May 2020 Residential Sales, Inventory and Prices

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Sales of new single-family houses in May 2020 were at a seasonally adjusted annual rate (SAAR) of 676,000 units (630,000 expected). This is 16.6% (±15.5%) above the revised April rate of 580,000 (originally 623,000 units) and 12.7% (±23.5%)* above the May 2019 SAAR of 600,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was +14.3%. For longer-term perspectives, NSA sales were 51.3% below the “housing bubble” peak but 22.4% above the long-term, pre-2000 average. May was only the second instance in which single-family sales exceeded starts; the previous occurrence was in February 2009.

The median sales price of new houses sold in May rose ($14,900 or +4.9% MoM) to $317,900; meanwhile, the average sales price increased to $368,800 ($16,500 or +4.7%). Starter homes (defined here as those priced below $200,000) comprised 15.6% of the total sold, up from the year-earlier 10.7%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 made up 3.1% of those sold in May, down from 3.6% 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 May, single-unit completions decreased by 86,000 units (-9.8%). Since sales jumped (by 96,000 units; +16.6%), inventory for sale contracted in both absolute (-7,000 units) and months-of-inventory (-1.1 months) terms. 

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Existing home sales dropped in May (420,000 units or -9.7%), to a SAAR of 3.91 million units (4.29 million expected). Inventory of existing homes for sale expanded in both absolute (+90,000 units) and months-of-inventory terms (+0.8 month). Because new-home sales rose while resales fell, the share of total sales comprised of new homes jumped to 14.7%. The median price of previously owned homes sold in May slipped to $284,600 ($2,100 or -0.7% MoM). 

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Housing affordability improved (+9.6 percentage points) even as the median price of existing homes for sale in April rose by $6,100 (+2.2% MoM; +7.3 YoY), to $288,700. 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 +1.1% (+4.7% YoY).

“April’s housing price data continue to be remarkably stable,” said Craig Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P Dow Jones Indices. “The National Composite Index rose by 4.7% in April 2020, with comparable growth in the 10- and 20-City Composites (up 3.4% and 4.0%, respectively). In all three cases, April’s year-over-year gains were ahead of March’s, continuing a trend of gently accelerating home prices that began last fall. Results in April continued to be broad-based. Prices rose in each of the 19 cities for which we have reported data, and price increases accelerated in 12 cities.

“As was the case in March, we have data from only 19 cities this month, since transactions records for Wayne County, Michigan (in the Detroit metropolitan area) continue to be unavailable. This is, so far, the only directly visible impact of COVID-19 on the S&P CoreLogic Case-Shiller Indices. The price trend that was in place pre-pandemic seems so far to be undisturbed, at least at the national level. Indeed, prices in 12 of the 20 cities in our survey were at an all-time high in April.

“Among the cities, Phoenix retains the top spot for the 11th consecutive month, with a gain of 8.8% for April. Home prices in Seattle rose by 7.3%, followed by increases in Minneapolis (6.4%) and Cleveland (6.0%). Prices were particularly strong in the West and Southeast, and comparatively weak in the Northeast.” 

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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.

1Q2020 Gross Domestic Product: Third Estimate

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In its third estimate of 1Q2020 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 -4.99% (-5.0% expected), up 0.06 percentage point (PP) from the second estimate (“1Qv2”) but -7.11PP from 4Q2019.

As noted in prior 1Q reports, two of the four groupings of GDP components -- net exports (NetX) and government consumption expenditures (GCE) -- contributed to 1Q growth; personal consumption expenditures (PCE) and private domestic investment (PDI) detracted.

The headline GDP was essentially unrevised from 1Qv2, thanks to an upward revision to business investment (+0.21PP) that was offset by downward revisions to inventory investment (-0.13PP), consumer spending (-0.04PP), and exports (-0.04PP). 

