4Q2020 Gross Domestic Product: Second Estimate

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In its second estimate of 4Q2020 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) lifted the growth rate of the U.S. economy to a seasonally adjusted and annualized rate (SAAR) of +4.10% (+4.1% expected), up 0.08 percentage point (PP) from the “advance” estimate (“4Qv1”) but down 29.34PP from 3Q2020.

As with 4Qv1, 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. All line-item contributions to the headline percentage change were revised by ±0.1PP or less relative to 4Qv1; in fact 16 of the 21 line items changed by ±0.05PP or less. Generally speaking, growth in consumer spending on goods decelerated more quickly than reported in 4Qv1, while growth in commercial and private fixed investments decelerated more slowly than first thought. Revisions to net exports and government spending offset each other. As for details:

PCE. Contribution to 4Q headline: +1.61PP; -23.83PP from 3Q and -0.09PP from 4Qv1. Spending on furnishings and durable household equipment (-$3.4 billion, nominal) led the 3Q-to-4Q decline in durable goods purchases, while food and beverage purchases (-$7.3B) led the decline in nondurable goods. However, those declines were more than offset by QoQ increases in spending on healthcare (+$78.1B) and housing and utilities (+$17.7B).

PDI. Contribution to 4Q headline: +4.23PP; -7.73PP from 3Q but +0.17PP from 4Qv1. Equipment (+$64.2B relative to 3Q; especially transportation), residential spending (+$88.1B) and nonfarm inventories (+$44.9B) were the major drivers behind PDI’s positive 4Q headline contribution.

NetX. Contribution to 4Q headline: -1.55PP; +1.66PP from 3Q but -0.03PP from 4Qv1. Goods exports were $122.8b higher than in 3Q, but that was more than offset by a $176.7B increase in goods imports.

GCE. Contribution to 4Q headline: -0.19PP; +0.56PP from 3Q and +0.03PP from 4Qv1. Federal (+$6.5B, mostly defense-related) and state and local spending (+$9.4B) both increased relative to 3Q.

The BEA's real final sales of domestic product -- which ignores inventories -- was revised to +2.99% (+0.01PP), a level 23.88PP below the 3Q estimate. 

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Consumer Metric Institute’s Rick Davis summarized the key points of this report as follows:

-- Consumer spending on goods continues to contract, and consumer spending on services shows only modest growth after the 3Q2020 bounce from the horrific lows of 2Q2020.

-- The growth in fixed investment spending is occurring in both non-residential and residential arenas, with the non-residential growth happening mostly in IT and transportation infrastructures -- which shouldn't shock anybody.

“The line item growth revisions in this report are statistical noise,” Davis concluded. “The more interesting quarter-to-quarter changes show the economy organically adjusting to some sort of ‘new reality.’ The real questions are how much of the displacements are merely temporary, and how long ‘temporary’ really is.”

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.

January 2021 Residential Sales, Inventory and Prices

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Sales of new single-family houses in January 2021 were at a seasonally adjusted annual rate (SAAR) of 923,000 units (855,000 expected). This is 4.3% (±18.1%)* above the revised December rate of 885,000 (originally 842,000 units) and 19.3% (±19.5%)* above the January 2020 SAAR of 774,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was +18.6%. For longer-term perspectives, NSA sales were 33.5% below the “housing bubble” peak but 33.9% above the long-term, pre-2000 average.

The median sales price of new houses sold in January slid ($6,700 or -1.9% MoM) to $346,400; meanwhile, the average sales price jumped to $408,800 ($14,100 or +3.6% MoM). Starter homes (defined here as those priced below $200,000) comprised 5.7% of the total sold, down from the year-earlier 6.8%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 were 1.4% of sales, down from 1.7% a year earler.

* 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 January, single-unit completions increased by 94,000 units (+10.0%). Because sales (+38,000 units; +4.3%) rose more slowly than completions, inventory for sale expanded in absolute terms (+8,000 units) but shrank in months-of-inventory (-0.1 month) terms. 

