June 2019 Residential Sales, Inventory and Prices

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Sales of new single-family houses in June 2019 were at a seasonally adjusted annual rate (SAAR) of 646,000 units (655,000 expected). This is 7.0% (±15.2%)* above the revised May rate of 604,000 (originally 626,000) and 4.5% (±21.8%)* above the June 2018 SAAR of 618,000 units; the not-seasonally adjusted year-over-year comparison (shown in the table above) was +1.8%. For longer-term perspectives, not-seasonally adjusted sales were 53.5% below the “housing bubble” peak but 9.0% above the long-term, pre-2000 average.

The median sales price of new houses sold in June 2019 rose to $310,400 ($6,900 or +2.3% MoM); meanwhile, the average sales price retreated to $368,600 ($2,600 or -0.7%). Starter homes (defined here as those priced below $200,000) comprised 10.5% of the total sold, down from the year-earlier 12.5%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 made up less than 1% of those sold in June, down from 1.8% 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 June, single-unit completions fell by 16,000 units (-1.8%). Although sales rose (+42,000 units; 7.0%) while completions fell, inventory for sale expanded in absolute terms (+2,000 units) but contracted in months-of-inventory (-0.4 month) terms. 

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Existing home sales retreated in June (-90,000 units), to a SAAR of 5.27 million units (5.34 million expected). Inventory of existing homes for sale expanded in both absolute (+20,000 units) and months-of-inventory terms (+0.1 month). The median price of previously owned homes sold in June jumped to a new record $285,700 (+$7,500 or 2.7% MoM). Because new-home sales rose while resales fell, the share of total sales comprised of new homes bumped up to 10.9%. 

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Housing affordability declined (-2.1 percentage points) as the median price of existing homes for sale in May rose by $11,100 (+4.1%; +4.6 YoY), to $280,200. 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 +0.8% (+3.4% YoY) -- the slowest rate of annual appreciation since September 2012.

“Nationally, year-over-year home price gains were lower in May than in April, but not dramatically so and a broad-based moderation continued,” said Philip Murphy, Managing Director and Global Head of Index Governance at S&P Dow Jones Indices. “Among 20 major U.S. city home price indices, the average YoY gain has been declining for the past year or so and now stands at the moderate nominal YoY rate of 3.1%.

“Though home price gains seem generally sustainable for the time being, there are significant variations between YoY rates of change in individual cities. Seattle’s home price index is now 1.2% lower than it was in May 2018, the first negative YoY change recorded in a major city in a number of years. On the other hand, Las Vegas and Phoenix, while cooler than they were during 2018, remain quite strong at 6.4% and 5.7% YoY gains, respectively. Whether negative YoY rates of change spread to other cities remains to be seen; for now, there is still substantial diversity in local trends. Nationally, increasing housing supply points to somewhat weakened demand, but the fact that seven cities experienced stronger YoY price gains in May than they did in April suggests an underlying resiliency that may mitigate the risk of overshooting to the downside at the national level." 

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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.

2Q2019 Gross Domestic Product: First (“Advance”) Estimate

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After annual revisions spanning back through 2014, the Bureau of Economic Analysis (BEA) pegged its advance (first) estimate of 2Q2019 U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate (SAAR) of +2.05% (1.9% expected), down 1.05 percentage points (PP) from 1Q2019’s +3.10% (previously 3.12%).

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 2Q2019 was 2.29% higher than in 2Q2018; that growth rate was slightly slower (-0.36PP) than 1Q2019’s +2.65% relative to 1Q2018.

Two groupings of GDP components -- personal consumption expenditures (PCE) and government consumption expenditures (GCE) -- contributed to 2Q growth. Private domestic investment (PDI) and net exports (NetX) detracted from growth. This report reversed several trends. For example:

PCE – After decelerating for three consecutive quarters, consumer spending “came roaring back” in 2Q, contributing 2.85PP -- the most since 4Q2017 -- to the headline number. Spending on motor vehicles and RVs dominated this category.

PDI – Drop-offs in the value of private inventories and spending on nonresidential structures flipped private domestic investment into contraction after three quarters of expansion. Residential investment spending also exerted a minor drag on PDI.

NetX – A drop in exports and rise in imports pulled net exports “into the red.”

GCE – Spending at both the federal and state/local levels boosted this category’s contribution to the headline.

The BEA’s real final sales of domestic product growth, which excludes the effect of inventories, rose to +2.91%, up 0.34PP from 1Q2019. 

