1Q2020 Gross Domestic Product: Second Estimate

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In its second estimate of 1Q2020 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) revised the growth rate of the U.S. economy to a seasonally adjusted and annualized rate (SAAR) of -5.05% (-3.8% expected), down 0.26 percentage point (PP) from the “advance” estimate (“1Qv1”) and -7.17PP from 4Q2019.

As with 1Qv1, two of the four GDP component groupings -- net exports (NetX) and government consumption expenditures (GCE) -- made positive contributions to the headline; however, personal consumption expenditures (PCE) and private domestic investment (PDI) were overwhelmingly negative.

This report contained few material changes. As for details:

·      PCE. Revisions to consumer spending were either somewhat less negative (services and durable goods) or marginally more positive (nondurable goods). The net effect was a +0.57PP revision from the previous 1Q estimate, but -5.93PP from 4Q2019.

·      PDI. Inventories were revised down by 0.90PP from 1Qv1 (-0.45PP from 4Q2019), while fixed investment was revised slightly upward (+0.02PP). Investment in equipment and residential structures weakened further in this report, however.

·      NetX. The QoQ drop in imports (imports subtract from GDP) remained greater than that in exports, leading to a positive contribution to the headline.

·      GCE. Federal defense and state/local spending were each revised fractionally higher.

The BEA's real final sales of domestic product was revised modestly upward (+0.64PP, to -3.62%), which is 6.72PP below the 4Q estimate. 

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

-- As expected, this report's headline number is lower than the previous report. But the cause of the downward revision to the headline was inventories, not consumers.

-- Consumer spending was reported to be contracting at a 4.69% annualized rate. But this was actually up 0.57PP from the previous report. All of that reported contraction is in spending for consumer services, and spending on goods is now reported to have continued modest growth.

The BEA's previous report was a ball-park “guesstimate” placeholder under circumstances where their measuring methodologies are woefully inadequate to deal with an economy in drastic transition -- and in a political environment where they wanted to be out in front with the bad news. As a practical matter, they won't even have a good handle on the true state of the economy when initially reporting a much worse second quarter and doing their annual July historical revisions.

If we now understand the value of national and global pandemic response planning exercises, we might also understand the need for more timely reporting from the BEA (e.g., month-by-month series instead of quarterly series, based on something far closer to real-time transaction data). Otherwise you will end up with Congress tossing around multi-trillion dollar relief packages with no quantitative idea about how much of what kind of aid is truly needed.

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.

April 2020 Residential Sales, Inventory and Prices

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Sales of new single-family houses in April 2020 were at a seasonally adjusted annual rate (SAAR) of 623,000 units (495,000 expected). This is 0.6% (±14.9%)* above the revised March rate of 619,000 (originally 627,000), but 6.2% (±17.1%)* below the April 2019 SAAR of 664,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was -7.8%. For longer-term perspectives, NSA sales were 55.1% below the “housing bubble” peak but 12.9% above the long-term, pre-2000 average.

The median sales price of new houses sold in April fell ($17,000 or -5.2% MoM) to $309,900; meanwhile, the average sales price decreased to $364,500 ($12,900 or -3.4%). Starter homes (defined here as those priced below $200,000) comprised 11.9% of the total sold, up from the year-earlier 7.8%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 made up 1.7% of those sold in April, up from 1.6% 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 April, single-unit completions decreased by 45,000 units (-4.9%). Since sales ticked higher (by 4,000 units; +0.6%), inventory for sale contracted in both absolute (-6,000 units) and months-of-inventory (-0.1 month) terms. 

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Existing home sales retreated in April (940,000 units or -17.8%), to a SAAR of 4.33 million units (4.325 million expected). Inventory of existing homes for sale contracted in absolute terms (-20,000 units) but expanded in months-of-inventory terms (+0.7 month). Because new-home sales edged higher while resales fell, the share of total sales comprised of new homes jumped to 12.6%. The median price of previously owned homes sold in April increased to $286,800 ($6,100 or +2.2% MoM). 

