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.


Thursday, June 27, 2019

1Q2019 Gross Domestic Product: Third Estimate

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In its third estimate of 1Q2019 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) nudged the growth rate of the U.S. economy to a seasonally adjusted and annualized rate (SAAR) of +3.12% (+3.1% expected), up 0.06 percentage point (PP) from the second estimate (“1Qv2”) and +0.95PP from 4Q2018.
As in 1Qv1&2, 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. Although the headline number was essentially unchanged in 1Qv3, more material shifts occurred in:
* Consumer spending on goods -- revised from contraction to expansion;
* Consumer spending on services -- growth was cut nearly in half; and
* Fixed investment -- especially in the non-residential and intellectual property products line items -- was increased by more than one-third above the 1Qv2 rate.
A modest reduction (-0.05PP from 1Qv2) in the contribution of private inventories bumped real 1Q final sales of domestic product (which exclude inventories) slightly higher compared to 1Qv2. Moreover, the final 1Q RFSDP estimate of +2.57% was 0.51PP above the 4Q2018 estimate. 
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The key takeaways from the 1Qv3 report are as follows, according to Consumer Metric Institute’s Rick Davis:
-- Although the headline number was largely unchanged, this report shifted a material portion of that growth from the consumer sector to commercial fixed investment.
-- In the 43 quarters since 2Q2008 the cumulative annualized growth rate for real per-capita disposable income has been a dismal 1.27%.
-- The BEA's headline number was more than doubled by an inflation rate that was materially at odds with the inflation recorded by the Bureau of Labor Statistics.
-- Happily for policy makers, this revision left the headline number (for the moment) in the "Goldilocks" zone of economic growth. But if the New York Fed's "NowCast" and/or the Atlanta Fed's "GDPNow" projections for the 2Q2019 are reasonably accurate, we can expect the next report to move the headline somewhat south of where Goldilocks resides.
“We look forward to the BEA's next report,” Davis concluded “which will also contain their annual revisions to historical data.”
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Wednesday, June 26, 2019

May 2019 Residential Sales, Inventory and Prices

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Sales of new single-family houses in May 2019 were at a seasonally adjusted annual rate (SAAR) of 626,000 units (680,000 expected). This is 7.8% (±14.7%)* below the revised April rate of 679,000 (originally 673,000) and 3.7% (±15.0%)* below the May 2018 SAAR of 650,000 units; the not-seasonally adjusted year-over-year comparison (shown in the table above) was -3.2%. For longer-term perspectives, not-seasonally adjusted sales were 54.9% below the “housing bubble” peak but 14.8% above the long-term, pre-2000 average.
The median sales price of new houses sold in May 2019 was $308,000 (-$27,100 or 8.1% MoM); meanwhile, the average sales price fell to $377,200 (-$9,300 or 2.4%). Starter homes (defined here as those priced below $200,000) comprised 11.7% of the total sold, down from the year-earlier 16.1%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 made up 3.3% of those sold in May, up fractionally from 3.2% a year earlier.
* 90% confidence interval includes zero. The Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different from zero. 
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As mentioned in our post about housing permits, starts and completions in May, single-unit completions fell by 47,000 units (-5.0%). Because sales (-53,000 units; 7.8%) fell more dramatically than completions, inventory for sale expanded in both absolute (+1,000 units) and months-of-inventory (+0.3 month) terms. 
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Existing home sales advanced in May (+130,000 units), to a SAAR of 5.34 million units (5.29 million expected). Inventory of existing homes for sale expanded in both absolute (+90,000 units) and months-of-inventory terms (+0.1 month). The median price of previously owned homes sold in May jumped to $277,700 (+$10,800 or 4.0% MoM). Because new-home sales fell while resales rose, the share of total sales comprised of new homes ticked down to 10.5%. 
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Housing affordability was nearly unchanged (-0.3 percentage point) although the median price of existing homes for sale in April rose by $7,800 (+3.0%; +3.7 YoY), to $269,300. 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 +0.9% (+3.5% YoY) -- the slowest rate of annual appreciation since September 2012.
“Home price gains continued in a trend of broad-based moderation,” said Philip Murphy, Managing Director and Global Head of Index Governance at S&P Dow Jones Indices. “Year-over-year price gains remain positive in most cities, though at diminishing rates of change. Seattle is a notable exception, where the YOY change has decreased from 13.1% in April 2018 to 0.0% in April 2019.
“The national average 30-year fixed mortgage rate rose from below 4% in late 2017 to briefly reaching almost 5% by the latter part of 2018. Peak YOY changes in the 20-City Composite coincided with the upward turn in mortgage rates during the first quarter of 2018. In 2019, mortgage rates reversed course again and the 30-year fixed mortgage rate is again under 4%, yet the YOY house price moderation that coincided with the 2018 uptick in rates has not changed course. Other industry statistics are consistent with this observation. For example, the national supply of housing is trending upward and suggesting weaker demand. Perhaps the trend for the moment is toward normalization around the real long run average annual price increase. Comparing the YOY National Index nominal change of 3.5% to April’s inflation rate of 2.0% yields a real house price change of 1.5% -- edging closer to the real long run average of 1.2% cited by David Blitzer last month.” 
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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Tuesday, June 18, 2019

