October 2020 Residential Sales, Inventory and Prices

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Sales of new single-family houses in October 2020 were at a seasonally adjusted annual rate (SAAR) of 999,000 units (1.016 million expected). This is 0.3% (±13.6%)* below the revised September rate of 1,002,000 (originally 0.959 million units), but 41.5% (±22.6%) above the October 2019 SAAR of 706,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was +45.5%. For longer-term perspectives, NSA sales were 28.1% below the “housing bubble” peak but 53.0% above the long-term, pre-2000 average.

The median sales price of new houses sold in October dipped ($1,000 or -0.3% MoM) to $330,600; meanwhile, the average sales price slumped to $386,200 ($17,700 or -4.4% MoM). Starter homes (defined here as those priced below $200,000) comprised 7.5% of the total sold, up from the year-earlier 7.3%; 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 October, 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 October, single-unit completions decreased by 31,000 units (-3.4%). Although completions fell faster than sales (3,000 units; -0.3%), inventory for sale was unchanged in both absolute and months-of-inventory terms. 

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Existing home sales extended gains in October (280,000 units or +4.3%), to a SAAR of 6.85 million units (6.47 million expected). Inventory of existing homes for sale contracted in both absolute (-40,000 units) and months-of-inventory terms (-0.2 month). Because resales rose while new-home sales fell, the share of total sales comprised of new homes dropped to 12.7%. The median price of previously owned homes sold in October rose to another new record $313,000 ($1,600 or +0.5 MoM).

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Housing affordability improved slightly (+0.7 percentage point) although the median price of existing homes for sale in September rose by $1,400 (+0.4% MoM; +15.2 YoY), to a new high of $316,200. 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 +1.2% (+7.0% YoY).

“Housing prices were notably -- I am tempted to say ‘very’ -- strong in September,” said Craig Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P Dow Jones Indices. “The National Composite Index gained 7.0% relative to its level a year ago, well ahead of August’s 5.8% increase. The 10- and 20-City Composites (up 6.2% and 6.6%, respectively) also rose at an accelerating pace in September. The strength of the housing market was consistent nationally -- all 19 cities for which we have September data rose, and all 19 gained more in the 12 months ended in September than they had done in the 12 months ended in August.

“A trend of accelerating increases in the National Composite Index began in August 2019 but was interrupted in May and June, as COVID-related restrictions produced modestly-decelerating price gains. Our three monthly readings since June of this year have all shown accelerating growth in home prices, and September’s results are quite strong. The last time that the National Composite matched September’s 7.0% growth rate was more than six years ago, in May 2014. This month’s increase may reflect a catch-up of COVID-depressed demand from earlier this year; it might also presage future strength, as COVID encourages potential buyers to move from urban apartments to suburban homes. The next several months’ reports should help to shed light on this question.

“Phoenix’s 11.4% increase topped the league table for September; this is the 16^th consecutive month in which Phoenix home prices rose more than those of any other city. Seattle (10.1%) and San Diego (9.5%) repeated in second and third place. Even the worst-performing cities, New York (4.3%) and Chicago (4.7%), did better in September than in August. Prices were strongest in the West and Southwest regions, but even the comparatively weak Midwest scored 6.0% gains.”

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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.

3Q2020 Gross Domestic Product: Second Estimate

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In its second estimate of 3Q2020 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) left the growth rate of the U.S. economy essentially unchanged at a seasonally adjusted and annualized rate (SAAR) of +33.06% (+33.1% expected), down 0.02 percentage point (PP) from the “advance” estimate (“3Qv1”) but +64.45PP from 2Q2020.

As with 3Qv1, two groupings of GDP components -- personal consumption expenditures (PCE) and private domestic investment (PDI) -- were the drivers behind the expansion, whereas net exports (NetX) and government consumption expenditures (GCE) made minor negative offsets.

This report contained no material revisions. Generally speaking, some of the growth in consumer spending was shifted from services to goods, while reducing the overall consumer spending by 0.06PP. Growth in commercial and private fixed investments was adjusted upward by 0.27PP, but that was offset by downward adjustments to inventories, governmental spending and imports. As for details:

PCE. Consumer spending for goods reportedly grew at a 9.49PP rate, up 0.25PP from 3Qv1 and +11.55PP from 2Q. Spending on services added 15.73PP, down 0.31PP from 3Qv1 but +37.68PP from 2Q. The combined consumer contribution to the headline was +25.22PP, down 0.05PP from 3Qv1.

