than they spent in the first quarter of this year. This continues a trend that has been ongoing throughout the fracking boom where companies are spending $1.13 for every $1 they take in. While lenders are hoping that much higher prices will soon wipe out the massive debts drillers are accumulating, it could be a question of whether drillers are forced to default before the days of $100+ oil prices return.

Selected highlights from the 1 June 2018 issue of Oil & Energy Insider include:
Oil prices were a mixed bag this week, with Brent holding steady but WTI declining on higher U.S. output. The spread between the two benchmarks is rare, and reflects uncertainty and confusion in the oil market, as well as regional differences in supply and demand.
U.S. tariffs threaten financial markets. President Trump resumed this trade war this week, slapping steel and aluminum tariffs on Canada, Mexico and the EU and industrial tariffs on China. The decision comes after offering exemptions to U.S. trading partners in recent months, and comments from the Treasury Secretary just last week that the trade war would be “put on hold.” The about-face has spooked financial markets. As for oil, a trade war threatens to undermine demand, although the magnitude of the slowdown is hard to predict.
WTI blowout. WTI dropped to a more than $10-per-barrel discount to Brent this week, the widest spread in three years. The pipeline bottlenecks in the Permian are starting to bite. “This was inevitable. There was way too much production growth for infrastructure to handle,” Vikas Dwivedi, global oil and gas strategist at Macquarie, told Reuters. Meanwhile, the uncertainty surrounding the OPEC deal, plus geopolitical risk, has Brent looking for direction. “The market doesn’t know where the price of oil is going to be and probably doesn’t know where it should be, and so it’s open to some major price fluctuations,” Richard Hastings, an independent analyst, told Reuters. U.S. exports of crude are rising, while Brent-linked cargoes in the Atlantic Basin are struggling to find buyers.
Permian bottleneck crushes Midland oil prices. While WTI is trading at a steep discount to Brent, things are worse in the Permian. Oil in Midland is trading more than $20 per barrel below Brent. “This is probably just the start with more downside to come for the local Permian crude price in order to halt the ongoing booming production growth as there is nowhere to store the local surplus production and limited means to get it to market,” Bjarne Schieldrop, chief commodities analyst at SEB, said in a statement. Schieldrop predicts that U.S. shale will only grow by 1 million barrels per day over the coming year, or 0.5 mb/d less than previously expected.
GE backs out of Iran. GE (NYSE: GE) will end sales of oil and natural gas equipment in Iran later this year, the latest sign that pending U.S. sanctions are having a serious impact. GE had received contracts from Iran for tens of millions of dollars for oil and gas equipment since 2017. For Iran, the withdrawal is a problem because the gear and equipment are crucial to maintaining and growing oil and gas production.
Shell starts Gulf of Mexico project year ahead of schedule. Royal Dutch Shell (NYSE: RDS.A) started up the Kaikias oil field in the Gulf of Mexico this week, one year ahead of schedule. "Shell has reduced costs by around 30% at this deep-water project since taking the investment decision in early 2017, lowering the forward-looking, break-even price to less than $30 per barrel of oil," the company says in a statement. The project will have peak daily output of 40,000 bpd.
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Tuesday, June 5, 2018

May 2018 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that the expansion in U.S. manufacturing accelerated in May. The PMI registered 58.7%, up 1.4 percentage points (PP) from the April reading. (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. “[The PMI reading] indicates strong growth in manufacturing for the 21st consecutive month, led by continued expansion in new orders, production and employment. However, inventories are struggling to maintain expansion levels, and suppliers continue to deliver at essentially the same rate as the previous month, relative to production,” said Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee.
Also, the Prices Index inched up to its highest level since May 2011; 62.2% of respondents reported paying higher prices, 3.1% reported paying lower prices, and 34.7% of supply executives reported paying the same prices as in April. 
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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- also rebounded (+1.8PP) to 58.6%. Services’ price index was less of an outlier; still, 41% of respondents reported higher prices whereas 54% indicated no change in prices paid. 
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All of the industries we track except Wood Products expanded in May. Respondent comments included the following --
·     Construction: "Material prices have been difficult to predict this year, and suppliers have struggled to hold prices for any extended period on quotes, specifically on lumber and lumber-related products. The instability has proven frustrating, but a larger problem is that we are starting to see longer lead times in many of the same areas that could start impacting timelines if they continue to get worse as we get into the main building season."

