2Q2020 Gross Domestic Product: Second Estimate

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In its second estimate of 2Q2020 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 -31.70% (-32.9% expected), up 1.21 percentage points (PP) from the “advance” estimate (“2Qv1”) but -26.74PP from 1Q2020.

As with 2Qv1, 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. The +0.29PP revision to consumer spending was concentrated in nondurable goods (+0.14PP from 2Qv1) and services (+0.16PP). Whereas revisions were somewhat evenly distributed among the line items in the nondurable goods category, in the services category revisions were overwhelmingly concentrated in healthcare spending.

PDI. This category saw the biggest revision (+0.70PP), of which the majority originated from private inventories (+0.52PP) and nonresidential equipment (+0.11PP).

NetX. Upward revisions to goods exports (+0.18PP) and imports (+0.08PP) strengthened this category by 0.22PP relative to 2Qv1.

GCE. With each line item changing by less than ±$4 billion, this category netted to no change.

The BEA's real final sales of domestic product -- which ignores inventories -- was revised modestly upward (+0.69PP, to a still-alarming -28.24%) to a level 24.62PP below the 1Q estimate. 

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“While the economy has already made some headway toward recovery, the [GDP] figure is an important testament to the sharp economic pain inflicted by the coronavirus pandemic,” wrote senior economist Lydia Boussour of Oxford Economics, “and should motivate policymakers to get their act together to preserve the nascent recovery.”

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.

July 2020 Residential Sales, Inventory and Prices

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Sales of new single-family houses in July 2020 were at a seasonally adjusted annual rate (SAAR) of 901,000 units (700,000 expected). This is 13.9% (±20.0%)* above the revised June rate of 791,000 and is 36.3% (±27.4%) above the July 2019 SAAR of 661,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was +41.8%. For longer-term perspectives, NSA sales were 35.1% below the “housing bubble” peak but 49.2% above the long-term, pre-2000 average.

The median sales price of new houses sold in July fell ($6,400 or -1.9% MoM) to $330,600; meanwhile, the average sales price increased to $391,300 ($9,400 or +2.5%). Starter homes (defined here as those priced below $200,000) comprised 9.0% of the total sold, down from the year-earlier 10.9%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 made up 1.3% of those sold in July, down from 1.8% 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 July, single-unit completions decreased by 17,000 units (-1.8%). Since completions fell while sales rose (110,000 units; +13.9%), inventory for sale contracted in both absolute (-5,000 units) and months-of-inventory (-0.6 month) terms.

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Existing home sales soared by a record amount in July (1.160 million units or +24.7%), to a SAAR of 5.86 million units (5.400 million expected). Inventory of existing homes for sale contracted in both absolute (-40,000 units) and 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 13.3%. The median price of previously owned homes sold in July rose to a record $304,100 ($9,600 or +3.3 MoM).

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Housing affordability deteriorated (-6.5 percentage points) even as the median price of existing homes for sale in June rose by $12,000 (+4.2% MoM; +3.5 YoY), to $298,600. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices rose at a not-seasonally adjusted monthly change of +0.6% (+4.3% YoY).

“Housing prices were stable in June,” said Craig Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P Dow Jones Indices. “The National Composite Index rose by 4.3% in June 2020, as it had also done in May (June’s growth was slightly lower in the 10- and 20-City Composites, which were up 2.8% and 3.5%, respectively). More data will be required to understand whether the market resumes its previous path of accelerating prices, continues to decelerate, or remains stable. That said, it’s important to bear in mind that deceleration is quite different from an environment in which prices actually fall.

“June’s gains were quite broad-based. Prices increased in all 19 cities for which we have data, accelerating in five of them. Phoenix retains the top spot for the 13th consecutive month, with a gain of 9.0% for June. Home prices in Seattle rose by 6.5%, followed by Tampa at 5.9% and Charlotte at 5.7%. As has been the case for the last several months, prices were particularly strong in the Southeast and West, and comparatively weak in the Midwest and (especially) 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.