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“We are not quite sure what to make of this new report,” wrote Consumer Metric Institute’s Rick Davis, “primarily because it singularly reverses a number of trends that were very noticeable over the course of the past year. With that in mind, and at face value, the key takeaways from this report for 2Q2019 are as follows:

-- The much lamented demise of the consumer sector seems to have been premature. Combined spending on goods and services provided more growth (+2.84%) than the net headline number. The improvement in disposable income and the decrease in savings have likely fueled this spending surge -- reflecting improving household sentiment.

-- Commercial spending on fixed investment, which had materially supported the headline number for the past year, slid into contraction for the first time since 2015.

-- Inventories did their "thing" -- flipping sharply into negative territory. This is mean reversion at its very best. But arguably it is the flip side of the improvement in consumer spending. And it brings to mind that inventory draw-downs are the ultimate mixed message -- demonstrating caution on the part of inventory holders while simultaneously offering an encouraging long-range future to manufacturers.

-- Government spending soared, with all of the increase in Federal non-defense spending. [Federal spending, of which non-defense was indeed the lion’s share, was actually 60% of the total.] This is likely related to a time-shifted spending from the extended "shutdown" -- although the "shutdown" itself (as expected) resulted in no material reduction in spending.

-- Foreign trade also flipped, dropping the headline by -0.64pp after adding +0.72pp in the prior quarter, a -1.36pp quarter-to-quarter swing.

-- The BEA's deflator is now substantially higher than the CPI-U reported by the BLS, resulting in a materially more pessimistic growth rate than might otherwise have been reported -- reversing yet another trend.

-- The 22 quarters of historic revisions were, as a whole, relatively benign -- averaging an upward +0.02PP per quarter. However the immediately preceding four quarters took a beating, with 4Q2018 dropping by a material -1.07pp.

"Over the years we have come to expect that the revision process will reduce the growth reported in the relatively recent past. That raises the obvious question: Is the BEA's data collection process naturally biased to optimism on a quarter by quarter basis? Or is it just good bureaucratic policy to bury some of the negative stuff in the revisions that nobody really looks at?

"It is plausible that the BEA's survey based approach introduces a short-term survivor bias in their reports -- a phenomenon also observed in employment data. Non-responding survey participants are assumed to still be operating, and their prior responses are simply carried forward. Eventually the dead entities get weeded out, but not before the earlier assumptions about them creates a short term survivor bias.

"We certainly hope that the bias is procedural, and not bureaucratic policy," Davis concluded. "And if it is procedural, we might point out that this is the 21st century -- with even tradition bound Major League Baseball embracing instant replays and experimenting with robots calling balls and strikes. Surely we should expect the BEA to be doing much better."

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.

June 2019 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in June at a seasonally adjusted annual rate (SAAR) of 1,253,000 units (1.260 million expected). This is 0.9% (±7.9%)* below the revised May estimate of 1,265,000 (originally 1.269 million units), but 6.2% (±7.8%)* above the June 2018 SAAR of 1,180,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +4.9%.

Single-family housing starts in June were at a SAAR of 847,000; this is 3.5% (±9.6%)* above the revised May figure of 818,000 (-2.3% YoY). Multi-family starts: 406,000 units (-9.2% MoM; +26.0% 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 June were at a SAAR of 1,161,000 units. This is 4.8% (±12.8%)* below the revised May estimate of 1,220,000 (originally 1.213 million units) and 3.7% (±10.5%)* below the June 2018 SAAR of 1,205,000 units; the NSA comparison: -4.9% YoY.

Single-family housing completions were at a SAAR of 870,000; this is 1.8% (±11.5%)* below the revised May rate of 886,000 (+0.5% YoY). Multi-family completions: 291,000 units (-12.9% MoM; -17.3% YoY). 

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Total permits amounted to a SAAR of 1,220,000 units (1.300 million expected). This is 6.1% (±1.2%) below the revised May rate of 1,299,000 (originally 1.294 million units) and 6.6% (±1.1%) below the June 2018 SAAR of 1,306,000 units; the NSA comparison: -10.7% YoY.

Single-family permits were at a SAAR of 813,000; this is 0.4% (±1.0%)* above the revised May figure of 810,000 (-9.4% YoY). Multi-family: 407,000 (-16.8% MoM; -13.3% YoY). 

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Builder confidence in the market for newly-built single-family homes rose one point to 65 in July, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This marks the sixth consecutive month that sentiment levels have held at a steady range in the low- to mid-60s.

