4Q2019 Gross Domestic Product: Second Estimate

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In its second estimate of 4Q2019 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) bumped the growth rate of the U.S. economy to a seasonally adjusted and annualized rate (SAAR) of +2.10% (2.1% expected), up 0.02 percentage point (PP) from the “advance” estimate (“4Qv1”) but down less than 0.01PP from 3Q2019.

As with 4Qv1, three of the four GDP component groupings -- personal consumption expenditures (PCE), net exports (NetX) and government consumption expenditures (GCE) -- contributed to 4Q growth; private domestic investment (PDI) detracted from it.

This report contained no material changes, and the revisions can be regarded as statistical noise. As for details:

·     PCE. A 0.12PP decrease in good purchases was partially offset by a 0.09PP increase in spending on services.

·     PDI. A 0.10PP decline in fixed investment was more than offset by a 0.11PP increase in inventories.

·     NetX. A 0.07PP increase in exports was partially offset by a 0.03PP decrease in imports.

·     GCE. A 0.02PP increase in federal spending was essentially offset by a decline in state and local government spending

The BEA's real final sales of domestic product was revised modestly downward (-0.08PP, to +3.08%), which is 0.94PP above the 3Q estimate. 

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Consumer Metric Institute’s Rick Davis summarized the key points of this report as follows:

-- There were no reported material changes in a report that can be characterized as statistical noise.

-- Both consumer spending and commercial investments are weak.

-- The headline number is boosted by questionable inflationary assumptions and the BEA's logic for dealing with reduced imports (largely from China).

-- The quarter in question was one of high political theater/drama, which can explain a significant amount of the tepid consumer spending.

“We probably do not need to note that all of this reporting is for a quarter before the widespread impact of the new corona virus,” Davis added. “It could be argued that U.S. economic growth had already topped by 4Q2019, making it more vulnerable than usual to any sort of ‘Black Swan.’ And a Black Swan is exactly what we now see flying out of China.”

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

January 2020 Residential Sales, Inventory and Prices

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Sales of new single-family houses in January 2020 were at a seasonally adjusted annual rate (SAAR) of 764,000 units (708,000 expected). This is 7.9% (±17.8%)* above the revised December rate of 708,000 (originally 694,000) and 18.6% (±19.2%)* above the January 2019 SAAR of 644,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was +16.3%. For longer-term perspectives, NSA sales were 45.0% below the “housing bubble” peak and 9.0% below the long-term, pre-2000 average.

The median sales price of new houses sold in January jumped ($24,100 or +7.4% MoM) to a record $348,300; meanwhile, the average sales price increased to $402,300 ($29,000 or +7.8%). Starter homes (defined here as those priced below $200,000) comprised 8.8% of the total sold, up from the year-earlier 8.2%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 made up 1.8% of those sold in January, down from 2.0% a year earlier.

* 90% confidence interval includes zero. The Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different from zero. 

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As mentioned in our post about housing permits, starts and completions in January, single-unit completions decreased by 32,000 units (-3.5%). Although sales rose (56,000 units; +7.9%) while completions fell, inventory for sale expanded in absolute terms (+1,000 units) but contracted in months-of-inventory (-0.4 month) terms. 

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Existing home sales retreated in January (70,000 units or -1.3%), to a SAAR of 5.46 million units. Inventory of existing homes for sale expanded in both absolute (+30,000 units) and months-of-inventory (+0.1 month) terms. Because new-home sales rose while resales fell, the share of total sales comprised of new homes advanced to 12.3%. The median price of previously owned homes sold in January decreased to $266,300 ($8,200 or -3.0% MoM). 

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Housing affordability deteriorated (+1.9 percentage points) as the median price of existing homes for sale in December rose by $2,900 (+1.1%; +8.0 YoY), to $277,000. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices inched up at a not-seasonally adjusted monthly change of +0.1% (+3.8% YoY).

