2Q2020 Gross Domestic Product: First (“Advance”) Estimate

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The Bureau of Economic Analysis (BEA) pegged its advance (first) estimate of 2Q2020 U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate (SAAR) of -32.91% (-35.0% expected), down 27.95 percentage points (PP) from 1Q2020’s -4.96%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 2Q2020 was 9.54% lower than in 2Q2019; that growth rate was dramatically slower (-9.86PP) than 1Q2020’s +0.32% relative to 1Q2019.

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 --

PCI (Contributed -25.05PP to the headline, down 20.3PP from 1Q):

• Goods. Consumer spending for goods contracted at a rate of 2.12PP (down 2.15PP from 1Q), as the downturn in nondurable goods purchases swamped an uptick in durable goods.
• Services. Spending on services slumped at a rate of 22.93PP (down 18.15PP from 1Q).

PDI (Contributed -9.36PP, down 780PP from 1Q):

• Fixed investment. Nonresidential fixed investment fell at a rate of 5.38PP (-5.15PP from 1Q), while residential investment declined at a rate of 1.76PP (-2.44PP from 1Q).
• Inventories. Inventories declined at a rate of 3.98%, down 2.64PP from 1Q.

NetX (Contributed 0.68PP, down 0.45PP from 1Q):

• Exports. Exports fell at a rate of 9.38PP, down 8.26PP from 1Q.
• Imports. A collapse in imports (recall that imports are inversely correlated with GDP) added 10.06PP to the headline, up 7.81PP from 1Q.

GCE (Contributed 0.82PP, up 0.60PP from 1Q).

Annualized growth in the BLS’s real final sales of domestic product, which excludes the value of inventories) was -28.93% (-25.31PP from 1Q).

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The key points of this report can be summarized as follows, Consumer Metric Institute’s Rick Davis indicated:

-- The numbers are far beyond merely historically bad.

-- But the year-over-year data is not nearly as disastrous as the annualized headline suggests.

-- We have pointed out before that the BEA’s quarterly regimen and methodologies render their data useless for policy making purposes. It is perhaps an academic treasure trove for PhD candidates, but the policy informing purpose that FDR envisioned for the agency in 1939 is simply no longer being met. In the 21st century -- with millisecond transacting -- there is no excuse for not replacing this exercise with a monthly series, published in the middle of the following month. The “consistency” mantra for maintaining the current series helps the PhD candidates, but it utterly fails the American people. Let the PhD candidates figure out how to reconcile a new monthly series to the historical quarterly data.

-- This sets the stage for an equally outrageous up-side quarterly report, to be published just days before the US 2020 election -- although most voters by that time will be in a “who cares” mode.

“There is not much more we can say,” Davis concluded. “Things are bad, but reports like this don’t help any ongoing policy or response debates. And the next release will merely be more of the same. Luckily, the pandemic will probably keep most people from taking note of this mess of a report.”

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.

June 2020 Residential Sales, Inventory and Prices

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Sales of new single-family houses in June 2020 were at a seasonally adjusted annual rate (SAAR) of 776,000 units (700,000 expected). This is 13.8% (±17.8%)* above the revised May rate of 682,000 (originally 676,000 units) and 6.9% (±13.7%)* above the June 2019 SAAR of 726,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was +12.1%. For longer-term perspectives, NSA sales were 44.1% below the “housing bubble” peak but 41.5% above the long-term, pre-2000 average.

The median sales price of new houses sold in June rose ($19,000 or +6.1% MoM) to $329,200; meanwhile, the average sales price increased to $384,700 ($22,400 or +6.2%). Starter homes (defined here as those priced below $200,000) comprised 8.1% of the total sold, down from the year-earlier 10.6%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 made up 1.4% of those sold in June, almost unchanged from 1.5% 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 June, single-unit completions increased by 80,000 units (+9.6%). Since sales jumped by a larger margin (94,000 units; +13.8%), inventory for sale contracted in both absolute (-4,000 units) and months-of-inventory (-0.8 month) terms.