“Builders report solid demand for single-family homes. However, they continue to grapple with labor shortages, a dearth of buildable lots and rising construction costs that are making it increasingly challenging to build homes at affordable price points relative to buyer incomes,” said NAHB Chairman Greg Ugalde.

“Even as builders try to rein in costs, home prices continue to outpace incomes,” said NAHB Chief Economist Robert Dietz. “The current low mortgage interest rate environment should be getting more buyers off the sidelines, but they remain hesitant due to affordability concerns. Still, attractive rates should help spur new home purchases in large metro suburban markets, where approximately one-third of new construction takes place.”

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.

June 2019 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) was unchanged in June (+0.1% expected), as increases for both manufacturing and mining offset a decline for utilities. For 2Q as a whole, IP declined at an annual rate of 1.2%, its second consecutive quarterly decrease. At 109.6% of its 2012 average, total industrial production was 1.3% higher in June than it was a year earlier.  

In June, manufacturing output advanced 0.4%. An increase of nearly 3% for motor vehicles and parts contributed significantly to the gain in factory production; excluding motor vehicles and parts, manufacturing output moved up 0.2%. The output of utilities fell 3.6% as milder-than-usual temperatures in June reduced the demand for air conditioning. The index for mining rose 0.2%. 

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Industry Groups

Manufacturing output increased 0.4% in June after moving up 0.2% in May (NAICS manufacturing: +0.4% MoM; +0.5% YoY). Despite the gains in the past two months, factory production declined at an annual rate of 2.2% in 2Q, about the same pace as in 1Q. In June, the indexes for durables and for nondurables advanced 0.4% and 0.5%, respectively. The output for other manufacturing (publishing and logging) declined 0.5%. Among durables, an increase of nearly 3% in the output of motor vehicles and parts was accompanied by gains of around 1% in the indexes for nonmetallic mineral products and for computer and electronic products (wood products: +0.6%). Among nondurables, the index for petroleum and coal products recorded the largest advance (2.5%) and most other categories also posted gains (paper products: +0.4%); the indexes for printing and support activities and for chemicals registered the only declines.

In June, electric utilities and natural gas utilities posted drops of 3.9% and 2.0%, respectively. Mining output rose 0.2%, as a gain in oil and gas extraction was partly offset by declines in coal mining and in support activities for mining. Mining production advanced 8.9% at an annual rate for the second quarter, its 11th consecutive quarterly increase. 

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Capacity utilization (CU) for the industrial sector decreased 0.2 percentage point (PP) in June to 77.9%, a rate that is 1.9PP below its long-run (1972–2018) average.

Manufacturing CU rose 0.3PP in June (NAICS manufacturing: +0.3%, to 76.4%), with increases for both durables and nondurables (wood products: +0.2%; paper products: +0.4%) and a decrease for other manufacturing (publishing and logging). The overall manufacturing (i.e., non-NAICS) operating rate of 75.9% is 2.4PP below its long-run average. The utilization rate for mining moved down to 91.5%, which is still more than 4PP higher than its long-run average. The operating rate for utilities dropped 3.0PP and remained well below its long-run average. 

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Capacity at the all-industries level nudged up 0.2% (+2.1 % YoY) to 140.6% of 2012 output. Manufacturing (NAICS basis) rose fractionally (+0.1% MoM; +1.3% YoY) to 139.2%. Wood products: +0.3% (+4.0% YoY) to 165.8%; paper products: 0.0% (-0.6 % 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.

June 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 0.1% in June (+0.0% expected), the same increase as in May. Increases in the indexes for shelter, apparel, and used cars and trucks more than offset declines in energy indexes to result in the seasonally adjusted all-items monthly increase in June. The energy index fell 2.3% as all of the major energy component indexes declined. The food index was unchanged as the index for food away from home rose but the index for food at home declined.

The index for all items less food and energy rose 0.3 in June, its largest monthly increase since January 2018. Along with the indexes for shelter, used cars and trucks, and apparel, the indexes for household furnishings and operations, medical care, and motor vehicle insurance were among the indexes that increased in June. The indexes for recreation, airline fares, and personal care all declined in June.

The all-items index increased 1.6% for the 12 months ending June, a smaller increase than the 1.8% rise for the period ending May. The index for all items less food and energy rose 2.1% over the last 12 months, and the food index increased 1.9%. The energy index, in contrast, declined 3.4% over the last 12 months.   