"The U.S. housing market continued its trend of stable growth in December,” said Craig Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P Dow Jones Indices. “December’s results bring the National Composite Index to a 3.8% increase for calendar 2019. This marks eight consecutive years of increasing housing prices (an increase which is echoed in our 10- and 20-City Composites). At the national level, home prices are 59% above the trough reached in February 2012, and 15% above their pre-financial crisis peak. Results for 2019 were broad-based, with gains in every city in our 20-City Composite.

“At a regional level, Phoenix retains the top spot for the seventh consecutive month, with a gain of 6.5% for December. Charlotte and Tampa rose by 5.3% and 5.2% respectively, leading the Southeast region. The Southeast has led all regions for the past year.

“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 faster rate in December than they had done in November; 12 of our 20 cities likewise saw accelerating prices. It is, of course, 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.

January 2020 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in January at a seasonally adjusted annual rate (SAAR) of 1,567,000 units (1.420 million expected). This is 3.6 percent (±13.3 percent)* below the revised December estimate of 1,626,000 (originally 1.608 million units), but 21.4 percent (±12.2 percent) above the January 2019 SAAR of 1,291,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +25.4%.

Single-family housing starts in January were at a SAAR of 1,010,000; this is 5.9 percent (±11.6 percent)* below the revised December figure of 1,073,000 units (+7.0% YoY). Multi-family starts: 557,000 units (+0.7% MoM; +76.9% YoY).

* 90% confidence interval (CI) is not statistically different from zero. The Census Bureau does not publish CIs for the entire multi-unit category. 

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Total completions were at a SAAR of 1,280,000 units. This is 3.3 percent (±8.4 percent)* below the revised December estimate of 1,323,000 (originally 1.277 million units), but 1.5 percent (±11.7 percent)* above the January 2019 SAAR of 1,261,000 units; the NSA comparison: +1.7% YoY.

Single-family completions were at a rate of 877,000; this is 3.5 percent (±6.8 percent)* below the revised December rate of 909,000 units (-5.3% YoY). Multi-family completions: 403,000 units (-2.7% MoM; +21.3% YoY). 

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Total permits amounted to a SAAR of 1,551,000 units (1.458 million expected). This is 9.2 percent (±2.1 percent) above the revised December rate of 1,420,000 (originally 1.474 million units) and 17.9 percent (±1.3 percent) above the January 2019 SAAR of 1,316,000 units; the NSA comparison: +19.7% YoY.

Single-family permits were at a SAAR of 987,000; this is 6.4 percent (±2.5 percent) above the revised December figure of 928,000 units (+21.2% YoY). Multi-family: 564,000 (+14.6% MoM; +17.4% YoY). 

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Builder confidence in the market for newly-built single-family homes edged one point lower to 74 in February, according to the latest NAHB/Wells Fargo Housing Market Index (HMI) released today. The last three monthly readings mark the highest sentiment levels since December 2017.

“Steady job growth, rising wages and low interest rates are fueling demand but builders are still grappling with increasing construction and development costs,” said NAHB Chairman Dean Mon.

“At a time when demand is on the rise, regulatory constraints along with a shortage of construction workers and a dearth of lots are hindering the production of affordable housing in local communities across the nation,” said NAHB Chief Economist Robert Dietz. “And while lower mortgage rates have improved housing affordability in recent months, accelerating price growth due to limited inventory may offset some of that effect.”

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

January 2020 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 0.1% in January (+0.2% expected) after rising 0.2% in December. The index for shelter accounted for the largest part of the increase in the seasonally adjusted all items index, with the indexes for food and for medical care services also rising. These increases more than offset a decrease in the gasoline index, which fell 1.6% in January. The energy index declined 0.7%, and the major energy component indexes were mixed. The index for food rose 0.2% in January 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 0.2% in January after increasing 0.1% in December. Along with the indexes for shelter and medical care, the indexes for apparel, recreation, education, and airline fares all increased in January. The indexes for used cars and trucks, prescription drugs, motor vehicle insurance, and household furnishings and operations were among those to decline.