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Existing home sales soared by a record amount in June (810,000 units or +20.7%), to a SAAR of 4.72 million units (4.795 million expected). Inventory of existing homes for sale expanded in absolute terms (+20,000 units) but contracted in months-of-inventory terms (-0.8 month). Because resales rose by a wider margin than new-home sales, the share of total sales comprised of new homes slipped to 14.1%. The median price of previously owned homes sold in June rose to $295,300 ($11,700 or +4.1% MoM).

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Housing affordability deteriorated (-2.3 percentage points) even as the median price of existing homes for sale in May inched down by $1,000 (-0.3% MoM; +2.4 YoY), to $287,700. 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 +0.7% (+4.5% YoY).

“May's housing price data were 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 4.5% in May 2020, with comparable growth in the 10- and 20-City Composites (up 3.1% and 3.7%, respectively). In contrast with the past eight months, May's gains were less than April’s. Although prices increased in May, in other words, they did so at a decelerating rate. We observed an analogous development at the city level: prices increased in all 19 cities for which we have data, but accelerated in only 3 of them (in contrast with 12 cities last month and 18 the month before that).

“More data will obviously be required in order to know whether May’s report represents a reversal of the previous path of accelerating prices or merely a slight deviation from an otherwise intact trend. Even if prices continue to decelerate, that is quite different from an environment in which prices actually decline.

“Among the cities, Phoenix retains the top spot for the 12^th consecutive month, with a gain of 9.0% for May. Home prices in Seattle rose by 6.8%, followed by Tampa at 6.0%. As has been the case for the last several months, 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.

June 2020 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in June at a seasonally adjusted annual rate (SAAR) of 1,186,000 units (1.190 million expected). This is 17.3% (±11.0%) above the revised May estimate of 1,011,000 (originally 974,000 units), but 4.0% (±9.1%)* below the June 2019 SAAR of 1,235,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -2.5%.

Single-family housing starts in June were at a SAAR of 831,000; this is 17.2% (±10.0%) above the revised May figure of 709,000 units (-1.6% YoY). Multi-family starts: 355,000 units (+17.5% MoM; -5.0% 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 1,225,000 units. This is 4.3% (±12.2%)* above the revised May estimate of 1,174,000 (originally 1.115 million units) and 5.1% (±11.9%)* above the June 2019 SAAR of 1,166,000 units; the NSA comparison: +4.8% YoY.

Single-family completions were at a SAAR of 910,000; this is 9.6% (±15.2%)* above the revised May rate of 830,000 units (+4.2% YoY). Multi-family completions: 315,000 units (-8.4% MoM; +6.7% YoY).

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Total permits amounted to a SAAR of 1,241,000 units (1.300 million expected). This is 2.1% (±1.2%) above the revised May rate of 1,216,000 (originally 1.220 million units), but 2.5% (±1.7%) below the June 2019 SAAR of 1,273,000 units; the NSA comparison: +7.4% YoY.

Single-family permits were at a SAAR of 834,000; this is 11.8% (±2.0%) above the revised May figure of 746,000 units (+9.7% YoY). Multi-family: 407,000 (-13.4% MoM; +2.7% YoY).

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In a strong signal that the housing market is ready to lead a post-COVID economic recovery, builder confidence in the market for newly-built single-family homes jumped 14 points to 72 in July, according to the latest NAHB/Wells Fargo Housing Market Index (HMI). The HMI now stands at the solid pre-pandemic reading in March before the outbreak affected much of the nation.

“Builders are seeing strong traffic and lots of interest in new construction as existing home inventory remains lean,” said NAHB Chairman Chuck Fowke.  “Moreover, builders in the Northeast and the Midwest are benefiting from demand that was sidelined during lockdowns in the spring. Low interest rates are also fueling demand, and we expect housing to lead an overall economic recovery.”

“While the housing market is clearly rebounding, challenges exist,” said NAHB Chief Economist Robert Dietz. “Lumber prices are at a two-year high and builders are reporting rising costs for other building materials while lot and skilled labor availability issues persist. Nonetheless, the important story of the changing geography of housing demand is benefiting new construction. New home demand is improving in lower density markets, including small metro areas, rural markets and large metro exurbs, as people seek out larger homes and anticipate more flexibility for telework in the years ahead. Flight to the suburbs is real.”