May 2019 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in May at a seasonally adjusted annual rate (SAAR) of 1,269,000 units (1.240 million expected). This is 0.9% (±12.9%)* below the revised April estimate of 1,281,000 (originally 1.235 million units) and 4.7% (±8.9%)* below the May 2018 SAAR of 1,332,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -4.0%.
Single-family housing starts in May were at a SAAR of 820,000; this is 6.4% (±9.5%)* below the revised April figure of 876,000 (-11.7% YoY). Multi-family starts: 449,000 units (+10.9% MoM; +15.4% YoY).
* 90% confidence interval (CI) is not statistically different from zero. The Census Bureau does not publish CIs for the entire multi-unit category. 
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Completions in May were at a SAAR of 1,213,000 units. This is 9.5% (±13.7%)* below the revised April estimate of 1,340,000 (originally 1.312 million units) and 2.8% (±9.1%)* below the May 2018 SAAR of 1,248,000 units; the NSA comparison: -4.1% YoY.
Single-family completions were at a SAAR of 890,000; this is 5.0% (±12.7%)* below the revised April rate of 937,000 (+1.1% YoY). Multi-family completions: 323,000 units (-19.9% MoM; -16.1% YoY). 
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Total permits were at a SAAR of 1,294,000 units (1.290 million expected). This is 0.3% (±1.3%)* above the revised April rate of 1,290,000 (originally 1.296 million units), but 0.5% (±1.4%)* below the May 2018 SAAR of 1,301,000 units; the NSA comparison: -0.8% YoY.
Single-family permits were at a SAAR of 815,000; this is 3.7% (±1.2%) above the revised April figure of 786,000 (-3.8% YoY). Multi-family: 479,000 (-5.0% MoM; +5.4% YoY). 
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Builder confidence in the market for newly-built single-family homes fell two points to 64 in June, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI). Sentiment levels have held at a solid range in the low- to mid-60s for the past five months.
“While demand for single-family homes remains sound, builders continue to report rising development and construction costs, with some additional concerns over trade issues,” said NAHB Chairman Greg Ugalde.
“Despite lower mortgage rates, home prices remain somewhat high relative to incomes, which is particularly challenging for entry-level buyers,” said NAHB Chief Economist Robert Dietz. “And while new home sales picked up in March and April, builders continue to grapple with excessive regulations, a shortage of lots and lack of skilled labor that are hurting affordability and depressing supply.”
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Friday, June 14, 2019

