4Q2018 Gross Domestic Product: “Initial” Estimate

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In its “initial” estimate (comparable to a combination of the more typical “advance” and “second” estimates) of 4Q2018 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) pegged growth of the U.S. economy at a seasonally adjusted and annualized rate (SAAR) of +2.59% (2.4% expected), down 0.76 percentage point (PP) from 3Q2018’s +3.35%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 4Q2018 was 3.08% higher than in 4Q2017; that growth rate was slightly faster (+0.07PP) than 3Q2018’s +3.00% relative to 3Q2017.

Three groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), and government consumption expenditures (GCE) -- contributed to 4Q growth. Net exports (NetX) detracted from growth.

The headline number’s relatively modest -0.76PP QoQ change masked significant shifts in the underlying line items: contributions from inventory growth dropped by 2.20PP (from 2.33% to 0.13%), net exports added 1.77PP (from -1.99% to -0.22%), and consumer spending growth weakened by 0.46PP (from +2.37 to +1.92%). Growth in governmental spending shrank by 0.37PP (+0.44% to +0.07%), while commercial fixed investment accelerated by 0.48PP (from +0.21% to 0.69%).

Somewhat counterintuitively in relation to the drop in consumer spending, the BEA’s real final sales of domestic product growth, which excludes the effect of inventories, jumped to +2.46%, up by 1.44PP from 3Q. 

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“This initial report for 4Q2018 (delayed for a month by the ‘Great Shutdown’) is interesting in a number of ways,” wrote Consumer Metric Institute’s Rick Davis:

-- The net headline number remains in the "Goldilocks" zone, neither too hot nor too cold. In fact, at surface value, it can't justify a change in Federal Reserve policy in any direction. Clearly the Fed is stepping away from tightening because of the condition of the markets, not the condition of the economy.

-- That said, a deeper dive into the numbers reveals a second consecutive quarter of weakening growth in consumer spending. And the increase in the household savings rate explains to a large extent where any additional disposable income is actually going -- into savings in lieu of spending.

-- The unsustainable growth in inventories that propped up last quarter's gaudy headline has vanished. But it has been largely replaced by a dramatic (and equally unsustainable) swing in foreign trade.

“We don't pretend to understand the intricacies of household or consumer psychology,” Davis continued. “However, our own data suggests that, from time to time, consumer sentiment and spending can be suppressed by FUD (Fear, Uncertainty and Doubt). And the U.S. political stage is currently generating a lot of FUD. How that FUD is damaging the household/consumer psyche -- and hence the economy -- will become better understood over the next few quarters.”

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.

December 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 December decreased $0.9 billion or 0.2% to $504.9 billion. Durable goods shipments increased $1.7 billion or 0.7% to $259.1 billion led by transportation equipment. Meanwhile, nondurable goods shipments decreased $2.6 billion or 1.0% to $245.8 billion, led by petroleum and coal products. Shipments of wood products rose by 0.2%; paper: -0.3%. 

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Inventories decreased $0.1 billion or virtually unchanged to $681.5 billion. The inventories-to-shipments ratio was 1.35, unchanged from November. Inventories of durable goods increased $1.1 billion or 0.3% to $415.1 billion, led by primary metals. Nondurable goods inventories decreased $1.2 billion or 0.4% to $266.5 billion, led by petroleum and coal products. Inventories of wood products expanded by 0.4%; paper: +0.9%. 

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New orders increased $0.3 billion or 0.1% to $499.9 billion. Excluding transportation, new orders edged up by 0.1% (+2.5% YoY). Durable goods orders increased $2.9 billion or 1.2% to $254.1 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- dropped 1.0% (+2.1% YoY). New orders for nondurable goods decreased $2.6 billion or 1.0% 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 56% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders decreased $0.9 billion or 0.1% to $1,180.3 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.55, down from 6.58 in November. 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 been gradually declining on trend.

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.

December 2018 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in December at a seasonally adjusted annual rate (SAAR) of 1,078,000 units (1.256 million expected). This is 11.2 percent (±14.0 percent)* below the revised November estimate of 1,214,000 (originally 1.256 million units) and 10.9 percent (±16.1 percent)* below the December 2017 rate of 1,210,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -11.9%.

