3Q2018 Gross Domestic Product: Second Estimate

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In its second estimate of 3Q2018 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) left the growth rate of the U.S. economy virtually unchanged at a seasonally adjusted and annualized rate (SAAR) of +3.50% (in line with consensus expectations), up 0.01 percentage point (PP) from the “advance” estimate (“3Qv1”) but -0.65PP from 2Q2018.

Three groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), and government consumption expenditures (GCE) -- contributed to 3Q growth. Net exports (NetX) detracted from growth.

The negligible improvement in the 3Qv2 headline number masks a noteworthy shift in the composition of that growth -- from consumer spending to even more inventory growth. The contribution from consumer spending on goods and services weakened by 0.24PP, to a lower growth rate than in 2Q. Nearly offsetting that was an upward revision to inventories (+0.20PP), which are now reported to be growing at a +2.27% annualized rate. As a consequence, the BEA revised real final sales of domestic product downward by 0.20PP, to -4.09PP compared to 2Q.

The growth in commercial fixed investment was revised upward (+0.29PP), while government spending and net exports were trimmed by a combined -0.25PP. Foreign trade is now removing 1.91% from the headline number, off 3.13PP from 2Q.

Again it is worth noting that the headline number has been propped up by the most fickle of the BEA's data items: inventories; which added +3.44PP more to the 3Q headline than in 2Q. 

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The key number from this report is the BEA's real final sales of domestic product which is now reported to be down by 4.09PP from 2Q, remarked Consumer Metric Institute’s Rick Davis. “This revision simply reinforced [3Qv1’s] story -- that the growth rate for consumer spending was weakening, with inventories growing as a consequence. Global economics and politics also are not helping, with trade now removing another 3% from the headline quarter over quarter.”

“In a sense this report was even more of the same, an economy clearly in transition from the happy news reported for 2Q2018,” Davis concluded.

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 2018 Residential Sales, Inventory and Prices

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Sales of new single-family houses in October 2018 were at a seasonally adjusted annual rate (SAAR) of 544,000 units (575,000 expected). This is 8.9% (±13.7%)* below the revised September rate of 597,000 units (originally 553,000) and 12.0% (±13.1%)* below the October 2017 SAAR of 618,000 units; the not-seasonally adjusted year-over-year comparison (shown in the table above) was -14.3%. For longer-term perspectives, not-seasonally adjusted sales were 60.8% below the “housing bubble” peak and 19.7% below the long-term, pre-2000 average.

The median sales price of new houses sold in October was $309,700 (-$11,600 or 3.6% MoM); meanwhile, the average sales price jumped to $395,000 (+$16,000 or 4.2%). Starter homes (defined here as those priced below $200,000) comprised 11.9% of the total sold, down from the year-earlier 12.2%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 made up 4.8% of those sold in October, up from 4.1% 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 October, single-unit completions fell by 10,000 units (-1.2%). Because the drop in completions was outpaced by that of sales (-53,000 units; 8.9%), inventory for sale expanded in both absolute (+14,000 units) and months-of-inventory (+0.9 month) terms. 

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Existing home sales ambled higher in October (+70,000 units), to a SAAR of 5.22 million units (5.200 million expected). Inventory of existing homes for sale shrank in both absolute (-30,000 units) and months-of-inventory (-0.1 month) terms. Because new-home sales fell by a proportionally greater amount than resales, the share of total sales comprised of new homes tumbled to 9.4%. The median price of previously owned homes sold in October retreated to $255,400 (-$1,500 or 0.6% MoM). 

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Housing affordability marginally improved as the median price of existing homes for sale in September dropped by $7,700 (-2.9%; +4.6 YoY), to $260,500. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices slowed to a not-seasonally adjusted monthly change of +0.1% (+5.5% YoY) -- but still marked a new all-time high for the index.

“Home prices plus data on house sales and construction confirm the slowdown in housing,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The S&P CoreLogic Case-Shiller National Index showed a 5.5% YoY gain, weaker for the second month in a row as 16 of 20 cities showed smaller annual price gains. On a monthly basis, nine cities saw prices decline in September compared to August. In Seattle, where prices were rising at double-digit annual rates a few months ago, prices dropped last month. The few places reporting larger gains including some of the cities which had the biggest gains and largest losses 10 years ago: Las Vegas, Phoenix and Tampa.

