1Q2020 Gross Domestic Product: First (“Advance”) Estimate

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The Bureau of Economic Analysis (BEA) pegged its advance (first) estimate of 1Q2020 U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate (SAAR) of -4.79% (-3.8% expected), down 6.91 percentage points (PP) from 4Q2019’s +2.12%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 1Q2020 was 0.32% higher than in 1Q2019; that growth rate was dramatically slower (-2.01PP) than 4Q2019’s +2.33% relative to 4Q2018.

Two groupings of GDP components -- personal consumption expenditures (PCE) and private domestic investment (PDI) were the drivers behind the contraction, whereas net exports (NetX) and government consumption expenditures (GCE) made minor positive contributions.

As for details (note that all dollar amounts are nominal) --

PCI:

·     Goods. Contributions to the headline from durable goods were negative across the board (-1.21%; -1.41PP QoQ), thanks mainly to a $53 billion drop in motor vehicles and parts. Nondurable goods added to the headline (+0.94%; +1.02PP QoQ) as a result of a $68.3 billion surge in grocery shopping and $38.1 billion in other nondurable goods purchases.

·     Services. Spending on services was a major detraction (-4.99%; -6.11PP QoQ) -- especially health care (-$109.9 billion), and food services and accommodations (-$81.5 billion).

PDI:

·     Fixed investment. Contributions from nonresidential fixed investment fell (-1.17%; -0.84PP QoQ) as structures (-$13.0 billion) and transportation equipment (-$24.3 billion) declined. By contrast, the contribution from residential investment accelerated (+0.74%; +0.50PP QoQ), consistent with a $44.3 billion increase.

·     Inventories. The contribution from inventories was less negative (-0.53%; +0.45PP QoQ) despite a $32.2 billion contraction in non-farm inventories.

NetX: Because the value of imports fell (-$125.0 billion) more than exports (-$75.0 billion), net exports added to the headline (+1.30%; -0.21PP QoQ).

GCE: Increased expenditures (+$36.8 billion) at all levels of government accounted for a modest addition to the headline (+0.13%; -0.31PP QoQ).

Annualized growth in the BLS’s real final sales of domestic product, which excludes the value of inventories) was -4.26% (-7.36PP QoQ). 

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Commentary from Consumer Metric Institute’s Rick Davis:

-- This is only the beginning, and this number is very likely to be revised lower in the next two reports and again in July. We have previously criticized the BEA for being late in recognizing dramatic turns in the economy, and we would be remiss if we didn't recognize that they are much more timely this time around.

-- Timing is everything. Depending on just how bad the second quarter is, the third quarter is likely to show quarter-over-quarter growth -- even as year-over-year data remains abysmal. That quarter-over-quarter growth will be conveniently announced just prior to the November Presidential Election. The political cynics among us might suggest that the BEA's new-found timeliness in fully reporting this contraction stems from an interest in advancing the inevitable bad news precisely in order to set the stage for a 3Q2020 quarter-over-quarter turnaround.

-- Moving forward, the contraction in consumer services spending, the security of paychecks and the rise in the household savings rate will not be evenly experienced among all demographics -- just like the pandemic itself. Individual household economics will continue to divide those advocating for maximized public health and those seeking a rapid return to economic normality.

“The latter point may be the most important,” Davis concluded. “We may be observing yet another divide opening in an already divided society.

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

March 2020 Residential Sales, Inventory and Prices

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Sales of new single-family houses in March 2020 were at a seasonally adjusted annual rate (SAAR) of 627,000 units (632,000 expected). This is 15.4 percent (±14.8 percent) below the revised February rate of 741,000 (originally 765,000) and 9.5 percent (±14.6 percent)* below the March 2019 SAAR of 693,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was -10.3%. For longer-term perspectives, NSA sales were 54.9% below the “housing bubble” peak but 16.7% above the long-term, pre-2000 average.

The median sales price of new houses sold in March fell ($8,700 or -2.6% MoM) to $321,400; meanwhile, the average sales price decreased to $375,300 ($11,900 or -3.1%). Starter homes (defined here as those priced below $200,000) comprised 11.5% of the total sold, down from the year-earlier 11.8%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 made up 1.6% of those sold in March, down from 2.9% a year earlier.