Relevant commodities --
* Priced higher: Caustic soda; corrugate and corrugated boxes and cartons; fuel (diesel and gasoline); paper and paper products; wood; and construction labor.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Construction subcontractors and labor.

IHS Markit’s May surveys presented an equally upbeat view.
Manufacturing -- May PMI signals further steep improvement in business conditions
Key findings:
* Sharp increases in output and new orders
* Staffing levels expand at quicker pace
* Inflationary pressures remain elevated
Services -- Services business activity growth accelerates to fastest since April 2015
Key findings:
* Output growth quickens to strongest in over three years
* Capacity pressures intensify
* Input price inflation fastest since October 2013

Commenting on the data, Chris Williamson, Markit’s chief business economist said --
Manufacturing: “The U.S. manufacturing sector enjoyed another bumper month in May, though continues to run hot.
“The past two months have seen the strongest back-to-back improvements in order books since the fall of 2014, fueled by strengthening domestic demand. New orders have in fact now grown at a faster rate than output in each of the past five months, highlighting how producers have struggled to boost production to meet sales. In the words of one manufacturer, “we’re selling more than we can make”.
“The upturn has stretched supply chains to the extent that May saw the greatest lengthening of delivery times in the near-ten year history of the survey. Producers are also finding it difficult to find suitable staff.
“With sales growing faster than production, backlogs of work are accumulating at the fastest rate for nearly four years, which should support further production growth in coming months. Business expectations regarding future production in fact picked up again to one of the highest levels seen over the past three years, adding to signs that strong growth will persist through the summer months.”

Services: “The U.S. economy kicked up a gear in May. A markedly improved service sector performance takes the final composite PMI reading above the flash estimate and to its highest for over three years. The composite PMI is a reliable leading indicator of GDP, and has risen to a level which is consistent with the economy growing at an annualized rate of approximately 3.5%.
“With business optimism about the year ahead running at one of the highest levels seen over the past three years, it looks likely that good growth momentum will be sustained in coming months.
“However, the survey also reveals increased concerns regarding rising costs and the impact of tariffs. Across both manufacturing and services, companies’ costs are now rising at one of the strongest rates seen over the past seven years, which will likely feed through to higher consumer prices in coming months.”
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.

Monday, June 4, 2018

May 2018 Currency Exchange Rates

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In May the monthly average value of the U.S. dollar (USD) appreciated versus Canada’s “loonie” (+1.1%), euro (+3.8%) and yen (+1.9%). On a trade-weighted index basis, the USD gained 2.8% 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.

April 2018 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 $492.8 billion in April. Durable goods shipments decreased less than $0.1 billion or virtually unchanged to $247.0 billion led by transportation equipment. Meanwhile, nondurable goods shipments increased $0.1 billion or 0.1 percent to $245.8 billion, led by food products. Shipments of wood products fell by 0.4%; paper: -0.3%. 
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Inventories increased $2.2 billion or 0.3 percent to $666.9 billion. The inventories-to-shipments ratio was 1.35, unchanged from March. Inventories of durable goods increased $1.3 billion or 0.3 percent to $401.9 billion, led by fabricated metal products. Nondurable goods inventories increased $0.8 billion or 0.3 percent to $265.0 billion, led by chemical products. Inventories of wood products rose by 0.3%; paper: -0.1%. 
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New orders decreased $4.0 billion or 0.8 percent to $494.4 billion. Excluding transportation, new orders rose (+0.4% MoM; +8.7% YoY). Durable goods orders decreased $4.1 billion or 1.6 percent to $248.6 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- jumped (+1.0% MoM; +7.4% YoY). New orders for nondurable goods increased $0.1 billion or 0.1 percent to $245.8 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 less than 70% of the losses incurred since the beginning of the Great Recession. The recovery in real new orders is back to just 57% of the ground given up in the Great Recession. 
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Unfilled durable-goods orders increased $5.4 billion or 0.5 percent to $1,153.1 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.73, up from 6.66 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 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.

