December 2020 Residential Sales, Inventory and Prices

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Sales of new single-family houses in December 2020 were at a seasonally adjusted annual rate (SAAR) of 842,000 units (869,000 expected). This is 1.6% (±15.8%)* above the revised November rate of 829,000 (originally 841,000 units) and 15.2% (±17.2%)* above the December 2019 SAAR of 731,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was +12.2%. For longer-term perspectives, NSA sales were 39.4% below the “housing bubble” peak but 5.2% above the long-term, pre-2000 average.

An estimated 810,000 new homes were sold in 2020. This is 18.8% (±4.3%) above the 2019 figure of 683,000.

The median sales price of new houses sold in December jumped ($12,000 or +3.5% MoM) to a new all-time high of $355,900; meanwhile, the average sales price rose to $394,900 ($1,700 or +0.4% MoM). Starter homes (defined here as those priced below $200,000) comprised 5.5% of the total sold, down from the year-earlier 10.2%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 were so few, the Census Bureau did not report actual numbers.

* 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 December, single-unit completions increased by 91,000 units (+10.2%). Because sales (+13,000 units; +1.6%) rose more slowly than completions, inventory for sale expanded in both absolute (+12,000 units) and months-of-inventory (+0.1 month) terms. 

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Existing home sales nudged higher in December (50,000 units or +1.9%), to a SAAR of 6.76 million units (6.540 million expected). Inventory of existing homes for sale contracted in both absolute (-210,000 units) and months-of-inventory terms (-0.4 month). Because resales rose proportionally more slowly than new-home sales, the share of total sales comprised of new homes inched up to 11.1%. The median price of previously owned homes sold in December retreated to $309,800 ($1,100 or -0.4% MoM).

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Housing affordability improved slightly (+1.2 percentage points) as the median price of existing homes for sale in November fell by $2,300 (-0.7% MoM; +15.1 YoY), to $315,500. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices rose at a not-seasonally adjusted monthly change of +1.1% (+9.5% YoY).

“The trend of accelerating home prices that began in June 2020 has now reached its sixth month with November’s emphatic report,” said Craig Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P Dow Jones Indices. “The National Composite Index gained 9.5% relative to its level a year ago, accelerating from October’s 8.4% increase. The 10- and 20-City Composites (up 8.8% and 9.1%, respectively) also rose more rapidly in November than they had done in October. The housing market’s strength was once again broadly-based: all 19 cities for which we have November data rose, and all 19 gained more in the 12 months ended in November than they had gained in the 12 months ended in October.

“As COVID-related restrictions began to grip the economy last spring, their effect on housing prices was unclear. Price growth decelerated in May and June before beginning a steady climb upward. November’s report continues that acceleration in a particularly impressive manner. The National Composite last matched this month’s 9.5% growth rate in February 2014, more than six and a half years ago. From the perspective of more than 30 years of S&P CoreLogic Case-Shiller data, November’s 9.5% year-over-year change ranks near the top decile of all monthly reports.

“Recent data are consistent with the view that COVID has encouraged potential buyers to move from urban apartments to suburban homes. This may represent a true secular shift in housing demand, or may simply represent an acceleration of moves that would have taken place over the next several years anyway. Future data will be required to address that question.

“Phoenix’s 13.8% increase led all cities for the 18th consecutive month. Seattle (+12.7%) and San Diego (+12.3%) took the silver and bronze medals once again. Prices were strongest in the West (+10.1%) and Southwest (+9.7%) regions, with the historically lagging Northeast (+9.3%) also turning in an impressive month.”

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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.

4Q2020 Gross Domestic Product: First (“Advance”) Estimate

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The Bureau of Economic Analysis (BEA) pegged its advance (first) estimate of 4Q2020 U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate (SAAR) of +4.02% (+4.2% expected), down 29.42 percentage points (PP) from 3Q2020’s +33.44%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 4Q2020 was 2.46% lower than in 4Q2019; that growth rate was marginally better (+0.39PP) than 3Q2020’s -2.85% relative to 3Q2019. Total GDP was nearly $474 billion (chained 2012 dollars) below its 4Q2019 peak.