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Existing home sales nudged higher in January (40,000 units or +0.6%), to a SAAR of 6.69 million units (6.600 million expected). Inventory of existing homes for sale contracted in absolute terms (-20,000 units) but was unchanged in months-of-inventory terms. Because resales rose proportionally more slowly than new-home sales, the share of total sales comprised of new homes rose to 12.1%. The median price of previously owned homes sold in January retreated to $303,900 ($5,300 or -1.7% MoM).

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Housing affordability improved (+3.6 percentage points) as the median price of existing homes for sale in December fell by $1,900 (-0.6% MoM; +13.2 YoY), to $313,700. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices rose at a not-seasonally adjusted monthly change of +0.9% (+10.4% YoY).

“Home prices finished 2020 with double-digit gains, as the National Composite Index rose by 10.4% compared to year-ago levels,” said Craig Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P DJI. “The trend of accelerating prices that began in June 2020 has now reached its seventh month and is also reflected in the 10- and 20-City Composites (up 9.8% and 10.1%, respectively). The market’s strength continues to be broadly-based: 18 of the 19 cities for which we have December data rose, and 18 cities gained more in the 12 months ended in December than they had gained in the 12 months ended in November.

“As COVID-related restrictions began to grip the economy in early 2020, their effect on housing prices was unclear. Price growth decelerated in May and June, and then began a steady climb upward, and December’s report continues that acceleration in an emphatic manner. 2020’s 10.4% gain marks the best performance of housing prices in a calendar year since 2013. From the perspective of more than 30 years of S&P CoreLogic Case-Shiller data, December’s year-over-year change ranks within the top decile of all reports.

“These data are consistent with the view that COVID has encouraged potential buyers to move from urban apartments to suburban homes. This may indicate a 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 14.4% increase led all cities for the 19th consecutive month, with Seattle (+13.6%) and San Diego (+13.0%) close behind. Prices were strongest in the West (+10.8%) and Southwest (+10.5%), but gains were impressive in every region.”

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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.

January 2021 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in January at a seasonally adjusted annual rate (SAAR) of 1,580,000 units (1.650 million expected). This is 6.0% (±16.4%)* below the revised December estimate of 1,680,000 (originally 1.669 million units) and 2.3% (±13.9%)* below the January 2020 SAAR of 1,617,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -3.2%.

Single-family housing starts in January were at a SAAR of 1,162,000; this is 12.2% (±11.3%) below the revised December figure of 1,323,000 units (+15.6% YoY). Multi-family: 418,000 units (+17.1% MoM; -30.9% 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 1,336,000. This is 2.3% (±6.6%)* below the revised December estimate of 1,368,000 (originally 1.417 million units), but 2.4% (±11.0%)* above the January 2020 SAAR of 1,305,000 units; the NSA comparison: +4.0% YoY.

Single-family housing completions were at a SAAR of 1,036,000; this is 10.0% (±8.5%) above the revised December rate of 942,000 units (+17.4% YoY). Multi-family: 300,000 units (-29.6% MoM; -26.4% YoY).

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Total permits amounted to a SAAR of 1,881,000 units (1.670 million expected). This is 10.4% (±1.2%) above the revised December rate of 1,704,000 (originally 1.709 million units) and 22.5% (±1.8%) above the January 2020 SAAR of 1,536,000 units; the NSA comparison: +13.7% YoY.

Single-family permits were at a SAAR of 1,269,000; this is 3.8% (±0.9%) above the revised December figure of 1,223,000 units (+19.2% YoY). Multi-family: 612,000 units (+27.2% MoM; +4.7% YoY).

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Strong buyer demand helped offset supply chain challenges and a surge in lumber prices as builder confidence in the market for newly built single-family homes inched up one point to 84 in February, according to the latest NAHB/Wells Fargo Housing Market Index (HMI).