PDI. The contribution from commercial/private fixed investments was 5.23PP, up 0.27PP from 3Qv1 and +10.50PP from 2Q. Inventories added 6.55PP to the headline, down 0.07PP from 3Qv1 but +10.05PP from 2Q.

NetX. Exports added 4.95PP, up 0.05PP from 3Qv1 and +14.46PP from 2Q. Imports subtracted 8.12PP, down 0.13PP from 3Qv1 and -18.25PP from 2Q. On net, foreign trade subtracted 3.17PP from the headline.

GCE. Governmental spending was revised to -0.76PP, down 0.08PP from 3Qv1 and -1.53PP from 2Q.

The BEA's real final sales of domestic product -- which ignores inventories -- was revised upward (+0.05PP) to a level 54.40PP above the 2Q estimate. 

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“The revisions in this report are statistical noise that is immaterial relative to the unprecedented contraction during 2Q and 3Q's equally unprecedented (albeit partial) rebound shown in this report's headline number,” wrote Consumer Metric Institute’s Rick Davis.

“Unfortunately, the current recession will play out over the period covering at least the twelve months 4Q2020 through 3Q2021. The speed, logistics and demographics of the vaccine distributions will initially monopolize mainstream media headlines, while the less newsworthy economic damage will likely persist long after the vaccinations are done. The real fear is that US ‘Mom & Pop’ entrepreneurs -- retail, dining and services -- have been crushed in ways that will require many more quarters of recovery.

“As always,” Davis concluded, “the winners will be the entities with the deepest pockets.”

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.

October 2020 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in October at a seasonally adjusted annual rate (SAAR) of 1,530,000 units (1.460 million expected). This is 4.9% (±11.1%)* above the revised September estimate of 1,459,000 (originally 1.415 million units) and 14.2% (±8.8%) above the October 2019 SAAR of 1,340,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +15.0%.

Single-family housing starts in October were at a rate of 1,179,000; this is 6.4% (±8.7%)* above the revised September figure of 1,108,000 units (+31.5% YoY). Multi-family: 351,000 units (0.0% MoM; -18.4% YoY).

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

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Total completions were at a SAAR of 1,343,000. This is 4.5% (±9.5%)* below the revised September estimate of 1,406,000 (originally 1.413 million units), but 5.4% (±10.7%)* above the October 2019 SAAR of 1,274,000 units; the NSA comparison: +6.1% YoY.

Single-family completions were at a SAAR of 883,000; this is 3.4% (±8.4%)* below the revised September rate of 914,000 units (-3.7% YoY). Multi-family: 460,000 units (-6.5% MoM; +33.6% YoY).

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Total permits amounted to a SAAR of 1,545,000 units (1.560 million expected). This is virtually unchanged (±1.3%)* from the revised September rate of 1,545,000 (originally 1.553 million units), but 2.8% (±1.6%) above the October 2019 SAAR of 1,503,000 units; the NSA comparison: -2.1% YoY.

Single-family permits were at a rate of 1,120,000; this is 0.6% (±1.0%)* above the revised September figure of 1,113,000 units (+16.4% YoY). Multi-family: 425,000 units (-1.6% MoM; -29.5% YoY).

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In another sign that housing continues to lead the economy forward, builder confidence in the market for newly-built single-family homes increased five points to 90 in November, shattering the previous all-time of 85 recorded in October, according to the latest NAHB/Wells Fargo Housing Market Index (HMI). Builder confidence levels have hit successive all-time highs over the past three months.

“Historically low mortgage rates, favorable demographics and an ongoing suburban shift for home buyer preferences have spurred demand and increased new home sales by nearly 17% in 2020 on a year-to-date basis,” said NAHB Chairman Chuck Fowke. “Though builders continue to sign sales contracts at a solid pace, lot and material availability is holding back some building activity. Looking ahead to next year, regulatory policy risk will be a key concern given these supply-side constraints.”

“Another record high for the HMI reflects that housing is a bright spot for the economy,” said NAHB Chief Economist Robert Dietz. “However, affordability remains an ongoing concern, as construction costs continue to rise and interest rates are expected to move higher as more positive news emerges on the coronavirus vaccine front. In the short run, the shift of housing demand to lower density markets such as suburbs and exurbs with ongoing low resale inventory levels is supporting demand for home building.”

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.