The all items index increased 2.5% for the 12 months ending January, the largest 12-month increase since the period ending October 2018. The index for all items less food and energy rose 2.3% over the last 12 months, the same 12-month increase as reported in the previous 3 months. The food index rose 1.8% over the last 12 months, while the energy index increased 6.2% over that period.

Producer Price Index

The Producer Price Index for final demand (PPI-FD) advanced 0.5% in January (+0.2% expected). Final demand prices rose 0.2% in December and declined 0.1% in November. In January, 90% of the increase in the final demand index is attributable to prices for final demand services, which climbed 0.7%. The index for final demand goods inched up 0.1%.

On an unadjusted basis, the final demand index increased 2.1% for the 12 months ended in January, the largest advance since moving up 2.1% for the 12 months ended May 2019. Prices for final demand less foods, energy, and trade services advanced 0.4% in January, the largest increase since a 0.4% rise in April 2019. For the 12 months ended in January, the index for final demand less foods, energy, and trade services moved up 1.5%.

Final Demand

Final demand services: The index for final demand services climbed 0.7% in January, the largest increase since rising 0.7% in October 2018. In January, margins for final demand trade services advanced 1.2%, and prices for final demand services less trade, transportation, and warehousing moved up 0.6%. (Trade indexes measure changes in margins received by wholesalers and retailers.) In contrast, the index for final demand transportation and warehousing services fell 1.6%.

Product detail: Forty percent of the January increase in the index for final demand services can be traced to margins for apparel, jewelry, footwear, and accessories retailing, which jumped 10.3%. The indexes for machinery and vehicle wholesaling; health, beauty, and optical goods retailing; inpatient care; guestroom rental; and portfolio management also moved higher. Conversely, prices for airline passenger services decreased 5.8%. The indexes for professional and commercial equipment wholesaling and for wireless telecommunication services also declined.

Final demand goods: Prices for final demand goods inched up 0.1% in January, the fourth consecutive rise. Leading the January increase, the index for final demand goods less foods and energy climbed 0.3%. Prices for final demand foods advanced 0.2%. In contrast, the index for final demand energy fell 0.7%.

Product detail: A 13.9% rise for prices of iron and steel scrap was a major factor in the January advance in the index for final demand goods. Prices for fresh and dry vegetables; jet fuel; search, detection, navigation, and guidance systems and equipment; and grains also moved higher. Conversely, the gasoline index decreased 1.5%. Prices for chicken eggs, diesel fuel, and motor vehicles also declined. 

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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.

January 2020 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) declined 0.3% in January (-0.3% expected), as unseasonably warm weather held down the output of utilities and as a major manufacturer significantly slowed production of civilian aircraft. The index for manufacturing edged down 0.1% in January; excluding the production of aircraft and parts, factory output advanced 0.3%. The index for mining rose 1.2%. At 109.2% of its 2012 average, total industrial production was 0.8% lower in January than it was a year earlier. 

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Industry Groups

Manufacturing output decreased 0.1% in January to a level 0.8% below its year-earlier reading (NAICS manufacturing: -0.1% MoM; -0.7% YoY). The production of durable goods moved down 0.5% in January, as drops for aerospace and miscellaneous transportation equipment and for machinery were partially offset by a gain for motor vehicles and parts (wood products: +0.3%). The output of nondurable manufacturing rose 0.3%, and almost all of its component categories posted gains (paper products: +0.5%). The indexes for petroleum and coal products and for plastics and rubber products recorded increases of more than 1%, whereas only the index for apparel and leather recorded a decrease of more than 1%.

Mining output advanced 1.2% in January and stood 3.1% above its level of a year earlier. The output of utilities fell 4.0% in January, with electric and natural gas utilities posting declines of 3.2% and 7.7%, respectively. 

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Capacity utilization (CU) for the industrial sector fell 0.3 percentage point (PP) in January to 76.8%, a rate that is 3.0PP below its long-run (1972–2019) average.