“Sales of both new and existing single family homes peaked one year ago in November 2017. Sales of existing homes are down 9.3% from that peak. Housing starts are down 8.7% from November of last year. The National Association of Home Builders sentiment index dropped seven points to 60, its lowest level in two years. One factor contributing to the weaker housing market is the recent increase in mortgage rates. Currently the national average for a 30-year fixed rate loan is 4.9%, a full percentage point higher than a year ago.” 

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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 2018 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 1,228,000 units (1.240 million expected). This is 1.5% (±12.9%)* above the revised September estimate of 1,210,000 (originally 1.201 million units), but 2.9% (±10.4%)* below the October 2017 SAAR of 1,265,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -2.1%.

Single-family housing starts in October were at a rate of 865,000; this is 1.8% (±10.8%)* below the revised September figure of 881,000 (-1.5% YoY). Multi-family starts: 363,000 units (+10.3% MoM; -3.5% 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 October were at a SAAR of 1,111,000. This is 3.3% (±10.5%)* below the revised September estimate of 1,149,000 and 6.5% (±9.2%)* below the October 2017 SAAR of 1,188,000 units; the NSA comparison: -6.5% YoY.

Single-family housing completions in October were at a SAAR of 832,000; this is 1.2% (±10.6%)* below the revised September rate of 842,000 (+4.1% YoY). Multi-family completions: 279,000 units (-9.1% MoM; -29.8% YoY). 

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Total permits in October were at a SAAR of 1,263,000 units (1.260 million expected). This is 0.6% (±2.4%)* below the revised September rate of 1,270,000 (originally 1.241 million units) and 6.0% (±1.6%) below the October 2017 SAAR of 1,343,000 units; the NSA comparison: -3.3% YoY.

Single-family authorizations in October were at a rate of 849,000; this is 0.6% (±2.2%)* below the revised September figure of 854,000 (+4.5% YoY). Multi-family: 414,000 (-0.5% MoM; -15.5% YoY). 

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Growing affordability concerns resulted in builder confidence in the market for newly-built single-family homes falling eight points to 60 in November on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). Despite the sharp drop, builder sentiment still remains in positive territory.

“Builders report that they continue to see signs of consumer demand for new homes but that customers are taking a pause due to concerns over rising interest rates and home prices,” said NAHB Chairman Randy Noel.

“For the past several years, shortages of labor and lots along with rising regulatory costs have led to a slow recovery in single-family construction,” said NAHB Chief Economist Robert Dietz. “While home price growth accommodated increasing construction costs during this period, rising mortgage interest rates in recent months coupled with the cumulative run-up in pricing has caused housing demand to stall.”

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 2018 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) edged up 0.1% in October (+0.2% expected), as a gain for manufacturing outweighed decreases elsewhere. As a result of upward revisions primarily in mining, the overall index is now reported to have advanced at an annual rate of 4.7% in 3Q, appreciably above the gain of 3.3% reported initially. Hurricanes lowered the level of IP in both September and October, but their effects appear to be less than 0.1% per month. In October, manufacturing output rose 0.3% for its fifth consecutive monthly increase, while the indexes for mining and for utilities declined 0.3% and 0.5%, respectively. At 109.1% of its 2012 average, total IP was 4.1% higher in October than it was a year earlier. 

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Industry Groups

Manufacturing output moved up 0.3% in October despite a sizable drop in motor vehicle assemblies; manufacturing production excluding motor vehicles and parts increased 0.5%. The output of durables advanced 0.5%, as the indexes for most of its component industries other than motor vehicles strengthened (wood products: -0.4%). Nondurables posted a gain of 0.2%, with mixed results among its industries (paper products: +0.9%). The output of other manufacturing (publishing and logging) fell 1.5%.

Mining output declined 0.3% in October. After reaching an all-time high in August, primarily as a result of gains in the oil and gas sector, production slipped slightly over the past two months; the index in October was about 24% above its trough in 2016. The index for utilities moved down 0.5% in October, as a decrease for electric utilities was partially offset by a large increase for natural gas utilities. 

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Capacity utilization (CU) for the industrial sector was 78.4%, a rate that is 1.4 percentage points (PP) below its long-run (1972–2017) average.