Two groupings of GDP components -- personal consumption expenditures (PCE) and private domestic investment (PDI) were the drivers behind the 4Q expansion, whereas net exports (NetX) and government consumption expenditures (GCE) made minor negative offsets.

As for details --

PCE (Contributed +1.70PP to the headline, down 23.74PP from 3Q):

·     Goods. Consumer spending for goods contracted at a rate of 0.10PP, a 9.65PP decline from 3Q. A $7.5billion (nominal) increase in purchases of motor vehicles and parts was more than offset by a decline in food and beverage purchases (-$9.0B).

·     Services. Spending on services decelerated to +1.80PP (-14.09PP from 3Q); once again, health care ($77.8B) led the increase.

PDI (Contributed +4.06PP, down 7.90PP from 3Q):

·     Fixed investment. Gains were fairly evenly split between transportation equipment ($27.6B) and intellectual property products ($26.6B). Residential investment added another $81.9B, or +1.29PP (down 0.90PP from 3Q).

·     Inventories. Inventories expanded by $44.3B, or +1.04PP (down 5.53PP from 3Q).

NetX (Detracted 1.52PP, up 1.69PP from 2Q):

·     Exports. Exports rose by $135.5B, or +2.01PP (down 2.88PP from 3Q).

·     Imports. Imports (recall that imports are inversely correlated with GDP) increased by $204.7B, subtracting 3.53PP from the headline (a 4.57PP improvement from 3Q).

GCE (Detracted 0.22PP, up 0.53PP from 3Q) despite a $16.9B increase in defense expenditures.

Annualized growth in the BLS’s real final sales of domestic product, which excludes the value of inventories) was +2.98% ( down 23.89PP from 3Q).

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“Although the economy has stabilized relative to the free-fall experienced during 2Q, it remains in modest year-over-year contraction,” observed Consumer Metric Institute’s Rick Davis. “Spending on consumer goods and commercial fixed investment have bounced back nicely, although spending on consumer services and by state and local governments are still contracting.

“As expected, the more serious issue is household income. As bad as the material drop in real household disposable income is, the aggregate number masks a huge disparity among those households -- creating a dramatic new socioeconomic divide between households with Covid-safe income streams and those with Covid-devastated income streams. Although this new divide often overlays many of the previously existing economic disparities, there are clearly sectors of the workplace where this particular divide has moved many households from ‘living paycheck to paycheck’ to ‘we have no idea how we are going to pay next month's rent.’

“The year-over-year numbers and household data contain a simple message: the fat lady ain't gonna sing anytime soon,” Davis concluded.

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

December 2020 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in December at a seasonally adjusted annual rate (SAAR) of 1,669,000 units (1.558 million expected). This is 5.8 percent (±11.0 percent)* above the revised November estimate of 1,578,000 (originally 1.547 million units) and 5.2 percent (±10.1 percent)* above the December 2019 SAAR of 1,587,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +4.6%.

Single-family housing starts in December were at a SAAR of 1,338,000; this is 12.0 percent (±13.4 percent)* above the revised November figure of 1,195,000 units (+29.6% YoY). Multi-family: 331,000 units (-13.6% MoM; -39.1% YoY).

An estimated 1,380,300 housing units were started in 2020. This is 7.0 percent (±2.3 percent) above the 2019 figure of 1,290,000.

* 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 1,417,000. This is 15.9 percent (±14.8 percent) above the revised November estimate of 1,223,000 (originally 1.163 million units) and 8.0 percent (±12.2 percent)* above the December 2019 SAAR of 1,312,000 units; the NSA comparison: +9.2% YoY.

Single-family housing completions in December were at a SAAR of 984,000; this is 10.2 percent (±17.0 percent)* above the revised November rate of 893,000 units (+9.2% YoY). Multi-family: 433,000 units (+31.2% MoM; +9.0% YoY).

An estimated 1,290,600 housing units were completed in 2020. This is 2.8 percent (±3.4 percent)* above the 2019 figure of 1,255,100.

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Total permits amounted to a SAAR of 1,709,000 units (1.610 million expected). This is 4.5 percent (±1.4 percent) above the revised November rate of 1,635,000 (originally 1.639 million units) and 17.3 percent (±1.8 percent) above the December 2019 SAAR of 1,457,000 units; the NSA comparison: +21.1% YoY.