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Housing affordability deteriorated (+7.5 percentage points) as the median price of existing homes for sale in March rose by $9,700 (+3.6; +8.0 YoY), to $282,500. 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% (+4.4% YoY).

"March’s data witnessed the first impact of the COVID-19 pandemic on the S&P CoreLogic Case-Shiller Indices,” said Craig Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P Dow Jones Indices. “We have data from only 19 cities this month, since transactions records for Wayne County, Michigan (in the Detroit metropolitan area) were unavailable.

“That said, housing prices continue to be remarkably stable. The National Composite Index rose by 4.4% in March 2020, with comparable growth in the 10- and 20-City Composites (up 3.4% and 3.9%, respectively). In all three cases, March’s year-over-year gains were ahead of February’s, continuing a trend of gently accelerating home prices that began last autumn. March results were broad-based. Prices rose in each of the 19 cities for which we have reported data, and price increases accelerated in 17 cities.

“At a regional level, Phoenix retains the top spot for the tenth consecutive month, with a gain of 8.2% for March. Home prices in Seattle rose by 6.9%, followed by increases in Charlotte (5.8%) and Tampa (5.7%). 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 March. Housing prices have not yet registered any adverse effects from the governmental suppression of economic activity in response to the COVID-19 pandemic. As much of the U.S. economy remained shuttered in April, next month’s data may show a more noticeable impact.” 

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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.

April 2020 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in April at a seasonally adjusted annual rate (SAAR) of 891,000 units (968,000 expected). This is 30.2% (±11.0%) below the revised March estimate of 1,276,000 (originally 1.216 million units) and 29.7% (±8.1%) below the April 2019 SAAR of 1,267,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -30.4%.

Single-family housing starts in April were at a rate of 650,000; this is 25.4% (±9.6%) below the revised March figure of 871,000 units (-26.0% YoY). Multi-family starts: 241,000 units (-40.5% MoM; -40.9% 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 1,176,000 units. This is 8.1% (±13.5%)* below the revised March estimate of 1,279,000 (originally 1.307 million units) and 11.8% (±9.9%) below the April 2019 SAAR of 1,334,000 units; the NSA comparison: -11.3% YoY.

Single-family housing completions were at a SAAR of 865,000; this is 4.9% (±16.7%)* below the revised March rate of 910,000 units (-6.5% YoY). Multi-family completions: 311,000 units (-15.7% MoM; -22.6% YoY). 

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Total permits amounted to a SAAR of 1,074,000 units (1.033 million expected). This is 20.8% (±0.9%) below the revised March rate of 1,356,000 (originally 1.353 million units) and 19.2% (±0.9%) below the April 2019 SAAR of 1,330,000 units; the NSA comparison: -20.0% YoY.

Single-family permits were at a SAAR of 669,000; this is 24.3% (±1.6%) below the revised March figure of 884,000 units (-16.6% YoY). Multi-family: 405,000 (-14.2% MoM; -26.0% YoY). 

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“In a signal that the housing market is showing signs of stabilizing and gradually moving forward in the wake of the COVID-19 pandemic, builder confidence in the market for newly-built single-family homes increased seven points to 37 in May, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI),” wrote NAHB’s Robert Dietz. “The rise in builder sentiment follows the largest single monthly decline in the history of the index in April.”

“The designation of home construction as an essential business during the crisis helped keep most residential construction workers on the job, which is reflected in the May HMI. At the same time, builders are showing flexibility in this new business environment by making sure buyers have the knowledge and access to the homes they are seeking through innovative measures such as social media, virtual tours and online closings. Jurisdictions are also adapting to the new environment with third-party and virtual inspection rules.

“Low interest rates are helping to sustain demand. As many states and localities across the nation lift stay-at-home orders and more furloughed workers return to their jobs, we expect this demand will strengthen. Other indicators that suggest a housing rebound include mortgage application data that has posted four weeks of gains and signs that buyer traffic has improved in housing markets in recent weeks. However, high unemployment and supply-side challenges including builder loan access and building material availability are near-term limiting factors,” Dietz concluded.