May 2019 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) rose 0.4% in May (+0.2% expected) after falling 0.4% in April (originally -0.5%); also, the rates of change for the five previous months were again revised down on net. The indexes for manufacturing and mining gained 0.2% and 0.1%, respectively, in May; the index for utilities climbed 2.1%. At 109.6% of its 2012 average, total industrial production was 2.0% higher in May than it was a year earlier. 
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Industry Groups
Manufacturing output increased 0.2% in May after having decreased about 0.4% per month, on average, in the first four months of the year (NAICS manufacturing: +0.2% MoM; +0.9% YoY). In May, the production of durable goods rose 0.3%, while the output of nondurable goods edged up 0.1%. Among durables, gains of more than 1% were posted by wood products (+1.3%); machinery; electrical equipment, appliances, and components; and motor vehicles and parts. These increases were partially offset by decreases in primary metals and in aerospace and miscellaneous transportation equipment. Among nondurables, the only gain greater than 1% was recorded by plastics and rubber products (paper products: +0.2%), and the only decline greater than 1% was recorded by apparel and leather products. The index for other manufacturing (publishing and logging) decreased 0.9% last month; it has fallen 6.5% during the past 12 months.
The output of utilities increased 2.1% in May, with identically sized gains in the indexes for both natural gas and electric utilities. Mining output inched up 0.1% in May and was 10.0% above its level of a year earlier. The increase in the mining index for May reflected gains in oil and natural gas extraction that were mostly offset by a large decline for oil and gas well drilling. 
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Capacity utilization (CU) for the industrial sector moved up 0.2 percentage point (PP) in May to 78.1%, a rate that is 1.7PP below its long-run (1972–2018) average.
Manufacturing CU moved up 0.1PP in May to 75.7%, a rate that is 2.6PP below its long-run average (NAICS manufacturing: +0.1%, to 76.2%). The utilization rates for durable and nondurable manufacturing were little changed (wood products: +1.0%; paper products: +0.2%), while the rate for other manufacturing (publishing and logging) slipped 0.4PP. Capacity utilization for mining dipped to 91.3% but remained well above its long-run average of 87.1%. The operating rate for utilities jumped to 77.5%; even so, it was still about 8PP below its long-run average. 
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Capacity at the all-industries level nudged up 0.2% (+2.1 % YoY) to 140.3% of 2012 output. Manufacturing (NAICS basis) rose fractionally (+0.1% MoM; +1.2% YoY) to 139.0%. Wood products: +0.3% (+3.8% YoY) to 165.1%; paper products: 0.0% (-0.7 % 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.

Wednesday, June 12, 2019

April 2019 International Trade (Softwood Lumber)

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Softwood lumber exports increased (9 MMBF or +8.6%) in April; meanwhile, imports jumped (183 MMBF or +14.5%). Exports were 48 MMBF (-28.6%) below year-earlier levels; imports were 109 MMBF (+8.2%) higher. As a result, the year-over-year (YoY) net export deficit was 157 MMBF (+13.5%) larger. Also, the average net export deficit for the 12 months ending April 2019 was 4.4% larger 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 (42.4%; of which Canada: 23.0%; Mexico: 19.4%) and Asia (32.6%; especially China: 14.4%; and Japan: 6.8%) were the primary destinations for U.S. softwood lumber exports; the Caribbean ranked third with an 18.7% share. Year-to-date (YTD) exports to China were -64.5% relative to the same months in 2018. Meanwhile, Canada was the source of most (90.9%) of softwood lumber imports into the United States. Imports from Canada were 0.6% higher YTD than the same months in 2018. Overall, YTD exports were down 26.0% compared to 2018; imports: +0.3%. 
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U.S. softwood lumber export activity through the West Coast customs region represented the largest proportion (35.8% of the U.S. total), followed by the Eastern (28.6%) and Gulf (26.2%) regions. Seattle (23.7% of the U.S. total) maintained the lead over Mobile (16.3%) as the single most-active district. At the same time, Great Lakes customs region handled 65.6% of softwood lumber imports -- most notably the Duluth, MN district (28.4%) -- coming into the United States. 
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Southern yellow pine comprised 24.7% of all softwood lumber exports, Douglas-fir (16.6%) and treated lumber (12.1%). Southern pine exports were down 47.6% YTD relative to 2018, while treated: -29.6%; Doug-fir: -6.6%.
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

May 2019 Consumer and Producer Price Indices (incl. Forest Products)