Single-family permits were at a SAAR of 1,226,000; this is 7.8 percent (±0.9 percent) above the revised November figure of 1,137,000 units (+38.3% YoY). Multi-family: 483,000 units (-3.0% MoM; -2.6% YoY).

An estimated 1,452,000 housing units were authorized by building permits in 2020. This is 4.8 percent (±0.4 percent) above the 2019 figure of 1,386,000.

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Rising material costs led by a huge upsurge in lumber prices, along with a resurgence of the coronavirus across much of the nation, pushed builder confidence in the market for newly built single-family homes down three points to 83 in January, according to the latest NAHB/Wells Fargo Housing Market Index. Despite the drop, builder sentiment remains at a strong level.

“Despite robust housing demand and low mortgage rates, buyers are facing a dearth of new homes on the market, which is exacerbating affordability problems,” said NAHB Chairman Chuck Fowke. “Builders are grappling with supply-side constraints related to lumber and other material costs, a lack of affordable lots and labor shortages that delay delivery times and put upward pressure on home prices. They are also concerned about a changing regulatory environment.”

“While housing continues to help lead the economy forward, limited inventory is constraining more robust growth,” said NAHB Chief Economist Robert Dietz. “A shortage of buildable lots is making it difficult to meet strong demand and rising material prices are far outpacing increases in home prices, which in turn is harming housing affordability.”

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.

November 2020 International Trade (Softwood Lumber)

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Softwood lumber exports fell (8 MMBF or -8.30%) in November, along with imports (82 MMBF or -5.6%). Exports were 13 MMBF (-12.9%) below year-earlier levels; imports were 331 MMBF (+31.6%) higher. As a result, the year-over-year (YoY) net export deficit was 344 MMBF (+36.4%) larger. Also, the average net export deficit for the 12 months ending November 2020 was 6.1% 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 (50.8%; of which Canada: 24.7%; Mexico: 26.1%), Asia (19.9%; especially China: 4.7%; and Japan: 5.8%), and the Caribbean: 22.1% (especially the Dominican Republic: 7.2%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were -15.0% relative to the same months in 2019. Meanwhile, Canada was the source of most (85.4%) of softwood lumber imports into the United States. Imports from Canada were 0.3% lower YTD than the same months in 2019. Overall, YTD exports were down 16.7% compared to 2019; imports: +3.5%.

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U.S. softwood lumber export activity through the West Coast customs region represented the largest proportion (32.0% of the U.S. total), followed by the Gulf (28.7%) and Eastern (28.1%) regions. Mobile (16.8% of the U.S. total) was the single most-active district, followed by Seattle (16.1%) and San Diego (14.1%). At the same time, Great Lakes customs region handled 57.2% of softwood lumber imports -- most notably the Duluth, MN district (23.1%) -- coming into the United States. 

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Southern yellow pine comprised 28.3% of all softwood lumber exports; Douglas-fir (15.0%) and treated lumber (12.4%) were also significant. Southern pine exports were down 12.3% YTD relative to 2019, while Doug-fir: -13.3%; and treated: -8.1%.

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.

December 2020 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) advanced 1.6% in December (+0.4% expected), with gains of 0.9% for manufacturing, 1.6% for mining, and 6.2% for utilities. The increase for utilities resulted from a rebound in demand for heating after unseasonably warm weather in November. For 4Q as a whole, total IP rose at an annual rate of 8.4%. At 105.7% of its 2012 average, total industrial production in December was 3.6% lower than it was a year earlier and 3.3% below its pre-pandemic February reading.

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Industry Groups

Manufacturing output advanced 0.9% in December for its eighth consecutive monthly gain (NAICS manufacturing: +1.0% MoM; -2.6% YoY). For 4Q, manufacturing production rose at an annual rate of 11.2%. The index for motor vehicles and parts declined 1.6% in December but was nevertheless 3.6% higher than its year-earlier level. Excluding the motor vehicle sector, factory output moved up 1.1% as most manufacturing industries posted gains. The production of durable goods other than motor vehicles and parts rose 1.5%, and nondurable goods production increased 0.9%. Within durables, primary metals posted its seventh consecutive monthly increase; wood products: +2.3%. Within nondurables, plastics and rubber products posted the largest gain (3.2%), while printing and support recorded the only decrease (1.4%); paper products: +0.9%. The output of other manufacturing (publishing and logging) decreased 0.6%.