Single-family housing starts were at a SAAR of 758,000; this is 6.7 percent (±15.3 percent)* below the revised November figure of 812,000 (-11.1% YoY). Multi-family starts: 320,000 units (-20.4% MoM; -13.7% YoY). An estimated 1,246,600 housing units were started in 2018. This is 3.6 percent (±2.1%) above the 2017 figure of 1,203,000.

* 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 December were at a SAAR of 1,097,000. This is 2.7 percent (±10.0 percent)* below the revised November estimate of 1,128,000 and 8.4 percent (±12.2 percent)* below the December 2017 SAAR of 1,197,000 units; the NSA comparison: -8.6% YoY.

Single-family housing completions were at a SAAR of 790,000; this is 0.1 percent (±14.0 percent)* above the revised November rate of 789,000 (-6.3% YoY). Multi-family completions: 307,000 units (-9.4% MoM; -14.5% YoY). An estimated 1,191,700 housing units were completed in 2018. This is 3.4 percent (±3.8%) above the 2017 figure of 1,152,900. 

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Total permits were at a SAAR of 1,326,000 units (1.297 million expected). This is 0.3 percent (±1.2 percent)* above the revised November rate of 1,322,000 (originally 1.328 million units) and 0.5 percent (±1.1 percent)* above the December 2017 rate of 1,320,000 units; the NSA comparison: +0.6% YoY.

Single-family permits were at a SAAR of 829,000; this is 2.2 percent (±0.7 percent) below the revised November figure of 848,000 (-5.5% YoY). Multi-family: 497,000 (+4.9% MoM; +9.7% YoY). An estimated 1,310,700 housing units were authorized by building permits in 2018. This is 2.2 percent (±0.6%) above the 2017 figure of 1,282,000. 

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Builder confidence in the market for newly-built single-family homes rose four points to 62 in February, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

“Ongoing reduction in mortgage rates in recent weeks coupled with continued strength in the job market are helping to fuel builder sentiment,” said NAHB Chairman Randy Noel. “In the aftermath of the fall slowdown, many builders are reporting positive expectations for the spring selling season.”

February marked the second consecutive month in which all the HMI indices posted gains. The index measuring current sales conditions rose three points to 67, the component gauging expectations in the next six months increased five points to 68 and the metric charting buyer traffic moved up four points to 48.

“Builder confidence levels moved up in tandem with growing consumer confidence and falling interest rates,” said NAHB Chief Economist Robert Dietz. “The five-point jump on the six-month sales expectation for the HMI is due to mortgage interest rates dropping from about 5 percent in November to 4.4 percent this week. However, affordability remains a critical issue. Rising costs stemming from excessive regulations, a dearth of buildable lots, a persistent labor shortage and tariffs on lumber and other key building materials continue to make it increasingly difficult to produce housing at affordable price points.”

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.

January 2019 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) decreased 0.6% in January (+0.2% expected) after rising 0.1% in December (originally +0.3%). In January, manufacturing production fell 0.9%, primarily as a result of a large drop in motor vehicle assemblies; factory output excluding motor vehicles and parts decreased 0.2%. The indexes for mining and utilities moved up 0.1% and 0.4%, respectively. At 109.4% of its 2012 average, total IP was 3.8% higher in January than it was a year earlier. 

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Industry Groups

Manufacturing output decreased 0.9% in January to a level that was, nonetheless, 2.9% above a year earlier (NAICS manufacturing: -0.9% MoM; +3.1%YoY). The output of durable goods moved down 1.7% because of a sizable drop for motor vehicles. The index for motor vehicles and parts fell 8.8%, as vehicle assemblies fell from 12.3 million units at an annual rate in December (their highest monthly pace since June 2016) to 10.6 million units in January (their lowest reading since May 2018). Most other major durable goods industries also recorded decreases (wood products: -0.4%); only fabricated metal products and furniture posted gains. The output of nondurables was unchanged; its components posted mixed results (paper products: +0.1%), with only petroleum and coal products recording an increase of more than 1% and only apparel and leather recording a decrease of more than 1%. The output of other manufacturing (publishing and logging) rose 0.5%.