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 International Trade (Softwood Lumber)

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Softwood lumber exports retreated (6 MMBF or -5.6%) in March; imports rose (290 MMBF or +27.0%). Exports were 8 MMBF (-7.4%) below year-earlier levels; imports were 103 MMBF (+8.2%) higher. As a result, the year-over-year (YoY) net export deficit was 111 MMBF (+9.6%) larger. However, the average net export deficit for the 12 months ending March 2020 was 0.3% 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 (45.8%; of which Canada: 24.7%; Mexico: 21.2%), Asia (26.8%; especially China: 7.9%; and Japan: 8.0%), and the Caribbean: 19.9% (especially the Dominican Republic: 6.0%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were -33.1% relative to the same months in 2019. Meanwhile, Canada was the source of most (88.2%) of softwood lumber imports into the United States. Imports from Canada were 1.9% higher YTD than the same months in 2019. Overall, YTD exports were down 6.4% compared to 2019; imports: +4.8%. 

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U.S. softwood lumber export activity through the West Coast customs region represented the largest proportion (34.6% of the U.S. total), followed by the Eastern (28.9%) and Gulf (26.5%) regions. Seattle (21.8% of the U.S. total) was the single most-active district, followed by Mobile (16.5%). At the same time, Great Lakes customs region handled 60.7% of softwood lumber imports -- most notably the Duluth, MN district (21.6%) -- coming into the United States. 

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Southern yellow pine comprised 30.3% of all softwood lumber exports, Douglas-fir (15.9%) and treated lumber (12.0%) were also significant. Southern pine exports were up 10.6% YTD relative to 2019, while treated: +1.7%; Doug-fir: -8.6%.

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.

April 2020 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) fell 11.2% in April (-11.5% expected) for its largest monthly drop in the 101-year history of the index, as the COVID-19 (coronavirus disease 2019) pandemic led many factories to slow or suspend operations throughout the month. Manufacturing output dropped 13.7%, its largest decline on record, as all major industries posted decreases. The output of motor vehicles and parts fell more than 70%; production elsewhere in manufacturing dropped 10.3%. The indexes for utilities and mining decreased 0.9% and 6.1%, respectively. At 92.6% of its 2012 average, the level of total industrial production was 15.0% lower in April than it was a year earlier. 

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Industry Groups

Manufacturing output dropped 13.7% in April (NAICS manufacturing: -13.8% MoM; -18.0% YoY). At 85.5% of its 2012 average, manufacturing production was at its lowest level since August 1997. The index for durable manufacturing fell 19.3%; among its components, the largest decline was posted by motor vehicles and parts. The shutdowns of most motor vehicle assembly plants led to light vehicle production at an annual rate of only 70,000 units, far below the assembly rate of 11.0 million units in February 2020. Among other durable goods industries, decreases of around 20% were recorded by primary metal products, by aerospace and miscellaneous transportation equipment, and by furniture and related products (wood products: --9.0%). The index for nondurables fell 8.2%, with declines of around 20% for textile and product mills, for apparel and leather, for printing and support, and for petroleum and coal products (paper products: -2.6%). The output of other manufacturing (publishing and logging) fell 10.4%.

The output of utilities weakened 0.9% in April, as a decrease for electric utilities was mostly offset by a gain for natural gas utilities that reflected strong demand for heating due to cold temperatures. Mining output fell 6.1%, with the largest decreases in crude oil extraction, in oil and gas well drilling, in coal mining, and in non-energy mining. The index for oil and gas well drilling fell 28%, its largest drop on record (since 1972). 

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Capacity utilization (CU) for the industrial sector decreased 8.3 percentage points (PP) to 64.9% in April, a rate that is 14.9PP below its long-run (1972–2019) average and 1.8PP below its all-time (since 1967) low set in 2009.

Manufacturing CU in April was 61.1%, 9.7PP lower than in March and 2.6PP below its recession trough of June 2009, the previous historical (since 1948) low for the measure (NAICS manufacturing: -13.8%, at 61.4%). The operating rate for durable manufacturing also dropped below its 2009 low to 55.3% and was held down by decreases in every major industry group (wood products: -9.2%). Likewise, capacity utilization for nondurables set a new low, falling 6.1PP to 68.0% (paper products: -2.6%). 

