4Q2019 Gross Domestic Product: First (“Advance”) Estimate

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The Bureau of Economic Analysis (BEA) pegged its advance (first) estimate of 4Q2019 U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate (SAAR) of +2.07% (2.1% expected), down 0.04 percentage point (PP) from 3Q2019’s +2.11%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 4Q2019 was 2.32% higher than in 4Q2018; that growth rate was slightly faster (+0.25PP) than 3Q2019’s +2.07% relative to 3Q2018.

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

Consumer spending rose at a 1.2PP pace in 4Q, a substantial slowdown from gains of 3.2PP (2Q) and 2.1PP (3Q). The headline got a bigger boost -- though likely a short-lived one -- from a sharp decline in the U.S. trade deficit. Exports contributed 0.17PP while the drop in imports bumped up the headline by 1.32PP. The fall-off in imports stemmed mostly from an increase in U.S. tariffs on Chinese goods last September. Companies rushed to beat the tariff increases, then cut back on import orders as the measures went into effect.

The business side of the ledger held the economy back again. Nonresidential fixed investment subtracted 0.2PP from the headline, which was a modest improvement from 3Q’s -0.3PP. The big hit to PDI came from inventory growth, which sank in large part due to last autumn’s strike at General Motors that crimped auto production. Residential activity was a bright spot in an otherwise gloomy PDI -- with a modest (0.04PP) acceleration.

Government spending, meanwhile, contributed 0.47PP to the headline -- largely reflecting an increase in outlays on ships, planes, missile systems and other military hardware.

For this estimate the BEA assumed an effective annualized deflator of 1.50%. During 4Q the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was significantly higher at 3.39%. Underestimating inflation results in optimistic growth rates, and if the BEA's nominal data was deflated using CPI-U inflation information the headline growth number would have been a minuscule 0.22%.

The BEA’s growth in real final sales of domestic product, which excludes the effect of inventories, jumped by nearly one-half, to +3.16%, up 1.02PP from 3Q2019. 

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“Some people will take the BEA's "bottom line" number (i.e., the real final sales of domestic product) from the report at its very attractive face value of +3.16% growth,” wrote Consumer Metric Institute’s Rick Davis. “If so, they will be seriously misled. Sadly the key points of this report can be summarized as follows:

-- Correcting for inflation using data from the Bureau of Labor Statistics gives us a headline of only +0.22% growth.

-- The headline was supported by a huge swing in imports -- which in the BEA's calculation matrix actually results from weakened (exchange rate adjusted) domestic demand for foreign goods.

-- Inventories can contract for one of two reasons: either companies can't keep up with demand, or they are allowing inventories to contract because of lower demand. Unfortunately, the consumer and commercial spending lines tell us that the latter seems far more plausible.

“Neither consumers nor fixed investments are driving the headline number,” Davis concluded. “Because of that, the cosmetics of this report are far more glamorous than the reality would suggest.”

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

December 2019 Residential Sales, Inventory and Prices

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Sales of new single-family houses in December 2019 were at a seasonally adjusted annual rate (SAAR) of 694,000 units (728,000 expected). This is 0.4% (±15.1%)* below the revised November rate of 697,000 (originally 719,000), but 23.0% (±20.0%) above the December 2018 SAAR of 564,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was +23.7%. For longer-term perspectives, NSA sales were 50.0% below the “housing bubble” peak and 10.1% below the long-term, pre-2000 average.

An estimated 681,000 new homes were sold in 2019. This is 10.3% (±6.4%) above the 2018 figure of 617,000.

The median sales price of new houses sold in December rose to $331,400 ($10,500 or +3.3% MoM); meanwhile, the average sales price increased to $384,500 ($6,900 or +1.8%). Starter homes (defined here as those priced below $200,000) comprised 10.6% of the total sold, down from the year-earlier 13.2%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 made up 2.1% of those sold in December, down from 5.3% 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 December, single-unit completions increased by 6,000 units (+0.7%). Because sales ticked down (3,000 units; -0.4%) while completions rose, inventory for sale expanded in both absolute (+5,000 units) and months-of-inventory (+0.2 month) terms. 