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

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As mentioned in our post about housing permits, starts and completions in March, single-unit completions decreased by 152,000 units (-15.0%). Although sales also fell (114,000 units; -15.4%), inventory for sale expanded in both absolute (+9,000 units) and months-of-inventory (+1.2 months) terms. 

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Existing home sales retreated in March (490,000 units or -8.5%), to a SAAR of 5.27 million units (5.4 million expected). Inventory of existing homes for sale expanded in both absolute (+40,000 units) and months-of-inventory (+0.6 month) terms. Because new-home sales fell by a larger proportion, the share of total sales comprised of new homes retreated to 10.6%. The median price of previously owned homes sold in March increased to $280,600 ($10,200 or +3.8% MoM). 

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Housing affordability improved (+6.7 percentage points) as the median price of existing homes for sale in January fell by $8,400 (-3.0; +6.9 YoY), to $268,600. 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 +0.4% (+4.2% YoY).

"The stable growth pattern established in the last half of 2019 continued into February,” said Craig Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P Dow Jones Indices. “The National Composite Index rose by 4.2% in February 2020, and the 10- and 20-City Composites also advanced (by 2.9% and 3.5%, respectively). Results for the month were broad-based, with gains in every city in our 20-City Composite; 17 of the 20 cities saw accelerating prices. The National, 10-City, and 20-City Composites all rose at a faster rate in February than they had in January.

“At a regional level, Phoenix retains the top spot for the ninth consecutive month, with a gain of 7.5% for February. Home prices in Seattle rose by 6.0%, with Tampa and Charlotte prices both gaining 5.2%. Prices were particularly strong in the West and Southeast, and comparatively weak in the Midwest and Northeast.

“Importantly, today’s report covers real estate transactions closed during the month of February, and shows no signs of any adverse effect from the governmental suppression of economic activity in response to the COVID-19 pandemic. As much of the U.S. economy was shuttered in March, next month’s data may begin to reflect the impact of these policies on the housing market.”

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

March 2020 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in March at a seasonally adjusted annual rate (SAAR) of 1,216,000 units (1.320 million expected). This is 22.3% (±12.2%) below the revised February estimate of 1,564,000 (originally 1.599 million units), but 1.4% (±12.7%)* above the March 2019 SAAR of 1,199,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +1.9%.

Single-family housing starts in March were at a SAAR of 856,000; this is 17.5% (±13.1%) below the revised February figure of 1,037,000 units (+2.9% YoY). Multi-family starts: 360,000 units (-31.7% MoM; -0.4% YoY).

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

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Total completions were at a SAAR of 1,227,000 units. This is 6.1% (±12.0%)* below the revised February estimate of 1,307,000 (originally 1.316 million units) and 9.0% (±12.4%)* below the March 2019 SAAR of 1,348,000 units; the NSA comparison: -8.6% YoY.

Single-family housing completions were at a SAAR of 863,000; this is 15.0% (±11.6%) below the revised February rate of 1,015,000 units (-9.6% YoY). Multi-family completions: 364,000 units (+24.7% MoM; -6.1% YoY). 

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Total permits amounted to a SAAR of 1,353,000 units (1.300 million expected). This is 6.8% (±1.1%) below the revised February rate of 1,452,000 (originally 1.464 million units), but 5.0% (±2.4%) above the March 2019 SAAR of 1,288,000 units; the NSA comparison: +9.7% YoY.

Single-family permits were at a SAAR of 884,000; this is 12.0% (±1.9%) below the revised February figure of 1,005,000 units (+13.5% YoY). Multi-family: 469,000 (+4.9% MoM; +2.7% YoY). 

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Reflecting the growing effects of the COVID-19 pandemic, builder confidence in the market for newly-built single-family homes plunged 42 points in April to 30, according to the latest NAHB/Wells Fargo Housing Market Index (HMI). The decline in April was the largest single monthly change in the history of the index and marks the lowest builder confidence reading since June 2012. It is also the first time that builder confidence has been in negative territory (below 50) since June 2014.