The index for mining increased 1.6% in December, as continued gains in the oil and gas sector (both extraction and drilling) outweighed declines elsewhere; even so, the index was still 12.3% below its level of a year earlier. For the fourth quarter, mining output rose 3.7% at an annual rate.

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Capacity utilization (CU) for the industrial sector rose 1.1 percentage points (PP) in December, to 74.5%, a rate that is 5.3PP below its long-run (1972–2019) average.

Manufacturing CU increased 0.7PP in December to 73.4%, 13.3PP higher than its trough in April but still 4.8PP below its long-run average (NAICS manufacturing: +1.0% MoM, to 74.0%; wood products: +2.3% MoM; paper products: +0.9% MoM). The operating rates for mining and utilities increased to 80.5% and 74.5%, respectively, but both remained well below their long-run averages.

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Capacity at the all-industries level was essentially unchanged MoM (+0.0 % YoY) at 141.8% of 2012 output. Manufacturing (NAICS basis) was also unchanged (-0.2% YoY) at 140.0%. Wood products: 0.0% (+0.4% YoY) at 169.8%; paper products: -0.1% (-0.8 % YoY) to 108.8%.

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.

December 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 0.4% in December (+0.4% expected). The increase in the all-items index was driven by an 8.4% increase in the gasoline index, which accounted for more than 60% of the overall increase. The other components of the energy index were mixed, resulting in an increase of 4.0% for the month. The food index rose in December, as both the food at home and the food away from home indexes increased 0.4%. 

The index for all items less food and energy increased 0.1% in December after rising 0.2% in the previous month. The indexes for apparel, motor vehicle insurance, new vehicles, personal care, and household furnishings and operations all rose in December. The indexes for used cars and trucks, recreation, and medical care were among those to decline over the month.

The all-items index rose 1.4% for the 12 months ending December, a slightly larger increase than the 1.2% rise reported for the period ending November. The index for all items less food and energy rose 1.6% over the last 12 months, as it did in the periods ending October and November. The food index rose 3.9% over the last 12 months, while the energy index fell 7.0%.

 

Producer Price Index

The producer price index for final demand (PPI-FD) increased 0.3% in December (+0.3% expected). This rise followed advances of 0.1% in November and 0.3% in October. On an unadjusted basis, the final demand index moved up 0.8% in 2020, after increasing 1.4% in 2019.

The MoM advance in the final demand index can be traced to a 1.1% increase in prices for final demand goods. Conversely, the index for final demand services edged down 0.1%.

Prices for final demand less foods, energy, and trade services rose 0.4% in December, the eighth consecutive advance. In 2020, the index for final demand less foods, energy, and trade services moved up 1.1%, following a 1.5% increase in 2019.

Final Demand

Final demand goods: The index for final demand goods advanced 1.1% in December, the largest increase since moving up 1.5% in May. Over 70% of the December rise can be traced to prices for final demand energy, which climbed 5.5%. The index for final demand goods less foods and energy advanced 0.5%. In contrast, prices for final demand foods inched down 0.1%.

Product detail: Nearly half of the December increase in the index for final demand goods is attributable to gasoline prices, which jumped 16.1%. The indexes for iron and steel, diesel fuel, jet fuel, meats, and home heating oil also moved higher. Conversely, prices for natural cheese (except cottage cheese) fell 10.8%. The indexes for electric power and for electronic computers and computer equipment also declined.

Final demand services: The index for final demand services inched down 0.1% in December, the first decrease since falling 0.4% in April. Leading the December decline, margins for final demand trade services decreased 0.8%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand transportation and warehousing services edged down 0.1%. In contrast, the index for final demand services less trade, transportation, and warehousing rose 0.2%.

Product detail: Leading the December decrease in the index for final demand services, margins for fuels and lubricants retailing fell 6.6%. The indexes for apparel, footwear, and accessories retailing; health, beauty, and optical goods retailing; airline passenger services; and deposit services (partial) also moved lower. Conversely, prices for portfolio management increased 1.7%. The indexes for long-distance motor carrying, machinery and equipment parts and supplies wholesaling, and loan services (partial) also advanced.