September 2020 International Trade (Softwood Lumber)

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Softwood lumber exports fell (4 MMBF or -4.7%) in September whereas imports rose (85 MMBF or +6.3%). Exports were 18 MMBF (-17.6%) below year-earlier levels; imports were 185 MMBF (+14.9%) higher. As a result, the year-over-year (YoY) net export deficit was 203 MMBF (+17.8%) larger. Also, the average net export deficit for the 12 months ending September 2020 was 1.1% larger 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 (52.1%; of which Canada: 27.3%; Mexico: 24.8%), Asia (18.9%; especially China: 6.3%; and Japan: 4.8%), and the Caribbean: 24.3% (especially the Dominican Republic: 91%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were -12.1% relative to the same months in 2019. Meanwhile, Canada was the source of most (88.9%) of softwood lumber imports into the United States. Imports from Canada were 4.7% lower YTD than the same months in 2019. Overall, YTD exports were down 17.8% compared to 2019; imports: -0.8%.

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U.S. softwood lumber export activity through the West Coast customs region represented the largest proportion (37.1% of the U.S. total), followed by the Eastern (26.1%) and Gulf (26.1%) regions. Seattle (18.5% of the U.S. total) was the single most-active district, followed by Mobile (17.3%) and San Diego (16.2%). At the same time, Great Lakes customs region handled 60.7% of softwood lumber imports -- most notably the Duluth, MN district (20.9%) -- coming into the United States.

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Southern yellow pine comprised 23.0% of all softwood lumber exports; Douglas-fir (16.3%) and treated lumber (15.5%) were also significant. Southern pine exports were down 14.4% YTD relative to 2019, while treated: -9.6%; 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.

October 2020 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) rose 1.1% in October (+0.9% expected). The index has recovered much of its 16.5% decline from February to April, but output in October was still 5.6% lower than its pre-pandemic February level. After edging up 0.1% in September, manufacturing output increased 1.0% in October. The output of utilities rose 3.9%, while the output at mines declined 0.6% to a level that was 14.4% below its year-earlier reading. At 103.2% of its 2012 average, total IP was 5.3% lower in October than it was a year earlier.

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Industry Groups

Manufacturing output increased 1.0% in October; even so, it was about 5% below its level in February (NAICS manufacturing: +1.0% MoM; -3.6% YoY). The index for durable manufacturing stepped up 0.9%, as small drops in the indexes for furniture and related products, fabricated metal products, and motor vehicles and parts were outweighed by gains elsewhere, especially for aerospace and miscellaneous transportation equipment and for miscellaneous manufacturing (wood products: +0.5%). The index for nondurables rose 1.2%; nearly all of its components posted gains (paper products: +2.2%). The output of other manufacturing (publishing and logging) fell 1.5%.

The index for utilities moved up 3.9% in October, with an increase for electric utilities more than offsetting a decrease for natural gas utilities. Mining output declined 0.6%, as oil and gas extraction fell back in October after posting a gain in September.

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Capacity utilization (CU) for the industrial sector increased 0.8 percentage point (PP) in October to 72.8%, a rate that is 7.0PP below its long-run (1972–2019) average but 8.6PP above its low in April.

Manufacturing CU rose 0.7PP in October to 71.7%, 11.6PP higher than its trough in April but still 6.5PP below its long-run average (NAICS manufacturing: +1.1% MoM, to 72.3%; wood products: +0.5% MoM; paper products: +2.3% MoM). The utilization rate for mining declined to 77.9%, remaining below its long-run average of 87.2%. The operating rate for utilities increased to 72.7%, a rate that is 12.5PP below its long-run average.

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Capacity at the all-industries level was essentially unchanged MoM (+0.0 % YoY) at 141.9% of 2012 output. Manufacturing (NAICS basis) was also unchanged (+0.1% YoY) at 140.0%. Wood products: 0.0% (+1.0% YoY) at 169.8%; paper products: -0.1% (-0.7 % YoY) to 106.9%.

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.

October 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) was unchanged in October (0.2% expected). Component indexes were mixed, with many offsetting increases and decreases. The food index rose 0.2%, with the food away from home index increasing by 0.3% and a smaller 0.1% rise in the food at home index. The energy index rose 0.1% in October as the index for electricity increased 1.2%.

The index for all items less food and energy was unchanged in October following an increase of 0.2% in September. The index for shelter increased 0.1% in October, which was offset by a 0.4% decrease in the index for medical care. The indexes for airline fares, recreation, and new vehicles were among those to rise, while the indexes for motor vehicle insurance, apparel, and household furnishings and operations declined.

