What is Macro Pulse?

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.

Tuesday, January 29, 2019

December 2018 Residential Sales, Inventory and Prices

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Sales of new single-family houses in December 2018 have not yet been reported because of the federal government’s partial shutdown. Existing home sales retreated in December (-340,000 units), tumbling to a SAAR of 4.99 million units (5.240 million expected). Inventory of existing homes for sale shrank in both absolute (-190,000 units) and months-of-inventory (-0.2 month) terms. The median price of previously owned homes sold in December fell to $253,600 (-$3,700 or 1.4% MoM).
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Housing affordability worsened again as the median price of existing homes for sale in November rose by $2,800 (+1.1%; +5.0 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 edged up at a not-seasonally adjusted monthly change of +0.1% (+5.2% YoY).
“Home prices are still rising, but more slowly than in recent months,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The pace of price increases are being dampened by declining sales of existing homes and weaker affordability. Sales peaked in November 2017 and drifted down through 2018. Affordability reflects higher prices and increased mortgage rates through much of last year. Following a shift in Fed policy in December, mortgage rates backed off to about 4.45% from 4.95%.
“Housing market conditions are mixed while analysts’ comments express concerns that housing is weakening and could affect the broader economy. Current low inventories of homes for sale -- about a four-month supply -- are supporting home prices. New home construction trends, like sales of existing homes, peaked in late 2017 and are flat to down since then. Stable 2% inflation, continued employment growth, and rising wages are all favorable. Measures of consumer debt and debt service do not suggest any immediate problems.” 
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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.

Saturday, January 19, 2019

December 2018 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) increased 0.3% in December (+0.3% expected) after rising 0.4% in November (originally +0.6%). For 4Q as a whole, total IP moved up at an annual rate of 3.8%. In December, manufacturing output increased 1.1%, its largest gain since February 2018. The output of mines rose 1.5%, but the index for utilities fell 6.3%, as warmer-than-usual temperatures lowered the demand for heating. At 109.9% of its 2012 average, total IP was 4.0% higher in December than it was a year earlier. 
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Industry Groups
Manufacturing output advanced 1.1% in December and increased at an annual rate of 2.3% in 4Q; the index rose 2.5% between 4Q2017 and 4Q2018. Within durable manufacturing, motor vehicles and parts posted a gain of 4.7% in December, and nonmetallic mineral products recorded an increase of nearly 3%; the indexes for several other durable goods industries advanced more than 1% (wood products: +1.8%). Among nondurables, the index for petroleum and coal products jumped 3.5%. Most other major categories of nondurables posted gains of less than 1% (paper products: -0.2%). The output of other manufacturing (publishing and logging) increased 0.2%.
Mining output rose 1.5% in December, with gains in oil and gas extraction, coal mining, and support activities for mining (mainly oil and gas well drilling); the index for mining was 13.4% above its level from a year earlier. The output of utilities fell 6.3% in December, with both electric and gas utilities posting sharp declines.
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Capacity utilization (CU) for the industrial sector rose 0.1 percentage point (PP) in December to 78.7%, a rate that is 1.1PP below its long-run (1972–2017) average.
Manufacturing CU jumped 0.7PP in December to 76.5%, about 2PP below its long-run average (NAICS manufacturing: +0.9%, to 77.2%; wood products: +1.5%; paper products: -0.1%). The utilization rate for mining increased to 94.8% and remained well above its long-run average of 87.0%. The operating rate for utilities fell to 75.0%, a rate that is about 10PP below its long-run average. 
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Capacity at the all-industries level nudged up 0.2% (+2.1 % YoY) to 139.6% of 2012 output. Manufacturing (NAICS basis) rose fractionally (+0.1% MoM; +1.5% YoY) to 139.0%. Wood products: +0.3% (+3.7% YoY) to 164.3%; paper products: -0.1% (-1.0 % YoY) to 110.3%.
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, January 16, 2019