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“There really aren't any key points in this report,” wrote Consumer Metric Institute’s Rick Davis. “It is merely filling the time gap before the July 30th initial report on the second quarter. However, its inherent lameness does point out several things:

-- Treating 1Q2020 as a single (and implicitly unified) time span is ridiculous. The March economy bore no resemblance to the January economy, and lumping them together creates a bland “fruit cocktail” that does service to neither apples nor oranges.

-- This is a further indictment of the now over 80-year-old methodologies of the BEA. If that organization cannot provide more timely and more focused data for decision makers, perhaps it is time for major change.

-- And the annualized quarterly reporting regimen is about to present yet another absurdity: according to the Atlanta Fed's GDPNow forecast, on July 30th mainstream media will be reporting that the U.S. economy is contracting at a -45.5% rate. No, the size of the economy is not going to halve over the next 12 months. But annualized quarterly numbers can produce exactly those kinds of headlines.

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

May 2020 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in May at a seasonally adjusted annual rate (SAAR) of 974,000 units (1.100 million expected). This is 4.3% (±15.5%)* above the revised April estimate of 934,000 (originally 891,000 units), but 23.2% (±6.2%) below the May 2019 SAAR of 1,268,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -24.4%.

Single-family housing starts in May were at a SAAR of 675,000; this is 0.1% (±11.9%)* above the revised April figure of 674,000 units (-19.3% YoY). Multi-family starts: 299,000 units (+15.0% MoM; -34.1% 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 1,115,000 units. This is 7.3% (±12.3%)* below the revised April estimate of 1,203,000 (originally 1.176 million units) and 9.3% (±9.8%)* below the May 2019 SAAR of 1,230,000 units; the NSA comparison: -10.0% YoY.

Single-family completions were at a SAAR of 791,000; this is 9.8% (±11.5%)* below the revised April rate of 877,000 units (-11.7% YoY). Multi-family completions: 324,000 units (-0.6% MoM; -5.6% YoY). 

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Total permits amounted to a SAAR of 1,220,000 units (1.220 million expected). This is 14.4% (±1.1%) above the revised April rate of 1,066,000 (originally 1.074 million units), but 8.8% (±1.0%) below the May 2019 SAAR of 1,338,000 units; the NSA comparison: -17.2% YoY.

Single-family permits were at a SAAR of 745,000; this is 11.9% (±1.9%) above the revised April figure of 666,000 units (-19.0% YoY). Multi-family: 475,000 (+18.2% MoM; -14.1% YoY). 

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“In a sign that housing stands poised to lead a post-pandemic economic recovery,” wrote NAHB’s Robert Dietz, “builder confidence in the market for newly-built single-family homes jumped 21 points to 58 in June, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI). Any reading above 50 indicates a positive market.

“As the nation reopens, housing is well-positioned to lead the economy forward. Inventory is tight, mortgage applications are increasing, interest rates are low and confidence is rising. And buyer traffic more than doubled in one month even as builders report growing online and phone inquiries stemming from the outbreak.

“Housing clearly shows signs of momentum as challenges and opportunities exist in the single-family market. Builders report increasing demand for families seeking single-family homes in inner and outer suburbs that feature lower density neighborhoods.  At the same time, elevated unemployment and the risk of new, local virus outbreaks remain a risk to the housing market,” 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.

May 2020 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) increased 1.4% in May (+2.9% expected), as many factories resumed at least partial operations following suspensions related to COVID-19. Even so, total IP in May was 15.4% below its pre-pandemic level in February. Manufacturing output -- which fell sharply in March and April -- rose 3.8% in May; most major industries posted increases, with the largest gain registered by motor vehicles and parts. The indexes for mining and utilities declined 6.8% and 2.3%, respectively. At 92.6% of its 2012 average, the level of total industrial production was 15.3% lower in May than it was a year earlier. 