Mining output edged up 0.1% in January; the index for mining was 15.3% above its level of a year earlier. The output of utilities increased 0.4% in January, with natural gas utilities rising 6% after falling 19% in December. 

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Capacity utilization (CU) for the industrial sector decreased 0.6 percentage point (PP) in January to 78.2%, a rate that is 1.6PP below its long-run (1972–2018) average.

Manufacturing CU declined 0.7PP in January to 75.8%, about 2.5PP below its long-run average (NAICS manufacturing: -1.0%, to 76.4%; wood products: -0.4%; paper products: +0.2%). The utilization rate for mining fell to 94.8% but remained well above its long-run average of 87.1%. The operating rate for utilities increased to 75.4%, 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% (+2.2 % YoY) to 139.9% of 2012 output. Manufacturing (NAICS basis) rose fractionally (+0.1% MoM; +1.5% YoY) to 139.2%. Wood products: 0.0% (+3.4% YoY) to 164.3%; paper products: 0.0% (-0.9 % 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.

November 2018 International Trade (Softwood Lumber)

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Softwood lumber exports turned lower (26 MMBF or -17.1%) in November, along with imports (168 MMBF or -13.0%). Exports were 26 MMBF (-17.1%) below year-earlier levels; imports were 220 MMBF (-16.3%) lower. As a result, the year-over-year (YoY) net export deficit was 194 MMBF (-16.3%) smaller. Also, the average net export deficit for the 12 months ending November 2018 was 3.0% 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 (39.5%; of which Canada: 22.0%; Mexico: 17.5%) and Asia (27.9%; especially China: 9.9%) were the primary destinations for U.S. softwood lumber exports; the Caribbean ranked third with a 25.9% share. Year-to-date (YTD) exports to China were -14.1% relative to the same months in 2017. Meanwhile, Canada was the source of most (88.7%) of softwood lumber imports into the United States. Imports from Canada were 4.2% lower YTD than the same months in 2017. Overall, YTD exports were up 2.1% compared to 2017, while imports were down -2.5%. 

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U.S. softwood lumber export activity through the West Coast customs region represented the largest proportion (32.5% of the U.S. total), followed by the Gulf region (30.7%) and the Eastern (27.0%) regions. Moreover, Mobile (22.1% of the U.S. total) extended its lead over Seattle (19.8%) as the single most-active district. At the same time, Great Lakes customs region handled 64.0% of softwood lumber imports -- most notably the Duluth, MN district (26.2%) -- coming into the United States. 

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Southern yellow pine comprised 25.7% of all softwood lumber exports, Douglas-fir (13.9%) and treated lumber (12.0%). Southern pine exports were up 1.6% YTD relative to 2017, while treated: -10.7%; Doug-fir: -8.8%.

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.

January 2019 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) was unchanged in January (+0.1% expected). The energy index declined for the third consecutive month, offsetting increases in the indexes for all items less food and energy and for food. All the major energy component indexes declined in January, with the gasoline index falling 5.5%. The food index increased 0.2%, with the index for food at home rising 0.1% and the food away from home index increasing 0.3%.

The index for all items less food and energy increased 0.2% in January for the fifth consecutive month. The indexes for shelter, apparel, medical care, recreation, and household furnishings and operations were among the indexes that rose in January, while the indexes for airline fares and for motor vehicle insurance declined.  

The all items index increased 1.6% for the 12 months ending January, the smallest increase since the period ending June 2017. The index for all items less food and energy rose 2.2% over the last 12 months, the same increase as the 12 months ending November and December 2018. The food index rose 1.6% over the past year, while the energy index declined 4.8%.

Producer Price Index

The Producer Price Index for final demand edged down 0.1% in January (+0.2% expected). Final demand prices also fell 0.1% in December and inched up 0.1% in November. In January, the decline in the final demand index can be traced to a 0.8% decrease in prices for final demand goods. In contrast, the index for final demand services increased 0.3%.