Manufacturing CU edged up in October to 76.2% (NAICS basis: +0.2%, to 76.8%) -- with gains for durables and nondurables (wood products: -0.7%; paper products: +1.0%) and a loss for other manufacturing (publishing and logging) -- but it was still 2.1PP below its long-run average. The utilization rate for mining fell to 92.7% but remained well above its long-run average of 87.0%. The operating rate for utilities moved down to 77.3%, a rate that is 8.0PP below its long-run average. 

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Capacity at the all-industries level nudged up 0.2% (+1.9 % YoY) to 139.1% of 2012 output. Manufacturing (NAICS basis) rose fractionally (+0.1% MoM; +1.4% YoY) to 138.7%. Wood products: +0.3% (+3.3% YoY) to 163.2%; paper products: -0.1% (-0.8% YoY) to 110.5%.

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

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

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Consumer Price Index

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3% in October (+0.3% expected). An increase in the gasoline index was responsible for over one-third of the seasonally adjusted increase in the all-items index; advances in the indexes for shelter, used cars and trucks, and electricity also contributed. The increases in the gasoline and electricity indexes led to a 2.4% rise in the energy index. The food index, in contrast, declined slightly in October.

The index for all items less food and energy rose 0.2% in October following a 0.1% increase in September. Along with the indexes for shelter and for used cars and trucks, the indexes for medical care, household furnishings and operations, motor vehicle insurance, and tobacco all increased in October. The indexes for communication, new vehicles, and recreation all declined.

The all-items index rose 2.5% for the 12 months ending October, a larger increase than the 2.3% increase for the 12 months ending September. The index for all items less food and energy rose 2.1% for the 12 months ending October. The energy index increased 8.9%, while the food index increased more modestly, advancing 1.2% over the last 12 months.

Producer Price Index

The Producer Price Index for final demand (PPI) rose 0.6% in October (+0.2% expected). Final demand prices advanced 0.2% in September and declined 0.1% in August. In October, over 60% of the rise in final demand prices can be traced to a 0.7% advance in the index for final demand services. Prices for final demand goods moved up 0.6%.

On an unadjusted basis, the final demand index increased 2.9% for the 12 months ended in October. The index for final demand less foods, energy, and trade services rose 0.2% in October after climbing 0.4% in September. For the 12 months ended in October, prices for final demand less foods, energy, and trade services advanced 2.8%.

Final Demand

Final demand services: The index for final demand services increased 0.7% in October, the largest advance since climbing 0.8% in January 2016. Nearly three-fourths of the broad-based October rise can be traced to margins for final demand trade services, which moved up 1.6%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand services less trade, transportation, and warehousing and for final demand transportation and warehousing services increased 0.2% and 0.6%, respectively.

Product detail: About one-fifth of the October advance in prices for final demand services is attributable to a 1.2% rise in margins for machinery, equipment, parts, and supplies wholesaling. The indexes for food and alcohol retailing; health, beauty, and optical goods retailing; inpatient care; apparel, jewelry, footwear, and accessories retailing; and traveler accommodation services also moved higher. In contrast, prices for loan services (partial) fell 0.5%. The indexes for hospital outpatient care and furniture retailing also declined.

Final demand goods: The index for final demand goods climbed 0.6% in October, the largest rise since advancing 0.9% in May. Nearly three-fourths of the October increase can be traced to prices for final demand energy, which moved up 2.7%. The index for final demand foods rose 1.0%. Prices for final demand goods less foods and energy were unchanged. 

Product detail: Over 60% of the October increase in prices for final demand goods is attributable to the gasoline index, which jumped 7.6%. Prices for diesel fuel, fresh and dry vegetables, beef and veal, cigarettes, and jet fuel also moved higher. Conversely, the motor vehicles index fell 0.7%. Prices for liquefied petroleum gas and for fresh fruits and melons also decreased. 

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The not-seasonally adjusted price indexes we track were mixed on both a MoM and YoY basis. 

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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 2018 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil edged up in October, by $0.52 (+0.7%), to $70.75 per barrel. The increase occurred within the context of a stronger U.S. dollar, the lagged impacts of an 681,000 barrel-per-day (BPD) jump in the amount of oil supplied/demanded during August (to 21.3 million BPD -- the highest volume since February 2007), and a corresponding rise in accumulated oil stocks (monthly average: 419 million barrels). 