July 2020 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in July at a seasonally adjusted annual rate (SAAR) of 1,496,000 units (1.240 million expected). This is 22.6 percent (±14.7 percent) above the revised June estimate of 1,220,000 (originally 1,186,000 units) and 23.4 percent (±12.4 percent) above the July 2019 SAAR of 1,212,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +22.1%.

Single-family housing starts in July were at a SAAR of 940,000; this is 8.2 percent (±10.3 percent)* above the revised June figure of 869,000 units (+6.6% YoY). Multi-family starts: 556,000 units (+58.4% MoM; +64.8% YoY).

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

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Total completions were at a SAAR of 1,280,000 units. This is 3.6 percent (±14.9 percent)* above the revised June estimate of 1,236,000 (originally 1.225 million units) and 1.7 percent (±12.8 percent)* above the July 2019 SAAR of 1,258,000 units; the NSA comparison: +2.2% YoY.

Single-family completions were at a SAAR of 909,000; this is 1.8 percent (±16.8 percent)* below the revised June rate of 926,000 units (-0.7% YoY). Multi-family completions: 371,000 units (+19.7% MoM; +8.9% YoY).

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Total permits amounted to a SAAR of 1,495,000 units (1.300 million expected). This is 18.8 percent (±1.1 percent) above the revised June rate of 1,258,000 (originally 1.241 million units) and 9.4 percent (±1.5 percent) above the July 2019 rate of 1,366,000 units; the NSA comparison: +11.9% YoY.

Single-family permits were at a rate of 983,000; this is 17.0 percent (±1.2 percent) above the revised June figure of 840,000 units (+16.8% YoY). Multi-family: 512,000 (+22.5% MoM; +2.8% YoY).

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In a sign that housing continues to lead the economy forward, builder confidence in the market for newly-built single-family homes increased six points to 78 in August, according to the latest NAHB/Wells Fargo Housing Market Index (HMI). The HMI now stands at its highest reading in the 35-year history of the series, matching the record that was set in December 1998.

“The demand for new single-family homes continues to be strong, as low interest rates and a focus on the importance of housing has stoked buyer traffic to all-time highs as measured on the HMI,” said NAHB Chairman Chuck Fowke. “However, the V-shaped recovery for housing has produced a staggering increase for lumber prices, which have more than doubled since mid-April. Such cost increases could dampen momentum in the housing market this fall, despite historically low interest rates.”

“Housing has clearly been a bright spot during the pandemic and the sharp rebound in builder confidence over the summer has led NAHB to upgrade its forecast for single-family starts, which are now projected to show only a slight decline for 2020,” said NAHB Chief Economist Robert Dietz. “Single-family construction is benefiting from low interest rates and a noticeable suburban shift in housing demand to suburbs, exurbs and rural markets as renters and buyers seek out more affordable, lower density markets.”

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.

July 2020 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) rose 3.0% in July (+3.0% expected) after increasing 5.7% in June; even so, the index in July was 8.4% below its pre-pandemic February level. Manufacturing output continued to improve in July, rising 3.4%. Most major industries posted increases, though they were much smaller in magnitude than the advances recorded in June. The largest gain in July—28.3%—was registered by motor vehicles and parts; factory production elsewhere advanced 1.6%. Mining production rose 0.8% after decreasing for five consecutive months. The output of utilities increased 3.3%, as unusually warm temperatures increased the demand for air conditioning. At 100.2% of its 2012 average, the level of total industrial production was 8.2% lower in July than it was a year earlier.

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Industry Groups

Manufacturing output increased 3.4% in July, but it was still about 8% below its pre-pandemic February level (NAICS manufacturing: +3.4% MoM; -7.5% YoY). The index for durable manufacturing rose 5.5% in July. In addition to the large advance for motor vehicles and parts, increases of more than 6% were recorded by aerospace and miscellaneous transportation equipment and by miscellaneous manufacturing (wood products: +2.5%). Substantial gains in the past three months have pushed the output of motor vehicles and parts to nearly its February level. The index for nondurables rose 1.3% in July, with gains of more than 3% for textile and product mills, for printing and support, and for petroleum and coal products (paper products: -1.1%). The output of other manufacturing (publishing and logging) increased 1.5%.