On an unadjusted basis, the final demand index advanced 2.0% for the 12 months ended in January. The index for final demand less foods, energy, and trade services rose 0.2% in January following no change in December. For the 12 months ended in January, prices for final demand less foods, energy, and trade services moved up 2.5%.

Final Demand

Final demand goods: The index for final demand goods fell 0.8% in January, the largest decrease since dropping 1.2% in September 2015. Over three-quarters of the January decline can be traced to prices for final demand energy, which moved down 3.8%. The index for final demand foods fell 1.7%. Conversely, prices for final demand goods less foods and energy climbed 0.3%.

Product detail: Forty percent of the decrease in the index for final demand goods is attributable to a 7.3% decline in gasoline prices. The indexes for fresh and dry vegetables, diesel fuel, fresh fruits and melons, basic organic chemicals, and jet fuel also moved lower. In contrast, prices for construction machinery and equipment rose 1.7%. The indexes for processed poultry and residential electric power also increased.

Final demand services: The index for final demand services advanced 0.3% in January following no change in December. Over 80% of the rise can be traced to margins for final demand trade services, which increased 0.8%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand transportation and warehousing services climbed 0.5%. The index for final demand services less trade, transportation, and warehousing was unchanged.

Product detail: Half of the advance in prices for final demand services is attributable to margins for apparel, jewelry, footwear, and accessories retailing, which rose 6.3%. The indexes for health, beauty, and optical goods retailing; machinery, equipment, parts, and supplies wholesaling; chemicals and allied products wholesaling; hospital inpatient care; and transportation of passengers (partial) also moved higher. Conversely, prices for portfolio management fell 5.2%. The indexes for automotive fuels and lubricants retailing and for physician care also decreased. 

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

January 2019 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil broke off its year-end 2018 slide when ticking up by $1.85 (+3.7%), to $51.38 per barrel in January. The increase occurred within the context of a weaker U.S. dollar, the lagged impacts of an 119,000 barrel-per-day (BPD) rise in the amount of oil supplied/demanded during November (to 20.9 million BPD), and a gradual rise in accumulated oil stocks (monthly average: 442 million barrels). 

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From the 28 January 2019 issue of Peak Oil Review:

The main issue affecting prices remains the efficacy of the OPEC+ production cut vs. U.S. shale oil production and the slowing Chinese economy.  Last week a political upheaval occurred in Venezuela, raising the possibility that Caracas would no longer be able to export 500,000 b/d to the U.S. or that its production might fall below its current 1 million b/d level.  So far, the Venezuelan turmoil has not moved oil prices, but with the world's major powers lining up for or against the Maduro government, prices seem likely to be affected.

The OPEC Production Cut.  The International Energy Agency said last week that the OPEC+ cuts that started this month are likely to put a floor beneath oil prices, but that it would still take time before the reductions balance the oil market.  According to the latest edition of the IEA's monthly Oil Market Report, Russia produced 11.5 million barrels of crude daily last month and "It is unclear when it will cut and by how much."  Russia undertook to reduce its production by 228,000 b/d beginning this month, with the cuts to last until April, when OPEC+ will meet to review the results of its latest price-boosting effort.  However, Energy Minister Alexander Novak warned early on-and recently repeated-that it would be difficult for Russian producers to cut quickly and by a lot.  Recent reporting suggests that Russia's oil production was continuing to climb slowly in January.

OPEC and its allies do not rule out taking further action at their next meeting in April should oil inventories build up in the first quarter, OPEC's secretary general told Reuters.  "We remain focused on the supply-demand balance," Barkindo told Reuters TV at the World Economic Forum in Davos.  "Our challenge is to maintain supply-demand balance."

U.S. oil producers are trying to soothe OPEC's worries about losing market share, telling the group that investors in the U.S. firms want a reduction in growth and higher payouts.  With U.S. output approaching 12 million b/d, OPEC's forecasts and even U.S. government predictions have repeatedly underestimated U.S. shale oil growth.  The CEOs of Occidental Petroleum and Hess Corp, attending a session at the World Economic Forum in Davos, said that growth of U.S. shale oil output would slow.  The meeting was a rare occasion when U.S. shale oil producers and an OPEC representative, Secretary-General Mohammed Barkindo, sat on the same panel.