Manufacturing CU edged down 0.1PP in January to 75.1%, 3.1PP below its long-run average (NAICS manufacturing: -0.2%, at 75.6%; wood products: +0.1%; paper products: +0.5%). The utilization rate for mining rose to 90.7% and remained well above its long-run average of 87.2%. The operating rate for utilities fell to 70.6%, a rate that is about 15PP below its long-run average. 

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Capacity at the all-industries level nudged up 0.1% (+2.0 % YoY) to 142.2% of 2012 output. Manufacturing (NAICS basis) rose fractionally (+0.1% MoM; +1.4% YoY) to 140.3%. Wood products: +0.2% (+4.0% YoY) to 169.5%; 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 International Trade (Softwood Lumber)

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Softwood lumber exports decreased (8 MMBF or -8.2%) in December; imports rose (191 MMBF or +18.2%). Exports were 2 MMBF (1.8%) above year-earlier levels; imports were 123 MMBF (11.1%) higher. As a result, the year-over-year (YoY) net export deficit was 122 MMBF (11.9%) larger. Also, the average net export deficit for the 12 months ending December 2019 was 1.5% 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 (41.0%; of which Canada: 19.8%; Mexico: 21.2%) and Asia (29.7%; especially China: 7.6%; and Japan: 7.4%) were the primary destinations for U.S. softwood lumber exports; the Caribbean ranked third with a 22.4% share (especially Dominican Republic: 7.3%). Year-to-date (YTD) exports to China were -59.7% relative to the same months in 2018. Meanwhile, Canada was the source of most (86.5%) of softwood lumber imports into the United States. Imports from Canada were 4.1% lower YTD than the same months in 2018. Overall, YTD exports were down 21.5% compared to 2018; imports: -3.7%. 

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U.S. softwood lumber export activity through the West Coast customs region represented the largest proportion (33.5% of the U.S. total), followed by the Gulf (31.6%) and Eastern (25.7%) regions. Seattle (18.6% of the U.S. total) was overtaken by Mobile (21.2%) as the single most-active district. At the same time, Great Lakes customs region handled 62.5% of softwood lumber imports -- most notably the Duluth, MN district (23.9%) -- coming into the United States. 

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Southern yellow pine comprised 27.0% of all softwood lumber exports, Douglas-fir (16.5%) and treated lumber (12.8%) were also significant. Southern pine exports were down 34.1% YTD relative to 2018, while treated: -21.4%; Doug-fir: -5.3%.

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

January 2020 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm payroll employment rising by 225,000 jobs in January (+153,000 expected). Also, combined November and December employment gains were revised up by 7,000 (November: +5,000; December: +2,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) ticked up to 3.6%. 

Because January’s estimates reflect the annual benchmarking process and the updating of seasonal adjustment factors, comparison with December’s estimates is not statistically valid. The adjustments decreased the estimated size of the civilian noninstitutional population in December by 811,000, the civilian labor force by 524,000, employment by 507,000, and unemployment by 17,000. The number of persons not in the labor force was decreased by 287,000. 

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Despite the above caveat, observations from the employment reports include:

* Goods-producing industries added 32,000 jobs, while service-providing employment jumped by 193,000. 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 slower pace in January. Wood Products employment was unchanged(ISM increased); Paper and Paper Products: +400 (ISM unchanged); Construction: +44,000 (ISM increased). 

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* The number of employment-age persons not in the labor force (NILF) tumbled (-729,000) to 94.9 million; a sizeable proportion of that decline is likely due to the above-mentioned revisions. As a result, the employment-population ratio (EPR) bumped up to 61.2% -- its highest level since November 2008; roughly, then, for every five people being added to the working-age population, three are employed. 