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Industry Groups

Manufacturing output rose 3.8% in May, but it was still 16.9% below its pre-pandemic level in February (NAICS manufacturing: +3.8% MoM; -16.5% YoY). The index for durable manufacturing increased 5.8% in May; the most sizable gain among its components was for motor vehicles and parts, where output rose substantially but also remained more than 60% below its February level. Durable goods industries that recorded production increases between 8% and 10% include nonmetallic mineral products, aerospace and miscellaneous transportation equipment, and furniture and related products (wood products: 0.0%). The index for nondurables rose 2.1%, with advances of around 10% or more for textile and product mills, for apparel and leather, for printing and support, and for plastics and rubber products (paper products: -0.1%). The output of other manufacturing (publishing and logging) moved up 2.5%.

The output of utilities fell 2.3% in May, as both gas and electric utilities posted losses. Mining output dropped 6.8%, with declines in nearly all categories. After falling nearly 28% in April, the index for oil and gas well drilling declined almost 37% further in May and was more than 63% below its year-earlier level. In addition, the index for crude oil extraction has fallen about 5% in each of the past two months. 

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Capacity utilization (CU) for the industrial sector increased 0.8 percentage point (PP) to 64.8% in May, a rate that is 15.0PP below its long-run (1972–2019) average and 1.9PP below its trough during the Great Recession.

Manufacturing CU in May was 62.2%, 2.2PP higher than in April but 1.5PP below its recession trough of June 2009 (NAICS manufacturing: +3.8%, to 62.6%). The operating rate for durable manufacturing increased 3.1PP in May to 57.1% but remained below its 2009 low (wood products: -0.2%). Capacity utilization for nondurables rose 1.4PP to 68.5%, slightly below its 2009 low (paper products: -0.1%). 

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Capacity at the all-industries level edged up 0.1% (+1.7 % YoY) to 142.8% of 2012 output. Manufacturing (NAICS basis) rose fractionally (+0.1% MoM; +1.2% YoY) to 140.7%. Wood products: +0.2% (+3.5% YoY) to 171.1%; 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.

May 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 0.1% in May (0.0% expected) after falling 0.8% in April. Declines in the indexes for motor vehicle insurance, energy, and apparel more than offset increases in food and shelter indexes to result in the monthly decrease in the seasonally adjusted all-items index. The gasoline index declined 3.5% in May, leading to a 1.8% decline in the energy index. The food index, in contrast, increased 0.7% in May as the index for food at home rose 1.0%.

The index for all items less food and energy fell 0.1% in May, its third consecutive monthly decline. This is the first time this index has ever declined in three consecutive months. Along with motor vehicle insurance and apparel, the indexes for airline fares and used cars and trucks declined in May. The indexes for shelter, recreation, medical care, household furnishings and operations, and new vehicles all increased.

The all-items index increased 0.1% for the 12 months ending May. The index for all items less food and energy increased 1.2% over the last 12 months; this compares to a 2.4% increase a few months ago (the period ending February). The energy index fell 18.9% over the last year. The food index increased 4.0% over the last 12 months, with the index for food at home rising 4.8%.

Producer Price Index

The Producer Price Index for final demand (PPI-FD) rose 0.4% in May (+0.1% expected). This increase followed declines of 1.3% in April and 0.2% in March. The advance in the final demand index is attributable to prices for final demand goods, which climbed 1.6%. In contrast, the index for final demand services fell 0.2%. On an unadjusted basis, the final demand index decreased 0.8% for the 12 months ended in May.

Prices for final demand less foods, energy, and trade services edged up 0.1% in May, following three consecutive declines. For the 12 months ended in May, the index for final demand less foods, energy, and trade services moved down 0.4%, the largest 12-month decrease since the index began in August 2013.

Final Demand

Final demand goods: The index for final demand goods rose 1.6% in May, the largest increase since the index began in November 2009. Nearly two-thirds of the advance can be traced to prices for final demand foods, which increased 6.0%. The index for final demand energy climbed 4.5%, while prices for goods less foods and energy were unchanged.

Product detail: Two-thirds of the May increase in the index for final demand goods is attributable to a 40.4% jump in meat prices. The indexes for gasoline, processed young chickens, light motor trucks, liquefied petroleum gas, and carbon steel scrap also moved higher. Conversely, prices for chicken eggs fell 41.2%. The indexes for diesel fuel and for plastic resins and materials also decreased.