“This unprecedented drop in builder confidence is due exclusively to the coronavirus outbreak across the nation, as unemployment has skyrocketed and gaps in the supply chain have hampered construction activities,” said NAHB Chairman Dean Mon. “Meanwhile, there continues to be some confusion over builder eligibility for the Paycheck Protection Program, as some builders have successfully submitted loan applications while others have not been able to. NAHB is working with the White House, Treasury and Congress to get the broadest builder participation possible. Home building remains an essential business throughout most of the nation, and as the pandemic shows signs of easing in the weeks ahead, buyers should return to the marketplace.”

“Before the pandemic hit, the housing market was showing signs of strength with January and February new home sales at their highest pace since the Great Recession,” said NAHB Chief Economist Robert Dietz. “To show how hard and fast this outbreak has hit the housing sector, a recent poll of our members reveals that 96% reported that virus mitigation efforts were hurting buyer traffic. While the virus is severely disrupting residential construction and the overall economy, the need and demand for housing remains acute. As social distancing and other mitigation efforts show signs of easing this health crisis, we expect that housing will play its traditional role of helping to lead the economy out of a recession later in 2020.”

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

March 2020 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) fell 5.4% in March (-4.2% expected), as the coronavirus pandemic led many factories to suspend operations late in the month. Manufacturing output fell 6.3%; most major industries posted decreases, with the largest decline registered by motor vehicles and parts. The decreases for total IP and for manufacturing were their largest since January 1946 and February 1946, respectively. The indexes for utilities and mining declined 3.9% and 2.0%, respectively. At 103.7% of its 2012 average, the level of total IP in March was 5.5% lower than a year earlier. 

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Industry Groups

Manufacturing output dropped 6.3% in March and at an annual rate of 7.1% in the first quarter (NAICS manufacturing: -6.3% MoM; -6.4% YoY). In March, the index for durable manufacturing fell 9.1%; the most sizable decline among its components was in motor vehicles and parts, where output fell 28.0%. Durable goods industries that recorded decreases of between 8% and 10% included fabricated metal products, aerospace and miscellaneous transportation equipment, furniture and related products, and miscellaneous manufacturing (wood products: -4.2%). The index for nondurables fell 3.2%, with substantial declines in many industries but smaller decreases of 2% or less in food, beverage, and tobacco products; paper products (-2.0%); and chemicals. The output of other manufacturing (publishing and logging) fell 5.4%.

The output of utilities declined 3.9% in March, with similarly sized decreases for both electric and natural gas utilities. Mining output fell 2.0%, with the largest decreases in crude oil extraction, natural gas liquids extraction, coal mining, and non-energy mining. 

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Capacity utilization (CU) for the industrial sector decreased 4.3 percentage points (PP) to 72.7% in March, a rate that is 7.1PP below its long-run (1972–2019) average.

Manufacturing CU in March was 70.3%, 4.7PP lower than in February and 7.9PP below its long-run average (NAICS manufacturing: -6.3%, at 70.8%). The operating rate for durable manufacturing dropped to 67.8%, about 9PP below its long-run average, held down by decreases in every major industry group (wood products: -4.4%). Capacity utilization for nondurables fell 2.5PP to 73.9%, about 6PP below its long-run average (paper products: -2.0%). Utilization rates for printing and support, for textile and product mills, and for apparel and leather all recorded drops of nearly 10PP or more. 

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Capacity at the all-industries level edged up 0.1% (+1.9 % YoY) to 142.5% of 2012 output. Manufacturing (NAICS basis) rose fractionally (+0.1% MoM; +1.3% YoY) to 140.6%. Wood products: +0.2% (+3.7% YoY) to 170.3%; paper products: 0.0% (-0.2 % YoY) to 109.6%.

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

February 2020 International Trade (Softwood Lumber)

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Softwood lumber exports edged up (1 MMBF or +0.9%) in February; imports rose (45 MMBF or +4.4%). Exports were 1 MMBF (+1.2%) above year-earlier levels; imports were 74 MMBF (+7.4%) lower. As a result, the year-over-year (YoY) net export deficit was 73 MMBF (+8.1%) larger. Also, the average net export deficit for the 12 months ending February 2020 was 0.4% 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 (42.1%; of which Canada: 22.6%; Mexico: 19.5%), Asia (24.6%; especially China: 7.4%; and Japan: 5.0%), and the Caribbean: 26.0% (especially the Dominican Republic: 9.1%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were -38.1% relative to the same months in 2019. Meanwhile, Canada was the source of most (88.7%) of softwood lumber imports into the United States. Imports from Canada were 0.8% higher YTD than the same months in 2019. Overall, YTD exports were down 5.9% compared to 2019; imports: +2.7%. 