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

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The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1% in December (-0.1% expected). The seasonally adjusted decline in the all items index was caused by a sharp decrease in the gasoline index, which fell 7.5% in December. This decline more than offset increases in several indexes including shelter, food, and other energy components. The energy index fell 3.5%, as the gasoline and fuel oil indexes fell, but the indexes for natural gas and for electricity increased. The food index increased 0.4% in December.
The index for all items less food and energy increased 0.2% in December, the same increase as in October and November. Along with the index for shelter, the indexes for recreation, medical care, and household furnishings and operations all increased in December, while the indexes for airline fares, used cars and trucks, and motor vehicle insurance all declined.
The all items index increased 1.9% for the 12 months ending December; this was the first time the 12-month change has been under 2.0% since August 2017. The index for all items less food and energy rose 2.2% over the last 12 months, the same increase as for the 12 months ending November. The food index rose 1.6% over the past year, while the energy index declined 0.3%.
The Producer Price Index for final demand (PPI) fell 0.2% in December (-0.1% expected). Final demand prices advanced 0.1% in November and 0.6% in October. In December, 80% of the decrease in the final demand index is attributable to a 0.4% decline in prices for final demand goods. The index for final demand services edged down 0.1%.
On a year-over-year basis, the final demand index moved up 2.5% in December. The index for final demand less foods, energy, and trade services was unchanged in December following a 0.3% rise in November. In 2018, prices for final demand less foods, energy, and trade services advanced 2.8% following a 2.3% increase in 2017.
Final Demand
Final demand goods: The index for final demand goods moved down 0.4% in December, the same as in November. In December, the decline was the result of a 5.4% drop in the index for final demand energy. In contrast, prices for final demand foods advanced 2.6%, and the index for final demand goods less foods and energy rose 0.1%.
Product detail: Leading the December decrease in the index for final demand goods, gasoline prices dropped 13.1%. The indexes for diesel fuel, basic organic chemicals, jet fuel, residual fuels, and beef and veal also moved down. Conversely, prices for fresh fruits and melons jumped 48.9%. The indexes for construction machinery and equipment and for residential natural gas also increased. (See table 4.)
Final demand services: Prices for final demand services edged down 0.1% in December after increasing for three straight months. The decline was led by a 0.3% decrease in the index for final demand trade services. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand transportation and warehousing services fell 0.2%. In contrast, the index for final demand services less trade, transportation, and warehousing inched up 0.1%.
Product detail: The December decrease in prices for final demand services was led by margins for food retailing, which fell 2.5%. The indexes for cellular phone and other wireless telecommunication services, automotive fuels and lubricants retailing, residential real estate loans (partial), and airline passenger services also moved lower. Conversely, prices for guestroom rental rose 2.9%. The indexes for inpatient care, machinery and equipment parts and supplies wholesaling, and long-distance motor carrying also increased. 
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The not-seasonally adjusted price indexes we track were mixed on both MoM and YoY bases. It appears softwood lumber has stopped retreating. 
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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, January 8, 2019

December 2018 Currency Exchange Rates

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In December the monthly average value of the U.S. dollar (USD) appreciated versus Canada’s “loonie” (+1.8%), but depreciated against both the euro (-0.1%) and yen (-1.1%). On a trade-weighted index basis, the USD gained 0.1% 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.

Monday, January 7, 2019

December 2018 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in December the expansion in U.S. manufacturing decelerated. The PMI registered 54.1%, down 5.2 percentage points (PP) from the November 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 only sub-indexes with higher December values were customer inventories and export orders. 
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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 (-3.1PP) to 57.6%. Only new orders and exports exhibited higher index values. 
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Of the industries we track, Paper Products contracted and Real Estate was unchanged; the rest expanded. Respondent comments included:
* Construction -- "New residential home sales have slowed significantly. Tariff delay has slowed material cost increases, but all indications are that January will bring price increases."
* Real Estate, Rental & Leasing -- "Business is exceeding expectations. 2019 should [equal] or exceed 2018."
Relevant commodities:
* Priced higher -- Construction subcontractors; freight; labor (general and construction).
* Priced lower -- Crude oil; lumber products.
* Prices mixed -- Fuel (diesel and gasoline).
* In short supply -- Construction subcontractors; labor (general, construction and temporary); hardwood.

IHS Markit’s December survey headlines also showed decelerating activity.
Manufacturing -- PMI slips to 15-month low in December
Key findings:
* Weakest improvement in operating conditions since September 2017
* New order growth eases to 15-month low
* Business confidence lowest since October 2016
Services -- New business growth weakest since October 2017
Key findings:
* New orders expand at solid, albeit slower rate
* Business activity growth softens to three-month low
* Business confidence dips to lowest in a year

Commentary by Chris Williamson, Markit’s chief business economist:
Manufacturing -- "Manufacturers reported a weakened pace of expansion at the end of 2018, and grew less upbeat about prospects for 2019. Output and order books grew at the slowest rates for over a year and optimism about the outlook slumped to its gloomiest for over two years. The month rounds of a fourth quarter in which manufacturing production is indicated to have risen at only a modest annualized rate of about 1%.
“Some of the weakness is due to capacity constraints, with producers again reporting widespread difficulties in finding suitable staff and sourcing sufficient quantities of inputs. However, the survey also revealed signs of slower demand growth from customers, as well as rising concerns over the impact of tariffs. Just over two thirds of manufacturers reporting higher costs attributed the rise in prices to tariffs.
“Growth was led by strengthening demand for consumer goods, and robust growth was also reported for investment goods such as plant and machinery. But producers of intermediate goods -- who supply inputs to other manufactures -- reported the weakest rise in new orders for over two years, hinting at increased destocking by their customers. “A shift to inventory reduction was highlighted by purchasing activity in the manufacturing sector rising at the weakest rate for one and a half years in December, providing further evidence that companies have become increasingly cautious about spending amid rising uncertainty about the outlook.”