Final demand services: The index for final demand services fell 0.2% in May, the same as in April. The May decrease can be attributed to margins for final demand trade services, which declined 0.8%. (Trade indexes measure changes in margins received by wholesalers and retailers.) In contrast, prices for final demand transportation and warehousing services advanced 1.5%. The index for final demand services less trade, transportation, and warehousing was unchanged.

Product detail: Leading the May decline in the index for final demand services, margins for fuels and lubricants retailing dropped 13.1%. The indexes for loan services (partial); securities brokerage, dealing, investment advice, and related services; truck transportation of freight; machinery and vehicle wholesaling; and automobile and automobile parts retailing also moved lower. Conversely, prices for transportation of passengers (partial) rose 12.2%. The indexes for dental care and apparel, jewelry, footwear, and accessories retailing also increased. 

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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.

April 2020 International Trade (Softwood Lumber)

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Softwood lumber exports retreated (22 MMBF or -21.3%) in April; imports also fell (163 MMBF or -12.0%). Exports were 39 MMBF (-32.8%) below year-earlier levels; imports were 244 MMBF (-16.9%) lower. As a result, the year-over-year (YoY) net export deficit was 205 MMBF (-15.4%) smaller. Also, the average net export deficit for the 12 months ending April 2020 was 2.9% 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 (45.3%; of which Canada: 31.5%; Mexico: 13.8%), Asia (33.5%; especially China: 16.1%; and Japan: 9.3%), and the Caribbean: 15.9% (especially the Jamaica: 6.1%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were -30.5% relative to the same months in 2019. Meanwhile, Canada was the source of most (86.0%) of softwood lumber imports into the United States. Imports from Canada were 5.2% lower YTD than the same months in 2019. Overall, YTD exports were down 13.3% compared to 2019; imports: -1.8%. 

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U.S. softwood lumber export activity through the West Coast customs region represented the largest proportion (38.3% of the U.S. total), followed by the Eastern (28.5%) and Gulf (22.8%) regions. Seattle (30.1% of the U.S. total) was the single most-active district, followed by Mobile (15.4%). At the same time, Great Lakes customs region handled 59.0% of softwood lumber imports -- most notably the Duluth, MN district (24.0%) -- coming into the United States. 

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Southern yellow pine comprised 28.7% of all softwood lumber exports, Douglas-fir (18.3%) and treated lumber (12.4%) were also significant. Southern pine exports were up 2.1% YTD relative to 2019, while treated: -6.5%; Doug-fir: -13.6%.

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.

May 2020 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm payroll employment added 2.5 million jobs in May (-7.725 million expected). However, March and April employment changes were revised down by a combined 642,000 (March: -492,000; April: -150,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) receded (-1.4PP) to 13.3% as the number of employed persons (+3.8 million) expanded by a far wider margin than the labor force (+1.7 million). 

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Observations from the employment reports include:

* The establishment (+2.5 million jobs) and household survey results (+3.8 million employed) were at least directionally consistent.

* Goods-producing industries regained 669,000 jobs, while service-providing employment jumped (+2.425 million jobs) -- especially leisure and hospitality (+1.239 million), education and health services (+424,000), and retail trade (+367,800). Manufacturing expanded by 225,000 jobs. That result is perhaps somewhat consistent the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which contracted more slowly in May. Wood Products employment advanced by 3,000 (ISM decreased); Paper and Paper Products: -100 (ISM increased); Construction: +464,000 (ISM decreased). 

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* The number of employment-age persons not in the labor force (NILF) fell (-1.6 million) to 101.8 million. As a result, the employment-population ratio (EPR) rose to 52.8%; thus, a little over half of the people being added to the working-age population are finding work. 