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Capacity at the all-industries level edged up 0.1% (+1.8 % YoY) to 142.7% of 2012 output. Manufacturing (NAICS basis) rose fractionally (+0.1% MoM; +1.3% YoY) to 140.7%. Wood products: +0.2% (+3.6% YoY) to 170.7%; 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.

April 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 0.8 percent in April (-0.8% expected), the largest monthly decline since December 2008. A 20.6-percent decline in the gasoline index was the largest contributor to the monthly decrease in the seasonally adjusted all items index, but the indexes for apparel, motor vehicle insurance, airline fares, and lodging away from home all fell sharply as well. In contrast, food indexes rose in April, with the index for food at home posting its largest monthly increase since February 1974. The energy index declined mostly due to the decrease in the gasoline index, though some energy component indexes rose. 

The index for all items less food and energy fell 0.4 percent in April, the largest monthly decline in the history of the series, which dates to 1957. Along with the indexes mentioned above, the indexes for used cars and trucks and recreation also declined. The indexes for rent, owners’ equivalent rent, medical care, and household furnishings and operations all increased in April.

The all items index increased 0.3 percent for the 12 months ending April, the smallest 12-month increase since October 2015. The index for all items less food and energy increased 1.4 percent over the last 12 months, its smallest increase since April 2011. The energy index fell 17.7 percent over the last year. In contrast, the food index rose 3.5 percent over the last 12 months, its largest 12-month increase since February 2012.

Producer Price Index

The Producer Price Index for final demand (PPI-FD) declined 1.3 percent in April (-0.5% expected). This decrease is the largest since the index began in December 2009. Final demand prices fell 0.2 percent in March and 0.6 percent in February. Over 80 percent of the decrease in the final demand index can be traced to a 3.3-percent drop in prices for final demand goods. The index for final demand services moved down 0.2 percent.

The final demand index moved down 1.2 percent for the 12 months ended in April, the largest decline since falling 1.3 percent for the 12 months ended November 2015. Prices for final demand less foods, energy, and trade services fell 0.9 percent in April, the largest decline since the index was introduced in September 2013. For the 12 months ended in April, the index for final demand less foods, energy, and trade services moved down 0.3 percent, the first 12-month decrease.

Final Demand

Final demand goods: The index for final demand goods fell 3.3 percent in April, the largest decline since the series began in December 2009. Most of the broad-based decrease is attributable to prices for final demand energy, which fell 19.0 percent. The indexes for final demand goods less foods and energy and for final demand foods moved down 0.4 percent and 0.5 percent, respectively.

Product detail: Two-thirds of the April decrease in the index for final demand goods can be traced to prices for gasoline, which dropped 56.6 percent. This is the largest decrease since the series began in February 1947. The indexes for jet fuel, diesel fuel, basic organic chemicals, home heating oil, and corn also moved lower. In contrast, prices for beef and veal rose 12.6 percent. The indexes for distilled and bottled liquor (excluding brandy) and for electric power also increased.

Final demand services: The index for final demand services fell 0.2 percent in April following a 0.2-percent advance in March. Leading the decrease, prices for final demand services less trade, transportation, and warehousing moved down 0.9 percent. The index for final demand transportation and warehousing services declined 3.5 percent. Conversely, margins for final demand trade services increased 1.6 percent. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail: Leading the April decline in the index for final demand services, prices for portfolio management fell 12.0 percent. The indexes for airline passenger services; traveler accommodation services; services related to securities brokerage and dealing (partial); hospital outpatient care; and apparel, footwear, and accessories retailing also moved lower. In contrast, margins for automotive fuels and lubricants retailing rose 41.6 percent. The indexes for inpatient care and for chemicals and allied products wholesaling also advanced. 

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The not-seasonally adjusted price indexes we track were mixed on a MoM basis, but declined on a YoY basis. 