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Existing home sales advanced in December (190,000 units or +3.6%), to a SAAR of 5.54 million units. Inventory of existing homes for sale shrank in absolute (-240,000 units) and months-of-inventory (-0.7 month) terms. Because new-home sales fell while resales rose, the share of total sales comprised of new homes retreated to 11.1%. The median price of previously owned homes sold in December increased to $274,500 ($3,200 or +1.2% MoM). 

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Housing affordability marginally improved (+0.5 percentage point) despite the median price of existing homes for sale in November inching up by $200 (+0.1%; +5.4 YoY), to $274,000. 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% (+3.5% YoY).

"The U.S. housing market was stable in November,” said Craig Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P Dow Jones Indices. “With the month’s 3.5% increase in the national composite index, home prices are currently 59% above the trough reached in February 2012, and 15% above their pre-financial crisis peak. November’s results were broad-based, with gains in every city in our 20-city composite.

“At a regional level, Phoenix retains the top spot for the sixth consecutive month, with a gain of 5.9% for November. Charlotte and Tampa rose by 5.2% and 5.0% respectively, leading the Southeast region. The Southeast has led all regions since January 2019.”

“As was the case last month, after a long period of decelerating price increases, the National, 10-city, and 20-city Composites all rose at a modestly faster rate in November than they had done in October. This increase was broad-based, reflecting data in 15 of 20 cities. It is, of course, still too soon to say whether this marks an end to the deceleration or is merely a pause in the longer-term trend.” 

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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.

December 2019 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) declined 0.3% in December (-0.3% expected), as a decrease of 5.6% for utilities outweighed increases of 0.2% for manufacturing and 1.3% for mining. The drop for utilities resulted from a large decrease in demand for heating, as unseasonably warm weather in December followed unseasonably cold weather in November. For 4Q as a whole, total IP moved down at an annual rate of 0.5%.

At 109.4% of its 2012 average, total IP was 1.0% lower in December than it was a year earlier. 

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Industry Groups

Manufacturing output advanced 0.2% (NAICS manufacturing: +0.2% MoM; -1.3% YoY) in December but decreased at an annual rate of 1.0% in 4Q. The gain in December came despite a decrease of 4.6% for motor vehicles and parts; assemblies of light motor vehicles fell from 11.2 million units (annual rate) in November to 10.3 million units in December.

Excluding the motor vehicle sector, factory output rose 0.5%. The index for durable goods manufacturing slipped 0.2%, as the decrease for motor vehicles outweighed widespread increases in other industries (wood products: +1.1%). The index for nonmetallic mineral products advanced 2.3% for the largest gain among durables. The production of nondurables moved up 0.6%, led by increases of more than 1% for petroleum and coal products and for food, beverage, and tobacco products (paper products: +0.1%). The output of other manufacturing (publishing and logging) decreased 0.2%.

Mining output rose 1.3%, with most of the gain from oil and gas extraction; the index for mining rose at an annual rate of about 2% in 4Q to reverse a similarly sized decrease in 3Q. 

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Capacity utilization (CU) for the industrial sector fell 0.4 percentage point (PP) in December to 77.0%, a rate that is 2.8PP below its long-run (1972–2018) average.

Manufacturing CU edged up 0.1PP in December to 75.2%, about 3.1PP below its long-run average (NAICS manufacturing: 0.0%, at 75.7%; wood products: +0.8%; paper products: +0.1%). The utilization rate for mining increased to 89.6%, remaining above its long-run average of 87.1%. The operating rate for utilities fell to 73.5%, a rate that is about 12PP below its long-run average. 

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Capacity at the all-industries level nudged up 0.2% (+2.1 % YoY) to 142.1% of 2012 output. Manufacturing (NAICS basis) rose fractionally (+0.1% MoM; +1.5% YoY) to 140.2%. Wood products: +0.3% (+4.1% YoY) to 169.2%; paper products: 0.0% (-0.3 % YoY) to 109.7%.