The output of utilities rose 3.3% in July, largely reflecting strength in electric utilities. Mining output increased 0.8%. Gains were concentrated primarily in crude oil extraction and coal mining but also were recorded by most other types of mining. In contrast, the index for oil and gas well drilling fell 8.0% and was about 70% below its year-earlier level.

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Capacity utilization (CU) for the industrial sector increased 2.1 percentage points (PP) in July to 70.6%, a rate that is 9.2PP below its long-run (1972–2019) average but 6.4PP above its low in April.

Manufacturing CU was 69.2% in July, 9.2PP higher than its trough in April and 5.5PP above its recession trough of June 2009 (NAICS manufacturing: +3.4%, to 69.8%). The operating rates for durable and nondurable manufacturing increased to 68.1% and 71.5%, respectively. The rate for durables was about 14PP above its April low but still about 7PP below its pre-pandemic February level (wood products: +2.5%); the rate for nondurables has risen 4.2PP since April but was still about 5PP below February (paper products: -1.1%). The operating rate for mining rose to 73.5% in July. However, a downward revision to crude oil extraction in May left the utilization rates for mining in May, June, and July lower than any previous rates in the history of the series (since 1967).

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Capacity at the all-industries level was unchanged MoM (+0.8 % YoY) at 142.0% of 2012 output. Manufacturing (NAICS basis) was also unchanged (+0.6% YoY) to 140.1%. Wood products: 0.0% (+2.0% YoY) at 169.7%; paper products: -0.1% (-0.5 % YoY) to 109.2%.

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 International Trade (Softwood Lumber)

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Softwood lumber exports increased (4 MMBF or +5.2%) in June; imports also rose (86 MMBF or +7.9%). Exports were 22 MMBF (-19.4%) below year-earlier levels; imports were 94 MMBF (-7.4%) lower. As a result, the year-over-year (YoY) net export deficit was 72 MMBF (-6.2%) smaller. Also, the average net export deficit for the 12 months ending June 2020 was 5.1% 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 (47.4%; of which Canada: 28.2%; Mexico: 19.2%), Asia (32.8%; especially China: 16.4%; and Japan: 7.7%), and the Caribbean: 13.8% (especially the Dominican Republic: 4.9%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were -7.0% relative to the same months in 2019. Meanwhile, Canada was the source of most (86.8%) of softwood lumber imports into the United States. Imports from Canada were 10.4% lower YTD than the same months in 2019. Overall, YTD exports were down 16.6% compared to 2019; imports: -6.6%.

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U.S. softwood lumber export activity through the West Coast customs region represented the largest proportion (43,6% of the U.S. total), followed by the Eastern (27.4%) and Gulf (19.4%) regions. Seattle (29.7% of the U.S. total) was the single most-active district, followed by Mobile (12.1%). At the same time, Great Lakes customs region handled 56.2% of softwood lumber imports -- most notably the Duluth, MN district (19.4%) -- coming into the United States.

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Southern yellow pine comprised 25.1% of all softwood lumber exports, Douglas-fir (16.9%) and treated lumber (12.5%) were also significant. Southern pine exports were down 8.1% YTD relative to 2019, while treated: -11.5%; Doug-fir: -12.6%.

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.

July 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 July (0.3% expected). The gasoline index continued to rise in July after increasing sharply in June and accounted for about one quarter of the monthly increase in the seasonally adjusted all-items index. The energy index increased 2.5% in July as the gasoline index rose 5.6%. This was partially offset by the food index, which decreased 0.4% in July, with the index for food at home declining 1.1%.

The index for all items less food and energy rose 0.6% in July, its largest increase since January 1991. The index for motor vehicle insurance increased sharply in July, as it did the previous month. The indexes for shelter, communication, used cars and trucks, and medical care also increased in July, while the index for recreation declined.

The all-items index increased 1.0% for the 12 months ending July, a larger increase than the 0.6% rise for the period ending June. The index for all items less food and energy increased 1.6% over the last 12 months. The food index increased 4.1% over the last 12 months, with the index for food at home rising 4.6%. Despite increasing in July, the energy index fell 11.2% over the last 12 months.