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* Because the civilian labor force expanded by 1.7 million in May, the labor force participation rate rose (+0.6PP) to 60.8%. Average hourly earnings of all private employees retreated by $0.29 to $29.75, resulting in a 6.7% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages dipped by $0.14, to $25.00 (+6.7% YoY). Since the average workweek for all employees on private nonfarm payrolls expanded (+0.5 hour) to 34.7 hours, average weekly earnings increased by $4.96, to $1,032.33 (+7.7% YoY). With the consumer price index running at an annual rate of +0.3% in April, those wage earners who remain employed are gaining purchasing power according to official metrics. 

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* Full-time jobs advanced (+2.2 million), to 116.5 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 -- edged down by 254,000; many in this category had been full-time workers. Those working part time for non-economic reasons jumped by 2.0 million, while multiple-job holders rose by 147,000. 

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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 May fell by $10.5 billion, to $172.1 billion (-5.8% MoM; -15.4% 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 May was 7.5% 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.

May 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil bounced off April’s low when rising by $12.01 (+72.6%), to $28.56 per barrel. The May jump occurred within the context of a marginally weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a nearly 1.6 million barrel-per-day (BPD) decline in the amount of petroleum products demanded/supplied during March (to 18.2 million BPD), and a stabilization of accumulated oil stocks (May average: 531 million barrels). 

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From the 1 June 2020 issue of The Energy Bulletin:

Oil closed out May…on hopes demand for oil would continue to rise as economies reopen and crude production continues to fall. The status of the U.S.-China trade agreement is in doubt as relations continue to deteriorate and resurgence of the coronavirus as lockdowns are lifted will be a significant factor in the movement of oil prices during the next few weeks.

The major issue is how long it will take for the oil markets to balance.  The IEA estimates that demand for oil in May was down on the order of 25 million BPD from May of 2019 and that June’s demand will be down by 15 million. The increase in demand this month is based on the relaxation of restrictions in the U.S., Europe, India, and China. However, large sectors of demand, such as air travel, shipping, tourism, sports, and entertainment are unlikely to be much affected by the relaxations. New spikes in the virus, however, are certain to result in enhanced restrictions or more public reluctance to resume non-essential activities. Moreover, the coronavirus is spreading rapidly in many parts of the underdeveloped world which is bound to have a significant impact on economic activity and imports of non-essential products.

There are two parts to the oil supply story. First is the OPEC+ agreement to curtail 9.7 million BPD through June and 7.7 million through December. The other is the ongoing decline of U.S. shale oil which could amount to 5 million BPD or more by the end of the year.

OPEC oil output hit the lowest in two decades in May as Saudi Arabia and other members started to deliver a record supply cut.  A Reuters survey found that on average, the 13-member Organization pumped 24.77 BPD in May, 5.91 million BPD from April’s revised figure.

Saudi Arabia and several other members of OPEC are discussing the possibility of extending the current level of OPEC+ production cuts to the end of the year, but Russia could be the stumbling block. OPEC and allies will hold online meetings on June 9-10 to discuss if they should extend their production cuts or start tapering them. Russia is said to be determined to start easing oil output cuts in July, as agreed by OPEC+ in April.

Availability of storage for the excess crude production is still an open question. U.S. crude oil stocks grew by nearly 8 million barrels the week before last, but this may have to due to the “Armada” of Saudi oil tankers that were dispatched to America back when Saudis were waging a price war with Russia. Some analysts believe that the oil storage crisis is far from over. Ships full of crude are still anchored off the coasts of the U.S., China, Europe, and elsewhere. With most onshore storage sold out and refinery run rates across the globe still a long way off their usual pace, storage could still be a problem.

US shale oil production is falling so fast that even the EIA can’t keep up with the decline and has been making downward revisions to its production forecasts in recent weeks. U.S. oil production has fallen 12 percent since early March to 11.4 million BPD, according to the Energy Information Administration. These numbers should be suspect until final production numbers are available in about six weeks.

Drilling is now at the slowest pace in more than a decade as the pandemic-driven collapse in energy demand wipes out cash flow, jobs and entire companies. Drillers idled 15 oil rigs across the U.S. last week, bringing the tally to 222, the lowest since 2009, according to Baker Hughes. The Permian Basin of West Texas and New Mexico accounted for the bulk of the reduction, with 14 rigs taken out of service.