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

December 2019 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in December at a seasonally adjusted annual rate (SAAR) of 1,608,000 units (1.373 million expected). This is 16.9 percent (±12.8 percent) above the revised November estimate of 1,375,000 (originally 1.365 million units) and 40.8 percent (±20.5 percent) above the December 2018 SAAR of 1,142,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +42.8%.

Single-family housing starts in December were at a SAAR of 1,055,000; this is 11.2 percent (±10.4 percent) above the revised November figure of 949,000 units (+30.4% YoY). Multi-family starts: 553,000 units (+29.8% MoM; +70.5% 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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Total completions were at a SAAR of 1,277,000 units. This is 5.1 percent (±15.1 percent)* above the revised November estimate of 1,215,000 (originally 1.188 million units) and 19.6 percent (±14.1 percent) above the December 2018 SAAR of 1,068,000 units; the NSA comparison: +19.8% YoY.

Single-family completions were at a SAAR of 912,000; this is 0.7 percent (±13.5 percent)* above the revised November rate of 906,000 units (+17.5% YoY). Multi-family completions: 365,000 units (+18.1% MoM; +26.7% YoY). 

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Total permits amounted to a SAAR of 1,416,000 units (1.458 million expected). This is 3.9 percent (±1.6 percent) below the revised November rate of 1,474,000 (originally 1.482 million units), but 5.8 percent (±1.1 percent) above the December 2018 SAAR of 1,339,000 units; the NSA comparison: +11.1% YoY.

Single-family permits were at a SAAR of 916,000; this is 0.5 percent (±1.3 percent)* below the revised November figure of 921,000 units (+16.9% YoY). Multi-family: 500,000 (-9.6% MoM; +3.9% YoY). 

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Builder confidence in the market for newly-built single-family homes edged one point lower to 75 in January, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI). The last two monthly readings mark the highest sentiment levels since July of 1999. Low interest rates and a healthy labor market combined with a need for additional inventory are setting the stage for further home building gains in 2020.

NAHB Chief Economist Robert Dietz believes that, with the Federal Reserve on pause and attractive mortgage rates, the steady rise in single-family construction that began last spring will continue into 2020. However, builders continue to grapple with a shortage of lots and labor while buyers are frustrated by a lack of inventory, particularly among starter homes.

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

November 2019 International Trade (Softwood Lumber)

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Softwood lumber exports decreased (7 MMBF or -6.3%) in November; imports fell (183 MMBF or -14.8%). Exports were 23 MMBF (-18.1%) below year-earlier levels; imports were 76 MMBF (-6.8%) lower. As a result, the year-over-year (YoY) net export deficit was 53 MMBF (-5.3%) smaller. Also, the average net export deficit for the 12 months ending November 2019 was 3.0% smaller than the average of the same months a year earlier (the “YoY MA(12) % Chng” series shown in the graph above). 

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North America (43.7%; of which Canada: 20.9%; Mexico: 22.9%) and Asia (27.7%; especially China: 6.9%; and Japan: 7.1%) were the primary destinations for U.S. softwood lumber exports; the Caribbean ranked third with a 21.1% share. Year-to-date (YTD) exports to China were -61.2% relative to the same months in 2018. Meanwhile, Canada was the source of most (86.8%) of softwood lumber imports into the United States. Imports from Canada were 5.0% lower YTD than the same months in 2018. Overall, YTD exports were down 22.8% compared to 2018; imports: -4.9%. 

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U.S. softwood lumber export activity through the West Coast customs region represented the largest proportion (33.6% of the U.S. total), followed by the Eastern (29.2%) and Gulf (28.5%) regions. Seattle (18.6% 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 60.1% of softwood lumber imports -- most notably the Duluth, MN district (20.9%) -- coming into the United States. 