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U.S. softwood lumber export activity through the Gulf customs region represented the largest proportion (34.0% of the U.S. total), followed by the West Coast (33.3%) and Eastern (24.4%) regions. Seattle (19.2% of the U.S. total) was overtaken by Mobile (24.8%) as the single most-active district. At the same time, Great Lakes customs region handled 59.2% of softwood lumber imports -- most notably the Duluth, MN district (24.3%) -- coming into the United States. 

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Southern yellow pine comprised 31.0% of all softwood lumber exports, Douglas-fir (13.2%) and treated lumber (13.9%) were also significant. Southern pine exports were up 7.7% YTD relative to 2019, while treated: +9.9%; Doug-fir: -8.4%.

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

March 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) declined 0.4% in March (-0.3% expected). A sharp decline in the gasoline index was a major cause of the monthly decrease in the seasonally adjusted all items index, with decreases in the indexes for airline fares, lodging away from home, and apparel also contributing. The energy index fell 5.8% as the gasoline index decreased 10.5%. The food index rose in March, increasing 0.3% as the food at home index rose 0.5%.

The index for all items less food and energy fell 0.1% in March, its first monthly decline since January 2010. Along with the indexes for airline fares, lodging away from home, and apparel, the index for new vehicles declined in March. The index for shelter was unchanged, with increases in the indexes for rent and for owners’ equivalent rent offsetting the aforementioned decline in the index for lodging away from home. Indexes that increased in March include medical care, used cars and trucks, motor vehicle insurance, and education. 

The all items index increased 1.5% for the 12 months ending March, a notably smaller increase than the 2.3% increase for the period ending February. The index for all items less food and energy rose 2.1% over the last 12 months. The food index rose 1.9% over the last 12 months, while the energy index declined 5.7%.

Producer Price Index

The Producer Price Index for final demand (PPI-FD) fell 0.2% in March (-0.3% expected). Final demand prices declined 0.6% in February and increased 0.5% in January. On an unadjusted basis, the final demand index advanced 0.7% for the 12 months ended in March.

In March, the decrease in the final demand index can be traced to a 1.0% drop in prices for final demand goods. The index for final demand services moved up 0.2%.

Prices for final demand less foods, energy, and trade services declined 0.2% in March, the largest decrease since falling 0.2% in October 2015. For the 12 months ended in March, the index for final demand less foods, energy, and trade services rose 1.0%.

Final Demand

Final demand goods: The index for final demand goods fell 1.0% in March, the largest decline since moving down 1.1% in September 2015. The March decrease can be attributed to prices for final demand energy, which dropped 6.7%. In contrast, the index for final demand goods less foods and energy advanced 0.2%. Prices for final demand foods were unchanged.

Product detail: Eighty percent of the March decrease in the index for final demand goods can be traced to prices for gasoline, which dropped 16.8%. The indexes for diesel fuel, meats, jet fuel, liquefied petroleum gas, and industrial chemicals also moved lower. Conversely, prices for motor vehicles rose 0.8%. The indexes for chicken eggs and frozen specialty foods also increased.

Final demand services: The index for final demand services rose 0.2% in March after declining 0.3% in February. In March, the increase can be traced to margins for final demand trade services, which moved up 1.4%. (Trade indexes measure changes in margins received by wholesalers and retailers.) In contrast, the index for final demand transportation and warehousing services decreased 3.3%. Prices for final demand services less trade, transportation, and warehousing were unchanged.

Product detail: Leading the March increase in the index for final demand services, margins for apparel, jewelry, footwear, and accessories retailing jumped 8.1%. The indexes for fuels and lubricants retailing; securities brokerage, dealing, and investment advice; loan services (partial); food retailing; and inpatient care also moved higher. Conversely, prices for airline passenger services decreased 10.0%. The indexes for deposit services (partial) and health, beauty, and optical goods retailing 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.