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

April 2020 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm payroll employment crashed by a worst-ever 20.5 million jobs in April (-21.25 million expected). That was in addition to February and March employment changes that were revised down by a combined 214,000 (February: -45,000; March: -169,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) leapt (+10.3PP, the largest MoM rate increase on record) to 14.7% under a combination of a shrinking labor force (-6.432 million) and a plummeting number of employed persons (-22.369 million). 

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Observations from the employment reports include:

* Goods-producing industries lost 2.355 million jobs, while service-providing employment (-18.145 million jobs) again bore the brunt of the drop -- especially leisure and hospitality (-7.653 million), health care and social assistance (-2.087 million), administrative and support services (-1.523 million), and retail trade (-2.107 million). Manufacturing contracted by 1.330 million jobs. That result is consistent the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which fell into deep contraction in April. Wood Products employment retreated by 27,900 (ISM decreased); Paper and Paper Products: -8,200 (ISM unchanged); Construction: -975,000 (ISM decreased). 

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* The number of employment-age persons not in the labor force (NILF) jumped (+6.57 million) to 103.4 million. As a result, the employment-population ratio (EPR) dropped to 51.3%; roughly, barely half of the people being added to the working-age population are finding work. 

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* Because the civilian labor force shrank by 6.4 million in March, the labor force participation rate fell (-2.5PP) to 60.2%. Average hourly earnings of all private employees rose by $1.34 to $30.01, resulting in a 7.9% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $1.04, to $25.12 (+7.7% YoY). Since the average workweek for all employees on private nonfarm payrolls expanded (+0.1 hour) to 34.2 hours, average weekly earnings increased by $48.69, to $1,026.34 (+7.3% YoY). With the consumer price index running at an annual rate of 1.5% in March, those wage earners who remain are gaining purchasing power according to official metrics. 

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* Full-time jobs tumbled (-15.0 million), to 114.3 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 5.1 million; many in this category had been full-time workers. Those working part time for non-economic reasons slumped by 8.2 million, while multiple-job holders fell by 1.8 million. 

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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 April fell by a record $73.0 billion, to $182.6 billion (-28.6% MoM; -14.6% 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 April was 0.3% below the year-earlier average.

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.

April 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil extended losses in April when falling by $12.66 (-43.3%), to $16.55 per barrel -- the lowest nominal price since March 1999. The April drop occurred within the context of a stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 66,000 barrel-per-day (BPD) decline in the amount of petroleum products demanded/supplied during February (to 19.8 million BPD), and a jump in accumulated oil stocks (April average: 509 million barrels). 

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From the 4 May 2020 issue of The Energy Bulletin:

The story of the coronavirus’s impact on the world’s economy has yet to be written. Around the world, billions of people are still quarantined or living under social separation rules that severely restrict economic activity. Until either a vaccine for the virus is developed and disseminated to the 7.6 billion of us, or a “herd immunity” arises under which some 60-70 percent of the world’s population has been infected by the virus, this story will go on. Last week parts of the US and Europe relaxed harsh stay-at-home mandates, which had stopped much economic activity.

This relaxation of the lockdown in the US and EU came with complex rules of social behavior that are supposed to slow the growth of the contagion. It will be several weeks before we know how well the new standards work, and even more important is whether a critical mass of people is willing to risk lives by engaging in “non-essential” economic activities such as going to shopping malls. If this vital mass does not form, then many formerly profitable commercial businesses will not be profitable until the epidemic is over, which could take years.

In the meantime, global air travel is virtually halted, although the Chinese claim it has started up again while giving few details. Many international borders are closed, and there is close to zero tourist industry in operation. Even more severe is that the global supply chain has been severely damaged, and many economic enterprises can no longer receive adequate supplies of raw materials, parts, or finished goods. In the past week, the specter of global food shortages have arisen.

The US economy contracted in the first quarter at its sharpest pace since the Great Recession as stringent measures to slow the spread of the novel coronavirus almost shut down the country. The drop in the GDP at an annual rate of 4.8 percent reported on Wednesday reflected a plunge in economic activity mostly in the last two weeks of March. The rapid decline in GDP reinforced analysts’ predictions that the economy was already in a deep recession and left economists bracing for a record slump in output in the second quarter.

