March 2019 Residential Sales, Inventory and Prices

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Sales of new single-family houses in March 2019 were at a seasonally adjusted annual rate (SAAR) of 692,000 units (645,000 expected). This is 4.5% (±17.6%)* above the revised February rate of 662,000 (originally 667,000) and 3.0% (±11.4%)* above the March 2018 SAAR of 672,000 units; the not-seasonally adjusted year-over-year comparison (shown in the table above) was also +3.0%. For longer-term perspectives, not-seasonally adjusted sales were 50.2% below the “housing bubble” peak but 30.1% above the long-term, pre-2000 average.

The median sales price of new houses sold in March was $302,700 (-$12,500 or 4.0% MoM); meanwhile, the average sales price slipped to $376,000 (-$9,300 or 2.4%). Starter homes (defined here as those priced below $200,000) comprised 16.2% of the total sold, up from the year-earlier 10.6%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 made up 5.9% of those sold in March, up from 3.0% 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 March, single-unit completions jumped by 100,000 units (+11.9%). Although completions rose more quickly than sales (+30,000 units; 4.5%), inventory for sale contracted in both absolute (-1,000 units) and months-of-inventory (-0.3 month) terms. 

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Existing home sales retreated in March (-270,000 units), falling to a SAAR of 5.21 million units (5.30 million expected). Inventory of existing homes for sale expanded in both absolute (+50,000 units) and months-of-inventory terms (+0.3 month). The median price of previously owned homes sold in March jumped to $259,400 (+$9,300 or 3.7% MoM). Because resales fell while new-home sales increased, the share of total sales comprised of new homes rose to 11.7%. 

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Housing affordability was nearly unchanged as the median price of existing homes for sale in February inched up by $200 (+0.1%; +3.6 YoY), to $251,400. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices rose at a not-seasonally adjusted monthly change of +0.2% (+4.0% YoY).

“The pace of increases for home prices continues to slow,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Homes began their climb in 2012 and accelerated until late 2013 when annual increases reached double digits. Subsequently, increases slowed until now when the National Index is up 4% in the last 12 months. Sales of existing single family homes have recovered since 2010 and reached their peak one year ago in February 2018. Home sales drifted down over the last year except for a one-month pop in February 2019. Sales of new homes, housing starts, and residential investment had similar weak trajectories over the last year. Mortgage rates are down one-half to three-quarters of a percentage point since late 2018.

“The largest year-over-year price increase is 9.7% in Las Vegas; last year, the largest gain was 12.7% in Seattle. Regional patterns are shifting. The three California cities of Los Angeles, San Francisco and San Diego have the three slowest price increases over the last year. Chicago, New York and Cleveland saw only slightly larger prices increases than California. Prices generally rose faster in inland cities than on either the coasts or the Great Lakes. Aside from Las Vegas, Phoenix, and Tampa, which saw the fastest gains, Atlanta, Denver, and Minneapolis all saw prices rise more than 4% -- twice the rate of inflation.” 

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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.

1Q2019 Gross Domestic Product: First (“Advance”) Estimate

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In its advance (first) estimate of 1Q2019 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 +3.18% (2.3% expected), up 1.01 percentage points (PP) from 4Q2018’s +2.17%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 1Q2019 was 3.21% higher than in 1Q2018; that growth rate was slightly faster (+0.24PP) than 4Q2018’s +2.97% relative to 4Q2017.

All four groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), net exports (NetX) and government consumption expenditures (GCE) -- contributed to 1Q growth. As for details:

PCE – Growth in consumer spending decelerated for a third consecutive quarter. Spending on durable goods contracted (especially for motor vehicles) while spending on nondurables grew more slowly. Although health care spending jumped, overall consumer spending on services decelerated.

PDI – The contribution from private domestic investment increased; however, virtually all of the boost in PDI came from inventory growth. Also, both residential construction and nonresidential structures contracted more slowly. A stall in commercial spending on equipment was the major drag in this category.

NetX – Growth in exports and a collapse in imports pushed net exports to its highest contribution since 2Q2018.

GCE – While federal spending was flat, state and local spending rebounded.

The BEA’s real final sales of domestic product growth, which excludes the effect of inventories, rose to +2.53%, up 0.47PP from 4Q2018. 