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The not-seasonally adjusted price indexes we track all rose 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.

December 2020 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm employers shed 140,000 jobs in December (+100,000 expected). As part of the annual revision process, October and November employment changes were revised up by a combined 135,000 (October: +44,000; November: +91,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) was unchanged at 6.7% as most (re)entrants to the labor force (+31,000) apparently found employment (+21,000). 

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Observations from the employment reports include:

* Changes in the establishment (-140,000 jobs) and household surveys (+21,000 employed) were not well correlated. 

* Goods-producing industries gained 93,000 jobs, while service-providing employment lost a much greater 233,000 jobs. Job losses in leisure and hospitality (-498,000) and in educational services (-62,500) were partially offset by gains in professional and business services (+161,000), retail trade (+120,500), and construction (+51,000). Employment in government declined (-45,000), especially among state education workers (-19,900) and local government excluding education (-31,500). 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 December. Wood Products employment ticked up by 1,700 (ISM was unchanged); Paper and Paper Products: +700 (ISM was unchanged); Construction: +51,000 (ISM decreased).

* As a related point, all prior job gains in manufacturing since February 2010 were erased during March and April. Although 820,000 of those nearly 1.4 million jobs have been refilled since then, the recovery has slowed in recent months. More remarkably, employment in Food Services & Drinking Places (i.e., wait staff and bartender) plunged by 6.1 million jobs during those two months -- to a level below the earliest data (January 1990) for that industry. Nearly 4.0 million of those jobs have subsequently reappeared, but erosion is again occurring because of renewed lockdowns.

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* The number of employment-age persons not in the labor force rose (115,000) to 100.7 million. Nonetheless, the employment-population ratio (EPR) was stable at 57.4%; i.e., nearly six in 10 of the employment-age population is presently employed. 

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* Although the civilian labor force expanded by 31,000 in December, the labor force participation rate was unchanged at 61.5%. Meanwhile, average hourly earnings of all private employees jumped by $0.23 to $29.81, resulting in a 5.1% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.20, to $25.09 (+5.2% YoY). These increases largely reflect the disproportionate number of lower-paid workers in leisure and hospitality who went off payrolls, which put upward pressure on the average hourly earnings estimates.

Since the average workweek for all employees on private nonfarm payrolls declined by 0.1 hour, average weekly earnings increased by $5.03, to $1,034.41 (+4.6% YoY). With the consumer price index running at an annual rate of +1.2% in November, whether consumers are keeping up with price inflation depends primarily upon whether or not they are working.

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* Full-time jobs rose (+397,000) to 124.7 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 -- dropped by 471,000, whereas those working part time for non-economic reasons fell by 343,000; multiple-job holders retreated by 99,000. 

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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 December jumped by $52.3 billion, to $247.0 billion (+26.9% MoM; +1.4% 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 December was 2.3% below the year-earlier average. As we have previously mentioned, 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.

December 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 December. The PMI registered 60.7%, up 3.2 percentage points (PP) from the November 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. Rising values in the new orders (+2.8PP), production (+4.0PP) and employment (+3.1PP) supported that acceleration. An increase in slow deliveries likely also contributed to the headline increase, but we think the signal sent by that metric is being misinterpreted: Whereas slow deliveries often reflect pent-up demand in a healthy economy, in this case the metric reflects supply chain disruptions in the context of still-meager demand. The jump in input prices is perhaps the most disconcerting takeaway. 

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The services sector -- which accounts for 80% of the economy and 90% of employment -- also expanded at a marginally faster rate (+1.3PP, to 57.2%). The most noteworthy changes in the services PMI (formerly known as NMI) sub-indexes included jumps in slow deliveries (+5.8PP), inventories (+8.9PP, another indication of anemic demand) and order backlogs (-3.7PP), and exports (+6.9PP).

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Of the industries we track, only Real Estate contracted. Comments from respondents included:

Construction. “Lack of labor continues to be a significant drag on the business. We have plenty of work but are now considering rejecting some orders due to shrinking capacity.”