With much of the economy paralyzed, the Congressional Budget Office has estimated that economic activity will plunge this quarter at a 40 percent annual rate. “The longer consumers are stuck at home and workers can’t get to their jobs, the greater the structural damage to the US economy — permanent loss of household income, permanent business closures, permanent job losses, reduced business investment — which would prevent a strong rebound,” said Gus Faucher, chief economist at PNC Financial Services Group.

With a flood of unemployment claims continuing to overwhelm many state agencies, economists say the job losses may be far worse than government tallies indicate. The Labor Department said Thursday that 3.8 million workers filed for unemployment benefits the week before last, bringing the six-week total to 30 million. But researchers say that millions of others have lost jobs but have yet to see benefits. Traffic congestion and hours worked in South Carolina, and other states in which lockdowns were eased late last week, indicate workers and consumers haven’t resumed their pre-pandemic routines. 

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Selected highlights from the 1 May 2020 issue of OilPrice.com’s Oil & Energy Insider include:

Oil is set to post its first weekly gain in more than a month as production cuts and some relatively positive news regarding the coronavirus boosted sentiment. The OPEC+ deal begins today, while shut-in wells have begun to pile up in meaningful volumes.

Fed opens spigot for shale. The U.S. Federal Reserve revised its Main Street Lending Program to allow larger and more indebted companies to qualify for lending. The announcement received criticism from multiple corners. “The major changes announced today mirror the top requests of the oil and gas industry,” a congressional watchdog said. “That raises questions about how the changes promote the broader public interest -- especially when these companies will still have no real obligation to retain or rehire their workers.” Even the powerful American Petroleum Institute spoke out. “You can’t have capitalism on the way up and socialism on the way down,” an API executive said.

Shale production cuts rising. With U.S. storage about to hit tank tops in a matter of weeks and the world deep in the throes of the biggest pandemic in modern history, the inevitable has begun to unfold: The arduous and costly process of well shut-ins.

Oil and gas industry to lose $1 trillion. Oil and gas companies are set to lose $1 trillion in revenues this year, according to Rystad Energy.

Wells Fargo revives ‘bad loans’ unit. Wells Fargo has brought back a special department to handle bad energy loans. Some of the bankers involved previously worked on the same oil and gas loans issued by the bank, Reuters reports.

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.

April 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 further in April. The PMI registered 41.5%, down 7.6 percentage points (PP) from the March 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 another surge in slow deliveries (+11.0PP), all sub-indexes were negative (and generally more so than in March). Declines in new orders (-15.1PP), production (-20.2PP) and employment (-16.3PP) were particularly noteworthy.

"Comments from the [manufacturing] panel were strongly negative (three negative comments for every one positive comment) regarding the near-term outlook, with sentiment clearly impacted by the coronavirus (COVID-19) pandemic and continuing energy market recession,” said Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. “The PMI indicates a level of manufacturing-sector contraction not seen since April 2009, with a strongly negative trajectory.” 

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The non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- dropped into contraction (-10.7PP, to 41.8%). A further jump in slow deliveries (+16.2PP, to a record-high 78.3PP) limited the decrease in the composite NMI; drops in new orders (-20.0PP) and employment (-17.0PP) were also among the most noticeable changes. 

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Of the industries we track, only Paper Products expanded. Common themes among respondent comments included demand volatility from the coronavirus, supply chain disruptions, and oil. Most relevant were the following:

Paper Products. "Our packaging business is starting to see signs of a slowdown in May after two strong months into COVID-19."

Construction. "COVID-19 is altering the operation, supply chain and sales process of home-building. Stay-at-home orders have hampered business in residential construction. As ours has been deemed an essential industry, we continue to navigate changing guidelines and restrictions on a daily basis."

Relevant commodities:

Priced higher. Freight.

Priced lower. Crude oil, fuel (diesel and gasoline) and natural gas.