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Southern yellow pine comprised 24.5% of all softwood lumber exports, Douglas-fir (14.3%) and treated lumber (14.1%) were also significant. Southern pine exports were down 36.8% YTD relative to 2018, while treated: -23.8%; Doug-fir: -6.2%.

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

December 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) rose 0.2% in December (+0.3% expected) after rising 0.3% in November. The indexes for gasoline, shelter, and medical care all rose in December, accounting for most of the increase in the seasonally adjusted all items index. The gasoline index increased 2.8% in December. Other major energy component indexes were mixed, and the energy index rose 1.4%. The food index rose 0.2% in December with the indexes for both food at home and food away from home increasing over the month.

The index for all items less food and energy rose 0.1% in December after increasing 0.2% in November. Along with the indexes for shelter and medical care, the indexes for apparel, motor vehicle insurance, recreation, and new vehicles all increased in December. The indexes for used cars and trucks, household furnishings and operations, and airline fares were among those to decline.   

The all items index increased 2.3% for the 12 months ending December, the largest 12-month increase since the period ending October 2018. The index for all items less food and energy also rose 2.3% over the last 12 months, the same increase as the periods ending October and November. The food index rose 1.8% over the last 12 months, while the energy index increased 3.4%.

Producer Price Index

The Producer Price Index for final demand (PPI-FD) edged up 0.1% (+0.2% expected) in December. Final demand prices were unchanged in November and rose 0.4% in October. The increase in the final demand index was the result of a 0.3% rise in prices for final demand goods. The index for final demand services was unchanged.

On an unadjusted basis, the final demand index moved up 1.3% in 2019, after a 2.6% advance in 2018. Prices for final demand less foods, energy, and trade services inched up 0.1% in December following no change in November. In 2019, the index for final demand less foods, energy, and trade services climbed 1.5% after advancing 2.8% in 2018.

Final Demand

Final demand goods: The index for final demand goods rose 0.3% in December, the same as in November. Most of the increase in December can be traced to a 1.5% advance in prices for final demand energy. The index for final demand goods less foods and energy edged up 0.1%. In contrast, prices for final demand foods moved down 0.2%.

Product detail: Over 60% of the December increase in the index for final demand goods can be attributed to a 3.7% advance in gasoline prices. The indexes for diesel fuel, fresh fruits and melons, carbon steel scrap, residential electric power, and pork also moved higher. Conversely, prices for beef and veal fell 7.0%. The indexes for jet fuel and for plastic resins and materials also declined.

Final demand services: Prices for final demand services were unchanged in December following a 0.3% decrease in November. In December, a 2.7% advance in the index for final demand transportation and warehousing services offset a 0.3% decline in margins for final demand trade services and a 0.1% decrease in the index for final demand services less trade, transportation, and warehousing. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail: In December, prices for transportation of passengers (partial) jumped 8.5%. The indexes for machinery and vehicle wholesaling; machinery and equipment parts and supplies wholesaling; health, beauty, and optical goods retailing; and portfolio management also increased. In contrast, margins for apparel, jewelry, footwear, and accessories retailing declined 3.7%. The indexes for chemicals and allied products wholesaling, guestroom rental, fuels and lubricants retailing, and professional and commercial equipment wholesaling also moved lower. 

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The not-seasonally adjusted price indexes we track 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.

December 2019 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm payroll employment rising by 145,000 jobs in December (+160,000 expected). Also, combined October and November employment gains were revised down by 14,000 (October: -4,000; and November: -10,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) was unchanged at 3.5% as expansion of the labor force (+209,000) was more than matched by growth in the number of employed persons (+267,000). 

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Observations from the employment reports include:

* The establishment (+145,000 jobs) and household survey results (+267,000 employed), although at least directionally consistent, were otherwise poorly correlated. Had average (since 2009) December CES (business birth/death model) and seasonal adjustments been used, job gains might have been an even more sedate +120,000.