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Observations by Consumer Metric Institute’s Rick Davis included the following:

-- The fact that imports added +0.58% annualized growth to the headline may be good for the headline, but it actually reflects softening import prices in the midst of generally weaker global trade.

-- Ultimately, and despite weaker core spending, the headline number rebounded into the "Goldilocks" zone of economic growth. We expect that policy makers will be really proud of this report.

“Unfortunately, that ‘Goldilocks’ moment was achieved through growing inventories, increased governmental outlays, crashing import values and materially understated inflation,” Davis concluded. “The temperature of the porridge might be just right, but the taste seems a little off.”

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.

March 2019 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in March at a seasonally adjusted annual rate (SAAR) of 1,139,000 units (1.230 million expected). This is 0.3% (±14.6%)* below the revised February estimate of 1,142,000 (originally 1.162 million units) and 14.2% (±8.8%) below the March 2018 SAAR of 1,327,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -13.0%.

Single-family housing starts in March were at a rate of 785,000; this is 0.4% (±15.2%)* below the revised February figure of 788,000 (-9.7% YoY). Multi-family starts: 354,000 units (0.0% MoM; -19.9% 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 March were at a SAAR of 1,313,000. This is 1.9% (±19.5%)* below the revised February estimate of 1,338,000 (originally 1.303 million units), but 6.8% (±15.8%)* above the March 2018 SAAR of 1,229,000 units; the NSA comparison: +8.6% YoY.

Single-family housing completions in March were at a rate of 938,000; this is 11.9% (±14.2%)* above the revised February rate of 838,000 (+10.6% YoY). Multi-family completions: 375,000 units (-25.0% MoM; +4.0% YoY). 

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Total permits were at a SAAR of 1,269,000 units (1.300 million expected). This is 1.7% (±1.4%) below the revised February rate of 1,291,000 (originally 1.317 million units) and 7.8% (±1.9%) below the March 2018 rate of 1,377,000 units; the NSA comparison: -11.6% YoY.

Single-family permits were at a SAAR of 808,000; this is 1.1% (±1.5%)* below the revised February figure of 817,000 (-10.0% YoY). Multi-family: 461,000 (-2.7% MoM; -14.6% YoY). 

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Builder confidence in the market for newly-built single-family homes rose one point to 63 in April, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI). Sentiment levels have held in the low 60s for the past three months.

“Builders report solid demand for new single-family homes but they are also grappling with affordability concerns stemming from a chronic shortage of construction workers and buildable lots,” said NAHB Chairman Greg Ugalde.

“Ongoing job growth, favorable demographics and a low-interest rate environment will help to modestly spark sales growth in the near term,” said NAHB Chief Economist Robert Dietz. “However, supply-side headwinds that are putting upward pressure on housing costs will limit more robust growth in the housing market.”

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.

March 2019 Industrial Production, Capacity Utilization and Capacity

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After minor revisions to historical data, total industrial production (IP) was shown to have edged down 0.1% in March (+0.4% expected) after edging up 0.1% in February; for 1Q as a whole, the index slipped 0.3% at an annual rate. Manufacturing production was unchanged in March (+0.4% expected) after declining in both January and February. The index for utilities rose 0.2%, while mining output moved down 0.8%. At 110.2% of its 2012 average, total industrial production was 2.8% higher in March than it was a year earlier. 

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Industry Groups

Manufacturing output was unchanged in March and moved down at an annual rate of 1.1% in 1Q (NAICS manufacturing: 0.0% MoM; +1.3%YoY). The output of durables edged down in March. Losses of more than 2% were registered by wood products (-2.2%) and by motor vehicles and parts, while gains of more than 1% were registered by primary metals and by computer and electronic products. The production of nondurables inched up as a result of increases in the indexes for textile and product mills, for petroleum and coal products, and for chemicals (paper products: +0.2%). The index for other manufacturing (publishing and logging) edged down, remaining well below its year-earlier level.

The output of utilities rose 0.2% in March; the output of natural gas utilities climbed nearly 4%, while the output of electric utilities stepped down. Mining output declined 0.8% but remained 10.5% above its level of a year earlier. 

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Capacity utilization (CU) for the industrial sector decreased 0.2 percentage point (PP) in March to 78.8%, a rate that is 1.0PP below its long-run (1972–2018) average.