Oil companies have abandoned drilling programs and tossed out financial forecasts in the wake of the spiral that saw American crude prices turn negative in April. Bankruptcies are accelerating among the most heavily leveraged drillers, and even major oil companies such as Chevron are cutting jobs and adopting austerity plans to conserve capital.

The gap between the oil and equity markets and the real economy continues to widen. Over 40 million people have filed for unemployment. Corporate bankruptcies are accelerating. A real estate crisis is forming, with millions of people and thousands of businesses unable to pay rent and mortgages.

Consulting firm Rystad Energy is telling traders that the oil market was oversupplied only by around 16 million BPD in April so that the rapid shut-in of around 12 million BPD has erased a huge portion of the surplus. The supposed rebound in demand – of around 4 million BPD, according to Rystad – puts the market close to “balanced” in June. Such optimism, if true, gives traders a reason to push oil markets higher, but others are not so sure.

Oil prices are back at levels last seen in mid-March, prior to the shutdowns. “We find it hard to justify why prices are where they were on 11 March,” Standard Chartered wrote in a note last Tuesday. “We do not think expectations about the future have brightened significantly since this date.” The investment bank noted that the IEA’s projection for global demand in March was a slight decline of just 90,000 BPD for 2020. Now, the agency’s estimate is for demand to decline by 8.63 million BPD, “96 times more than the estimate on 11 March.” And yet, oil prices are trading in the mid-$30s, just as they were in March. 

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Selected highlights from the 29 May 2020 issue of OilPrice.com’s Oil & Energy Insider include:

Oil prices have held onto the gains from the last few weeks, but the recent rally seems to have stalled as demand shows signs of not returning to normal any time soon. Meanwhile, U.S.-China tensions weighed heavily on financial and commodity markets this week.

U.S.-China tensions threatens $52 billion in energy sales. The Phase 1 trade deal between Washington and Beijing is at risk of falling apart. President Trump is set to make a major announcement on Friday regarding China, and amid escalating tension and China’s moves in Hong Kong, the actions will likely be punitive. China had previously pledged to make $52 billion in oil purchases over two years, a total that was always going to be hard to meet.

What will OPEC+ do next? Two conflicting reports surfaced this week, one claiming that Russia was considering extending the OPEC+ production cuts beyond June, while the other said the opposite – that Russia would push for loosening the cuts. Saudi Arabia appears ready to extend, but in Moscow some Russian oil companies may find an extension difficult.

Refineries hit by overcapacity. A wave of refining capacity built over the past few years has squeezed margins, and the downturn in the oil market could push uncompetitive facilities offline permanently.

Bearish EIA data halts momentum. The EIA reported a jump in crude oil inventories this week, made worse by a surge in imports. At the same time, production dipped by another 100,000 bpd.

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 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 April decreased $63.6 billion or 13.5% to $406.8 billion. Durable goods shipments decreased $42.4 billion or 18.2% to $191.2 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $21.2 billion or 9.0% to $215.6 billion, led by petroleum and coal products. Shipments of wood products fell by 9.0%; paper: -0.9%. 

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Inventories decreased $2.6 billion or 0.4% to $686.5 billion. The inventories-to-shipments ratio was 1.69, up from 1.46 in March. Inventories of durable goods increased $0.6 billion or 0.2% to $425.3 billion, led by transportation equipment. Nondurable goods inventories decreased $3.2 billion or 1.2% to $261.2 billion, led by petroleum and coal products. Inventories of wood products edged down by 0.1%; paper: +1.1%. 

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New orders decreased $57.5 billion or 13.0% to $384.3 billion. Excluding transportation, new orders fell by 8.5% (-13.7% YoY). Durable goods orders decreased $36.3 billion or 17.7% to $168.7 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- decreased by 6.1% (-7.8% YoY). New orders for nondurable goods decreased $21.2 billion or 9.0% to $215.6 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. Real new orders have now fallen nearly 11% below the trough of the Great Recession. 