* Manufacturing shrank by 12,000 jobs. That result aligns with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which contracted at a faster pace in December. Wood Products employment added 1,200 jobs (ISM decreased); Paper and Paper Products: +200 (ISM unchanged); Construction: +20,000 (ISM decreased).

* As a related point, there are 891,000 fewer manufacturing jobs today than at the start of the Great Recession in December 2007, but 2.67 million more Food Services & Drinking Places (i.e., wait staff and bartender) jobs. In 2019, manufacturing added 46,000 jobs while FS&D jobs expanded by 271,300. 

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* The number of employment-age persons not in the labor force (NILF) was little changed (-48,000) at 95.6 million. This metric has leveled off since the latter half of 2018. Meanwhile, the employment-population ratio (EPR) was stable at 61.0% -- its highest level since December 2008; roughly, then, for every five people being added to the working-age population, three are employed. 

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* Despite growth in the labor force of nearly 1.3 times that of the working-age civilian population, the labor force participation rate was unchanged at 63.2%. Average hourly earnings of all private employees inched up by $.0.03, to $28.32, resulting in a 2.9% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.02, to $23.79 (+3.0% YoY). Although the average workweek for all employees on private nonfarm payrolls shrank by 0.1 hour (to 34.3 hours), average weekly earnings increased by $1.03, to $971.38 (+2.6% YoY). With the consumer price index running at an annual rate of 2.1% in November, workers are maintaining purchasing power according to official metrics. 

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* Full-time jobs jumped up by 194,000, to a new record of 131.8 million; there are now nearly 9.9 million more full-time jobs than the pre-recession high; for perspective, however, the non-institutional, working-age civilian population has risen by over 27.2 million. Those employed part time for economic reasons (shown in the graph above) -- e.g., slack work or business conditions, or could find only part-time work -- fell by 140,000. Those working part time for non-economic reasons rose by 54,000 while multiple-job holders dropped by 161,000. 

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For a “sanity test” of the employment numbers, we consult employment withholding taxes published by the U.S. Treasury. Although “noisy” and highly seasonal, the data show the amount withheld in December jumped by $43.1 billion, to a record $243.6 billion (+21.5% MoM; +4.1% YoY and +4.3% YTD). 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 December was 4.0% 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.

December 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in December, U.S. manufacturing contracted at a marginally faster pace. The PMI registered 47.2%, down 0.9 percentage point (PP) from the November reading. (50% is the breakpoint between contraction and expansion.) ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. Production (-5.9PP) and customer inventories (-3.9PP) were noteworthy negative changes, while the Input Prices index (+5.0PP) pushed back into positive territory. 

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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 (+1.1PP, to 55.0%). Although the business activity index jumped (+5.6PP), the indexes for new orders (-2.2PP), order backlogs (-1.0PP) and exports (-1.0PP) all declined. 

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Of the industries we track, only Ag&Forestry did not contract. Respondent comments included the following:

Construction -- "Weather and the holiday season have had an impact on residential new construction sales and production. While demand is outstripping supply in the housing market, business is down due to global trade insecurity causing affordability, labor and cost pressures."

Relevant commodities:

Priced higher -- Fuel and oriented strand board.

Priced lower -- Corrugate, freight and natural gas.

Prices mixed -- None.

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

As has become common in recent months, findings of IHS Markit’s November surveys were mixed relative to their ISM counterparts.

Manufacturing -- Manufacturing output continues to recover amid further new order growth

Key findings:

* Modest expansions in production and new business
* Inflationary pressures intensify
* Business confidence remains relatively subdued

Services -- Business activity growth accelerates to five-month high in December

Key findings:

* Output and new order expansions quicken, but remain only modest
* Fastest rise in employment since July
* Inflationary pressures pick up

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

Manufacturing -- "The U.S. manufacturing sector continued to recover from the soft patch seen in the summer, ending 2019 with its best quarter since the early months of 2019.

"The overall rate of expansion nevertheless faltered somewhat in December and remains well below that seen this time last year, suggesting producers are starting 2020 on a softer footing than they had enjoyed heading into 2019.