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.

June 2020 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) rose 5.4% in June (+4.3% expected) after increasing 1.4% in May; even so, it remained 10.9% below its pre-pandemic February level. For 2Q2020 as a whole, the index fell 42.6% at an annual rate, its largest quarterly decrease since the industrial sector retrenched after World War II. Manufacturing output climbed 7.2% in June, as all major industries posted increases. The largest gain—105.0%—was registered by motor vehicles and parts, while factory production elsewhere rose 3.9%. Mining production fell 2.9%, and the output of utilities increased 4.2%. At 97.5% of its 2012 average, the level of total industrial production was 10.8% lower in June than it was a year earlier. 

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Industry Groups

Manufacturing output increased 7.2% in June, but it was still 11.1% below its pre-pandemic February level; factory output fell 47.0% at an annual rate in 2Q (NAICS manufacturing: +7.4% MoM; -11.0% YoY). The index for durable manufacturing rose 11.6% in June (wood products: +1.7%). Despite substantial gains in the past two months, the output of motor vehicles and parts remained nearly 25% below its February level. The index for nondurables rose 3.4%, with sizable gains for apparel and leather and for plastics and rubber products (paper products: +3.4%). The output of other manufacturing (publishing and logging) increased 2.2%.

The output of utilities rose 4.2% in June, as both gas and electric utilities posted gains. Mining output fell 2.9%, with declines in nearly all categories. The index for oil and gas well drilling fell 18.0% in June and was about 70% below its year-earlier level. For the second quarter, mining output declined 42.7% at an annual rate.

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Capacity utilization (CU) for the industrial sector increased 3.5 percentage points (PP) to 68.6% in June, a rate that is 11.2PP below its long-run (1972–2019) average but 1.9PP above its trough during the Great Recession.

Manufacturing CU in June was 66.9%, 4.6PP higher than in May and 3.2PP above its recession trough of June 2009 (NAICS manufacturing: +7.4%, to 67.4%). The operating rate for durable manufacturing increased 6.7PP in June to 64.3%, 5.9PP above its 2009 low (wood products: +1.6%). Capacity utilization for nondurables rose 2.4PP to 70.6%, 1.8PP above its 2009 low (paper products: +3.4%). The operating rate for mining fell to 75.0%, somewhat below its low in 2016 but slightly above its historical low in 1986.

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Capacity at the all-industries level was unchanged MoM (+1.0 % YoY) at 142.0% of 2012 output. Manufacturing (NAICS basis) was also unchanged (+0.7% YoY) to 140.2%. Wood products: 0.0% (+2.3% YoY) at 169.7%; paper products: -0.1% (-0.5 % YoY) to 109.3%.

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

June 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) increased 0.6% in June (0.5% expected) after falling 0.1% in May. The gasoline index rose sharply in June after recent declines and accounted for over half of the monthly increase in the seasonally adjusted all-items index. The energy index increased 5.1% in June as the gasoline index rose 12.3%.  The food index also rose in June, increasing 0.6% as the index for food at home continued to rise.

The index for all items less food and energy rose 0.2% in June, its first monthly increase since February. The index for motor vehicle insurance increased sharply in June after recent declines. The indexes for apparel, shelter, and medical care also increased in June, while the indexes for used cars and trucks, recreation, and communication all declined.

The all items index increased 0.6% for the 12 months ending June; this compares to a 0.1% increase for the 12 months ending May. The index for all items less food and energy increased 1.2% over the last 12 months. The food index increased 4.5% over the last 12 months, with the index for food at home rising 5.6%. Despite increasing in June, the energy index fell 12.6% over the last 12 months.

 

Producer Price Index

The Producer Price Index for final demand (PPI-FD) fell 0.2% in June (+0.4% expected). This decrease followed a 0.4% increase in May and a 1.3% decline in April. In June, the decrease in the final demand index is attributable to a 0.3% decline in prices for final demand services. In contrast, the index for final demand goods rose 0.2%.