Manufacturing CU edged down 0.1PP in March to 76.4%, about 2PP below its long-run average (NAICS manufacturing: -0.1%, to 76.9%). The utilization rate for durable manufacturing declined, while capacity utilization rates for nondurable manufacturing and for other manufacturing (publishing and logging) were unchanged (wood products: -2.5%, to 74.6%; paper products: +0.3%, to 86.1%). Capacity utilization for mining decreased to 90.9% but was still above its long-run average of 87.1%. The utilization rate for utilities was unchanged at 79.9% and remained 5½PP below its long-run average. 

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Capacity at the all-industries level nudged up 0.2% (+2.0 % YoY) to 139.9% of 2012 output. Manufacturing (NAICS basis) rose fractionally (+0.1% MoM; +1.1% YoY) to 138.7%. Wood products: +0.3% (+3.7% YoY) to 164.1%; paper products: 0.0% (-0.8 % YoY) to 109.8%.

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.

March 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) increased 0.4% in March (+0.2% expected). The energy index increased 3.5% in March, accounting for about 60% of the seasonally adjusted all-items monthly increase. The gasoline index increased sharply (+6.5%), and the electricity index also rose (+0.4%), although the natural gas index declined (-0.1%). The food index also increased in March (+0.3%), with the indexes for food at home and food away from home both continuing to rise.

The index for all items less food and energy increased 0.1% in March, the same increase as in February. The indexes for shelter, medical care, new vehicles, recreation, education, and tobacco were among those that increased in March, while the indexes for apparel, used cars and trucks, and airline fares all declined. 

The all-items index increased 1.9% for the 12 months ending March, a larger increase than the 1.5% rise for the period ending February. The index for all items less food and energy rose 2.0% over the last 12 months. The food index rose 2.1% over the past year, its largest 12-month increase since the period ending March 2015, while the energy index declined 0.4% over the past year.

Producer Price Index

The Producer Price Index for final demand (PPI-FD) rose 0.6% in March (+0.4% expected). Final demand prices edged up 0.1% in February and decreased 0.1% in January. Over 60% of the increase in the index for final demand can be traced to a 1.0% advance in prices for final demand goods. The index for final demand services moved up 0.3%.

On an unadjusted basis, the final demand index increased 2.2% for the 12 months ended in March, the largest 12-month rise since a 2.5% advance in December 2018. The index for final demand less foods, energy, and trade services was unchanged in March following a 0.1% advance in February. For the 12 months ended in March, prices for final demand less foods, energy, and trade services rose 2.0%.

Final Demand

Final demand goods: The index for final demand goods moved up 1.0% in March, the largest advance since a 1.0% rise in May 2015. In March, over 80% of the broad-based increase can be traced to prices for final demand energy, which jumped 5.6%. The index for final demand goods less foods and energy rose 0.2%. Prices for final demand foods advanced 0.3%.

Product detail: Over 60% of the increase in the index for final demand goods is attributable to a 16.0% jump in gasoline prices. The indexes for diesel fuel, fresh and dry vegetables, cigarettes, beverages and beverage materials, and residential electric power also moved higher. In contrast, prices for pork declined 8.7%. The indexes for light motor trucks and liquefied petroleum gas also decreased.

Final demand services: Prices for final demand services rose 0.3% in March after no change in February. The increase is attributable to the index for final demand trade services, which advanced 1.1%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Conversely, prices for final demand transportation and warehousing services declined 0.8%. The index for final demand less trade, transportation, and warehousing was unchanged.

Product detail: Nearly a third of the increase in the index for final demand services can be traced to margins for apparel, jewelry, footwear, and accessories retailing, which rose 4.2%. The indexes for machinery, equipment, parts, and supplies wholesaling; deposit services (partial); food and alcohol retailing; health, beauty, and optical goods retailing; and portfolio management also advanced. In contrast, prices for long-distance motor carrying fell 1.2%. The indexes for fuels and lubricants retailing and for residential real estate loans (partial) also declined. 

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

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

February 2019 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 February increased $2.0 billion or 0.4% to $505.5 billion. Durable goods shipments increased $0.5 billion or 0.2% to $258.5 billion led by computers and electronic products. Meanwhile, nondurable goods shipments increased $1.5 billion or 0.6% to $247.0 billion, led by petroleum and coal products. Shipments of wood products were unchanged; paper: +0.5%. 