"Business sentiment about the outlook remains especially subdued compared to a year ago, reflecting ongoing worries about geopolitics and trade wars, especially the impact of tariffs, as well as fears that political and economic uncertainty surrounding the 2020 elections could dampen demand.

"The impact of tariffs was clearly evident via higher prices, while the relatively subdued level of business confidence manifested itself in a pullback in hiring, hinting at risk aversion and cost-cutting."

Services -- "Business activity in the vast service sector picked up pace at the end of last year as rising domestic demand and signs of reviving exports led to higher workloads. Combined with indications of manufacturing lifting out of its recent lull, the survey data suggest the overall pace of economic growth accelerated to its fastest since last April.

"However, while moving in the right direction, service sector growth remains well below that seen in the early months of 2019, and the overall survey results are indicative of GDP rising at a relatively modest annual rate of 1.8% in December.

"The missing ingredient compared to this time last year is optimism about the future, with business sentiment regarding prospects for the next 12 months running well below levels seen this time last year, and close to the lowest for at least seven years. Indeed, much of the recent improvement in demand has come from stronger sales to consumers, with business spending and investment remaining under pressure amid this anxiety about the economic and political outlook."

Commenting on the J.P.Morgan Global Composite PMI, Olya Borichevska, from Global Economic Research at J.P.Morgan, said:

“The December global all-industry PMI came in positively at the end of the year reinforcing a view that activity will improve in the coming quarters. The all-industry activity PMI increased for the second month to an eight-month high. Improving trends in new order inflows, employment and business sentiment also suggest that further headway should be made at the start of the new year. International trade remains the main drag on efforts to lift growth further, so any moves that reduce tensions and barriers on this front will be especially beneficial.”

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

November 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 November increased $1.7 billion or 0.3% to $502.2 billion. Durable goods shipments increased $0.1 billion or virtually unchanged to $251.4 billion, led by electrical equipment. Meanwhile, nondurable goods shipments increased $1.6 billion or 0.6% to $250.8 billion, led by petroleum and coal products. Shipments of wood products jumped by 1.5%; paper +0.2%. 

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Inventories increased $2.0 billion or 0.3% to $701.0 billion. The inventories-to-shipments ratio was 1.40, unchanged from October. Inventories of durable goods increased $1.6 billion or 0.4% to $433.7 billion, led by transportation equipment. Nondurable goods inventories increased $0.3 billion or 0.1% to $267.3 billion, led by petroleum and coal products. Inventories of wood products shrank by 0.3%; paper: -0.1%. 

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New orders decreased $3.6 billion or 0.7% to $493.0 billion. Excluding transportation, new orders rose by 0.3% (-0.6% YoY). Durable goods orders decreased $5.2 billion or 2.1% to $242.2 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- rose by 0.2% (-1.2% YoY). New orders for nondurable goods increased $1.6 billion or 0.6% to $250.8 billion.

As can be seen in the graph above, real (inflation-adjusted) new orders were essentially flat between early 2012 and mid-2014, recouping on average less than 70% of the losses incurred since the beginning of the Great Recession. The recovery in real new orders is back to just 48% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders decreased $4.9 billion or 0.4% to $1,158.7 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.67, down from 6.68 in October. 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 trending 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.

December 2019 Currency Exchange Rates

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In December the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-0.5%) and euro (-0.6%) but appreciated against the yen (+0.2%). On the broad trade-weighted index basis (goods and services), the USD lost 0.5% 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.

December 2019 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose by $2.85 (+5.0%), to $59.82 per barrel in December. The increase occurred within the context of a marginally weaker U.S. dollar (broad trade-weighted index basis, which now accounts for the value of both goods and services), the lagged impacts of a 551,000 barrel-per-day (BPD) rise in the amount of petroleum products supplied during October (to 20.8 million BPD), and a moderate drop in accumulated oil stocks (December average: 442 million barrels). 