“Lumber prices have been steadily rising this year and hit a record high in mid-February, adding thousands of dollars to the cost of a new home and causing some builders to abruptly halt projects at a time when inventories are already at all-time lows,” said NAHB Chairman Chuck Fowke. “Builders remain very focused on regulatory and other policy issues that could price out households seeking new homes in a tight market this year.”

“Demand conditions remain solid due to demographics, low mortgage rates and the suburban shift to lower cost markets, but we expect to see some cooling in growth rates for residential construction in 2021 due to cost factors, supply chain issues and regulatory risks,” said NAHB Chief Economist Robert Dietz. “Some builders are at capacity and may not be able to expand production due to these headwinds.”

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.

January 2021 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) increased 0.9% in January (+0.5% expected). Manufacturing output rose 1.0%, about the same as its average gain over the previous five months. Mining production advanced 2.3%, while the output of utilities declined 1.2%. At 107.2% of its 2012 average, total IP in January was 1.8% lower than its year-earlier level. 

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Industry Groups

Manufacturing output increased 1.0% in January (NAICS manufacturing: +1.0% MoM; -0.8% YoY). Durable and nondurable manufacturing recorded advances of 0.9% and 1.2%, respectively, while other manufacturing (publishing and logging) posted a decrease of 0.8%. Among durables, many sectors experienced gains of between 1 and 2½%. The largest gain, 3.9%, was posted by primary metals, while the only losses were posted by nonmetallic mineral products and by motor vehicles and parts (wood products: +0.9%). The output of motor vehicles was held down by a global shortage of semiconductors used in vehicle components. Most nondurable sectors recorded growth rates in the 1 to 2% range. The only exceptions were the indexes for paper (-0.7%) and for printing and support, which both declined a bit more than ½%.

The output of utilities fell 1.2% in January, largely because of a drop of 5.7% for natural gas utilities. The index for mining jumped 2.3%. Oil and gas well drilling continued its climb with an advance of 11.3%, though it remains about 50% below its year-earlier level. An increase of more than 1% for oil and natural gas extraction also contributed significantly to the gain for mining in January.

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Capacity utilization (CU) for the industrial sector increased 0.7 percentage point (PP) in January to 75.6%, a rate that is 4.0% below its long-run (1972–2020) average.

Manufacturing CU increased 0.7PP in January to a rate 14.5PP higher than its trough in April and less than 1PP below its pre-pandemic level (NAICS manufacturing: +1.0% MoM, to 75.2%; wood products: +0.8% MoM; paper products: -0.8% MoM). The operating rate for mining rose 2.0PP to 82.2%, while the operating rate for utilities dropped 1.1PP to 73.5%; both rates remained below their long-run averages.

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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: +0.1% (+0.4% YoY) at 169.9%; paper products: +0.1% (-0.7% YoY) to 108.9%.

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.

January 2021 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 0.3% in January (+0.3% expected). The gasoline index continued to increase, rising 7.4% in January and accounting for most of the seasonally adjusted increase in the all items index. Although the indexes for electricity and natural gas declined, the energy index rose 3.5% over the month. The food index rose slightly in January, increasing 0.1% as an advance in the index for food away from home more than offset a decline in the index for food at home.

The index for all items less food and energy was unchanged in January. The indexes for apparel, medical care, shelter, and motor vehicle insurance all increased over the month. The indexes for recreation, used cars and trucks, airline fares, and new vehicles all declined in January.

The all items index rose 1.4% for the 12 months ending January, the same increase as for the period ending in December. The index for all items less food and energy also rose 1.4% over the last 12 months, a smaller increase than the 1.6% rise for the 12 months ending December. The food index rose 3.8% over the last 12 months. In contrast to these increases, and despite rising in recent months, the energy index declined 3.6% over the last year.