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Inventories increased $2.0 billion or 0.3% to $687.8 billion. The inventories-to-shipments ratio was 1.36, unchanged from January. Inventories of durable goods increased $1.3 billion or 0.3% to $418.9 billion, led by transportation equipment. Nondurable goods inventories increased $0.7 billion or 0.3% to $268.9 billion, led by petroleum and coal products. Inventories of wood products shrank by 0.3%; paper: 0.0%. 

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New orders decreased $2.6 billion or 0.5% to $497.5 billion. Excluding transportation, new orders increased by 0.3% (+1.5% YoY). Durable goods orders decreased $4.2 billion or 1.6% to $250.5 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- slipped by 0.1% (+1.9% YoY). New orders for nondurable goods increased $1.5 billion or 0.6% to $247.0 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 $3.6 billion or 0.3% to $1,177.6 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.54, down from 6.57 in January. Real unfilled orders, which had been a good litmus test for sector growth, show a less positive 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 going mostly sideways.

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.

March 2019 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm payroll employment rising by 196,000 jobs in March (+168,000 expected). Also, combined January and February employment gains were revised up by 14,000 (January: +1,000; February: +13,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) was unchanged at 3.8% as the labor force and number of employed both shrank by roughly the same magnitude (respectively, -224,000 and -201,000). 

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Observations from the employment reports include:

* The disparity between the establishment (+196,000 jobs) and household survey results (-201,000 employed) makes us somewhat skeptical of the headline number. Also, had average (since 2009) March CES (business birth/death model) and seasonal adjustments been used, job gains might have amounted to +111,000.

* With those caveats in mind, Manufacturing lost 6,000 jobs in March. That result is counter to the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded at a faster pace in March. Wood Products employment shrank by 2,200 jobs (ISM increased); Paper and Paper Products: +600 (ISM increased); Construction: +16,000 (ISM increased). 

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* The number of employment-age persons not in the labor force (NILF) expanded by 369,000 -- to 95.6 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) ticked down to 60.6%; roughly, then, for every five people being added to the population, three are employed. 

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* Similarly, the labor force participation rate dropped to 63.0% -- comparable to levels seen in the late-1970s. Average hourly earnings of all private employees increased by $0.04, to $27.70, resulting in a 3.2% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.06, to $23.24 (+3.3% YoY). The average workweek for all employees on private nonfarm payrolls expanded by 0.1 hour (to 34.5 hours), average weekly earnings increased by $4.15, to $955.65 (+3.2% YoY). With the consumer price index running at an annual rate of 1.5% in February, workers are -- by official metrics, at least -- gaining purchasing power. 

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* Full-time jobs retreated by 190,000. Those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- jumped by 189,000. Those working part time for non-economic reasons rose by 144,000 while multiple-job holders advanced by 212,000. 

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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 March soared by $27.9 billion, to an all-time high $237.7 billion (+13.3% MoM and +3.6% 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 March was 0.9% below the year-earlier average -- well off the peak of +13.8% set back in September 2013. More than a full year has now passed with the lower withholding rates from the Tax Cuts and Jobs Act of 2017, and the lagged effects of the partial federal government shutdown should have been minimal.

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.

March 2019 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil posted a third month of gains when rising by $3.20 (+5.8%), to $58.15 per barrel in March. The increase occurred within the context of a stronger U.S. dollar, the lagged impacts of a 27,000 barrel-per-day (BPD) drop in the amount of oil supplied/demanded during January (to 20.5 million BPD), and a minimal decline in accumulated oil stocks (monthly average: 447 million barrels). 

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From the 1 April 2019 issue of Peak Oil Review:

Prices have climbed steadily for the last three months closing on Friday above $60 a barrel in New York and $67 in London.  The combination of slowing U.S. shale oil drilling and the Venezuela, Iran, and the OPEC+ situations continue to outweigh the bad economic news that may someday lower demand.  The situation in Venezuela gets worse every day, and it seems likely that the country will see a significant drop in production and exports during March.