March 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil tumbled by $21.33 (-42.2%), to $29.21 per barrel in March; for perspective, this price drop was exceeded only by a $27.25 fall in October 2008. The March 2020 slump occurred within the context of a substantially stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 407,000 barrel-per-day (BPD) decline in the amount of petroleum products supplied during January (to 19.9 million BPD), and a jump in accumulated oil stocks (March average: 458 million barrels). 

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From the 6 April 2020 issue of The Energy Bulletin:

“Last week saw one of the biggest price leaps in the history of the oil industry, with U.S. futures surging from around $20 a barrel at mid-week to a close of $28.34 on Friday.  The surprise surge came after President Trump tweeted Thursday morning that the Saudis and Russia were going to cut production by “10 million barrels or may be substantially more.” The tweet came after Trump talked with the Saudi crown prince.  Later in the day, Moscow weighed in to say that it was unaware of such an agreement and that the Saudis were making every effort to increase, not cut oil production.

“Analysts and the IEA were quick to point out that the coronavirus pandemic had already cut global oil demand by an estimated 20-30 million BPD or possibly more.  In the unlikely occurrence that OPEC+ could agree on production cuts totaling millions of barrels, any agreement to cut output would likely be too late and too little.  The market is grappling with an enormous oversupply.  Vitol, the world’s largest independent oil trader, says demand is set to fall by as much as 30 million barrels a day in April.

…

“The U.S. shale oil industry is contracting rapidly, but it will be a couple of months before the EIA can sort out just how much production has declined.  Six weeks ago, the discussion was about how much slower the growth of shale oil production would be this year.  Now the issue is how much it might fall.

…

“As part of the $2 trillion fiscal stimuli meant to resuscitate the U.S. economy, Congress allocated $454 billion to help underwrite the special lending programs.  This could generate up to $4.540 trillion in new lending (assuming 10x leverage for highly-rated assets}.  It now turns out that the first industry to benefit from direct Fed loans is the U.S. energy sector, some of which is facing near-certain bankruptcy, assuring that new loans will never be repaid.

“Global spending on oilfield equipment and services this year is expected to fall 21% from 2019 to $211 billion, the lowest level since 2005, according to a report to be released on Wednesday by consultancy Spears & Associates.  Spears’ estimate for 2020 spending is below industry outlays at the nadir of the last price crash in 2016, and less than half the 2014 peak of $473 billion.  The company, which surveys oilfield firms, evaluates company reports and models sales, historically has not publicly released its data.

“Oil is entering a period of unparalleled demand destruction this month that promises to transform the industry for years to come.  Daily consumption is forecast to plummet by 20 million to 22 million BPD from a year earlier.  The crash has already led to refiners slashing processing, drillers halting output, and storage tanks swelling across the world. “This will likely be a game-changer for the industry,” Goldman Sachs analysts including Jeffrey Currie and Damien Courvalin said in a March 30th note.  “It is impossible to shut down that much demand without large and persistent ramifications to supply.” 

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

China’s refiners increase processing. China’s refineries have started to increase processing, with runs set to increase by 755,000 BPD in April, a 10% month-on-month increase.

Schlumberger to cut workforce. Schlumberger said that it would implement widespread salary and job cuts.

BP slashes spending 20%. BP said it would cut spending by 20%, including a 50% cut in U.S. shale spending. “This may be the most brutal environment for oil and gas businesses in decades,” CEO Bernard Looney said in a statement.

Gas inventories rise. Warmer-than-average temperatures along with demand destruction have led to a spike in natural gas inventories in Europe. “There’s a chance we will see a collapse in prices in the U.S.,” Francisco Blanch, head of global commodities and derivatives research at Bank of America, told Bloomberg. “We are going to be weak on the demand destruction related to the virus, but the real issue is that we had a very warm winter and we are coming out with extreme high inventories.”

U.S. DOE to allow SPR storage. After a plan to buy oil for the U.S. SPR fell through, the Department of Energy is going to open up the SPR for leased storage. There is roughly 77 million barrels of capacity available.