 

Producer Price Index

The producer price index for final demand (PPI-FD) increased 0.3% in December. 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 producer price index for final demand (PPI-FD) increased 1.3% in January (+0.4% expected). This advance is the largest since the index began in December 2009. Final demand prices rose 0.3% in December and 0.1% in November. Two-thirds of the January advance in prices for final demand can be traced to a 1.3% rise in the index for final demand services. Prices for final demand goods increased 1.4%.

On an unadjusted basis, the index for final demand moved up 1.7% for the 12 months ended January 2021, the largest increase since climbing 2.0% for the 12 months ended January 2020. Prices for final demand less foods, energy, and trade services moved up 1.2% in January, the largest advance since the index began in September 2013. For the 12 months ended in January, prices for final demand less foods, energy, and trade services rose 2.0%, the largest increase since a 2.1% advance for the 12 months ended June 2019.

Final Demand

Final demand services: Prices for final demand services rose 1.3% in January, the largest advance since the index began in December 2009. Over 70% of the broad-based January increase is attributable to a 1.4% jump in prices for final demand services less trade, transportation, and warehousing. The indexes for final demand trade services and for final demand transportation and warehousing services also moved higher, 1.0% and 1.3%, respectively. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product Detail: One-fourth of the January advance in the index for final demand services can be traced to a 9.4% rise in prices for portfolio management. The indexes for outpatient care (partial); guestroom rental; machinery and vehicle wholesaling; apparel, jewelry, footwear, and accessories retailing; and truck transportation of freight also moved higher. Conversely, margins for automobile retailing (partial) fell 7.7%. The indexes for food retailing and for property and casualty insurance also declined. (See table 4.)

Final demand goods: Prices for final demand goods moved up 1.4% in January, the largest increase since the index jumped 1.4% in May 2020. Nearly 60% of the broad-based January advance is attributable to a 5.1% rise in prices for final demand energy. The indexes for final demand goods less foods and energy and for final demand foods also climbed, 0.8% and 0.2%, respectively.

Product Detail: Forty percent of the January increase in prices for final demand goods can be traced to a 13.6% jump in the index for gasoline. Prices for iron and steel scrap, oilseeds, industrial chemicals, diesel fuel, and light motor trucks also rose. In contrast, the index for beef and veal declined 8.4%. Prices for fresh and dry vegetables and for search, detection, navigation, and guidance systems and equipment also fell.

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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 International Trade (Softwood Lumber)

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Softwood lumber exports rose (4 MMBF or +4.5%) in December, along with imports (35 MMBF or +2.5%). Exports were 1 MMBF (-0.9%) below year-earlier levels; imports were 175 MMBF (+14.1%) higher. As a result, the year-over-year (YoY) net export deficit was 175 MMBF (+15.3%) larger. Also, the average net export deficit for the 12 months ending December 2020 was 6.5% 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 (49.9%; of which Canada: 27.1%; Mexico: 22.9%), Asia (19.2%; especially China: 5.2%; and Japan: 4.5%), and the Caribbean: 23.7% (especially the Dominican Republic: 9.1%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were -16.0% relative to the same months in 2019. Meanwhile, Canada was the source of most (81.9%) of softwood lumber imports into the United States. Imports from Canada were 0.3% higher YTD than the same months in 2019. Overall, YTD exports were down 15.6% compared to 2019; imports: +4.4%.

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U.S. softwood lumber export activity through the West Coast customs region represented 32.0% of the U.S. total; Gulf: 30.7%, and Eastern: 24.7%. Mobile (19.8% of the U.S. total) was the single most-active district, followed by Seattle (17.4%) and San Diego (12.5%). At the same time, Great Lakes customs region handled 55.1% of softwood lumber imports -- most notably the Duluth, MN district (22.8%) -- coming into the United States. 

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Southern yellow pine comprised 29.8% of all softwood lumber exports; Douglas-fir (15.4%) and treated lumber (12.3%) were also significant. Southern pine exports were down 10.6% YTD relative to 2019, while Doug-fir: -12.9%; and treated: -7.8%.