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Unfilled durable-goods orders decreased $17.6 billion or 1.6% to $1,107.6 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 7.62, up from 6.70 in March. 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.

May 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 somewhat more slowly in May. The PMI registered 43.1%, up 1.6 percentage points (PP) from the April 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. All of the sub-indexes showed improvement except for imports, which contracted further (-1.4PP).

“Three months into the manufacturing disruption caused by the coronavirus (COVID-19) pandemic, comments from the panel were cautious (two cautious comments for every one optimistic comment) regarding the near-term outlook,” said Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. “As was the case in April, the PMI® indicates a level of manufacturing-sector contraction not seen since April 2009; however, the trajectory improved.” 

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The non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment – also contracted more slowly (+3.6PP, to 45.4%). Here, too, imports exhibited the most notable downturn (-5.6PP). “The non-manufacturing composite index indicated contraction for a second consecutive time,” said Anthony Nieves, Chair of ISM’s Non-Manufacturing Business Survey Committee. “Respondents remain concerned about the ongoing impact of the coronavirus. Additionally, many of the respondents' respective companies are hoping and/or planning for a resumption of business.” 

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Of the industries we track, Real Estate and Construction contracted. "Sales have slowed, but backlog has remained [at] 2019 levels,” observed one Construction respondent. “Several key commodities have seen radical up-and-down swings in pricing, specifically lumber. Some suppliers recognize the downturn and are beginning to voluntarily offer pricing concessions.”

Relevant commodities:

Priced higher. Crude oil, freight, lumber products and oriented strand board.

Priced lower. Fuel (diesel and gasoline) and natural gas.

Prices mixed. None.

In short supply. Paper products.

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

Manufacturing. Ongoing COVID-19 impact drags output down further in May.

Key findings:

* Production and new orders fall substantially due to weak client demand
* Employment drops markedly amid signs of excess capacity
* Steepest decline in output charges on record

Services. Business activity slumps further amid COVID-19 pandemic, but speed of downturn eases.

Key findings:

* Output and new business drops substantially as COVID-19 crisis continues
* Business confidence improves but remains negative
* Input costs and output charges fall further

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

Manufacturing. “Manufacturing remained in a deep downturn in May, as measures taken to contain the spread of COVID-19 continued to cause production losses, disrupt supply chains and hit demand. Job losses meanwhile continued to run at one of the highest rates in over a decade, and pricing power has collapsed.

“With increasing numbers of companies restarting production, we should see some improvements in the output trend in coming months, and it was reassuring to see signs of the downturn already starting to ease in May, suggesting April was the eye of the storm as far as the production collapse is concerned.

“There remains a high risk that any recovery will be frustratingly slow as ongoing social distancing measures, high unemployment, job insecurity and damaged balance sheets constrain consumer and business spending. The recovery will of course also fade quickly if virus infections start to rise again. For now, however, we focus on the good news that we may be past the worst in terms of the economic decline.”

Services. “The PMI numbers indicate that the US economy remained in a steep downturn in May. Encouragingly, the rate of contraction has eased considerably since the height of the lockdown in April as some firms get back to work and economic activity starts to resume.

“While views about prospects for the year ahead remained negative on balance, the degree of pessimism has also moderated considerably since April, to hint that sentiment is improving as increasing numbers of companies see the worst of the lockdown being behind them.

“A substantial part of the service sector nevertheless continued to be devastated by social distancing measures, and looks set to remain so for some months to come, limiting scope for a V-shaped recovery. The ongoing steep fall in employment remains a particular concern, pointing to a weakened consumer sector but also underscoring heightened risk aversion as companies seek to cut costs in the face of collapsing sales and an uncertain outlook.”

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

May 2020 Currency Exchange Rates

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In May the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-0.5%), euro (-0.3%) and yen (-0.5%). On the broad trade-weighted index basis (goods and services), the USD weakened by 0.4% against a basket of 26 currencies. 

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