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The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1% in May (+0.1% expected) after rising 0.3% in April. The food index rose 0.3% in May after declining in April, with the food index accounting for nearly half of the May seasonally adjusted all items monthly increase. The energy index fell 0.6% in May, with the gasoline index falling 0.5% and the indexes for electricity and natural gas also declining in May.
The index for all items less food and energy increased 0.1% for the fourth consecutive month. The indexes for shelter, medical care, airline fares, education, household furnishings and operations, and new vehicles all rose in May. The indexes for used cars and trucks, recreation, and motor vehicle insurance were among those that declined over the month.   
Over the last 12 months, the all items index increased 1.8% before seasonal adjustment. The all items index increased 1.8% for the 12 months ending May. The index for all items less food and energy rose 2.0% over the last 12 months, and the food index also rose 2.0%. The energy index decreased 0.5% over the past year.
The Producer Price Index for final demand (PPI-FD) rose 0.1% in May (+0.1% expected). Final demand prices advanced 0.2% in April and 0.6% in March. The rise in final demand prices is attributable to a 0.3% increase in the index for final demand services. In contrast, prices for final demand goods declined 0.2%.
On an unadjusted basis, the final demand index increased 1.8% for the 12 months ended in May. The index for final demand less foods, energy, and trade services moved up 0.4% in May, the same as in April. For the 12 months ended in May, prices for final demand less foods, energy, and trade services advanced 2.3%.
Final Demand
Final demand services: Prices for final demand services moved up 0.3% in May, the fourth consecutive increase. Most of the May advance can be traced to the index for final demand services less trade, transportation, and warehousing, which rose 0.5%. Prices for final demand transportation and warehousing services climbed 0.7%. Conversely, margins for final demand trade services fell 0.5%. (Trade indexes measure changes in margins received by wholesalers and retailers.)
Product detail: Nearly 80% of the May advance in the index for final demand services is attributable to prices for guestroom rental, which jumped 10.1%. The indexes for fuels and lubricants retailing, outpatient care (partial), inpatient care, portfolio management, and transportation of passengers (partial) also moved higher. In contrast, margins for apparel, footwear, and accessories retailing declined 5.2%. The indexes for machinery, equipment, parts, and supplies wholesaling and for loan services (partial) also decreased.
Final demand goods: The index for final demand goods moved down 0.2% in May following three consecutive increases. About three-quarters of the decrease can be traced to prices for final demand energy, which fell 1.0%. The index for final demand foods declined 0.3%, while prices for final demand goods less foods and energy were unchanged.
Product detail: Nearly 40% of the May decrease in the index for final demand goods is attributable to prices for gasoline, which fell 1.7%. The indexes for diesel fuel, iron and steel scrap, chicken eggs, beef and veal, and fresh fruits and melons also moved lower. Conversely, prices for prepared poultry products increased 7.0%. The indexes for light motor trucks and jet fuel also advanced. 
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The not-seasonally adjusted price indexes we track were nearly all down on a MoM basis, but mixed on a YoY basis. 
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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Friday, June 7, 2019