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* After accounting for the annual adjustments to the population controls, the civilian labor force rose by 574,000 in January, and the labor force participation rate edged up to 63.4%. Average hourly earnings of all private employees rose by $0.07, to $28.44, resulting in a 3.1% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.03, to $23.87 (+3.3% YoY). Although the average workweek for all employees on private nonfarm payrolls was unchanged at 34.3 hours, average weekly earnings increased by $2.40, to $975.49 (+2.5% YoY). With the consumer price index running at an annual rate of 2.3% in December, workers are “treading water” with regard to purchasing power according to official metrics. 

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* Full-time jobs retreated by 656,000, to 131.1 million. Workers 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 -- rose by 34,000. Those working part time for non-economic reasons rose by 22,000 while multiple-job holders jumped by 206,000. 

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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 January fell by $11.1 billion, to $232.4 billion (-4.6% MoM; +10.0% 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 January was 7.2% 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.

January 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil fell by $2.30 (-3.8%), to $57.52 per barrel in January. The decrease occurred within the context of a marginally weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 182,000 barrel-per-day (BPD) decline in the amount of petroleum products supplied during November (to 20.8 million BPD), and a sideways move in accumulated oil stocks (January average: 431 million barrels). 

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From the 3 February 2020 issue of Peak Oil Review:

“Oil prices fell for the fourth straight week on mounting worries about economic damage from the coronavirus that has spread from China to around 20 countries.  Futures closed the month down about $10 a barrel since the beginning of the year, seeing the biggest January loss since 1991.  New York futures settled at $51.56 and London at $56.62.  The rapid price decline is causing much consternation with OPEC+ as some commentators are talking about $40 oil if the virus situation gets much worse.

“Global oil prices rallied at the end of last year due to announcements of cuts in production, followed by a boost in early January due to tensions in the Middle East.  But Brent crude is now down almost 17% from its early January peak, while U.S. natural gas prices are also under pressure due to a mild winter.  That is prompting a lot of investors to consider more in-depth, longer-term challenges for producers and refiners.  Some analysts warn that too many companies in the oil and gas sector have unsustainable balance sheets, weighed down by too much debt.

“The coronavirus-triggered fall in crude oil prices over the last few weeks has shaken some OPEC countries, including Saudi Arabia, to the realization that waiting until March 5-6, as scheduled, to potentially announce deeper production cuts may be too late.  OPEC’s core Middle East members typically announce how they have allocated their crude exports to customers between the 10th and 15th of each month.  March loading programs and allocations have already been set, so any OPEC+ decision would affect April shipments at the earliest.  Holding the meeting on its scheduled date of March 5-6 would push any changes to the May loading program.

“Beyond the physical market practicalities, the politics of agreeing on deeper cuts could be complicated.  OPEC and its 10 allies are one month into their latest production accord, which commits them to a 1.7 million BPD cut through the end of March.  The deal, signed at a highly fractious meeting in December 2019, saw Angola walk out of the talks at one point, and Iraq and Russia play hardball in negotiating their new quotas.  “Saudi Arabia, as expected, is leading by example, but should other producers fail to pull their weight or offer further adjustments, does the kingdom act unilaterally if the coronavirus impact escalates and spirals from here on out?” said an analyst with Medley Global Advisors.

“Even with Libya’s oil production plummeting by nearly 1 million BPD due to a port blockade, oil prices have seen downward pressure over the past week as fears of oil demand destruction currently outweigh supply outages.  Last week’s EIA inventory report was not supportive, reporting a 3.5 million build during the seven days to January 4th.  According to oil market analysts, until the impact of the Wuhan virus on the Chinese economy and oil demand becomes clearer, market participants will continue to be spooked by the specter of waning oil demand during the season when demand is weakest.

“The Phase One trade deal between the U.S. and China may end up being exports on paper only—at least as far as energy is concerned.  Analysts concur that the Chinese promise to buy an additional $52.4 billion worth of U.S. energy products in 2020 and 2021 on top of the 2017 levels is most likely unachievable, even if China intends to fulfill all its pledges in the deal.  With the coronavirus epidemic leaving a large share of Chinese industry, retail, and non-essential transportation shut down for an indefinite period, demand for oil in China and even around the world is bound to slow significantly.” 