On an unadjusted basis, the final demand index moved down 0.8% for the 12 months ended in June. Prices for final demand less foods, energy, and trade services advanced 0.3% in June, the largest increase since a 0.3% rise in January. For the 12 months ended in June, prices for final demand less foods, energy, and trade services edged down 0.1%.

Final Demand

Final demand services: The index for final demand services moved down 0.3% in June, the largest decrease since falling 0.3% in February. The June decline can be attributed to margins for final demand trade services, which dropped 1.8%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Conversely, the indexes for final demand services less trade, transportation, and warehousing and for final demand transportation and warehousing services increased 0.3% and 0.9%, respectively.

Product detail: Eighty percent of the June decline in the index for final demand services can be traced to a 7.3% drop in margins for machinery and vehicle wholesaling. The indexes for apparel, jewelry, footwear, and accessories retailing; fuels and lubricants retailing; dental care; deposit services (partial); and long-distance motor carrying also fell. In contrast, prices for hospital inpatient care rose 0.8%. The indexes for transportation of passengers (partial) and automobile retailing (partial) also increased.

Final demand goods: The index for final demand goods rose 0.2% in June after increasing 1.6% in May. Leading the June advance, prices for final demand energy jumped 7.7%. The index for final demand goods less foods and energy inched up 0.1%. Conversely, prices for final demand foods dropped 5.2%.

Product detail: In June, a major factor in the increase in prices for final demand goods was the gasoline index, which rose 26.3%. Prices for diesel fuel; jet fuel; natural, processed, and imitation cheese; basic organic chemicals; and fresh and dry vegetables also advanced. In contrast, prices for meats dropped 27.7%. The indexes for residential electric power and light motor trucks 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.

May 2020 International Trade (Softwood Lumber)

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Softwood lumber exports advanced (5 MMBF or +6.3%) in May; imports fell (109 MMBF or -9.0%). Exports were 32 MMBF (-27.0%) below year-earlier levels; imports were 309 MMBF (-22.0%) lower. As a result, the year-over-year (YoY) net export deficit was 277 MMBF (-21.6%) smaller. Also, the average net export deficit for the 12 months ending May 2020 was 5.3% 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 (46.9%; of which Canada: 31.9%; Mexico: 14.9%), Asia (32.4%; especially China: 14.2%; and Japan: 8.7%), and the Caribbean: 16.8% (especially the Dominican Republic: 4.9%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were -20.6% relative to the same months in 2019. Meanwhile, Canada was the source of most (84.0%) of softwood lumber imports into the United States. Imports from Canada were 10.2% lower YTD than the same months in 2019. Overall, YTD exports were down 16.1% compared to 2019; imports: -6.4%. 

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U.S. softwood lumber export activity through the West Coast customs region represented the largest proportion (45.8% of the U.S. total), followed by the Eastern (24.9%) and Gulf (20.7%) regions. Seattle (33.1% of the U.S. total) was the single most-active district, followed by Mobile (14.4%). At the same time, Great Lakes customs region handled 59.2% of softwood lumber imports -- most notably the Duluth, MN district (19.8%) -- coming into the United States. 

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Southern yellow pine comprised 23.0% of all softwood lumber exports, Douglas-fir (18.7%) and treated lumber (13.3%) were also significant. Southern pine exports were down 4.4% YTD relative to 2019, while treated: -9.1%; Doug-fir: -13.7%.

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

June 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 May’s gain when rising by $9.75 (+34.1%), to $38.31 per barrel in June. The May jump occurred within the context of a weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a nearly 3.6 million barrel-per-day (BPD) collapse in the amount of petroleum products demanded/supplied during April (to 14.7 million BPD), and a moderate increase in accumulated oil stocks (June average: 538 million barrels). 