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From the 5 November 2018 issue of Peak Oil Review:

“During September the threat of the renewed U.S. sanctions on Iranian exports forced world prices into the high $80s with many predicting that we would soon see $100 oil again.  During the past month, however, market sentiment changed as it appeared the sanctions might not be as effective as some hoped, the global oil production increase, higher prices and the brewing U.S.-China trade war threaten demand in the coming years.

“Most of the world's top oil trading houses expect prices to decline next year as slowing global economic growth and rising oil supply compensates for fewer Iranian crude barrels on the market.  Speculators second this sentiment with hedge funds closing out the bulk of their long positions in the oil market during October.  There are a few outliers such as Goldman Sachs which sees oil prices back to $80 a barrel by the end of the year, but for now, the sentiment that demand for oil will fall in the coming year seems to be predominant.

“A $14 decline in world oil prices is starting to pressure the budgets of the world's largest exporters and is likely to restrain in growth in investment in finding and producing from new oil fields.” 

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Selected highlights from the 2 November 2018 issue of OilPrice.com’s Oil & Energy Insider include:

U.S. to grant waivers to eight countries importing Iranian oil. The U.S. has granted exemptions to eight importers of Iranian oil just days before sanctions on Iran take effect. The countries will be allowed to continue to import oil without fear of retribution from the U.S. as long as they continue to make reductions in those purchases, according to Bloomberg. Four of the countries include Iran's top buyers - China, India, South Korea and Japan. The other four were not identified in the Bloomberg report, but the decision is expected to be announced on Monday.

U.S. oil production surges. The EIA said the U.S. produced more than 11.3 mb/d in August, a massive jump of over 400,000 bpd from a month earlier. The new record high also made the U.S. the largest oil producer in the world. Record output, combined with higher production from OPEC, has dealt sharp losses to crude oil prices amid mounting fears of oversupply.

U.S. seeks to keep Middle East oil flowing. U.S. diplomats have reportedly stepped in to try to resolve disputes in the Middle East to increase oil flows. According to the Wall Street Journal, the U.S. is trying to broker a deal between Saudi Arabia and Kuwait over the Neutral Zone oil fields, which have 500,000 bpd of capacity but have been offline for years. The U.S. is also trying to help Iraq export more oil through Kurdistan, which would add another 300,000 bpd or so to global supplies. Washington is trying to ease these burdens at a time when it is seeking to shut in Iranian production.

Continental Resources doubles resource estimate. Continental Resources doubled its estimated recoverable resources to 30-40 billion barrels, up from the previous estimate of 20 billion barrels set in 2011. "With today's completion technology we are recovering 15% and potentially 20% of the oil in place on a primary basis," Continental's President Jack Stark said during today's earnings conference call. "This is substantially higher than the recoveries that we thought possible back in 2011."

Oil and gas sector needs consolidation. Top industry executives said that the oil and gas industry needs to consolidate, in order to reach scale, cut costs and streamline services. "There's a lot of smaller high-quality companies across industry where synergy and value can be captured" by combining, Chesapeake Energy's CEO Doug Lawler said at the Deloitte Oil & Gas Conference, according to S&P Global Platts. "This will be a part of [Chesapeake's] strategy going forward." Other top analysts and executives voiced similar sentiments, an indication that a new wave of M&A activity could be coming.

Economists: Brent to average $76 in 2019. A Reuters survey of 46 economists find an averaged predicted Brent crude price of $76.88 per barrel in 2019. The respondents see Iran sanctions putting a floor beneath oil prices, but weaker demand and a slower global economy putting a cap on prices.

OPEC production hits two-year high. OPEC production rose in October to its highest level in nearly two years. Higher output from Saudi Arabia, Libya and the UAE pushed production up 390,000 bpd compared to September's levels. The figures gave the market confidence OPEC will be able to supply the market as Iranian production goes offline.