U.S. Shale Oil Production. All indications suggest that there will be a significant slowdown in the growth of U.S. shale oil production in 2019.  After growing by 1.6 million b/d last year, even the ever-optimistic EIA now is saying that growth will slow to 950,000 b/d in 2019 and to less than 500,000 b/d in 2020.  In its monthly Drilling Productivity Report, the EIA forecasts Permian oil production to grow by only 23,000 b/d from 3.83 million b/d in January to 3.85 million in February.  That would be the lowest rate of monthly growth the EIA has forecast for the Permian since September 2016.  Growth of oil production from the Bakken is forecast to be up by 9,000 b/d next month and Eagle Ford to be up by 11,000.

Industry insiders are saying much the same.  Continental Resources' Harold Hamm said that shale growth could decline by as much as 50 percent this year compared to 2018, although he added that it was just a "wild guess." Hamm said that a lot of shale E&Ps are trying to keep spending within cash flow.  Shares of oilfield service firm Halliburton fell sharply last week after the company forecast lower revenues in the first quarter.  Clients in North America, Halliburton's biggest market by revenue, began pulling back on some drilling services last year amid transportation bottlenecks in the largest U.S. production region and after oil prices slid sharply in the fourth quarter.

Of more interest is that capital raising by U.S. oil E&P companies has fallen sharply following the decline in crude prices, pointing to cutbacks in capital spending budgets and a continuing slowdown in activity.  The U.S. shale industry has relied heavily on debt to finance its growth, with E&P companies raising about $300 billion by issuing bonds during the past ten years.  As crude prices started to slide last October, that source of capital was choked off, with just three bond sales by exploration companies that month, and none at all since November.  For the time being debt and equity investors are encouraging oil producers to pursue cash generation rather than borrowing more to pursue growth.  Weak share prices have also been a deterrent to raising capital.

With the decline in the growth of U.S. shale oil production, the end of U.S. waivers on Iran, and the OPEC production cut, it seems likely that oil prices will be heading higher this year. The one event that could derail this scenario is more economic problems that would reduce the demand for oil this year. 

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Selected highlights from the 2 February 2019 issue of OilPrice.com’s Oil & Energy Insider include:

U.S. considers SPR release. The U.S. government is considering a release of oil from the strategic petroleum reserve (SPR), timed with potential outages from Venezuela. Venezuela has exported roughly 500,000 bpd to the U.S., and because of American sanctions, those volumes are now in jeopardy. The only problem is that the SPR does not contain heavy crude. Already the market for heavy oil is tight while that for lighter oil is much looser.

U.S. refiners looking for alternatives to Venezuela. U.S. refiners that import heavy oil from Venezuela are now looking for alternatives. Canada and Mexico have heavy oil, but have little scope to increase supply. “The region with the biggest shortfall of Venezuelan crudes, either through sanctions or inadvertently through further production declines is the U.S.,” said Michael Tran, commodity strategist at RBC Capital Markets, in a note. U.S. domestic medium and heavy sour grades, including Mars Sour, have seen their prices jump. “It’s nuts. Everything with sulfur in it is getting bid,” one U.S. crude trader told Reuters, referring to sour oil that is typically less desired. Valero, Chevron, and of course, Citgo, are the largest importers of Venezuelan oil.

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.

January 2018 Currency Exchange Rates

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In January the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-1.0%), euro (-0.3%) and yen (-2.9%). On a trade-weighted index basis, the USD lost 1.3% against a basket of 26 currencies. 

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

January 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in January the expansion in U.S. manufacturing accelerated. The PMI registered 56.6%, up 2.3 percentage points (PP) from the December 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 increases in the new orders (+6.9PP) and production (+6.0PP) sub-indexes were particularly noteworthy. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- decelerated (-1.3PP) to 56.7%. The exports orders sub-index tumbled by 9.0PP while the new order retreated by 5.0PP. 