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From the 6 July 2020 issue of The Energy Bulletin:

OPEC: The cartel’s oil production in June was at the lowest level since May 1991 during the Gulf War, and collectively meeting its promised cut. According to a Bloomberg survey, OPEC cut its output to 22.69 million b/d. Saudi Arabia met its promised cut, holding production to 7.53 million b/d. Saudi Arabia also met its additional voluntary reduction that phases out in July. While Kuwait and the UAE also met their promised cuts, they did not meet all of their voluntary cuts like Saudi Arabia did. To no one’s surprise, Angola, Iraq, and Nigeria did not meet their promised cuts. Of the three, Angola was the most compliant at 83 percent of its pledged cuts in June, while Nigeria hit 77 percent. Iraq remains the biggest laggard of the group.

Saudi Arabia has threatened to ignite an oil-price war unless fellow OPEC members make up for their failure to abide by the cartel’s recent production cuts, delegates said. Saudi energy minister Prince Abdulaziz bin Salman issued the ultimatum in recent weeks. He asked Angola and Nigeria to submit detailed pledges to carry extra oil-production curbs, delegates said. The hardline stance from OPEC’s de facto leader risks a new flare-up within the OPEC countries. It comes just months after Saudi Arabia waged a price war against longtime oil-market ally Russia following disagreements over how to supply global markets as the coronavirus spread.

OPEC+ is not discussing or planning changes to its production cut agreement, which should see the oil producers ease the cuts in August, Russia’s Energy Minister Alexander Novak said at an online conference on Thursday. OPEC+, led by Russia and OPEC’s top producer Saudi Arabia, agreed in June to extend the record production cuts of 9.7 million b/d by one month through the end of July. According to the original agreement reached in April, OPEC+ was to cut 9.7 million bpd in combined production for two months—May and June—and then ease these to 7.7 million b/d, to stay in effect until the end of the year. Then, from January 2021, the production cuts would be further eased to 5.8 million b/d, to remain in effect until end-April 2022.

Shale Oil: ConocoPhillips expects to start bringing back in July part of the oil production it had curtailed in the second quarter in response to the low oil prices. In April, when oil prices slumped to the low teens amid crashing demand in the pandemic and the Saudi pledge to flood the market with oil, ConocoPhillips reduced its 2020 capital expenditure for the second time in one month. They announced curtailment of some oil production in Canada and the US until market conditions improve. ConocoPhillips said it would voluntarily curtail 200,000 barrels of oil equivalent per day net until market conditions improve. The company reduced production at Surmont in Canada due to low Western Canada Select prices and production across its operations in US shale fields.

As much as 30 percent of shale drillers could go under if oil prices fail to move substantially higher, Deloitte said in a recent study, as quoted by CNN. The firm said these 30 percent are technically insolvent at oil prices of $35 a barrel. Right now, West Texas Intermediate is higher than $35 but not by much. Oil is currently trading closer to $35 than to $50—the level at which most shale drillers will be making money.

Banks have started cutting credit lines for shale drillers as they reassess their assets, and the products that they promised would be realized from these assets. According to calculations by Moody’s and JP Morgan, cited by the Wall Street Journal, banks could reduce asset-backed loan availability for the industry by as much as 30 percent, which translates into tens of billions of dollars.

Crude-by-rail shipments from the US Midwest to the West Coast fell 28 percent month on month to 157,000 b/d in April amid lower refining runs and plunging North Dakota oil production. The shipments were down from 211,000 b/d in April 2019. West Coast refineries would have an incentive to max out Bakken flows while prices are low, but a market source said the plants likely saw better waterborne prices from abroad. 

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

Crude oil hit four-month highs on Thursday (7/2), aided by a tightening market and a better-than-expected U.S. jobs report. The caveat is that the jobs survey took place before the latest Covid-19 wave and the associated closures. Analysts still expect oil to face resistance to any further gains. “Gasoline has carried the load on recovery and demand, and it’s not clear whether that could continue into August and September,” Andrew Lebow, senior partner at Commodity Research Group, told Bloomberg. Oil prices retreated during midday trading on Friday.

OPEC+ scheduled to ease production cuts. OPEC+ is scheduled to ease production cuts beginning in August, and sources told Reuters that the group will likely refrain from an extension. Saudi Arabia also reportedly put pressure on Nigeria to increase its compliance. On Thursday, Russian energy minister Alexander Novak reiterated that position. “At present, there are no decisions to prepare any changes…Next, under the current agreements we should have a partial restoration of the volume of reductions starting August 1,” he said, according to TASS.