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 2018 International Trade (Softwood Lumber)

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Softwood lumber exports turned lower (24 MMBF or -16.6%) in September, along with imports (29 MMBF or -2.2%). Exports were 28 MMBF (-19.0%) below year-earlier levels; imports were 4 MMBF (+0.3%) higher. As a result, the year-over-year (YoY) net export deficit was 32 MMBF (2.8%) larger. However, the average net export deficit for the 12 months ending September 2018 was 0.8% 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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North America (of which Canada: 21.4%; Mexico: 19.8%) and Asia (especially China: 8.4%) were the primary destinations for U.S. softwood lumber exports; the Caribbean ranked third with a 21.9% share. Year-to-date (YTD) exports to China were -2.5% relative to the same months in 2017. Meanwhile, Canada was the source of most (92.1%) of softwood lumber imports into the United States. Imports from Canada were 1.4% lower YTD than the same months in 2017. Overall, YTD exports were up 4.6% compared to 2017, while imports were down 0.3%. 

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U.S. softwood lumber export activity through the West Coast customs region represented the largest proportion (35.5% of the U.S. total), followed by the Eastern region (27.8%) and the Gulf (25.6%) regions. Moreover, Seattle maintained its lead (19.4% of the U.S. total) over Mobile (15.0%) as the single most-active district. At the same time, Great Lakes customs region handled 65.1% of softwood lumber imports -- most notably the Duluth, MN district (29.3%) -- coming into the United States. 

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Southern yellow pine comprised 30.1% of all softwood lumber exports, Douglas-fir (15.4%) and treated lumber (11.5%). Southern pine exports were up 5.9% YTD relative to 2017, while treated: -8.8%; Doug-fir: -7.5%.

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

October 2018 Currency Exchange Rates

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In October the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-0.2%) but appreciated against the euro (+1.6%) and yen (+0.6%). On a trade-weighted index basis, the USD gained 0.7% 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.

October 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 decelerated further in October. The PMI registered 57.7%, down 2.1 percentage points (PP) from the September 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. This report reflects “moderately strong production output and continued supplier delivery performance issues,” said Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. 

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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 decelerated (-1.3PP) to 60.3%. 

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Of the industries we track, only Wood Products contracted. Respondent comments included the following:

* Construction -- "Tariffs are beginning to impact business. We ask our suppliers to hold pricing for six months, but we are experiencing difficulties."

* Public Administration -- "September 30 was the last day of the fiscal year. To close out the year and transition to the new year, activity levels will be different from the usual. Economic growth continues to be high, especially related to construction projects. As such, construction contractors, sub-contractors and labor remain in short supply."

Relevant commodities:
* Priced higher -- Construction subcontractors; labor (general and temporary); paper and paper products; corrugate; freight; transportation costs; fuel (diesel and gasoline); and natural gas.
* Priced lower -- Lumber.
* Prices mixed -- None.
* In short supply -- Construction subcontractors; labor (general, construction and temporary); and trucking.

IHS Markit’s October surveys, with both headline numbers increasing, ran counter to ISM’s.

Manufacturing -- New order growth accelerates to five-month high

Key findings:
* Upturn in new business quickens to sharp rate
* Export orders increase fractionally
* Rate of job creation picks up to ten-month high

Services -- Business activity growth regains momentum in October

Key findings:
* Output expansion accelerates
* Input price inflation fastest since September 2013
* Rate of job creation dips to nine-month low

Commentary by Chris Williamson, Markit’s chief business economist:

Manufacturing -- "The manufacturing sector saw a strong start to the closing quarter of 2018, with new order inflows rising sharply and business optimism spiking higher in an encouraging sign that firms expect the good times to continue into 2019.

“The increasingly bullish mood was also reflected in one of the largest monthly increases in factory payroll numbers seen over the past seven years as firms grew capacity to meet rising workloads.

“The key area of concern remained tariffs, which were widely reported to have contributed to another month of stalled export sales and a steep rise in prices for many inputs. Average input prices rose at one of the sharpest rates seen over the past six years in October. In a clear sign that inflationary pressures are continuing to build, strong customer demand meant firms were often able to push cost increases through to selling prices. Average prices charged for goods leaving the factory gate consequently jumped to one of the greatest extents seen since mid-2011.”

Services -- “A rebound from a weather-torn September and strong demand propelled service sector growth in October. Combined with the steady output growth being recorded in the manufacturing sector, the survey data suggest the economy grew at its fastest rate since July.

“Comparisons with GDP indicate that the latest survey data translate into an annualized rate of economic growth of around 2.5%, representing a solid start to the fourth quarter.

“Expectations of future business growth spiked higher, suggesting companies are expecting a strong end to the year for the economy.