 

Relevant commodities:

Priced higher. Crude oil; diesel; gasoline; freight; corrugate; corrugate boxes; linerboard; paper products;  lumber; wood pallets; construction contractors; labor (general, temporary and construction); OSB; and shingles.

Priced lower. None.

Prices mixed. None.

In short supply. Construction contractors; labor; corrugate boxes.

 

Findings of IHS Markit‘s December survey results were about on par with their ISM counterparts.

Manufacturing. Operating conditions improve at fastest pace since September 2014.

Key findings:

* Expansions in output and new orders remain marked
* Supply chain disruptions most severe on record
* Sharpest rise in cost burdens since April 2018

 

Services. Business activity growth slowest for three months amid rise in virus cases.

Key findings:

* Output and new order growth ease from November's peaks
* Cost burdens rise at survey-record pace
* Business expectations moderate amid pandemic uncertainty

 

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

Manufacturing. “Manufacturers reported a strong end to 2020, with production and order books continuing to grow, albeit with the rates of expansion slowing as a result of rising virus case numbers and related restrictions. Producers of consumer goods reported a marked downturn in orders and production, reflecting weakened consumer expenditure amid the resurgence of COVID-19.

“More encouragingly, producers of machinery and equipment reported sustained strong demand, suggesting companies are increasing their investment spending. Producers of inputs to other factories also fared well, as manufacturers sought to restock their warehouses.

“However, the survey also highlights how manufacturers are now not only facing weaker demand conditions due to the pandemic, but are also seeing COVID-19 disrupt supply chains further, causing shipping delays. These delays are limiting production capabilities as well as driving producers’ input prices sharply higher, adding to the sector’s woes.

“Firms nevertheless remain highly positive about the outlook for the year ahead, anticipating that vaccine rollouts will help drive a further recovery in 2021, although some of November’s post-election exuberance has been tamed by the recent rise in virus case numbers, suggesting the near-term outlook will remain challenging."

 

Services. "Rising virus case numbers took an increasing toll on the US economy in December, with business activity, order books and employment all growing at much reduced rates. The slowdown was especially steep in the service sector, where stricter social distancing measures hit consumer-facing businesses in particular.

“While the survey data remained sufficiently resilient to indicate that GDP continued to expand at a relatively robust rate in the fourth quarter, the near-term outlook has deteriorated. Business expectations for the coming year fell considerably compared to November, as some postelection exuberance waned and companies grew more anxious about the ongoing impact of the pandemic. Rising case numbers represent an increased risk to the economy in the coming weeks, and hopes rest to a large extent on pandemic stimulus lifting the economy to prevent another downturn.

“More encouragingly, businesses remain much more confident about the outlook in a year’s time than before the successful vaccine developments, reflecting greater optimism for prospects of life returning to normal in the second half of 2021.”

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.

December 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose by $6.09 (+14.9%), to $47.03 per barrel in December. That increase occurred within the context of a weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 317,000 barrel-per-day (b/d) increase in the amount of petroleum products demanded/supplied during October (to 18.6 million b/d, on par with volumes during/after the Great Recession), and little change in accumulated oil stocks (December average: 499 million barrels).

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From the 4 January 2021 issue of The Energy Bulletin:

Prognosis: Average oil demand will probably rise by the most on record in 2021. The International Energy Agency projects consumption will increase by almost 6 million b/d this year but will average just 96.9 million b/d -- still well below the pre-pandemic record of 100 million in 2019. Oil demand was also forecast initially to expand by about 1 million b/d in 2020 and 2021. That means consumption in 2021 should be at least 5 million b/d below where it would have been without the coronavirus.

The sector with significantly lower demand this year will likely be jet fuel, with airlines consuming 2.5 million b/d less than before the pandemic. According to the IEA, gasoline and diesel demand are expected to be restricted in the first half of the year until vaccines are more widely available and will only reach 97-99 percent of pre-pandemic levels. A drop in economic output will also hurt demand with reduced manufacturing and fewer goods shipped by sea.