Shale drillers squeezed by banks. Lenders have tightened credit by as much as 20 percent in the latest credit redetermination period.

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.

June 2020 Currency Exchange Rates

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In June the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-3.0%) and euro (-3.1%), but appreciated against the yen (+0.4%). On the broad trade-weighted index basis (goods and services), the USD weakened by 2.4% 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.

June 2020 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed U.S. manufacturing moving back into expansion during June. The PMI registered 52.6%, up 9.5 percentage points (PP) from the May 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: the drop in slow deliveries (-11.1PP) indicates firms are ramping up activity, and the tick downward in customer inventories (-1.6PP) is suggestive of a potential improvement in demand.

“June signifies manufacturing entering an expected expansion cycle after the disruption caused by the coronavirus (COVID-19) pandemic,” said Timothy Fiore, chair of ISM’s Manufacturing Business Survey Committee. “Comments from the panel were positive (1.3 positive comments for every one cautious comment), reversing the cautious trend which began in March. The manufacturing sector is reversing the heavy contraction of April, with the PMI increasing month-over-month at a rate not seen since August 1980, with several other indexes also posting gains not seen in modern times. 

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The non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment – also jumped back into expansion (by a record +11.7PP, to 57.1%). The most noteworthy changes in the NMI sub-indexes included business activity (+25.0PP), new orders (+19.7PP), and exports (+17.4PP). “Respondents remain concerned about the coronavirus and the more recent civil unrest,” said Anthony Nieves, chair of the Non-Manufacturing Business Survey Committee. “However, they are cautiously optimistic about business conditions and the economy as businesses are beginning to reopen.” 

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Of the industries we track, only Paper Products contracted. Comments from respondents included:

Wood Products. “The building industry continues to defy expectations, as we continue to rebound stronger from the previous month. Being an essential business across most states and a surge in DIY projects has fueled the industry forward. While the industry will follow the greater economy, we do believe it will be more resilient than most due to potential migration from larger cities and an undersupplied housing market.”

Construction. “Sales have picked up tremendously. Sporadic supply issues. Biggest concern for us is lumber shortages.”

Real Estate. “COVID-19 and the riots have disrupted the normal flow of business. There is no new normal yet.”

Relevant commodities:

Priced higher. Crude oil, lumber products and transportation.

Priced lower. Natural gas.

Prices mixed. Fuel (including diesel).

In short supply. Labor (general, construction and sub-contractors.

Findings of IHS Markit’s June surveys paralleled those of their ISM counterparts, although both Markit surveys remained in contraction.

Manufacturing. Record rise in manufacturing PMI amid looser COVID-19 restrictions.

Key findings:

* Contraction in output slows as new orders stabilize
* First increase in selling prices since February, albeit only fractional
* Job losses ease amid renewed optimism

Services. Business activity contraction slows in June as new business nears stabilization.

Key findings:

* Softest fall in output since February amid strengthening demand
* Renewed increases in cost burdens and selling prices
* Business confidence improves

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

Manufacturing. “U.S. manufacturers have reported a marked turnaround in business conditions through the second quarter, with collapsing production and demand in April at the height of the COVID-19 lockdown turning rapidly to stabilization by June. The PMI posted a record 10PP rise in June amid unprecedented gains in the survey’s output, employment and order book gauges.

“The record rise in the New Orders Index, coupled with low inventory holdings, bodes well for a further improvement in production momentum in July. A record upturn in business sentiment about the year ahead likewise hints that business spending and employment will start to revive.

“However, while the PMI currently points to a strong V-shaped recovery, concerns have risen that momentum could be lost if rising numbers of virus infections lead to renewed restrictions and cause demand to weaken again.”