“Average selling prices for goods and services rose at a rate only marginally below September’s ten-year survey record high, however, indicating that intensifying inflationary pressures remain a key concern.

“Price rises often reflected the need to pass higher costs on to customers, in turn often linked to tariffs, upward wage growth and higher interest rates. Consumer price inflation therefore looks set to remain elevated.”

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 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 in September increased $4.6 billion or 0.9% to $509.8 billion. Durable goods shipments increased $3.0 billion or 1.2% to $256.5 billion led by transportation equipment. Meanwhile, nondurable goods shipments increased $1.6 billion or 0.6% to $253.3 billion, led by petroleum and coal products. Shipments of wood products slid by 0.3%; paper: -0.1%. 

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Inventories increased $3.7 billion or 0.5% to $680.4 billion. The inventories-to-shipments ratio was 1.33, down from 1.34 in August. Inventories of durable goods increased $3.0 billion or 0.7% to $410.9 billion, led by transportation equipment. Nondurable goods inventories increased $0.7 billion or 0.2% to $269.5 billion, led by petroleum and coal products. Inventories of wood products expanded by 0.5%; paper: 0.0%. 

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New orders increased $3.4 billion or 0.7% to $515.3 billion. Excluding transportation, new orders rose by 0.4% (+5.9% YoY). Durable goods orders increased $1.8 billion or 0.7% to $262.0 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- ticked down by -0.1% (+1.1% YoY). New orders for nondurable goods increased $1.6 billion or 0.6% to $253.3 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 66% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders increased $9.7 billion or 0.8% to $1,186.5 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.64, down from 6.67 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. Thereafter, however, real unfilled orders gradually declined and have turned higher only since 2018 began.

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 2018 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment rose by 250,000 jobs in October -- well above expectations of +190,000. Combined August and September employment gains were unchanged (August: +16,000; September: -16,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) remained at 3.7% because most (+600,000) of the new/re-entrants to the labor force (+711,000) found employment. 

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Observations from the employment reports include:

* The household (600,000 more people employed) and establishment (+250,000 jobs) survey results were at least directionally consistent, but again somewhat out of sync. Given the fact that employees returned to work in October after the disruptions from September’s hurricane Florence, this outcome is not entirely unexpected. Moreover, the BLS stated “hurricane Michael had no discernible effect on the national employment and unemployment estimates for October.”

* We have often been critical of the BLS’s seeming to “plump” the headline numbers with favorable adjustment factors; that appears to have occurred in October. Imputed jobs from by the CES (business birth/death model) adjustment were near the maximum for the month of October (since 2000), but the BLS also subtracted an above-average seasonal adjustment from the base data. Had average October adjustments been used, employment may have been a still-respectable +186,000 instead of the reported +250,000.

* As for industry details, Manufacturing expanded by 32,000 jobs, the largest MoM increase since December 2017. That result is somewhat consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded in October -- albeit at a slower pace than in September. Wood Products employment gained 1,300 jobs (ISM was unchanged); Paper and Paper Products: -700 (ISM increased). Construction employment added 30,000 (ISM not yet reported). 

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* The number of employment-age persons not in the labor force (NILF) retreated by 487,000 (-0.5%), to 95.9 million. As a result, the employment-population ratio increased fractionally to 60.6%; thus, for every five people being added to the population, roughly three are employed. 

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* Similarly, the labor force participation rate (LFPR) rose to 62.9% -- comparable to levels seen in the late-1970s. Average hourly earnings of all private employees rose by $0.05, to $27.30, resulting in a 3.1% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages advanced by $0.07, to $22.89 (+3.2% YoY). Since the average workweek for all employees on private nonfarm payrolls expanded by 0.1 hour (to 34.5 hours), average weekly earnings increased by $4.45 (+0.5%), to $941.85 (+1.2% YoY). With the consumer price index running at an annual rate of 2.3% in September, workers are still losing ground -- officially, at least -- in terms of purchasing power. 

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* Full-time jobs gained ground (318,000). Those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- slid by 21,000; non-economic reasons: +48,000. Those holding multiple jobs: +176,000. 

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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 rose in October, by $19.1 billion (+10.7% MoM; +0.9% YoY), to $197.0 billion; it is difficult to conclude anything meaningful from the data beyond observing that the increase occurred in the aftermath of adverse weather, and 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 October was 1.1% 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.