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Selected highlights from the 31 January 2020 issue of OilPrice.com’s Oil & Energy Insider include:

Oil posted its largest monthly loss since May 2019, as fears of the coronavirus continue to rise. The 15% price decline is also the worst January performance since 1991, according to Bloomberg. The oil market is “troubled by both rising demand worries and rising fuel stocks,” said Ole Sloth Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen. “It’s going to take a firm commitment by OPEC+, or rising geopolitical tensions, to achieve a sustained recovery.”

Bernstein: Chinese oil demand growth at just 100,000 BPD. China’s oil demand could grow at just 100,000 BPD this year due to the coronavirus, according to Bernstein. That would make it the slowest expansion in consumption in nearly 20 years. The firm previously predicted 350,000 BPD of growth.

Investors warn industry not to move on Trump’s deregulation. A group of 58 companies, including institutional investors, representing around $113 billion in assets, warned the energy, timber and mining industries not to move aggressively to take advantage of the Trump administration’s wide-ranging deregulatory campaign. The investors said that doing so would put investors at “significant risk of public backlash and stranded assets, should these actions be legally challenged or protections be restored by the courts or by future administrations.”

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

January 2020 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that U.S. manufacturing returned to expansion in January. The PMI registered 50.9%, up 3.1 percentage points (PP) from the revised December reading. (50% is the breakpoint between contraction and expansion.) ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. Production (+9.5PP), exports (+6.0PP), new orders (+4.4PP) and imports (+2.5PP) all flipped 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 (+0.6PP, to 55.5%). Imports (+7.1PP), business activity (+3.9PP) and new orders (+0.9PP) drove the increase. 

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Of the industries we track, only Paper Products and Real Estate did not expand. Respondent comments included the following:

Construction -- "1Q sales are improving, which makes us more optimistic."

Real Estate -- "Customer inquiries are strong to start the new year."

Relevant commodities:

Priced higher -- Oil, propane, and labor (general and construction).

Priced lower -- Freight, natural gas, and fuel (including diesel)

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 January surveys were mixed relative to their ISM counterparts.

Manufacturing -- Manufacturing growth slows at start of 2020 as exports fall.

Key findings:

* PMI dips to three-month low as exports fall
* Employment rises at only a marginal rate
* Business confidence picks up to seven-month high

Services -- Business activity growth accelerates to 10-month high at start of 2020.

Key findings:

* Faster upturn in output amid sustained rise in new orders
* Rate of job creation quickest since last July
* Business confidence remains subdued

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

Manufacturing -- "U.S. manufacturing limped into 2020, with falling exports dampening output growth and causing a pullback in hiring. The survey data are consistent with factory production falling moderately, meaning the manufacturing sector looks set to act as a drag on the overall economy once again in 1Q.

“Weakness looks broad-based. Rising demand from households has helped support production in recent months, but January saw a marked slowing in new orders for consumer goods. Production of capital goods such as business equipment, plant and machinery meanwhile fell for the first time in almost four years, hinting at weakened business investment.

“More encouragingly, business expectations for the year ahead perked up, coinciding with an easing of trade tensions and the signing of new North American and Chinese trade deals. Companies are therefore expecting the soft patch to be short-lived, though fears surrounding the Wuhan coronavirus and any further potential escalation of trade tensions could erode this optimism.”

Services -- "The PMI data indicate that the U.S. economy is ticking along at a steady but unspectacular annualized rate of growth of approximately 2% at the start of 2020. Growth has gained some momentum from the lows seen in the fall as the service sector enjoys stronger growth and manufacturing has also shown signs of the trade-led downturn easing. However, factory activity remains worryingly subdued, and optimism about future growth across the business community as a whole continues to run at one of the lowest levels seen over the past decade.