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.

January 2021 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm employers added a “meager” 49,000 jobs in January (+50,000 expected). November and December employment changes were revised down by a combined 159,000 (November: -72,000; December: -87,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) declined by 0.4 percentage point (to 6.3%) due largely to people abandoning job searches and thereby dropping out of the labor force. 

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Observations from the employment reports include:

* Changes in the establishment (+49,000 jobs) and household surveys (+201,000 employed -- although the BLS cautions against making MoM comparisons between December and January because of the annual benchmarking process) were not well correlated. 

* Goods-producing industries gave up 4,000 jobs, while service-providing employment added 53,000 positions. Notable job gains in professional and business services (+97,000), temporary help services (+80,900) and in both public (+85,500) and private (+33,900) education were offset by losses in leisure and hospitality (-61,000), in retail trade (-37,800), in health care (-40,800), and in transportation and warehousing (-27,800). Manufacturing contracted by 10,000 jobs. That result is somewhat inconsistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which rose faster in January. Wood Products employment ticked up by 1,300 (ISM was rose); Paper and Paper Products: -400 (ISM declined); Construction: -3,000 (ISM increased).

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* The number of employment-age persons not in the labor force rose (27,000) to 100.7 million. As a result, the employment-population ratio (EPR) ticked up to 57.5%; i.e., nearly six in 10 of the employment-age population are presently employed. 

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* Because the civilian labor force likely declined by roughly 400,000 in January, the labor force participation rate also nudged down to 61.4%. Meanwhile, average hourly earnings of all private employees rose by $0.06 to $29.96, resulting in a 5.4% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.03, to $25.18 (+5.4% YoY). Since the average workweek for all employees on private nonfarm payrolls expanded by 0.3 hour, average weekly earnings increased by $11.07, to $1,048.60 (+7.5% YoY). With the consumer price index running at an annual rate of +1.4% in December, 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 (+301,000) to 125.0 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 216,000, whereas those working part time for non-economic reasons rose by 282,000; multiple-job holders advanced by 163,000. 

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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 January declined by $21.7 billion, to $225.3 billion (-8.8% MoM; -3.1% 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 January was 1.5% below the year-earlier average. We expected withholding to jump, given the expiration of former-President Trump’s executive order deferring certain payroll obligations through December 31, 2020.

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 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 December increased $8.4 billion or 1.7% to $501.8 billion. Durable goods shipments increased $4.3 billion or 1.7% to $254.7 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased $4.1 billion or 1.7% to $247.1 billion, led by petroleum and coal products. Shipments of wood products rose by 1.8%; paper: +0.4%.

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Inventories increased $2.1 billion or 0.3% to $695.7 billion. The inventories-to-shipments ratio was 1.39, down from 1.41 in November. Inventories of durable goods decreased $1.0 billion or 0.2% to $425.6 billion, led by transportation equipment. Nondurable goods inventories increased $3.1 billion or 1.1% to $270.2 billion, led by petroleum and coal products. Inventories of wood products rose by 0.7%; paper: +0.2%.

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New orders increased $5.2 billion or 1.1% to $493.5 billion. Excluding transportation, new orders rose by $5.8 billion or 1.4% (+2.7% YoY). Durable goods orders increased $1.2 billion or 0.5% to $246.4 billion, led by machinery. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- increased by $0.5 billion or 0.7% (+11.5% YoY). New orders for nondurable goods increased $4.1 billion or 1.7% to $247.1 billion.

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Unfilled durable-goods orders decreased $3.0 billion or 0.3% to $1,070.8 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.28, down from 6.40 in November. Real unfilled orders, which had been a good litmus test for sector growth, show an even more-negative 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.

January 2021 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 $4.98 (+10.6%), to $52.0 per barrel in January. 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 78,000 barrel-per-day (b/d) increase in the amount of petroleum products demanded/supplied during November (to 18.7 million b/d, on par with volumes during/after the Great Recession), and a modest decline in accumulated oil stocks (January average: 481 million barrels).