The all items index rose 1.2% for the 12 months ending October, a slightly smaller increase than the 1.4% rise for the 12-month period ending September. The index for all items less food and energy rose 1.6% over the last 12 months after rising 1.7% in September. The food index increased 3.9% over the last 12 months, while the energy index declined 9.2%.

 

Producer Price Index

The Producer Price Index for final demand (PPI-FD) advanced 0.3% in October (+0.2% expected). Final demand prices rose 0.4% in September and 0.3% in August. Nearly 60% of October’s MoM rise in the final demand index can be traced to a 0.5% increase in prices for final demand goods. The index for final demand services moved up 0.2%.

The index for final demand less foods, energy, and trade services advanced 0.2% in October, the sixth consecutive increase. For the 12 months ended in October, prices for final demand less foods, energy, and trade services rose 0.8%, the largest advance since moving up 1.0% for the 12 months ended in March.

Final Demand

Final demand goods: The index for final demand goods increased 0.5% in October, the sixth consecutive rise. Nearly three-fourths of the October advance is attributable to prices for final demand foods, which jumped 2.4%. The index for final demand energy moved up 0.8%. Prices for final demand goods less foods and energy were unchanged.

Product detail: In October, a major factor in the increase in prices for final demand goods was the index for fresh and dry vegetables, which rose 26.8%. Prices for gasoline, meats, chicken eggs, and thermoplastic resins and materials also moved higher. In contrast, the residential electric power index fell 1.0%. Prices for light motor trucks, packaged fluid milk and related products, and passenger cars also decreased. (In accordance with usual practice, most new-model-year passenger cars and light motor trucks were introduced into the PPI in October. See Report on Quality Changes for 2021 Model Vehicles at www.bls.gov/web/ppi/ppimotveh.htm.)

Final demand services: The index for final demand services rose 0.2% in October after advancing 0.4% in September. Nearly 40% of the broad-based October increase can be traced to prices for final demand transportation and warehousing services, which moved up 1.1%. The indexes for final demand trade services and final demand services less trade, transportation, and warehousing also advanced, 0.2% and 0.1%, respectively. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail: Over a quarter of the advance in the index for final demand services can be traced to prices for long-distance motor carrying, which rose 1.9%. The indexes for hardware, building materials, and supplies retailing; securities brokerage, dealing, and investment advice; automotive fuels and lubricants retailing; hospital inpatient care; and automobile retailing (partial) also moved higher. Conversely, margins for chemicals and allied products wholesaling fell 2.6%. The indexes for gaming receipts (partial) and physician care 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.

October 2020 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm employers added 638,000 jobs in October (600,000 expected). Also, August and September employment changes were revised up by a combined 15,000 (August: +4,000; September: +11,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) fell (-1.0 percentage point) to 6.9% as the number of persons finding employment (+2.243 million) was over three times the growth of the labor force (+724,000).

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Observations from the employment reports include:

* Changes in the establishment (+638,000 jobs) and household surveys (+2.243 million employed) were not well correlated.

* Goods-producing industries gained 123,000 jobs, while service-providing employment added a more robust 515,000 jobs -- especially leisure and hospitality (+271,000), professional and business services (+208,000), retail trade (+103,700), and construction (+84,000). Employment in government declined (-268,00) driven by a loss of 147,000 temporary 2020 Census workers. Manufacturing expanded by 38,000 jobs. That result is consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded in October. Wood Products employment advanced by 4,400 (ISM increased); Paper and Paper Products: -1,500 (ISM decreased); Construction: +84,000 (ISM increased).

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* The number of employment-age persons not in the labor force receded (541,000) to 100.1 million. As a result, the employment-population ratio (EPR) rose to 57.4%; i.e., nearly six in 10 of the employment-age population is presently employed.

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* Because the civilian labor force expanded by 724,000 in October, the labor force participation rate advanced (+0.3 PP) to 61.7%. Average hourly earnings of all private employees gained $0.04 to $29.50, resulting in a 4.5% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.05, to $24.82 (+4.5% YoY). Since the average workweek for all employees on private nonfarm payrolls was unchanged at 34.8 hours, average weekly earnings increased by $1.38, to $1,026.60 (+6.0% YoY). With the consumer price index running at an annual rate of +1.4% in September, whether consumers are keeping up with price inflation depends primarily upon whether or not they are working.

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* Full-time jobs jumped (+1.170 million) to 123.6 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 -- rose by 383,000, whereas those working part time for non-economic reasons advanced by 503,000; multiple-job holders also rose by 204,000. 