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From the 30 December 2019 issue of Peak Oil Review:

Gold prices rose and an index of global equity markets hit an all-time high last week as a year-end rally on Wall Street increased optimism over a U.S.-China trade agreement.  Oil rose to three-month highs, buoyed by a report showing lower U.S. crude inventories, hopes the pending Sino-U.S. trade deal will soon be signed, and efforts by OPEC to curb crude supply.

U.S. unemployment continues to fall, and wages are starting to climb in the wake of labor shortages.  U.S. consumer purchases had a banner year as on-line shopping set a record.  The Chinese cabinet approved a plan to lower tariffs for all trading partners on more than 859 types of products to below the rates that most-favored nations enjoy.

The only dark spot on the horizon for the U.S. economy is the report that U.S. durable goods orders fell in November -- mainly because of a decline in orders for military equipment, which fell 35%.  However, through eleven months this year, durable goods orders were up 0.7% from the same period in 2018.  The Dallas office of the Federal Reserve is worried about the outlook next year for shale oil in its region.

With Brexit coming soon, strikes in France, and Germany's growth slowing, the outlook for the European economy is uncertain.

The prospects for China and its insatiable demand for oil are the great unknown.  China's top five oil suppliers -- Saudi Arabia, Russia, Iraq, Brazil, and Oman -- each delivered record high volumes of crude to China in November, propelling the crude import volume to a new high of 11.18 million BPD.  Much of this crude is going to oil products exports and does not reflect domestic demand. 

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Selected highlights from the 3 January 2020 issue of OilPrice.com’s Oil & Energy Insider include:

Oil prices spiked immediately after the U.S. killed Iranian General Qassem Soleimani on Thursday. Soleimani, as head of the Quds force of the Revolutionary Guard, was a very powerful Iranian official, often likened to a shadow foreign minister. Iran promised “severe retaliation,” and many analysts fear a broader regional war. At a minimum, attacks on U.S. military installations in the Middle East are expected. Brent prices shot up by more than 3%.

U.S. oil workers leaving Iraq. Dozens of workers in the southern oil fields in Iraq are leaving the country and the American embassy urged all U.S. citizens to leave the country immediately. Iraqi officials said production would not be affected.

Supply risks? The big question at this point is how Iran might respond. Rapidan Energy said that the vessels and oil facilities are at risk. “[T]he risk of another major attack against Gulf oil vessels or facilities is now above 50%,” the firm said.

Equity markets sink on attack. Equity markets fell after the attack on Soleimani, interrupting the bullish mood for stocks. The conflict could “dash market hopes for a rebound of the global economy that is still to emerge from under the cloud of the U.S.-China trade war,” Valentin Marinov, head of G-10 currency research at Credit Agricole SA, told Bloomberg. “Risk sentiment should remain fragile also because central banks may be slow to respond or simply no longer have the arsenal to respond in an adequate way.”

$200 billion in shale debt due in next four years. Roughly $200 billion in North American oil and gas debt will mature in the next four years, according to the Wall Street Journal, which includes $41 billion due this year. More than 200 companies have already filed for bankruptcy since 2015, but that number will continue to rise as drillers struggle amid the crushing weight of debt. The huge obligations will force drillers to cut spending, potentially bringing the shale boom to a halt.

Russia’s oil production hits post-Soviet record. Russia appears to be defying the OPEC+ deal, ramping up production to a new post-Soviet record high last year. According to Bloomberg, output exceeded its agreed upon limit in 9 out of 12 months in 2019.

OPEC production declines. OPEC production declined in December to 29.55 million BPD, according to Bloomberg, down 90,000 BPD from a month earlier.

Problems with new IMO compliant fuel. Reuters reports that some routine tests have turned up problems with new low-sulfur fuels. The new IMO rules took effect on January 1, requiring lower sulfur concentrations. The rules are expected to cut 77% of sulfur oxide emissions from the sector. But the implementation could be a bit rocky at first. Marine fuel suppliers “are struggling with sediments,” a specialist told Reuters.

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.