Producer Price Index

The Producer Price Index for final demand (PPI-FD) advanced 0.1% in June (+0.1% expected). Final demand prices moved up 0.1% in May and 0.2% in April. The rise is attributable to a 0.4% increase in the index for final demand services. Conversely, prices for final demand goods fell 0.4%. The index for final demand less foods, energy, and trade services was unchanged in June following advances of 0.4% in both April and May.

The final demand index rose 1.7% for the 12 months ended in June, the lowest rate of increase since advancing 1.7% in January 2017. Prices for final demand less foods, energy, and trade services climbed 2.1% YoY.

Final Demand

Final demand services: The index for final demand services rose 0.4% in June, the largest increase since climbing 0.8% in October 2018. Most of the June advance is attributable to margins for final demand trade services, which moved up 1.3%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand transportation and warehousing services rose 0.3%, while the index for final demand services less trade, transportation, and warehousing was unchanged.

Product detail: Over a quarter of the June increase in prices for final demand services can be traced to margins for fuels and lubricants retailing, which jumped 12.2%. The indexes for health, beauty, and optical goods retailing; apparel, footwear, and accessories retailing; machinery, equipment, parts, and supplies wholesaling; loan services (partial); and truck transportation of freight also moved higher. In contrast, prices for traveler accommodation services fell 4.0%. The indexes for jewelry retailing and airline passenger services also declined.

Final demand goods: Prices for final demand goods moved down 0.4% in June, the largest decrease since falling 0.6% in January. The June decline is attributable to a 3.1% drop in the index for final demand energy. Conversely, prices for final demand foods climbed 0.6%. The index for final demand goods less foods and energy was unchanged.

Product detail: Nearly 60% of the June decrease in the index for final demand goods can be traced to a 5.0% decline in prices for gasoline. The indexes for diesel fuel, meats, liquefied petroleum gas, iron and steel scrap, and residual fuels also moved lower. In contrast, corn prices rose 19.9%. The indexes for ethanol and residential electric power also increased. 

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The not-seasonally adjusted price indexes we track were all down 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.

May 2019 International Trade (Softwood Lumber)

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Softwood lumber exports decreased (3 MMBF or -2.2%) in May; imports also fell (44 MMBF or -3.0%). Exports were 46 MMBF (-28.2%) below year-earlier levels; imports were unchanged (0.0%). As a result, the year-over-year (YoY) net export deficit was 46 MMBF (+3.7%) larger. Also, the average net export deficit for the 12 months ending May 2019 was 3.8% 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 (44.2%; of which Canada: 26.3%; Mexico: 17.9%) and Asia (29.4%; especially China: 7.4%; and Japan: 7.6%) were the primary destinations for U.S. softwood lumber exports; the Caribbean ranked third with a 19.7% share. Year-to-date (YTD) exports to China were -64.8% relative to the same months in 2018. Meanwhile, Canada was the source of most (89.9%) of softwood lumber imports into the United States. Imports from Canada were 0.4% lower YTD than the same months in 2018. Overall, YTD exports were down 26.5% compared to 2018; imports: +0.2%. 

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U.S. softwood lumber export activity through the West Coast customs region represented the largest proportion (36.9% of the U.S. total), followed by the Gulf (26.7%) and Eastern (25.8%) regions. Seattle (23.9% of the U.S. total) maintained the lead over Mobile (17.7%) as the single most-active district. At the same time, Great Lakes customs region handled 62.4% of softwood lumber imports -- most notably the Duluth, MN district (24.0%) -- coming into the United States. 

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Southern yellow pine comprised 24.2% of all softwood lumber exports, Douglas-fir (15.9%) and treated lumber (12.1%). Southern pine exports were down 46.6% YTD relative to 2018, while treated: -28.9%; Doug-fir: -5.5%.

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

June 2019 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm payroll employment rising by 224,000 jobs in June (+165,000 expected). Also, combined April and May employment gains were revised down by 11,000 (April: -8,000; May: -3,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) ticked up to 3.7% as expansion of the labor force (+335,000) exceeded growth in the number of employed persons (+247,000). 

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Observations from the employment reports include:

* For a change, the establishment (+224,000 jobs) and household survey results (+247,000 employed) were in general agreement. Also, the BLS’s headline estimate may have been somewhat conservative; had average (since 2009) June CES (business birth/death model) and seasonal adjustments been used, job gains might have amounted to a far more robust +419,000.

* Manufacturing gained 17,000 jobs in June. That result is reasonably consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded at a faster pace in June. Wood Products employment rose by 800 jobs (ISM decreased); Paper and Paper Products: -900 (ISM increased); Construction: +21,000 (ISM increased). 