Services. “June saw a record surge in the PMI’s main gauge of business activity in the U.S. as increasing numbers of companies returned to work and expanded their operations amid the reopening of the economy. The survey points to a strong initial rebound from the low point seen at the height of the pandemic lockdown in April, with indicators of output, demand, exports and employment all showing steep gains. Financial services and technology companies are now reporting improved demand, as are many consumer-facing companies. Many, however, remain constrained by social distancing measures.

“With business confidence in the outlook picking up again in June, a return to growth for the economy in the 3Q looks likely, though this will very much depend on the extent to which demand continues to strengthen. There remains a strong possibility that growth could tail off after the initial rebound due to weak demand and persistent virus containment measures. The need to reintroduce lockdowns to fight off second waves of coronavirus infections will pose a particular threat to recovery momentum, and could drive a return of the recession.”

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 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 May increased $12.5 billion or 3.1% to $417.0 billion. Durable goods shipments increased $8.3 billion or 4.4% to $198.0 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased $4.2 billion or 2.0% to $219.0 billion, led by petroleum and coal products. Shipments of wood products rose by 4.0%; paper: -0.2%. 

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Inventories increased $1.1 billion or 0.2% to $687.0 billion. The inventories-to-shipments ratio was 1.65, down from 1.70 in April. Inventories of durable goods increased $0.3 billion or 0.1% to $425.0 billion, led by transportation equipment. Nondurable goods inventories increased $0.8 billion or 0.3% to $262.0 billion, led by petroleum and coal products. Inventories of wood products fell by 1.5 %; paper: +0.9%. 

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New orders increased $30.5 billion or 8.0% to $412.8 billion. Excluding transportation, new orders rose by 2.6% (-13.7% YoY). Durable goods orders increased $26.3 billion or 15.7% to $193.8 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- increased by 1.6% (-7.3% YoY). New orders for nondurable goods increased $4.2 billion or 2.0% to $219.0 billion. 

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Unfilled durable-goods orders increased $0.7 billion or 0.1% to $1,108.5 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 7.53, down from 7.70 in April. 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.

June 2020 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm payroll employment added 4.8 million jobs in June (+3.0 million expected). Also, April and May employment changes were revised up by a combined 90,000 (April: -100,000; May: +190,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) receded (-2.2 percentage points) to 11.1% -- although the BLS acknowledged misclassification errors once again artificially lowered the rate -- as the number of employed persons (+4.9 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 (+4.8 million jobs) and household survey results (+4.9 million employed) were very highly correlated. 

* Goods-producing industries regained 504,000 jobs, while service-providing employment rocketed higher (+4.296 million jobs) -- especially leisure and hospitality (+2.088 million), retail trade (+739,800), and education and health services (+568,000). Manufacturing expanded by 356,000 jobs. That result is perhaps somewhat consistent the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which contracted much more slowly in June. Wood Products employment advanced by 5,200 (ISM was unchanged); Paper and Paper Products: +1,500 (ISM decreased); Construction: +158,000 (ISM not yet reported). 

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* The number of employment-age persons not in the labor force (NILF) fell (-1.5 million) to 100.3 million. As a result, the employment-population ratio (EPR) rose to 54.6%; i.e., a little more than half of the employment-age population is presently employed. 

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* Because the civilian labor force expanded by 1.7 million in June, the labor force participation rate rose (+0.7 PP) to 61.5%. Average hourly earnings of all private employees retreated by $0.35 to $29.37, resulting in a 5.0% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages dipped by $0.23, to $24.74 (+5.4% YoY). Since the average workweek for all employees on private nonfarm payrolls shrank (-0.2 hour) to 34.5 hours, average weekly earnings decreased by $18.01, to $1,013.27 (+3.5% YoY). With the consumer price index running at an annual rate of +0.1% in May, one's opinion of whether wage earners are keeping up with inflation depends upon the choice of MoM or YoY comparisons. 

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* Full-time jobs advanced (+2.4 million), to 118.9 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 -- fell by 1.57 million (presumably, in most cases returning to full-time work). Those working part time for non-economic reasons jumped by 2.7 million, while multiple-job holders rose by 681,000. 

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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 June rose by $17.1 billion, to $189.2 billion (+9.9% MoM; -2.4% 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 10.8% 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.