The outlook for oil supply is more complicated. Investment in the industry has been falling, and the pandemic has delayed drilling programs. U.S. shale, which transformed the oil and gas industry for much of the past five years, is in trouble. According to the EIA, this relatively expensive source of supply has been hard hit by the crash in prices, with U.S. crude output falling from a record 12.3 million b/d in 2019 to 11.3 million in 2020. Shale oil production stabilized in the second half of 2020, but the days of rapid growth are behind it for now. The EIA sees U.S. supply slipping to 11.1m b/d in 2021.

One of the critical variables for oil will be how shale and other producers respond if prices rise much above $50 a barrel - a level where most companies can cover their costs. Globally, the IEA sees non-OPEC growing by 500,000 b/d this year after falling 2.6 million b/d in 2020.

The supply surplus that developed due to the pandemic puts a lot of weight on what OPEC+ will do. The alliance called off a month-long price war in April and agreed to cut almost 10 percent of global oil production to rescue the market. The deal was meant to taper, allowing countries to produce more as demand recovers. But a drawn-out crisis has left them stuck with more than 7 million b/d of crude still offline. They are expected to meet again on Jan. 4th to discuss adding back 500,000 b/d.

The most significant geopolitical shift in 2021 will probably be the election of Joe Biden as U.S. president. President Trump became heavily involved with OPEC decisions, pressuring Saudi Arabia to raise or lower production in return for his support. President-elect Joe Biden is expected to be less hands-on with the cartel, but he may end up being no less influential. The potential revival of the Iran nuclear deal could result in Tehran adding close to 2 million b/d of crude back to the market if U.S. sanctions ease.

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Selected highlights from the 5 January 2021 issue of OilPrice.com’s Intelligence Report include:

OPEC+ leans towards no change. Oil prices rallied on Tuesday morning, following reports that Russia -- the OPEC+ producer that was insisting on a 500,000-bpd production increase in February -- has agreed that there would not be another rise in the pact's production next month.

U.S. shale could recover. EIA estimates point to U.S. oil production staying at around 11 million bpd for at least another year, as production rates from existing wells in the U.S. shale patch will fall faster than production gains from fewer newly drilled wells. But some analysts say that the market has been too quick to write off U.S. shale again, and will be surprised by the rebound in American oil production in 2021.

Permian showing signs of life. On the ground in the Permian basin, there are visible signs of an uptick in activity. More traffic, higher production, and better-than-expected revenues for the New Mexico state government. New Mexico's oil production increased by 5.5% in the third quarter.

Dallas Fed: Shale returning. The quarterly Dallas Fed survey showed a positive reading for its oil and gas index, the first positive reading since the first quarter of 2019. Multiple readings in the survey -- capex, drilling activity, employment, oilfield services activity -- showed improvement.

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.

November 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 November increased $3.4 billion or 0.7 percent to $492.9 billion. Durable goods shipments increased $0.8 billion or 0.3 percent to $250.1 billion, led by miscellaneous products. Meanwhile, nondurable goods shipments increased $2.7 billion or 1.1 percent to $242.8 billion, led by petroleum and coal products. Shipments of wood products rose by 1.0%; paper: +0.6%.

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Inventories increased $5.1 billion or 0.7 percent to $692.9 billion. The inventories-to-shipments ratio was 1.41, unchanged from October. Inventories of durable goods increased $3.8 billion or 0.9 percent to $426.5 billion, led by transportation equipment. Nondurable goods inventories increased $1.3 billion or 0.5 percent to $266.5 billion, led by petroleum and coal products. Inventories of wood products rose by 0.5%; paper: -0.2%.

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New orders increased $5.0 billion or 1.0 percent to $487.2 billion. Excluding transportation, new orders rose by $3.4 billion or 0.8% (-0.6% YoY). Durable goods orders increased $2.3 billion or 1.0 percent to $244.4 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- increased by $0.4 billion or 0.5% (+7.6% YoY). New orders for nondurable goods increased $2.7 billion or 1.1 percent to $242.8 billion.

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Unfilled durable-goods orders decreased $0.6 billion or 0.1 percent to $1,073.2 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.40, up from 6.38 in October. 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 lower.

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.

December 2020 Currency Exchange Rates

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In December the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-2.0%), the euro (-2.8%), and the Japanese yen (-0.6%). On the broad trade-weighted index basis (goods and services), the USD weakened by 1.9% against a basket of 26 currencies.

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