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* The number of employment-age persons not in the labor force (NILF) fell (-158,000) to 96.1 million. This metric seems to have leveled off since the latter half of 2018. 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 absolute growth in the labor force nearly double that of the civilian population, the labor force participation rate edged up to 62.9%. Average hourly earnings of all private employees increased by $0.06, to $27.90, resulting in a 3.1% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.04, to $23.43 (+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 $959.76 (+4.9% YoY). With the consumer price index running at an annual rate of 1.8% in May, workers appear to have gained -- by official metrics, at least -- purchasing power in June. 

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* Full-time jobs jumped by 453,000. Those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- slipped by 8,000. Those working part time for non-economic reasons rose by 158,000 while multiple-job holders spiked by 301,000. 

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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 June shrank by $9.6 billion, to $193.8 billion (-4.7% MoM, but +4.3% 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 June was 7.5% above the year-earlier average -- well off the peak of +13.8% set back in September 2013. 

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

June 2019 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil dipped further in June, falling by $6.17 (-10.1%), to $54.66 per barrel. The decrease occurred within the context of a marginally weaker U.S. dollar, the lagged impacts of a 92,000 barrel-per-day (BPD) drop in the amount of oil supplied/demanded during April (to 20.1 million BPD), and little net change in accumulated oil stocks (June average: 476 million barrels). 

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From the 1 July 2019 issue of Peak Oil Review:

After a week of rampant speculation about what could happen at the G20 summit that would affect oil prices, the announcement on [29 June] that the US and China have agreed to keep the current tariffs in place for now and would resume trade negotiations left the situation about where it has been for months.  President Putin announced that Russia and its friends would join Saudi Arabia in extending the OPEC production cut for another six to nine months eliminating the drama from the formal OPEC+ meeting that will take place early this week.  Oil prices were up a bit for the week settling at $64.74 in London and $58.47 in New York.

Although an end to the US-China trade dispute is nowhere in sight, the G20 announcements suggest that the situation is under control at the minute and that tariffs which could lead to an economic recession are on hold.  Likewise, the extension of the OPEC+ agreement until next year should prevent another 1 million b/d of crude being dumped on the market forcing prices down.  On Sunday, an editorial in the official China Daily warned while there was now a better likelihood of reaching an agreement, there's no guarantee there would be one.  "Things are still very much up in the air."

US Shale Oil Production: US crude oil output in April rose to a new monthly record of 12.16 million b/d, according to the EIA's Petroleum Supply Monthly which was released on Friday. 

There are numerous reports that most shale oil drillers, except perhaps for the major oil companies, are cutting back on opening new wells to mollify their financial backers.  It seems unlikely that the shale oil industry will be able to increase production by 83 thousand b/d in June and 70 thousand in July as projected by the EIA.

A recent survey by the Dallas Federal Reserve reveals that oil industry executives are unusually pessimistic about the prospects for the future.  A combination of low oil prices, increasing costs, and the lack of investor willingness to fund losing firms suggest that the era of rapid increases in shale oil production may be coming to a close. 

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Selected highlights from the 28 June 2019 issue of OilPrice.com’s Oil & Energy Insider include:

U.S. to assemble naval watch in Persian Gulf. The U.S. is hoping to enlist other nations in an effort to keep an eye on the Persian Gulf, according to the Wall Street Journal. The U.S. would contribute ships and aircraft but operational control would be headed by another nation. The plan aims to present deterrence to Iran, securing oil shipment lanes through the Strait of Hormuz.

Philadelphia refinery set to close. Philadelphia Energy Solutions may permanently shut down its damaged refinery, decimated from a series of explosions last week. PES may try to sell the complex as well.

Drillers use gas for electricity. Permian drillers are beginning to use some of their surplus gas to power their operations, a practice that will save on costs, reduce flaring and emissions, according to Bloomberg.

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.

June 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in June the rate of expansion in U.S. manufacturing decelerated to its slowest since September 2016. The PMI registered 51.7%, down 0.4 percentage point (PP) from the May 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 production (+2.8PP) and drop in input prices (-5.3PP) 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 -- also decelerated further (-1.8PP) to 55.1%. Increases in the input prices (+3.5PP) and order backlog (+3.5PP) sub-indexes were noticeable. 