Services -- “Service sector business activity grew at a reassuringly solid rate in December, though like the manufacturing economy has seen the pace of expansion moderate somewhat since the strong rates enjoyed earlier in the year. Despite the slowing, the December surveys remain consistent with GDP growing at a healthy annualized rate of about 2.5% in the fourth quarter, with momentum easing only very slightly as the quarter proceeded.
"Hiring also remains encouragingly buoyant. The December survey is indicative of non-farm payrolls growth of approximately 190,000, driven mainly by increased service sector job gains as firms boosted capacity in line with rising demand. Domestic markets remained the main source of business growth, though the weaker dollar was also reported to have helped boost exports.
"Growth may continue to moderate in coming months, however, as backlogs of unfinished work across the manufacturing and service sectors failed to rise for the first time since June 2017, reflecting the recent slowing in growth of new business. Firms’ expectations of growth in the coming year also deteriorated markedly, down to the second-lowest in over two years, adding to the gloomier outlook.
"Inflationary forces meanwhile cooled during the month as lower oil prices helped to alleviate upward cost pressures from tariffs and, to a lesser extent, wages. Average prices charged for goods and services rose at the slowest rate for a year as a result, which should feed through to lower consumer inflation in coming months, with PCE inflation dipping below 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.

Sunday, January 6, 2019

December 2018 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil in December extended losses when dropping by $7.44 (-13.1%), to $49.52 per barrel. The decrease occurred within the context of a stronger U.S. dollar, the lagged impacts of an 823,000 barrel-per-day (BPD) rise in the amount of oil supplied/demanded during October (to 20.8 million BPD), and a plateauing of accumulated oil stocks (monthly average: 442 million barrels). 
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From the 31 December 2018 issue of Peak Oil Review:
Most major investment banks are forecasting a rebound in oil prices in 2019.  However, forecasts vary widely.  Bank of America Merrill Lynch, for instance, sees WTI averaging $59 per barrel in 2019; Citi is at the bearish end with a forecast of oil averaging $49 per barrel; and Barclays, along with half a dozen others, says the WTI benchmark will average around $72 next year.
The OPEC Production Cut:  The continued decline in oil prices this month has raised concerns among oil exporters who had been expecting that their announcement of a 1.2 million b/d production cut would send prices higher.  Implementation of the production cut, however, has been somewhat lackadaisical, with exemptions for several members, and Moscow is waiting until spring before fully lowering its.  Now we are told that OPEC and allied oil producers are ready to hold an extraordinary meeting and will do what is needed if the current cut in oil output by 1.2 million b/d does not balance the market next year.
The United Arab Emirates’ energy minister said last week “If we are required to extend for (another) six months, we will do it … I can assure you an extension will not be a problem.”  Saudi Arabia’s OPEC governor, Adeeb Al-Aama, said his country is fully committed to the reduction agreement, adding that Saudi production in January was seen at 10.2 million b/d, lower than its output target of 10.3 million b/d under the recent pact.  The kingdom has over-committed with previous cuts, reducing by more than its share and reaching compliance of 120 percent from January 2017 until May 2018, Al-Aama said.
OPEC and Russia-led non-OPEC oil producers are unlikely to create a formal joint organization for managing the oil market, Russia’s Energy Minister Novak said last Thursday.  Although Russia and OPEC have been touting the idea of “institutionalizing” their cooperation in the oil market by forming some kind of organization, Novak said the idea had now been discarded.
“There is a consensus that there will be no such organization. That’s because it requires additional bureaucratic brouhaha in relation to financing with the US side,” Reuters quoted Novak as saying at a briefing with reporters.  Russia has been concerned with the possibility that the US could pass the so-called No Oil Producing and Exporting Cartels (NOPEC) Act that could pave the way to antitrust lawsuits in the US against the cartel and its national oil companies.  According to analysts, the possibility of a NOPEC Act has been a big concern for OPEC members lately as it could damage their relations with the US and result in sanctions similar to those imposed on Iran.
In addition to NOPEC, the cartel is facing several other problems in the coming year. Its rotating presidency is due to fall to Venezuela who will send a general with zero oil industry experience to lead the cartel.  The alliance with Russia means that any effective policy will require that Moscow be on board indicating that the Saudis and their allies are no longer in complete control.  The continuing growth of US shale oil production in the coming year suggests that the US alone could nullify much of an OPEC+ production cut.  Oil traders are becoming apathetic to announcements from OPEC as to what the cartel plans to do.  In the past, a leak or hint from an OPEC official was enough to send oil prices off in the desired direction.  In today’s world, this is no longer true. 
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Selected highlights from the 4 January 2019 issue of OilPrice.com’s Oil & Energy Insider include:
U.S. shale activity slowed in fourth quarter. The collapse of oil prices in the fourth quarter of 2018 led to a slowdown in the shale patch. The business activity index published by the Federal Reserve Bank of Dallas show that activity decelerated and production growth slowed. The data suggests that the U.S. shale industry was very responsive and sensitive to lower oil prices. The average prediction for year-end WTI prices from oil and gas executives was $59 per barrel.
OPEC production fell in December. OPEC’s oil production fell in December to 32.68 million BPD, down about 460,000 BPD from a month earlier, according to Reuters. It was the largest monthly decline in two years. The reductions came ahead of the OPEC+ deal, which begins this month, and suggests that Saudi Arabia wanted to unilaterally tighten up the market. Saudi Arabia alone slashed output by 400,000 bpd, and Saudi officials said they would cut deeper in January.
U.S. shale production problems. The Wall Street Journal reported that U.S. shale companies have over-hyped the production potential from thousands of shale wells. “Two-thirds of projections made by the fracking companies between 2014 and 2017 in America’s four hottest drilling regions appear to have been overly optimistic, according to the analysis of some 16,000 wells operated by 29 of the biggest producers in oil basins in Texas and North Dakota,” the WSJ wrote. “Collectively, the companies that made projections are on track to pump nearly 10% less oil and gas than they forecast for those areas.” The WSJ calculated that the lower-than-expected production adds up to nearly one billion barrels of oil and gas over 30 years, worth more than $30 billion at current prices.
Offshore drilling plans delayed on government shutdown. The U.S. Interior Department delayed the release of a proposed plan for offshore oil and gas leasing sales from 2019 through 2024 due to the ongoing government shutdown, according to S&P Global Platts. The plan was supposed to be released in mid-January but is now likely delayed.
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, January 4, 2019