“Business are concerned by the prospect of weaker economic growth at home and abroad in the coming year, especially with spending potentially being dampened in an election year. Fresh worries are also likely to appear. With the vast majority of the survey data having been collected prior to the 24th January, we’ve yet to see any impact from the Wuhan coronavirus outbreak, but the potential disruption to business and the associated financial market jitters pose additional downside risks to both the global and US economies in coming months."

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

“The global economy started 2020 on a stronger footing, with output growth rising for the third straight month to its highest since March [2019] suggesting global growth at an above-potential pace. However, we brace ourselves for a much weaker outcome this quarter as the outbreak of the nCoV virus disrupts activity in China and potentially around the world. Encouragingly, the gains in the PMI were not just confined to the Output Index, with trends in new orders, business sentiment and employment also firming.”

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 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments in December increased $2.3 billion or 0.5% to $504.1 billion. Durable goods shipments decreased $0.5 billion or 0.2% to $250.3 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased $2.8 billion or 1.1% to $253.8 billion, led by petroleum and coal products. Shipments of wood products fell by 0.5%; paper -0.4%. 

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Inventories increased $3.5 billion or 0.5% to $704.9 billion. The inventories-to-shipments ratio was 1.40, unchanged from November. Inventories of durable goods increased $2.1 billion or 0.5% to $435.9 billion, led by transportation equipment. Nondurable goods inventories increased $1.4 billion or 0.5% to $269.0 billion, led by petroleum and coal products. Inventories of wood products expanded by 0.5%; paper: +0.2%. 

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New orders increased $8.6 billion or 1.8% to $499.3 billion. Excluding transportation, new orders rose by 0.6% (+2.6% YoY). Durable goods orders increased $5.9 billion or 2.4% to $245.6 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- fell by 0.8% (+1.8% YoY). New orders for nondurable goods increased $2.8 billion or 1.1% to $253.8 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 51% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders decreased $0.6 billion or virtually unchanged to $1,156.2 billion, led by machinery. The unfilled orders-to-shipments ratio was 6.65, down from 6.66 in November. 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 Construction Spending

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Construction spending during December 2019 was estimated at a seasonally adjusted annual rate (SAAR) of $1,327.7 billion, 0.2% (± 0.8%)* below the revised November estimate of $1,329.9 billion (originally $1,324.1 billion); consensus expectations were for +0.5%. The December figure is 5.0% (±1.3%) above the December 2018 SAAR of $1,264.8 billion; the not-seasonally adjusted YoY change (shown in the table below) was +5.2%.

The value of construction in 2019 was $1,303.5 billion, 0.3% (±1.0%)* below the $1,307.2 billion spent in 2018.

* 90% confidence interval includes zero. The U.S. Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different from zero. 

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Private Construction

Spending on private construction was at a SAAR of $991.2 billion, 0.1% (±0.5%)* below the revised November estimate of $992.2 billion (originally $985.5 billion):
- Residential: $540.7 billion, +1.4% (±1.3%);
- Nonresidential: $450.5 billion, -1.8% (±0.5%).

The value of private construction in 2019 was $974.7 billion, 2.5% (±1.0%) below the $1,000.2 billion spent in 2018.
- Residential: $514.3 billion, 4.7% (±2.1%) below the 2018 figure of $539.6 billion;
- Nonresidential: $460.4 billion, virtually unchanged from (±1.0%)* the $460.5 billion in 2018.

Public Construction

Public construction spending was $336.4 billion, 0.4% (±1.3%)* below the revised November estimate of $337.7 billion (originally $338.6 billion):
- Educational: $80.4 billion, -2.1% (±2.1%)*;
- Highway: $99.9 billion, +3.1% (±3.1%)*.

The value of public construction in 2019 was $328.8 billion, 7.1% (±1.8%) above the $307.1 billion spent in 2018:
- Educational: $79.0 billion, 3.4% (±3.6%)* above the 2018 figure of $76.4 billion;
- Highway: $98.8 billion, 8.8% (±4.6%) above the $90.8 billion in 2018. 

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

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