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Of the industries we track, only Real Estate and Construction expanded. Respondent comments included:

·     Paper Products -- "Unlike in the last few years, we are experiencing a 1Q slowdown."

·     Construction -- "Business has slowed well below expectations as our customers deal with the effects of economic situations exacerbated by the government shutdown."

·     Real Estate, Rental & Leasing -- "Order input stable, and supplier deliveries growing. The industry is struggling with capacity constraints."

Relevant commodities:

·     Priced higher -- Labor; and freight.

·     Priced lower -- Fuel (diesel and gasoline).

·     Prices mixed -- None.

·     In short supply -- Construction subcontractors; and labor (general, construction, skilled and temporary).

IHS Markit’s January survey headlines generally paralleled those of ISM.

Manufacturing -- Output growth picks up to four-month high in January

Key findings:

·     Production and new orders both rise at sharper rates

·     Pace of employment growth accelerates

·     Input price inflation eases to one-year low

Services -- Joint-weakest rise in new business since October 2017

Key findings:

·     Rate of new order growth matches December's recent low

·     Activity expansion softest in four months

·     Price pressures ease to 22-month low 

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

Manufacturing -- "January saw U.S. manufacturers start the year with renewed vigor. Production rose at a markedly increased rate, commensurate with the factory sector contributing to robust economic growth of approximately 2.5% in 1Q if such momentum can be sustained in coming months.

"Other encouraging signs included an improved rate of job creation and increased purchasing of inputs, suggesting firms are in the mood for expanding capacity.

“The upturn in business activity in January helped lift confidence in the outlook, though many companies clearly remain concerned about the impact of trade wars and rising protectionism.

“Domestic markets provided the main source of new work for manufacturers, offsetting a near-stalling of export trade, the latter linked to subdued demand for U.S. goods in foreign markets. Although higher than December, the overall rise in new orders was the second-lowest since last August, hinting at a slight cooling of demand growth in recent months which served to keep the headline PMI below the average recorded last year.”

Services -- “The robust economic growth signaled by the U.S. PMI surveys at the start of the year sits in stark contrast to the near-stalling of growth seen in Europe, China and Japan. At current levels, the surveys are consistent with annualized GDP growth of around 2.5% at the start of the year.

“Jobs growth remained buoyant as business optimism perked up to its highest since October. Backlogs of work are meanwhile building up, in part because firms struggled to meet demand, which has in turn allowed sellers to continue to push prices higher.

“However, although still robust, the rates of economic growth, job creation and inflation signaled by the PMI surveys have cooled since peaks seen last year. This possibly reflects some impact from the government shutdown, though scant evidence of such was seen in the anecdotal evidence from the surveys, but also reflects an easing of demand growth, notably from abroad. Foreign sales of goods and services barely rose in January, contrasting with signs of faster growth of domestic orders.” 

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.

November 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 November decreased $3.2 billion or 0.6% to $505.1 billion. Durable goods shipments increased $1.8 billion or 0.7% to $256.7 billion led by transportation equipment. Meanwhile, nondurable goods shipments decreased $4.9 billion or 1.9% to $248.4 billion, led by petroleum and coal products. Shipments of wood products slid by 0.4%; paper: -0.4%. 

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Inventories decreased $1.0 billion or 0.1% to $681.1 billion. The inventories-to-shipments ratio was 1.35, up from 1.34 in October. Inventories of durable goods increased $1.6 billion or 0.4% to $413.7 billion, led by primary metals. Nondurable goods inventories decreased $2.6 billion or 1.0% to $267.4 billion, led by petroleum and coal products. Inventories of wood products expanded by 0.4%; paper: +0.1%. 

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New orders decreased $3.1 billion or 0.6% to $499.2 billion. Excluding transportation, new orders fell by 1.3% (+3.3% YoY). Durable goods orders increased $1.8 billion or 0.7% to $250.8 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- dropped 0.6% (+6.5% YoY). New orders for nondurable goods decreased $4.9 billion or 1.9% to $248.4 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 55% of the ground given up in the Great Recession.

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Unfilled durable-goods orders decreased $1.8 billion or 0.1% to $1,181.5 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.60, down from 6.68 in October. 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 on trend.