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Of the industries we track, only Wood Products and Ag & Forestry did not expand. Respondent comments included the following:

* Wood Products -- "Weather in various markets across the country has improved month over month, which has positively affected our daily output. If the trend continues, we will have to replenish [at] an increased month-over-month rate."

* Construction -- "New residential sales are off the typical pace by 10 to 15% year over year. Tariffs are working their way through the system, raising costs on finished materials. Wet weather has slowed construction and starts for the beginning of the season."

Relevant commodities:

* Priced higher -- Paper products.

* Priced lower -- Corrugated boxes; lumber products; and natural gas.

* Prices mixed -- Fuel (diesel and gasoline).

* In short supply -- Construction subcontractors; and labor (general, construction and professional).

IHS Markit’s June survey headlines were slightly more upbeat than those of ISM.

Manufacturing -- New orders return to growth in June

Key findings:

* Modest upturns in output and new business
* Employment expands at slowest rate since August 2016
* Inflationary pressures remain muted

Services -- Subdued growth of business activity continues in June

Key findings:

* Activity growth edges up from May's 39-month low
* New business growth quickens, but remains historically subdued
* Business confidence dips to three-year low

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

Manufacturing -- "U.S. manufacturers reported business conditions to have remained the toughest for nearly a decade in June. The past two months have seen the lowest readings since the height of the global financial crisis in 2009.

“The survey provides accurate advance indicators of comparable official data, and paints a worrying picture of marked declines in both output and jobs. The June survey sub-index readings are consistent with manufacturing output contracting at a quarterly rate of 0.7% and factory payrolls falling by 18,000.

“A major development in recent months has been the deteriorating performance of larger companies, where the last two months have seen the lowest PMI readings for a decade. After inventories rose sharply earlier in the year, large companies have moved to destocking in May and June amid a sharp slowing in new order inflows.

“Although business optimism about the future lifted slightly higher, it remained close to survey lows to indicate persistent low morale. Worries centered on signs of slowing demand both at home and internationally, weaker sales, and geopolitical uncertainty.

“Tariffs meanwhile continued to push up prices, but weak demand often limited the ability of firms to pass higher prices onto customers, suggesting overall inflationary pressures have weakened compared to earlier in the year."

Services -- “An improvement in service sector growth provides little cause for cheer, as the survey data still indicate a sharp slowing in the pace of economic growth in the second quarter. The PMI data for manufacturing and services collectively point to GDP expanding at an annualized rate of 1.5%.

"A major change since the first quarter has been a broadening-out of the slowdown beyond manufacturing, with the service sector growth now also reporting much weaker business activity and orders trends than earlier in the year.

"Hiring was hit as firms scaled back their expansion plans in the face of weaker than expected order inflows and gloomier prospects for the year ahead. Jobs growth was the weakest for over two years and future expectations across both services and manufacturing has slipped to the lowest seen since comparable data were first available in 2012.

"Trade wars and geopolitical concerns topped the list of companies’ worries about the year ahead, alongside forecasts of slower economic growth. Progress in U.S.-China trade talks could therefore be key to helping lift confidence in coming months."

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 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 May increased $0.4 billion or 0.1% to $504.3 billion. Durable goods shipments increased $0.9 billion or 0.3% to $254.2 billion led by machinery. Meanwhile, nondurable goods shipments decreased $0.5 billion or 0.2% to $250.1 billion, led by petroleum and coal products. Shipments of wood products were unchanged; paper: +0.6%. 

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Inventories increased $1.4 billion or 0.2% to $694.1 billion. The inventories-to-shipments ratio was 1.38, up from 1.37 in April. Inventories of durable goods increased $2.0 billion or 0.5% to $424.6 billion, led by transportation equipment. Nondurable goods inventories decreased $0.6 billion or 0.2% to $269.6 billion, led by petroleum and coal products. Inventories of wood products shrank by 0.2%; paper: +0.4%. 

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New orders decreased $3.6 billion or 0.7% to $493.6 billion. Excluding transportation, new orders inched up by 0.1% (+0.1% YoY). Durable goods orders decreased $3.1 billion or 1.3% to $243.5 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- rose by 0.5% (+1.0% YoY). New orders for nondurable goods decreased $0.5 billion or 0.2% to $250.1 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 49% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders decreased $6.3 billion or 0.5% to $1,171.1 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.64, down from 6.69 in April. 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 sideways-to-down.

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.

June 2019 Currency Exchange Rates

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In June the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-1.3%), euro (-1.0%) and yen (-1.7%). On a trade-weighted index basis, the USD lost 0.4% 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.