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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 October rose by $893 million, to $186.6 billion (+0.5% MoM; -5.6% YoY). To reduce some of the monthly volatility and determine broader trends, we average the most recent three months of data and estimate a percentage change from the same months in the previous year. The average of the three months ending October was 5.9% below the year-earlier average. As we mentioned last month, President Trump’s executive order deferring certain payroll obligations through December 31, 2020 complicates comparisons with earlier data.

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.

October 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil edged down by $0.23 (-0.6%), to $39.40 per barrel in October. That decrease occurred within the context of a marginally weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 116,000 barrel-per-day (BPD) increase in the amount of petroleum products demanded/supplied during August (to 18.4 million BPD, on par with volumes during/after the Great Recession), and a further decline in accumulated oil stocks (October average: 489 million barrels) -- falling below maximum of the five-year average range for the first time since mid-April.

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From the 2 November 2020 issue of The Energy Bulletin:

Oil posted its largest monthly drop [in the futures market] since March as renewed lockdown measures to contain the coronavirus threatened to upend a shaky demand recovery. Futures fell 1.1 percent in New York on Friday [10/30] to end the week below $36 a barrel, taking their cue from a broader market selloff and the worst week for U.S. stocks since March. Simultaneously, the U.S. posted a record surge in daily coronavirus infections, while new restrictions in Europe could drive the region toward another recession.

Oil futures settled near five-month lows Oct 30^th as rising COVID-19 cases continued to weigh on demand outlooks. New York settled at $35.79, and London was down to $37.46. Front-month WTI last settled lower on Jun 1st, while Brent futures were the weakest since May 29th. The slide comes as Europe's three largest economies, the UK, Germany, and France, prepare to enter partial one-month lockdowns to halt a growing second wave of the pandemic. European energy demand was already trending lower ahead of the lockdowns.

Two-thirds of the U.S. Gulf of Mexico's crude oil production was shut on Oct 28^th ahead of Hurricane Zeta. About 35 percent of the Gulf's platforms and rigs, or 231 facilities, were evacuated. Zeta was the 27^th named storm of the year, tying the 2005 record with more than a month remaining in the hurricane season. New Orleans-area refineries are returning after Hurricane Zeta knocked out power in much of southeastern Louisiana. An estimated 1.23 million b/d of crude production and 1,090 million cf/d of natural gas production remained offline on Oct 30th.

The monthly Reuters poll of 41 analysts forecasts that oil prices will continue to trade in a narrow range for the rest of the year, and the average Brent price next year will not exceed $50 a barrel. In another sign that the second coronavirus wave is hitting fuel demand, oil trading firms are looking for supertankers to use as floating storage for diesel. Analysts are expecting lower than usual diesel demand from the industrial, heating, and transport sector in the coming months.

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Selected highlights from the 30 October 2020 issue of OilPrice.com’s Oil & Energy Insider include:

Oil prices plunged [the last week of October] after spending months trapped in a narrow range around $40 per barrel. Renewed national lockdowns in France and Germany rattled financial markets, while the U.S. case count for covid-19 remained at record levels and may continue to rise. “As lockdowns begin to bite on demand concerns across Europe, the near-term outlook for crude starts to deteriorate,” said Stephen Innes, chief global market strategist at Axi. In early trading on Friday [10/30], WTI fell to $35 per barrel and Brent was at $37.

ExxonMobil warns of massive $30 billion write down. ExxonMobil posted a third-quarter loss of $680 million, or 15 cents per share, a smaller loss than expected. Exxon’s debt has climbed to $68 billion, more than triple since 2014. But the bigger news was that CEO Darren Woods warned that the company may take a $30 billion write-down, largely related to its North American shale gas assets. Exxon overpaid for XTO Energy more than a decade ago, right before a steep drop in natural gas prices.

ExxonMobil to cut jobs; keeps dividend flat. ExxonMobil kept its dividend flat for the first time in nearly 40 years. But with a dividend yield in excess of 10%, the oil major will be under pressure going forward. Exxon will also cut 15% of its workforce, which will translate into job losses of about 1,900.

OPEC members reluctant to extend cuts. Three of the biggest OPEC producers behind Saudi Arabia may not be on board with extending the current cuts into next year. Iraq, the United Arab Emirates (UAE), and Kuwait are reportedly not particularly inclined to support a rollover of the cuts of 7.7 million barrels per day (bpd), because such cuts are too deep for their economies and budget incomes to sustain.

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.