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.

November 2018 Construction Spending

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Construction spending during November 2018 was estimated at a seasonally adjusted annual rate (SAAR) of $1,299.9 billion, 0.8% (±1.3%)* above the revised October estimate of $1,289.7 billion (originally $1,308.8 billion); consensus expectations were for +0.3%. The November figure is 3.4% (±1.5%) above the November 2017 SAAR of $1,257.3 billion; the not-seasonally adjusted YoY change (shown in the table below) was +2.5%.

During the first eleven months of 2018, construction spending amounted to $1,200.7 billion, 4.5% (±1.2%) above the $1,149.3 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 $993.4 billion, 1.3% (±0.8%) above the revised October estimate of $980.4 billion.
- Residential+ $542.5 billion, 3.5% (±1.3%) above the revised October estimate of $524.2 billion.
- Nonresidential: $450.8 billion, 1.2% (±0.8%) below the revised October estimate of $456.1 billion.

Public Construction

Public construction spending was $306.5 billion, 0.9% (±2.3%)* below the revised October estimate of $309.3 billion.
- Educational: $76.7 billion, 2.0% (±1.6%)* below the revised October estimate of $78.3 billion.
- Highway: $93.4 billion, 1.7% (±5.6%)* above the revised October estimate of $91.8 billion.

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.

January 2019 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm payroll employment rising at a “blistering” pace of 304,000 jobs in January -- nearly double expectations of +158,000. However, combined November and December employment gains were revised down by 70,000 (November: +20,000; December: -90,000, the largest monthly revision since 2010). Meanwhile, the unemployment rate (based upon the BLS’s household survey) ticked up to 4.0% under the influence of new/re-entrants to the labor force and impacts on non-government employment stemming from the partial government shutdown. 

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Observations from the employment reports include:

* While welcoming the apparent strength of the employment report, we caution -- as we do each February -- against drawing too many inferences from the data. As explained by the BLS, “Establishment survey data have been revised as a result of the annual benchmarking process and the updating of seasonal adjustment factors. Also, household survey data for January 2019 reflect updated population estimates.” The “knock-on” effects of some federal workers being furloughed during much of January further confounded the survey results; hence, at least another month may be necessary before trends become discernable.

* With those caveats in mind, Manufacturing gained 13,000 jobs in January. 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 January. Wood Products employment grew by 3,100 jobs (ISM declined); Paper and Paper Products: -1,700 (ISM increased); Construction: +52,000 (ISM not yet published). 

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* The number of employment-age persons not in the labor force (NILF) retreated by 639,000 -- to 95.0 million. This metric has been trending lower since August as more potential workers conclude their prospects are improving and (re)enter the workforce. Meanwhile, the employment-population ratio (EPR) rose fractionally to 60.7%; roughly, then, for every five people being added to the population, three are employed. 

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* Similarly, given the number of people (re)entering the labor force, the labor force participation rate bumped up to 63.2% -- comparable to levels seen in the late-1970s. Average hourly earnings of all private employees increased by $0.03, to $27.56, resulting in a 3.2% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.03, to $23.12 (+3.4% YoY). Since the average workweek for all employees on private nonfarm payrolls was unchanged at 34.5 hours, average weekly earnings increased by $1.03, to $950.82 (+3.2% YoY). With the consumer price index running at an annual rate of 1.9% in December, workers are -- by official metrics, at least -- gaining purchasing power. 

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* Full-time jobs retreated by 76,000. Those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- jumped by 490,000; nearly all of this increase occurred in the private sector and according to the report, "reflects the impact of the partial federal government shutdown." Those working part time for non-economic reasons fell by 285,000 while multiple-job holders slid by 16,000. 

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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 January dropped by $22.6 billion, to $211.4 billion (-9.7% MoM, and -11.0% 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 January was 3.9% below the year-earlier average -- well off the peak of +13.8% set back in September 2013. Although a full year has now passed with the lower withholding rates from the Tax Cuts and Jobs Act of 2017, the partial federal government shutdown may have affected amounts withheld in January.

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.