 

Producer Price Index

The Producer Price Index for final demand (PPI-FD) increased 0.6% in July (+0.3% expected). This rise followed a 0.2% decline in June and a 0.4% advance in May. The July increase is the largest rise since a 0.7% advance in October 2018. On an unadjusted basis, the final demand index moved down 0.4% for the 12 months ended in July.

In July, the advance in the final demand index was led by a 0.5% rise in prices for final demand services. The index for final demand goods also moved higher, increasing 0.8%.

Prices for final demand less foods, energy, and trade services advanced 0.3% in July, the same as in June. For the 12 months ended in July, the index for final demand less foods, energy, and trade services edged up 0.1%, following three straight 12-month declines.

Final Demand

Final demand services: The index for final demand services moved up 0.5% in July, the largest advance since climbing 0.5% in April 2019. In July, about 60% of the rise can be traced to a 0.4% increase in prices for final demand services less trade, transportation, and warehousing. Margins for final demand trade services also moved higher, advancing 0.8%. (Trade indexes measure changes in margins received by wholesalers and retailers.) In contrast, prices for final demand transportation and warehousing services fell 0.8%.

Product detail: In July, a 7.8% rise in the index for portfolio management was a major factor in the advance in prices for final demand services. The indexes for machinery and vehicle wholesaling, automobiles and automobile parts retailing, long-distance motor carrying, legal services, and machinery and equipment parts and supplies wholesaling also moved higher. Conversely, prices for airline passenger services decreased 7.0%. The indexes for automotive fuels and lubricants retailing and for guestroom rental also declined.

Final demand goods: The index for final demand goods rose 0.8% in July, the third consecutive advance. Leading the July increase, prices for final demand energy climbed 5.3%. The index for final demand goods less foods and energy moved up 0.3%. In contrast, prices for final demand foods declined 0.5%.

Product detail: Over one-third of the July advance in the index for final demand goods is attributable to gasoline prices, which rose 10.1%. The indexes for diesel fuel, home heating oil, electric power, fluid milk products, and industrial chemicals also increased. Conversely, meat prices fell 8.0%. The indexes for residential natural gas and carbon steel scrap also decreased.

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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.

July 2020 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm employers added nearly 1.8 million jobs in July (+2.0 million expected). Also, May and June employment changes were revised up by a combined 17,000 (May: +26,000; June: -9,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) receded (-0.9 percentage point) to 10.2% under a combination of employment gains (+1.35 million) and contraction in the labor force (-62,000). 

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Observations from the employment reports include:

* The establishment (+1.763 million jobs) and household survey results (+1.350 million employed) were very highly correlated.

* Goods-producing industries gained a relatively paltry 39,000 jobs, while service-providing employment jumped by 1.724 million jobs) – especially leisure and hospitality (+592,000), government (+301,000), retail trade (+258,300), professional and business services (+170,000), other services (+149,000), and health care (+125,500). Manufacturing expanded by 26,000 jobs. That result is perhaps somewhat consistent the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which contracted more slowly in July. Wood Products employment retreated by 1,300 (ISM was unchanged); Paper and Paper Products: +2,300 (ISM decreased); Construction: +20,000 (ISM decreased).

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* The number of employment-age persons not in the labor force rose (230,000) to 100.5 million. As a result, the employment-population ratio (EPR) rose to 55.1%; i.e., a little more than half of the employment-age population is presently employed. 

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* Because the civilian labor force contracted by 62,000 in July, the labor force participation rate retreated (-0.1 PP) to 61.4%. Average hourly earnings of all private employees gained $0.07 to $29.39, resulting in a 4.8% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages dipped by $0.11, to $24.63 (+4.6% YoY). Since the average workweek for all employees on private nonfarm payrolls shrank (-0.1 hour) to 34.5 hours, average weekly earnings decreased by $0.51, to $1,013.96 (+5.5% YoY). With the consumer price index running at an annual rate of +0.6% in June, whether consumers are keeping up with inflation depends upon their employment status.

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* Full-time jobs advanced (+591,000), to 119.5 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 -- fell by 619,000 (presumably, in most cases returning to full-time work). Those working part time for non-economic reasons jumped by 655,000 while multiple-job holders rose by 323,000. Interestingly, the shrinkage in the number of temporarily unemployed (-1.340 million, to 9.225 million) could explain the majority of July’s job gains.