May 2019 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm payroll employment rising by 75,000 jobs in May (+180,000 expected). Also, combined March and April employment gains were revised down by 75,000 (March: -36,000; April: -39,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) remained at 3.6% as the number of employed persons rose (+113,000) together with the civilian labor force (+176,000). 
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Observations from the employment reports include:
* For a change, the establishment (+75,000 jobs) and household survey results (+113,000 employed) were at least directionally in sync. The BLS may have “plumped” the headline number by a small amount; had average (since 2009) May CES (business birth/death model) and seasonal adjustments been used, job gains might have amounted to an even more abysmal +39,000.
* With those caveats in mind, Manufacturing gained 3,000 jobs in May. That result is reasonably consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded at a faster pace in May. Wood Products employment shrank by 1,800 jobs (ISM was unchanged); Paper and Paper Products: +300 (ISM increased); Construction: +4,000 (ISM increased). 
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* The number of employment-age persons not in the labor force (NILF) edged down (-8,000) to 96.2 million. This metric had been trending lower since August 2018 -- presumably, as more potential workers concluded their prospects were improving and (re)entered the workforce -- so it is reassuring to see hints this statistic may again be heading in the right direction. Meanwhile, the employment-population ratio (EPR) was unchanged at 60.6%; roughly, then, for every five people being added to the population, three are employed. 
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* With growth in the labor force slightly exceeding that of the civilian population, the labor force participation rate was stable at 62.8. Average hourly earnings of all private employees increased by $0.06, to $27.83, resulting in a 3.1% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.07, to $23.38 (+3.4% YoY). Because the average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours, average weekly earnings increased by $2.06, to $957.35 (+2.8% YoY). With the consumer price index running at an annual rate of 2.0% in April, workers’ purchasing power is -- by official metrics, at least -- reasonably stable. 
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* Full-time jobs retreated by 83,000. Those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- tumbled by 299,000; those working part time for non-economic reasons nudged up by 53,000 while multiple-job holders rose by 57,000. 
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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 May shrank by $10.5 billion, to $203.4 billion (-4.9% MoM, but +8.8% YoY). To reduce some of the monthly volatility and determine broader trends, we average the most recent three months of data and estimate a percentage change from the same months in the previous year. The average of the three months ending May was 7.2% above the year-earlier average -- well off the peak of +13.8% set back in September 2013. Nearly 1½ years have 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 effectively disappeared.
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Wednesday, June 5, 2019