Friday, June 1, 2018

April 2018 Construction Spending

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Construction spending during April 2018 was estimated at a seasonally adjusted annual rate (SAAR) of $1,310.4 billion, 1.8% (±1.0%) above the revised March estimate of $1,286.8 billion (originally $1,284.7 billion); consensus expectations were for +0.8%. The April figure is 7.6% (±1.5%) above the April 2017 SAAR of $1,217.7 billion; the not-seasonally adjusted YoY change (shown in the table below) was +8.3%. During the first four months of this year, construction spending amounted to $387.0 billion, 6.6% (±1.2%) above the $363.1 billion for the same period in 2017.
* 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 $1,014.3 billion, 2.8% (±0.8%) above the revised March estimate of $986.6 billion.
- Residential: $556.3 billion, 4.5% (±1.3%) above the revised March estimate of $532.4 billion.
- Nonresidential: $458.0 billion, 0.8% (±0.8%)* above the revised March estimate of $454.2 billion.
Public Construction
Public construction spending was $296.1 billion, 1.3% (±2.0%)* below the revised March estimate of $300.1 billion.
- Educational: $74.2 billion, nearly the same as (±2.3%)* the revised March estimate of $74.2 billion.
- Highway: $88.0 billion, 1.0% (±6.3%)* below the revised March estimate of $88.8 billion. 
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Click here for a discussion of April’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.

May 2018 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment rose by 223,000 jobs in May -- below expectations of +185,000. In addition, combined March and April employment gains were revised up by 15,000 (March: +20,000; April: -5,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) edged down to 3.8% because employment gains (+281,000) greatly exceeded expansion of the labor force (+12,000). 
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Observations from the employment reports include:
* For once, the household and establishment surveys were in sync.
* We have often been critical of the BLS’s seeming to “plump” the headline numbers with favorable adjustment factors, but the May numbers do not seem to be a case in point. Although imputed jobs from by the CES (business birth/death model) adjustment were within 8% of the maximum for the month of May (since 2000), the BLS also applied a slightly more negative-than-average seasonal adjustment to the base data. Had average May adjustments been used, employment changes might have been roughly +232,000 instead of the reported +223,000.
* As for industry details, Manufacturing expanded by 18,000 jobs. That result is reasonably consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded in May at a faster pace than in April. Wood Products employment gained 1,300 jobs (ISM was unchanged); Paper and Paper Products: +200 (ISM increased). Construction employment gained 25,000. 
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* The number of employment-age persons not in the labor force (NILF) rose by 170,000 (+0.2%), to a record 95.9 million. Meanwhile, the employment-population ratio hit 60.4%; thus, for every five people being added to the population, roughly three are employed. 
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* The labor force participation rate (LFPR) slipped to 62.7% -- comparable to levels seen in the late-1970s. Average hourly earnings of all private employees rose by $0.08, to $26.92, resulting in a 2.7% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages advanced by $0.07, to $22.59 (+2.8% YoY). Since the average workweek for all employees on private nonfarm payrolls was unchanged at 34.5 hours, average weekly earnings increased by $2.76 (+0.3%), to $928.74 (+3.0% YoY). With the consumer price index running at an annual rate of 2.5% in April, workers appear -- officially, at least -- to be holding steady in terms of purchasing power. 
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* Full-time jobs gained additional ground in April when jumping by 904,000. Those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work – edged down by 37,000; non-economic reasons: -163,000. Those holding multiple jobs fell by 225,000. 
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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 decreased in May, by $10.3 billion (-5.2% MoM; -6.1% YoY), to $185.4 billion; it is difficult to conclude anything meaningful from the data beyond observing that the falloff reflects lower withholding rates from the Tax Cuts and Jobs Act of 2017. 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 1.9% below 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.