December 2018 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment added 312,000 jobs in December -- well above expectations of +190,000. In addition, combined October and November employment gains were revised up by 58,000 (October: +21,000; November: +37,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) rose to 3.9% as only roughly one-third (142,000) of the 419,000 new/re-entrants to the labor force found work. 
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Observations from the employment reports include:
* Despite being directionally consistent, the establishment (+312,000) and household (+142,000) survey results were poorly matched in December.
* We have often been critical of the BLS’s seeming to “plump” the headline numbers with favorable adjustment factors. December seems to be such a case, as all of the job gains originated with the seasonal adjustment factor; we become somewhat concerned about the accuracy of the headline number whenever the CES (business birth/death model) and/or seasonal adjustments dwarf the initial value. That said, had average (since 2000) December adjustments been used, job gains might have amounted to a still-respectable +297,000.
* As for industry details, Manufacturing gained 32,000 jobs in December. That result is reasonably consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded -- albeit at a slower pace in December. Wood Products employment shrank by 1,100 jobs (ISM unchanged); Paper and Paper Products: +1,800 (ISM declined); Construction: +38,000 (ISM not published).
* As a related point, there are 904,000 fewer manufacturing jobs today than at the start of the Great Recession in December 2007, but 2.41 million more Food Services & Drinking Places (i.e., wait staff and bartender) jobs. On a more positive note, however, the gain in manufacturing employment has been outpacing that of FS&DP jobs since July 2017; in 2018, manufacturing added 284,000 jobs while FS&D jobs expanded by 235,400. 
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* The number of employment-age persons not in the labor force (NILF) retreated by 237,000 -- to 95.6 million, or within 0.7% of August 2018’s record high. Meanwhile, the employment-population ratio (EPR) remained unchanged at 60.6%; roughly, then, for every five people being added to the population, only three are employed. 
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* Given the number of people (re)entering the labor force, the labor force participation rate (LFPR) bumped up to 63.1% -- comparable to levels seen in the late-1970s. Average hourly earnings of all private employees increased by $0.11, to $27.48, resulting in a 3.2% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.09, to $23.05 (+3.3% 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 $6.53, to $948.06 (+5.2% YoY). With the consumer price index running at an annual rate of 2.2% in November, workers are -- officially, at least -- gaining purchasing power. 
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* Full-time jobs advanced by 139,000; there are now 8.0 million more full-time jobs than the pre-recession high; for perspective, however, the non-institutional, working-age civilian population has risen by over 25.7 million. Those employed part time for economic reasons -- e.g., slack work or business conditions, or could find only part-time work -- fell by 124,000; part time for non-economic reasons: +325,000. Those holding multiple jobs rose by 117,000. 
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For a “sanity check” of the employment numbers, we consult employment withholding taxes published by the U.S. Treasury. Although “noisy” and highly seasonal, the data show the amount withheld in December jumped by $47.9 billion, to $234.0 billion (+25.7% MoM, and +1.6% 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 December was unchanged from 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.