May 2019 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil reversed course in May when falling by $3.04 (-4.8%), to $60.83 per barrel. The increase occurred within the context of a stronger U.S. dollar, the lagged impacts of a 10,000 barrel-per-day (BPD) drop in the amount of oil supplied/demanded during March (to 20.2 million BPD), and an expansion in accumulated oil stocks (May average: 483 million barrels). 
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From the 3 June 2019 issue of Peak Oil Review:
Oil prices fell on Friday posting their biggest monthly drop in six months, after President Donald Trump threatened tariffs on imports from Mexico.  Unless the Mexican government stops people from illegally crossing into the U.S., he would impose a 5 percent tariff on imports starting on June 10th that would increase monthly, up to 25 percent on Oct. 1.   Following the threat Brent crude futures fell $2.38, or 3.6 percent, to settle at $64.49 a barrel and New York futures fell $3.09 to $53.50 a barrel, a 5.5 percent loss.  Brent touched a session low of $64.37 a barrel, lowest since March 8.  WTI hit $53.41 a barrel, weakest since Feb. 14.  During May Brent futures posted an 11 percent slide and WTI 1 percent, their largest monthly losses since November.
U.S. refiners import some 680,000 b/d of Mexican crude so that a 5 percent tariff would add an additional $2 million to the cost of their daily purchases and a 25 percent tariff an extra $10 million.  Given the scale of the pushback from the Congress and the many organizations that have interests in the U.S.-Mexico trade, it seems unlikely that the tariffs will be imposed. 
Other important factors bearing on the price decline last week were the on-going U.S.-China trade war and the U.S. stocks report showing that the U.S. crude inventories decreased by less than 300,000 barrels.  The American Petroleum Institute had estimated a 5.2-million-barrel drawdown earlier in the week sending the markets higher.
On the last day of every month, the U.S.'s Energy Information Administration releases its Petroleum Supply Monthly, which contains the U.S. oil production number up to 60 days before publication. While the newest of these numbers are two months old, they are more accurate than the forecasts the EIA releases in its Drilling Productivity Report on the 15th of each month.  Recently these forecasts have been too optimistic about how much shale oil would be produced in the coming month forcing revision when the actual production numbers become available ten weeks later.
When the May production numbers were released on Friday, Reuters headlined its conclusions as "U.S. crude output rises 2.1% in March to a near record high."  While this sounds great, digging into the details tells another story.  The EIA has been predicting that U.S. crude production, which now is critical to global economic growth, will grow by some 1.2 million b/d this year.  While U.S. production was up in March, it has been largely static for the last six months with production in November and December 2018 slightly higher than in March 2019.  Growth in output between February and March largely came from a rebound in North Dakota production which was hampered by frigid weather in February.  The other significant increase during March was an 11 percent increase in Gulf of Mexico production, which usually comes when a new production platform comes online and is unlikely to grow much in coming months.
The most interesting revelation in the report was that oil production in Texas declined by 0.1 percent between February and March to 4.873 million b/d.  This decline suggests that the press stories saying that small and medium-sized shale oil drillers are cutting back may be showing up in production numbers. The decline further suggests that the U.S. will have difficulty in achieving a 1.2 million b/d increase this year.  On the positive side, the new numbers show that oil production in New Mexico was up by 23,000 b/d last month and up by 39.5 percent since March 2018 to 870,000 b/d.  This westward extension into New Mexico's portion of the Permian Basin seems to be the fastest growth area in the shale oil industry.
The OPEC+ Production Cut: Preliminary figures show that OPEC's production dropped to a four-year low of 30.17 million b/d in May, as a 200,000 b/d increase in Saudi production was not enough to offset Iran's and Venezuela's lower output.  Crude oil has fallen from a six-month high above $75 a barrel in April to below $65 on Friday, due to concerns about the economic impact of the U.S.-China and U.S.-Mexico trade disputes.  This decline in prices is likely to affect the decision on whether to extend the production cut that is to be taken at the end of this month.
Despite the U.S. sanctions, Iran was able to ship out about 400,000 b/d last month, less than half as much as it exported in April.  Venezuela's production fell by 50,000 b/d in May due to the impact of U.S. sanctions and long-term deterioration of its production infrastructure.  Output also dropped in Nigeria because of a pipeline shutdown that disrupted exports.
The decline in oil prices increases the chances that that OPEC+ production cut will be extended for another six months at the June 25-26 meeting to consider the cuts.  The Saudis have been hinting for weeks that they want an extension and we have indications that Russia may be changing its position. Moscow's Finance Minister Siluanov said last week, "there are many arguments both in favor of the extension and against it, but we see that all these deals with OPEC result in our American partners boosting shale oil output and grabbing new markets."  Russia's energy ministry and the government will determine their stance on the pact's extension after weighing these pros and cons and the longevity of current market trends.