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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 July rose by $5.3 billion, to $194.5 billion (+2.8% MoM; -7.8% 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 July was 8.5% 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.

July 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil pared gains during July when rising by $2.40 (+6.3%), to $40.71 per barrel. The July increase occurred within the context of a slightly weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 1.4 million barrel-per-day (BPD) jump in the amount of petroleum products demanded/supplied during May (to 16.1 million BPD, on par with volumes previously seen in mid-1987), and a drop-off in accumulated oil stocks (July average: 530 million barrels) -- although still well above the five-year average maximum.

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From the 3 August 2020 issue of The Energy Bulletin:

Oil posted a small gain in July, boosted by a steadily weakening dollar and OPEC’s restraint. Deep output curbs by OPEC+ have helped futures rebound from their plunge below zero in April, yet the unprecedented cuts will ease this month. US crude inventories have shown signs of shrinking and are currently sitting at their lowest since April.

Futures have remained in a tight trading range with rallies limited by the pandemic holding back demand. ExxonMobil said it only sees an oil consumption recovery well into 2021.

US crude oil inventories moved sharply lower during the week ended July 24th as exports and refinery demand climbed to multi-month highs. Commercial oil stocks fell 10.61 million barrels, the biggest draw since 2019. While the draw pushed stockpiles to 14-week lows, they remained more than 17 percent above the five-year average for this time of year. The inventory draw was concentrated on the US Gulf Coast, where stocks fell 10.46 million barrels, and on the US West Coast, where stocks fell 1.7 million barrels. Meanwhile, stockpiles at the NYMEX delivery point of Cushing, Oklahoma, climbed 1.31 million barrels.

US oil companies have increased production by 1.2 million b/d over the past six weeks as they restored wells shut earlier this year and start producing from others they had left unfinished as prices sank. Output bottomed at 9.7 million b/d in the second week of June but has since risen to 10.9 million b/d as activity starts to pick up in Texas.

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

ExxonMobil posts huge $1.1 billion loss. ExxonMobil reported a loss of nearly $1.1 billion, the largest quarterly loss in 36 years. Production was down 7 percent, year-on-year. Exxon said it’s working on cost-cutting plans in a “last ditch” effort to preserve its dividend, and CEO Darren Woods said that the company would not take on more debt.

Chevron announces worst loss in three decades. Chevron reported an adjusted loss of $3 billion, along with an impairment of $5.6 billion. That included writing off Chevron’s entire unit in Venezuela, worth about $2.6 billion. “We would need to see sustained economic recovery and much lower inventory levels before we would add capital back to the Permian or other basins,” Pierre Breber, Chevron’s finance chief, told Reuters. “We’re in a lower for longer world where demand is down and there’s ample supply.”

Dakota Access dampens Bakken prospects. The potential loss of the Dakota Access pipeline could stall the North Dakota shale formation’s rebound. Moving oil by rail would add $3 to $6 in costs for producers. Anecdotally, some companies are holding off on drilling until they know more about the fate of Dakota Access, according to Reuters.

Saudi Arabia to unveil September prices amid market pressure. Saudi Arabia is under pressure to lower the price of its oil, according to Bloomberg. Traders expect a price cut for the first time since April. Saudi prices typically set the tone for the market, so the unveiling of prices for September in the next few days will offer clues into the market direction.

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.

July 2020 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey showed U.S. manufacturing expanding more quickly during July. The PMI registered 54.2%, up 1.6 percentage points (PP) from the June 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 (-1.1PP) indicates firms are ramping up activity, and the declines in inventories (-3.5PP) and customer inventories (-3.0PP) suggest the potential for a future ramp-up of output.

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The services sector -- which accounts for 80% of the economy and 90% of employment – also expanded further -- albeit at a significantly slower rate (+1.0PP, to 58.1%). The most noteworthy changes in the services PMI (formerly known as NMI) sub-indexes included inventories (-8.7PP), and export orders (-9.6PP).