Trump considers import tariffs on oil. The White House is reportedly considering placing tariffs on imported oil as a way of throwing aid to U.S. oil producers. The plan has met strenuous opposition from refiners and even the API, an oil lobby group that some say reflects the interests of the oil majors.

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

March 2020 Currency Exchange Rates

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In March the monthly average value of the U.S. dollar (USD) appreciated versus Canada’s “loonie” (+5.5%), but depreciated against the euro (-1.2%) and yen (-2.1%). On the broad trade-weighted index basis (goods and services), the USD gained 3.9% 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.

March 2020 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm payroll employment slumping by 701,000 jobs in March (-150,000 expected; forecasts ranged from +100,000 to -1.25 million). Also, combined January and February employment gains were revised down by 57,000 (January: -59,000; February: +2,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) jumped (+0.9PP, the largest rate increase since January 1975) to 4.4% under a combination of a shrinking labor force (-1.633 million) and a plummeting number of employed persons (-2.987 million). Because the BLS indicated that “the March survey reference periods for both surveys predated many coronavirus-related business and school closures that occurred in the second half of the month,” April’s jobs report will almost certainly be much worse. 

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Observations from the employment reports include:

* The establishment (-701,000 jobs) and household survey results (-2.987 million employed), although directionally consistent, were otherwise poorly correlated. 

* Goods-producing industries lost 54,000 jobs, while service-providing employment (-647,000 jobs) bore the brunt of the drop -- especially food services and drinking places (-417,000), health care and social assistance (-61,200), temporary help services (-49,500), and retail trade (-46,200). Manufacturing contracted by 18,000 jobs. That result is consistent the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which fell at a faster pace in March. Wood Products employment retreated by 700 (ISM decreased); Paper and Paper Products: -200 (ISM unchanged); Construction: +29,000 (ISM decreased). 

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* The number of employment-age persons not in the labor force (NILF) jumped (+1.8 million) to 96.8 million. As a result, the employment-population ratio (EPR) dropped to 60.0%; roughly, then, for every five people being added to the working-age population, three are employed. 

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* Because the civilian labor force shrank by 1.6 million in March, the labor force participation rate fell (-0.7PP) to 62.7%. Average hourly earnings of all private employees rose by $0.11, to $28.62, resulting in a 3.1% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.10, to $24.07 (+3.4% YoY). Since the average workweek for all employees on private nonfarm payrolls shrank (-0.2 hour) to 34.2 hours, average weekly earnings decreased by $1.94, to $978.80 (+4.0% YoY). With the consumer price index running at an annual rate of 2.3% in February, those wage earners who remain are gaining purchasing power according to official metrics. 

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* Full-time jobs tumbled (-1.8 million), to 129.3 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 -- jumped by 1.4 million; many in this category had been full-time workers. Those working part time for non-economic reasons slumped by 1.6 million, while multiple-job holders fell by 802,000. 

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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 March rose by $32.7 billion, to a record $255.6 billion (+14.7% MoM; +7.5% 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 March was 7.9% above the year-earlier average. We expect a much lower withholding number at the end of April.

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

March 2020 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that U.S. manufacturing contracted in March. The PMI registered 49.1%, down 1.0 percentage point (PP) from the February reading. (50% is the breakpoint between contraction and expansion.) ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. Except for a surge in slow deliveries (+7.7PP), all sub-indexes were negative (and generally more so than in February). Declines in new orders (-7.7PP) and input prices (-8.5PP) were particularly noteworthy. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- exhibited marked deceleration (-4.8PP, to 52.5%). Except for a jump in slow deliveries (+9.7PP), other sub-indexes were either less positive or outright negative. 

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Of the industries we track, however, only Ag & Forestry did not expand. Common themes among respondent comments included demand volatility from the coronavirus, supply chain disruptions, and oil. Most relevant were the following:

Construction -- “The coronavirus is having an impact, but not as much as we thought it would at this point. All sectors are staying busy. Although there are many customer concerns, we are finding work-arounds and adapting to the ever-changing situation.”

Real Estate -- “The coronavirus is affecting every aspect of business.”

Relevant commodities:

Priced higher – Labor, lumber, and oriented strand board.