October 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 October. The PMI registered 59.3%, up 3.9 percentage points (PP) from the September 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. The sub-indexes reflected that faster growth, including “too-low” customer inventories, and slowing supplier deliveries -- “which is typical as the economy improves and customer demand increases.”

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The services sector -- which accounts for 80% of the economy and 90% of employment -- expanded at a somewhat slower rate (-1.2PP, to 56.6%). The most noteworthy changes in the services PMI (formerly known as NMI) sub-indexes included a greater prevalence of businesses paying higher input prices (+4.9PP), and a jump in order backlogs (+4.3PP).

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All of the industries we track expanded. Comments from respondents included:

Construction. “Interesting business cycle: Labor is still in short supply, and work orders are picking up.”

Paper Products. “October order books are the strongest we have seen in the past six months.”

Furniture & Related Products: “Construction materials have leveled off but continue to be at an all-time high. Mills for board sheet stock have pushed out lead times citing increasing backlogs related to the pandemic and increased supply in the housing market.”

 

Relevant commodities:

Priced higher. Freight, labor (general and temporary), construction contractors, lumber and lumber products, wood pallets, and corrugate.

Priced lower. None.

Prices mixed. Fuel.

In short supply. Labor (construction and temporary), construction contractors and subcontractors, lumber, and paper products.

 

Findings of IHS Markit‘s October survey results were somewhat more positive than their ISM counterparts.

Manufacturing. PMI improves to highest since January 2019.

Key findings:

* Faster expansions in output and new orders drive overall improvement

* Employment growth slows amid dwindling pressure on capacity

* Cost burdens rise at sharpest pace since the start of 2019

 

Services. Business activity expands at fastest pace since April 2015.

Key findings:

* Stronger demand conditions drive faster upturn in output

* Business expectations show record jump to highest since April 2018

* Cost pressures and hiring ease

 

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

Manufacturing. “With clues being sought as to whether the economy can sustain its recovery after rebounding from lockdowns, the rise in the PMI in October is encouraging news. It’s inevitable that the pace of economic expansion will weaken after the surge seen in the third quarter, but the strength of the PMI hints at a recovery for which the underlying trend continues to strengthen at the start of the fourth quarter.

“Producers of investment goods such as business equipment and machinery are leading the upturn in a welcome sign of rising business confidence and corporate investment, but it was worrying to see consumer goods producers report weakened order book growth, reflecting rising virus-related worries. Going forward, much will naturally depend on the extent to which the economy can remain open and functioning in the face of rising virus case numbers.”

 

Services. “Growth of business activity accelerated markedly in October, indicating that the underlying health of the U.S. economy continued to recover at the start of the fourth quarter. While fourth quarter GDP will [inevitably] fail to match the strong rebound seen in the third quarter, the economy looks to be continuing to grow at an above-trend rate.

“Encouragingly, future business optimism showed a record surge, pulling prospects for the year ahead up to the highest for more than two years. Hopes of a brighter outlook were pinned on a vaccine ending the COVID-19 pandemic over the coming year and additional stimulus supporting the economy in the meantime.”

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.

September 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 September increased $1.6 billion or 0.3% to $482.8 billion. Durable goods shipments increased $0.9 billion or 0.4% to $245.2 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased $0.7 billion or 0.3% to $237.6 billion, led by beverage and tobacco products. Shipments of wood products rose by 3.1%; paper: +0.1%.

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Inventories increased $0.2 billion or virtually unchanged to $686.7 billion. The inventories-to-shipments ratio was 1.42, down from 1.43 in August. Inventories of durable goods increased $1.4 billion or 0.3% to $421.8 billion, led by transportation equipment. Nondurable goods inventories decreased $1.3 billion or 0.5% to $264.9 billion, led by petroleum and coal products. Inventories of wood products rose by 0.8%; paper: +0.2.

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New orders increased $5.2 billion or 1.1% to $475.0 billion. Excluding transportation, new orders rose by $2.1 billion or 0.5% (-1.5% YoY). Durable goods orders increased $4.4 billion or 1.9% to $237.4 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- increased by $0.7 billion or 1.0% (+6.1% YoY). New orders for nondurable goods increased $0.7 billion or 0.3% to $237.6 billion.

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Unfilled durable-goods orders decreased $2.5 billion or 0.2% to $1,075.9 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.59, down from 6.60 in August. 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.

October 2020 Currency Exchange Rates

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In October the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-0.1%) and the Japanese yen (-0.4%), but appreciated fractionally against the euro (+0.1%). On the broad trade-weighted index basis (goods and services), the USD weakened by 0.5% 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.