On Friday, the EIA reported that the average daily U.S. crude production slipped during January for the first time in nearly six months falling to 11.871 million BPD from 11.961 in December.  This number is likely to be more accurate than the weekly estimates that are based more on trends than actual production numbers.  Given the severe weather across North Dakota during the last two months, it seems unlikely there will be an increase in Bakken production until spring.

The U.S. oil rig count continues to slide, falling from 885 on January 1st to 816 last week. This situation suggests that we may not see another 1.8 million BPD gain in shale oil production like happened in 2018 despite all the hype about the smarter and wealthier international oil companies taking over the Permian Basin from smaller, less efficient, drillers.

U.S. and Brent crude oil futures touched a new high for the year this week.  While the price increase is underpinned by the fundamentals of the oil market, optimism is increasing that a settlement of the US-China trade dispute is in the offing and that the prospects for a recession later this year are receding.

It should be noted, however, that along with higher crude prices, U.S. gasoline prices have been increasing at a steady pace -- up 28 cents a gallon in the last month. Prices on the U.S. West Coast are already over $3 a gallon and Michigan, Illinois and Pennsylvania are in the vicinity of $2.80. While nobody is forecasting a return to $4 a gallon gasoline in the U.S. in the immediate future, California is already at $3.61 for regular and is approaching the point where discretionary driving starts to slow.

The OPEC Production Cut.  Saudi Arabia is having a hard time convincing Russia to stay much longer in an OPEC+ pact cutting oil supply, and Moscow may agree only to a three-month extension.  Russian Energy Minister Novak told the Saudis last month that he is under pressure to end the cuts but would agree to extend the cuts to the end of September.  Moscow has always been skeptical of the cuts, given that the collapse of Venezuela amounts to nearly the same thing without harming the major oil exporters. Last November, Russia agreed to go along with the deal but warned that it would not be able to cut 50,000-60,000 BPD until spring. This situation left the Saudis and the other Gulf Arabs to shoulder the bulk of the cut. 

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Selected highlights from the 29 March 2019 issue of OilPrice.com’s Oil & Energy Insider include:

While the breakneck growth of U.S. crude production has slowed considerably since January, domestic crude production continues to expand (albeit slowly) and will likely continue to grow thanks to tight oil production, according to projections from the U.S. Energy Information Administration (EIA). Meanwhile, overseas, Venezuela continues to face rolling blackouts and plunging oil production, Trump took to Twitter to take on OPEC, and international oil prices have remained weak in the wake last week's "flurry of bearish news."

Continued blackouts in Venezuela threaten oil production. With its second bout of nationwide blackouts in less than a month, completely halting operations at the nation's main oil export terminal as well as its heavy crude processing complex. While Maduro continues to blame U.S. sanctions for the power outages, the White House maintains that the matters are entirely unrelated. OPEC will likely chalk up the blow to Venezuela's oil production to a success, with every dip in the global oil inventory driving up prices.

Signs point to recession...but are oil markets taking heed? With the U.S. Federal Reserve, joining the IMF, the World Bank, and the OECD in making public statements about an impending economic slowdown, what are oil markets doing to prepare? Not much, apparently. The U.S. continues to push for higher oil production as U.S. stock and oil markets remain robust and bullish, but reality bites, and according to experts both "can be expected to correct."

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.

March 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in March the expansion in U.S. manufacturing marginally accelerated. The PMI registered 55.3%, up 1.1 percentage points (PP) from the February 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. Increases in employment (+5.2PP) and input prices (+4.9PP) 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 (-3.6PP) to 56.1%. The drop in new orders (-6.2PP) and jump in input prices (+4.3PP) were significant. 

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Of all the industries we track, only Paper Products contracted. Respondent comments included:

• Wood Products -- "Weather in the domestic market is constraining homebuilding across the nation -- too wet in the south, severe winter in the north. Expectations are that homebuilding backlog is growing, and a surge of domestic business will come in May and June. Internationally, the Chinese trade war is still holding business back, but expectations are that in April or May, business will spring back materially as tariffs resolve."
• Construction -- "While we have a slowed down in residential service and install [area], we are still experiencing strength in the new commercial construction area."
• Real Estate -- "April is when our real[ly] busy season begins and it has arrived early this year, demand is quite strong."