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Of the industries we track, only Paper Products did not expand. Comments from respondents included:

• Construction. “Sales have remained strong in homebuilding. We are experiencing longer lead times for lumber, interior trim components, appliances and light fixtures. Lumber prices are near all-time highs as lumber mills have yet to increase capacity as demand has increased.”
• Real Estate. “COVID-19 interruptions are changing the way business is done.”

 

Relevant commodities:

• Priced higher. Construction contractors and subcontractors; crude oil; fuel; lumber products; and OSB.
• Priced lower. None.
• Prices mixed. Diesel.
• In short supply. Labor (general, construction and sub-contractors.

 

Findings of IHS Markit‘s July surveys paralleled those of their ISM counterparts, although both Markit surveys either barely crossed the threshold into expansion (manufacturing) or stopped at the breakeven point (services).

Manufacturing. U.S. manufacturing operating conditions improve for the first time since February.

Key findings:

• Overall improvement driven by renewed upturns in output and new orders
• Quicker rise in input costs amid supplier shortages
• Business confidence picks up to five-month high

 

Services. Business activity stabilizes but demand conditions deteriorate.

Key findings:

• Reopening of firms leads to rise in Business Activity Index from June
• New orders continue to fall slightly amid subdued demand
• Input cost pressures intensify

 

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

Manufacturing. “Although indicating the strongest expansion of the manufacturing sector since January, the IHS Markit PMI remains worryingly weak. Much of the recent improvement in output appears to be driven merely by factories restarting work rather than reflecting an upswing in demand. Growth of new orders remains lackluster and backlogs of work continue to fall, hinting strongly at the build-up of excess capacity. Many firms and their customers remain cautious in relation to spending in the face of re-imposed lockdowns in some states and worries about further disruptions from the pandemic.

“Encouragingly, business optimism about the year ahead has revived to levels last seen in February, but many see the next few months being a struggle amid the ongoing pandemic, with a more solid-looking recovery not starting in earnest towards the end of the year or even into 2021. Further infection waves could of course derail the recovery, and many firms also cited the presidential elections as a further potential for any recovery to be dampened by heightened political uncertainty.”

 

Services. “The service sector is showing welcome signs of stabilizing after the unprecedented downturn seen during the second quarter, but many companies continue to struggle with virus-related constraints, especially in states where social distancing restrictions have been tightened again.

“The United States was the only major economy to see COVID-19 containment measures tighten again in July, and this is reflected in the data, with new business inflows falling at an increased rate to hint at the possible start of a double dip in business activity.

“More encouragingly, businesses have on balance become more optimistic about recovery in the year ahead, and took on extra staff to ensure capacity is sufficient to meet future growth. However, whether this optimism can be sustained and result in faster growth will of course depend on infection rates falling.”

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 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 June increased $40.7 billion or 9.8% to $457.3 billion. Durable goods shipments increased $29.8 billion or 15.1% to $227.3 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased $10.9 billion or 5.0% to $230.0 billion, led by petroleum and coal products. Shipments of wood products rose by 2.8%; paper: -0.5%.

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Inventories increased $4.0 billion or 0.6% to $690.9 billion. The inventories-to-shipments ratio was 1.51, down from 1.65 in May. Inventories of durable goods increased $0.2 billion or virtually unchanged to $425.0 billion, led by transportation equipment. Nondurable goods inventories increased $3.8 billion or 1.5% to $265.9 billion, led by petroleum and coal products. Inventories of wood products rose by 0.4%; paper: +0.4%.

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New orders increased $25.5 billion or 6.2% to $437.2 billion. Excluding transportation, new orders rose by 16.2 billion or 4.4% (-4.8% YoY). Durable goods orders increased $14.6 billion or 7.6% to $207.2 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- increased by $2.1 billion or 3.4% (-0.7% YoY). New orders for nondurable goods increased $10.9 billion or 5.0% to $230.0 billion.

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Unfilled durable-goods orders decreased $15.3 billion or 1.4% to $1,092.5 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 7.01, down from 7.56 in May. 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.

July 2020 Currency Exchange Rates

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In July the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-0.4%), euro (-2.0%) and yen (-0.8%). On the broad trade-weighted index basis (goods and services), the USD weakened by 0.8% 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.