Prices mixed. None.

In short supply. Labor (construction and temporary), paper products and toilet paper.

Findings of IHS Markit’s April surveys paralleled those of their ISM counterparts.

Manufacturing. Sharpest contraction in output in series history due to COVID-19 impact.

Key findings:

* Survey record decline in production
* Output expectations turn negative for first time in the series history
* New orders, employment and inventories fall at steepest rates since the global financial crisis

Services. COVID-19 impact drives record decline in business activity.

Key findings:

* Unprecedented contractions in output, new business and employment
* Business expectations turn pessimistic
* Output charges fall at sharpest rate on record

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

Manufacturing. "April saw the manufacturing sector struck hard by the COVID-19 pandemic, with output falling to an extent surpassing that seen even at the height of the global financial crisis. With orders collapsing at a rate not seen for over a decade, supply chains disrupted to a record degree and pessimism about the outlook hitting a new survey high, rising numbers of firms are culling payroll numbers.

“Consumer-facing businesses are being hit by slumping demand from households as April saw widespread lockdowns, but business spending on inputs and equipment has also tumbled as companies slash production and investment.

“Smaller firms are being hit the hardest, and also reporting the highest job losses, but large firms are also seeing the sharpest downturn on record.

“With infection curves showing signs of flattening, it is naturally hoped that the economic downturn will also bottom out. As restrictions are lifted, demand should gradually revive, but the trade-off between risking a second wave of infections and bringing the economy back to life looks set to be one of the greatest challenges faced by policy- and lawmakers in recent history. The process will inevitably be led by caution, meaning recovery will also be frustratingly slow.”

Services. “The slump in the business survey indicators to all-time lows in April indicates how the 4.8% rate of economic decline seen in the first quarter will likely be dwarfed by what’s to come in the second quarter. Measures to fight the COVID-19 outbreak mean vast swathes of the service sector have been especially hard hit by travel restrictions and social distancing, with temporary company closures and dramatically reduced demand resulting in an overall drop in activity of even greater magnitude than seen during the height of global financial crisis.

“With hope, infections rates have peaked and the economic downturn should start to ease as virus-related restrictions are lifted. However, while manufacturing may see a rebound in production as increasing numbers of factories are allowed to reopen, prospects look bleaker for many parts of the services economy, especially where businesses rely on travel, social gatherings or close contact with customers. Businesses such as airlines, bars, restaurants, cinemas, sports arenas and other recreational activities will likely be at the back of the line in terms of being able to reopen to anything like previous capacity levels, meaning the recovery will be long and slow.”

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.

April 2020 Currency Exchange Rates

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In April the monthly average value of the U.S. dollar (USD) appreciated versus Canada’s “loonie” (+0.6%), euro (+1.6%) and yen (+0.1%). On the broad trade-weighted index basis (goods and services), the USD gained 1.9% 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 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 March decreased $26.2 billion or 5.2% to $473.6 billion. Durable goods shipments decreased $11.8 billion or 4.7% to $240.4 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $14.4 billion or 5.8% to $233.2 billion, led by petroleum and coal products. Shipments of wood products fell by 0.4%; paper +1.2%. 

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Inventories decreased $5.8 billion or 0.8% to $693.5 billion. The inventories-to-shipments ratio was 1.46, up from 1.40 in February. Inventories of durable goods increased $2.8 billion or 0.6% to $437.4 billion, led by transportation equipment. Nondurable goods inventories decreased $8.6 billion or 3.2% to $256.1 billion, led by petroleum and coal products. Inventories of wood products was unchanged; paper: -0.3%. 

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New orders decreased $51.0 billion or 10.3% to $445.8 billion. Excluding transportation, new orders fell by 3.7% (-3.1% YoY). Durable goods orders decreased $36.6 billion or 14.7% to $212.6 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- decreased by 0.1% (-0.1% YoY). New orders for nondurable goods decreased $14.4 billion or 5.8% to $233.2 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 21% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders decreased $23.6 billion or 2.0% to $1,134.9 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.57, down from 6.62 in February. 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.