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From the 1 February 2021 issue of The Energy Bulletin:

As has become routine, much of the news impacting oil prices has to do with the coronavirus and vaccine programs’ pace. For the immediate future, lockdowns in many regions will limit demand.  The more contagious coronavirus variant identified in South Africa has reached the US, raising worries that more outbreaks may be ahead.

US commercial crude oil inventories moved sharply lower the week before last as exports surged and imports tested multi-month lows. Stocks declined 9.91 million barrels during the week ended Jan. 22nd to a 10-month low of 476.6 m/b. It was the largest one-week draw since last July and left inventories just 6% above the five-year average, the narrowest supply overhang since early April. All regions outside the Rockies saw crude inventory draws last week, but the bulk of the decline was concentrated on the US Gulf Coast, where stocks fell 6.43 m/b.

The barrage of Presidential executive orders related to climate and the oil industry has sent oil producers’ stocks tumbling and raised blood pressure across the industry. “In the first couple of days of the new administration, they are taking actions that will harm the economy and cost Americans their jobs,” said the senior vice president of policy for the American Petroleum Institute. “We’re concerned, and everyone in the country should be concerned.”

President Biden’s new moratorium on oil and gas lease sales will indefinitely postpone all lease sales previously scheduled under the Trump administration for both onshore acreage and parcels in the deepwater Gulf of Mexico. The executive order postpones — and potentially cancels — a March lease sale for the deepwater Gulf and March sales in Colorado, Utah, Wyoming, and Montana. The charge also applies to an April lease sale in New Mexico, which is the state potentially most impacted by the moratorium.

The moratorium, which has no time limit, will continue during a new review of fossil fuel leasing and permitting. The ban on oil and gas drilling across federal lands and waters will exclude tribal lands. Republican senators from oil-producing states introduced legislation on Thursday to block the Biden administration’s order pausing new oil and gas leasing on federal lands.

The temporary halt leaves the vast majority of US crude production untouched. Should the halt announced Wednesday become permanent, the US would stand to lose as much as 200,000 b/d of production by the end of this decade, according to Rystad Energy. It’s a small fraction of America’s roughly 11 million b/d in output. “The region that would bear the brunt of this ban are the deep waters of the Gulf of Mexico since the government entirely owns it.” It would mean a 40% output drop for the Gulf by 2030.

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Selected highlights from the 29 January 2021 issue of OilPrice.com’s Oil & Energy Insider include:

Biden EV order faces questions. President Biden ordered the U.S. government to switch over its 645,000-vehicle fleet to EVs made with union labor and at least 50% American-made parts. But no such EV exists yet. Tesla is not unionized and GM uses three-quarters imported parts. The EV order may be possible to achieve over time, but will not happen overnight, experts say.

Dakota Access loses court case, fate could be decided soon. A U.S. appeals court upheld a lower court decision to throw out a key federal permit this week, ordering an environmental review. The decision is a major blow to the pipeline and while the court allowed the pipeline to continue to operate, the decision also leaves the pipeline’s fate in the hands of the Army Corps of Engineers.

Shale promises capital discipline. As oil prices stabilize in the $50s, shale drillers are promising restraint, although many analysts question how sincere that mantra is. Rystad predicts an increase in drilling could see an extra 310,000 bpd return to the market by the end of the year. But Morgan Stanley says that of the companies they watch, on average they are pledging to reinvest no more than 80% of cash flow, suggesting an increased focus on returning cash to shareholders. 

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.

January 2020 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey showed a smaller preponderance of U.S. manufacturers reporting expansion in January. The PMI registered 58.7%, down 1.8 percentage points (PP) from December’s revised 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 were a mixed bag, with declines in new orders (-6.4PP), production (-4.0PP) and customer inventories (-4.8PP), but a 4.5PP increase in input prices (to the highest reading since April 2011).