U.S. Shale Oil Production: Despite the hype of lower breakeven prices, and the hype around longer laterals, energy digitalization, and other technological breakthroughs, most shale companies are still not profitable.  Nine in ten U.S. shale oil companies are burning cash, according to Rystad Energy.  The consulting firm has studied the financial performance of 40 dedicated U.S. shale oil companies, focusing on cash flow from operating activities.  Free cash is the money available to expand the business, reduce debt, or return to shareholders.  Only four companies in the group reported a positive cash flow balance in the first quarter of 2019, bringing down the share of companies with a positive cash flow balance from the recent average of around 20% to just 10%.
Evidence continues to mount that U.S. shale oil production is slowing.  Last week, Schlumberger, the largest oilfield service company in the world, saw its debt rating downgraded by S&P due to the slowdown in drilling by U.S. shale companies.  Meanwhile, rival Halliburton saw its outlook downgraded from "stable" to "negative."   An analyst at S&P wrote in a report, "The oilfield services industry has fundamentally changed due to permanent efficiency and productivity gains realized by E&P companies as well as investor sentiment calling for E&P companies to live within cash flow and limit production growth."
Independent shale drillers in the U.S. are facing pressure to either expand or be acquired, Robert Kaplan, president of the Federal Reserve Bank of Dallas, said recently.  "Smaller, independent drillers are losing access to capital and hearing complaints from shareholders."  In the Dallas Fed's most recent Energy Survey - a quarterly poll of about 200 oil and gas companies - one anonymous oil industry executive wrote that "the shrinkage in market capitalization of some companies is breathtaking."
North Dakota drillers are falling short of the state's goals to limit the burning of excess natural gas.  This situation comes five years after the state adopted rules to reduce the environmentally harmful practice. The industry has spent billions of dollars on building new infrastructure but is at least two years from catching up.  Regulators are saying that the state's increasing gas production will continue to outstrip new pipeline capacity to pipe it away.
Occidental Petroleum acquired some of the richest shale oilfields in Texas when it beat out Chevron Corp in a bidding war to acquire Anadarko Petroleum.  It also quadrupled its debt - to $40 billion - at a time when investors are calling for spending cuts and higher dividends.  The acquisition's success will depend on how quickly Occidental can sell off some of Anadarko's assets and focus on optimizing and integrating the assets it keeps - especially the U.S. shale fields.  Corporation activist investor Carl Icahn has filed a lawsuit against the company over what it called its "misguided" acquisition of Anadarko and may seek a special meeting to remove and replace board members. 
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Selected highlights from the 31 May 2019 issue of OilPrice.com’s Oil & Energy Insider include:
Oil prices are on track for their largest monthly decline in six months. The Trump administration exacerbated the selloff with another threat of trade escalation.
Trump threatens Mexico with 5 percent tariffs. President Trump threatened to slap a 5 percent tariff on all goods imported from Mexico beginning on June 10. In a tweet, he said that the tariff would gradually increase over time unless illegal immigration stopped. The announcement is also a serious blow to attempts to pass the NAFTA 2.0 agreement, which needs be ratified in the national legislatures of Mexico, the U.S. and Canada. "The decision, understandably, is sending shivers down investors' spines," PVM said in a note. "U.S. refiners import roughly 680,000 barrels per day of Mexican crude. The 5% tariff adds an extra $2 million to the cost of their daily purchases."
Fed under pressure to cut rates. The escalating trade war, which may now include Mexico, has led bond investors to bet that the U.S. Federal Reserve will cut interest rates. If the trade war is not resolved soon, "the patience needed to keep from easing will be severely tested sometime in the months ahead," Steven Blitz, chief U.S. economist at TS Lombard, told the Wall Street Journal. For now, the central bank is not making any moves.
Trump to lift summer E15 ban. The Trump administration has approved the sale of higher concentrations of ethanol in summer months, a move that will be welcomed by ethanol producers and American farmers, already battered by the trade war. Until now, the 15 percent ethanol mix was only allowed to be sold eight months out of the year over concerns about smog in summer months. The oil and refining industries oppose the move and will likely launch legal challenges.
OPEC output falls by 60,000 bpd in May. A Reuters survey puts OPEC's production at 30.17 million barrels per day in May, down 60,000 bpd from April and the lowest figure in nearly four years. Saudi Arabia increased output by 200,000 bpd, but Iran lost 400,000 bpd.
U.S. delays petrochemical sanctions on Iran. In what is being interpreted as an attempt to dial back tensions, the Trump administration has delayed sanctions on Iran's petrochemical sector.
Oil majors won't bail out struggling Permian drillers. The oil majors have said that they will not overpay for indebted and struggling drillers in the Permian. There is "not always alignment among buyers and sellers," ExxonMobil (NYSE: XOM) CEO Darren Woods said Wednesday, a diplomatic way of saying that smaller companies are demanding too much. He suggested that these companies will be squeezed over time and will lower their expectations.
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