Priced lower – Corrugate, crude oil, fuel (diesel and gasoline), and natural gas.

Prices mixed -- None.

In short supply -- Construction contractors and subcontractors, labor (temporary), paper products, paper towels, and toilet paper.

Findings of IHS Markit’s March surveys were reasonably consistent with their ISM counterparts.

Manufacturing -- Output declines at fastest pace since August 2009 amid COVID-19 outbreak.

Key findings:

* Production and new orders contract at fastest rates since financial crisis
* Employment falls at quickest pace for over a decade
* Business confidence drops to series low

Services -- Business activity declines steeply amid COVID-19 pandemic.

Key findings:

* Output and new business fall at fastest rates in series history
* Employment contracts at joint-sharpest pace since December 2009
* Business confidence drops to series low

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

Manufacturing -- “The final PMI data for March are even worse than the initial flash estimate, with manufacturing output slumping to the greatest extent since the height of the global financial crisis in 2009.

"Growing numbers of company closures and lockdowns as the nation fights the COVID-19 outbreak mean business levels have collapsed. While some producers reported being busier as a result of stockpiling and anti-virus activities, notably in the food and healthcare sectors, these are very much the minority, and most sectors reported a rapid deterioration in demand and production.

"Orders for capital equipment have deteriorated at a rate not seen since data were first available in 2009 as firms stopped investing in machinery. Companies have meanwhile reined-in spending on inputs and households have pulled back sharply on many forms of spending, especially for non-essential and big ticket items. With export sales also sliding, factories are facing a broad-based slide in demand which is already resulting in the largest job losses recorded since the global financial crisis. Worse is likely to come as consumer spending falls further in coming months as lockdowns intensify and unemployment spikes higher."

Services -- “Business activity slumped to the greatest extent for more than a decade in March as efforts to contain the spread of the COVID-19 pandemic intensified. The survey indicates that the economy contracted an annualized rate approaching 5% in March, but with more measures to fight the virus outbreak being taken this decline will likely be eclipsed by what we see in the second quarter. More nonessential businesses are being forced to close, some are going bust, and lockdowns are leading to vastly reduced consumer spending,

“Employment and prices charged for goods and services are already being slashed at rates not seen since 2009 as companies seek to aggressively cut costs and discount charges in the face of collapsing revenues. Given that the survey does not include the self-employed, the jobless numbers are likely to rise at a much faster rate than even the slide in the PMI indicates. The policy response to the economic damage from the virus has already been unprecedented, but the collapse in business expectations for the year ahead tells us that companies are expecting far worse to come. IHS Markit is now forecasting an around 5.5% contraction of US GDP in 2020.”

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

February 2020 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments in February decreased $0.8 billion or 0.2% to $500.3 billion. Durable goods shipments increased $2.2 billion or 0.9% to $252.4 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $3.0 billion or 1.2% to $247.9 billion, led by petroleum and coal products. Shipments of wood products fell by 0.4%; paper +0.5%. 

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Inventories decreased $2.6 billion or 0.4% to $699.4 billion. The inventories-to-shipments ratio was 1.40, unchanged from January. Inventories of durable goods decreased $0.1 billion or virtually unchanged to $434.5 billion, led by computers and electronic products. Nondurable goods inventories decreased $2.5 billion or 0.9% to $264.9 billion, led by petroleum and coal products. Inventories of wood products expanded by 0.4%; paper: -0.6%. 

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New orders decreased $0.1 billion or virtually unchanged to $497.4 billion. Excluding transportation, new orders fell by 0.9% (+2.1% YoY). Durable goods orders increased $3.0 billion or 1.2% to $249.5 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- decreased by 0.9% (+1.5% YoY). New orders for nondurable goods decreased $3.0 billion or 1.2% to $247.9 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 50% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders increased $1.4 billion or 0.1% to $1,158.6 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.61, down from 6.62 in January. Real unfilled orders, which had been a good litmus test for sector growth, show a less positive picture; in real terms, unfilled orders in June 2014 were back to 97% of their December 2008 peak. Real unfilled orders then jumped to 102% of the prior peak in July 2014, thanks to the largest-ever batch of aircraft orders. Since then, however, real unfilled orders have been 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.