“Suppliers continue to struggle to deliver, with deliveries slowing at a faster rate compared to the previous month. Transportation challenges and challenges in supplier-labor markets are still constraining production growth -- and to a greater extent compared to December,” remarked Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. “The Supplier Deliveries Index reflects the difficulties suppliers continue to experience due to COVID-19 impacts combined with strong growth in economic activity. Since stable manufacturing began in August 2020, the index has gone up every month, indicating that suppliers are experiencing greater difficulties in meeting factory needs. Supplier labor and transportation constraints are not expected to diminish in the near-to-moderate term due to COVID-19 impacts.”

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The services sector -- which accounts for 80% of the economy and 90% of employment -- showed an uptick in service-sector respondents reporting expansion (+1.0PP, to 58.7%). The most noteworthy changes in the sub-indexes included jumps in new orders (+3.2PP) and employment (+6.5PP), improvement in slow deliveries (-5.0PP) and outright contractions in inventories (-9.0PP) and exports (-10.3PP).

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

Construction. “Orders for new business have picked up. Labor is still the major impediment to the business.”

Relevant commodities:

Priced higher. Lumber; oriented strand board; interior door slabs; wood pallets; corrugate; corrugated boxes; paper products; labor (general and temporary); crude oil; fuel (diesel and gasoline); natural gas; freight; and transportation.

Priced lower. None.

Prices mixed. None.

In short supply. Lumber; oriented strand board; corrugated boxes; corrugate; labor (general, construction and temporary); construction contractors; and road freight.

 

Findings of IHS Markit‘s January survey results were at least as upbeat as their ISM counterparts.

Manufacturing. January PMI hits record high amid strong client demand.

Key findings:

* Marked improvement in operating conditions as PMI climbs to survey high
* Near-record supply chain disruptions push up input costs
* Prices charged rise at steepest pace since July 2008

 

Services. Sharp upturn in business activity amid stronger client demand.

Key findings:

* Output and new order growth regain momentum
* Fastest increase in cost burdens on record
* Slowest rise in employment since July 2020

 

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

Manufacturing. “US manufacturing started 2021 on an encouragingly strong footing, with production and order books growing at the fastest rates for over six years.

“Demand from both domestic and export customers picked up sharply in January, buoyed by several driving forces. Consumer demand has improved while businesses are investing in more equipment and restocking warehouses, preparing for better times ahead as vaccine roll outs allow life to increasingly return to normal over the course of 2021.

“Manufacturers are encountering major supply problems, however, especially in relation to sourcing inputs from overseas due to a lack of shipping capacity. Lead times are lengthening to an extent not previously seen in the survey’s history, meaning costs are rising as firms struggle to source sufficient quantities of inputs to meet production needs. These higher costs are being passed on to customers in the form of higher prices, which rose in January at the fastest rate since 2008. These price pressures should ease assuming supply conditions start to improve soon, but could result in some near-term uplift to consumer goods price inflation.”

 

Services. “A strong start to the year for manufacturing was accompanied by a marked upturn in the service sector, driving business activity growth to the fastest rate for almost six years during January. The improving data set the scene for a strong first quarter, and a rise in business expectations for the year ahead bodes well for the recovery to gain traction as the year proceeds. Companies have become increasingly upbeat amid news of vaccine roll-outs and hopes of further stimulus.

“The downside is that prices have risen sharply. Rising costs have fed through to higher prices charged for goods and services, which rose in January at a rate not seen since at least 2009. Inflation therefore looks likely to be pushed higher in the near-term. However, some of these price pressures reflect short-term supply constraints, which should ease in coming months as the recovery builds and more capacity comes online.”

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.

January 2021 Currency Exchange Rates

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In January the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-0.7%) and the euro (-0.1%), but was unchanged versus the Japanese yen. On the broad trade-weighted index basis (goods and services), the USD weakened by 0.3% 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.