Relevant commodities:

• Priced higher -- Construction subcontractors; fuel (diesel and gasoline); labor (general, construction and temporary); and paper and paper products.
• Priced lower -- None.
• Prices mixed -- None.
• In short supply -- Construction subcontractors; labor (general, construction and temporary); and truck deliveries.

IHS Markit’s March survey headlines diverged from those of ISM.

Manufacturing -- PMI dips to lowest since June 2017 and price pressures moderate

Key findings:

• Operating conditions improve at modest pace
• Output and new order growth rates ease
• Inflationary pressures soften further

Services -- Solid upturn in services activity, but business expectations drop to lowest since December 2017

Key findings:

• Business activity and new order growth rates soften, but remain strong
• Degree of business optimism at 15-month low
• Pace of cost inflation relatively subdued

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

Manufacturing -- "A further deterioration in the manufacturing PMI suggests the factory sector is acting as an increasing drag on the U.S. economy. The March survey is consistent with production falling at a quarterly rate of 0.6% according to historical comparisons with official data.

“Encouragingly, companies report that at least some of the slowdown is due to capacity constraints, notably in terms of skill shortages. One-in-three companies reporting a drop in headcounts cited an inability to fill vacancies. Those looking for positive signals will therefore note that hiring remained encouragingly solid during the month and expectations of future output perked up, albeit still running below levels seen this time last year.

“However, things may well get worse before they get better, as the forward-looking indicators are a cause for concern. New order growth has fallen close to the lows seen in the 2016 slowdown, often linked to disappointing exports, tariffs and signs of increasing caution among customers. The ratio of new orders to existing inventory has meanwhile fallen to its lowest since June 2017, suggesting the production trend may weaken further in April.”

Services -- “Another solid service sector performance helped offset a deteriorating trend in manufacturing to leave the PMI surveys indicative of robust economic growth in March. For the first quarter as a whole, the surveys are consistent with the economy growing at an annualized rate of approximately 2.5%, painting a relatively rosy picture compared to official data, which so far suggest GDP could come in slightly weaker.

“Dig deeper and the picture darkens. Inflows of new work have moderated markedly compared to this time last year as manufacturing weakness and growing concerns about the economic outlook have increasingly spread to the service sector. Business optimism about the year ahead is now the lowest for two and a half years, posing downside risks to growth in coming months.

“Hiring has already been hit by the drop in business optimism and weakened inflows of new work, easing to the lowest since mid-2017, albeit still indicating non-farm payroll growth of around 165,000.

“However, the surveys also provide evidence that hiring is in part being constrained by labor shortages, which is limiting capacity in both manufacturing and services, causing backlogs of work to build up again in March and suggesting that businesses -- especially in the service sector -- will remain busy in the near term at least.”

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.

March 2019 Currency Exchange Rates

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In March the monthly average value of the U.S. dollar (USD) appreciated versus Canada’s “loonie” (+1.2%), euro (+0.5%) and yen (+0.6%). On a trade-weighted index basis, the USD gained 0.3% 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.

February 2019 Construction Spending

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Construction spending during February 2019 was estimated at a seasonally adjusted annual rate (SAAR) of $1,320.3 billion, 1.0% (±0.8%) above the revised January estimate of $1,307.3 billion (originally $1,279.6 billion); consensus expectations were for -0.1%. The February figure is 1.1% (±1.5%)* above the February 2018 SAAR of $1,305.5 billion; the not-seasonally adjusted YoY change (shown in the table below) was +1.0%.

During the first two months of this year, construction spending amounted to $181.9 billion, 1.4% (±1.3%) above the $179.4 billion for the same period in 2018.

* 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 $994.5 billion, 0.2% (±0.8%)* above the revised January estimate of $993.0 billion.
- Residential: $540.9 billion, 0.7% (±1.3%)* above the revised January estimate of $536.9 billion.
- Nonresidential: $453.6 billion, 0.5% (±0.8%)* below the revised January estimate of $456.0 billion.

Public Construction

Public construction spending was $325.8 billion, 3.6% (±1.6%) above the revised January estimate of $314.4 billion.
- Educational: $76.3 billion, 0.8% (±2.0%)* above the revised January estimate of $75.7 billion.
- Highway: $111.1 billion, 9.5% (±5.3%) above the revised January estimate of $101.5 billion. 

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

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