May 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in May the expansion in U.S. manufacturing decelerated. The PMI registered 52.1%, down 0.7 percentage point (PP) from the April reading. (50% is the breakpoint between contraction and expansion.) ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. The jump in input prices (+3.2PP) and drop in order backlogs (-6.7PP) were the most noteworthy sub-index changes. 
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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- accelerated (+1.4PP) to 56.9%. The jump in employment (+4.4PP) and drop in imports (-5.0PP) were the most noteworthy sub-index changes. 
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Of the industries we track, only Real Estate and Construction expanded. "Ability to source and retain employees continues to strain the business," observed one Construction respondent.

Relevant commodities:
* Priced higher -- Freight; fuel (diesel and gasoline); and labor (general, construction and temporary).
* Priced lower -- Oriented strand board and natural gas.
* Prices mixed -- None.
* In short supply -- Construction subcontractors; and labor (general, construction and temporary).

IHS Markit’s May survey headlines were mixed relative to those of ISM.
Manufacturing -- PMI drops to lowest since September 2009
Key findings:
* Marginal improvement in operating conditions
* New orders fall for first time since August 2009
* Output expectations dip to joint-lowest in series history
Services -- New business expansion eases to slowest since March 2016
Key findings:
* Output and new orders rise at only a marginal rate
* Business expectations dip to lowest since June 2016
* Input cost inflation weakest since September 2016

Commentary by Chris Williamson, Markit’s chief business economist:
Manufacturing -- "May saw U.S. manufacturers endure the toughest month in nearly ten years, with the headline PMI down to its lowest since the height of the global financial crisis. New orders are falling at a rate not seen since 2009, causing increasing numbers of firms to cut production and employment. At current levels, the survey is consistent with the official measure of manufacturing output falling at an increased rate in the second quarter, meaning production is set to act as a further drag on GDP, with factory payroll numbers likewise in decline.
“While tariffs were widely reported as having dampened demand and pushed costs higher, both producers and their suppliers often reported the need to hold selling prices lower amid lackluster demand. While this bodes well for inflation, profit margins are clearly being squeezed as a result.
“With future optimism sliding sharply lower in May, risks to near-term growth have shifted further to the downside.
“While companies of all sizes are struggling, the biggest change since the strong growth seen late last year is a deteriorating performance among larger companies, where surging order book growth just a few months ago has now turned into contraction, the first such decline seen in the series’ ten-year history.”

Services -- “The final PMI data for May add to worrying signs about the health of the U.S. economy. With the exception of February 2016, business reported the weakest expansion for five and a half years as a trade-led slowdown continued to widen from manufacturing to services.
"Inflows of new business showed the second-smallest rise seen this side of the global financial crisis as the steepest fall in demand for manufactured goods since 2009 was accompanied by a further marked slowdown in orders for services.
"The survey data indicate a deterioration of annualized GDP growth to just 1.2% in May, down from 1.9% in April, putting the second quarter on course for a 1.5% rise.
"Employment growth has come off the boil in line with weaker-than-expected sales and gloomier prospects for the year ahead, albeit still showing some resilience. The survey data are running at a level broadly consistent with around 150,000 jobs being added in May.
"The slowdown has also seen inflationary pressures fade rapidly. Despite upward pressure on prices from tariffs, the rate of increase of average prices charged for goods and services barely rose in May, in marked contrast to the strong rises seen earlier in the year, as increasing numbers of companies competed on price amid weak demand.
"As with manufacturing, the biggest change in recent months has been a sharp deterioration in growth of orders and output at larger companies, linked in part to worsening export trends, trade war worries and rising geopolitical uncertainty."
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Tuesday, June 4, 2019

April 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 April decreased $2.7 billion or 0.5% to $504.1 billion. Durable goods shipments decreased $3.9 billion or 1.5% to $253.4 billion led by transportation equipment. Meanwhile, nondurable goods shipments increased $1.2 billion or 0.5% to $250.7 billion, led by petroleum and coal products. Shipments of wood products and paper were both unchanged. 
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Inventories increased $1.8 billion or 0.3% to $692.9 billion. The inventories-to-shipments ratio was 1.37, up from 1.36 in March. Inventories of durable goods increased $1.7 billion or 0.4% to $422.4 billion, led by transportation equipment. Nondurable goods inventories increased $0.2 billion or 0.1% to $270.5 billion, led by petroleum and coal products. Inventories of wood products declined by 0.2%; paper: 0.0%. 
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New orders decreased $4.0 billion or 0.8% to $499.3 billion. Excluding transportation, new orders increased by 0.3% (+2.4% YoY). Durable goods orders decreased $5.2 billion or 2.1% to $248.6 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- fell by 1.0% (+2.4% YoY). New orders for nondurable goods increased $1.2 billion or 0.5% to $250.7 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 53% of the ground given up in the Great Recession. 
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Unfilled durable-goods orders decreased $0.6 billion or 0.1% to $1,179.3 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.69, up from 6.61 in March. 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.

Monday, June 3, 2019

May 2019 Currency Exchange Rates

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In May the monthly average value of the U.S. dollar (USD) appreciated versus Canada’s “loonie” (+0.6%) and the euro (+0.4%) but depreciated against the yen (-1.5%). On a trade-weighted index basis, the USD gained 1.1% 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.