1Q2021 Gross Domestic Product: First (“Advance”) Estimate

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The Bureau of Economic Analysis (BEA) pegged its advance (first) estimate of 1Q2021 U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate (SAAR) of +6.39% (+6.5% expected), up 2.08 percentage points (PP) from 4Q2020’s +4.32%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 1Q2021 was 0.4% higher than in 1Q2020; that growth rate was significantly better (+2.79PP) than 4Q2020’s -2.39% relative to 4Q2019. Total GDP was $166 billion (chained 2012 dollars) below its 4Q2019 peak.

Two groupings of GDP components -- personal consumption expenditures (PCE) and government consumption expenditures (GCE) were the drivers behind the 1Q expansion, whereas private domestic investment (PDI) and net exports (NetX) made minor negative offsets.

As for details --

PCE (Contributed +7.02PP to the headline, up 5.44PP from 4Q):

* Goods. Consumer spending for goods expanded at a rate of 4.94PP, a 5.26PP increase from 4Q, led by a $58.3 billion (nominal) increase in purchases of motor vehicles and parts, and a $56.1 billion rise in gasoline purchases.

* Services. Spending on services accelerated to +2.07PP (+0.17PP from 4Q), led by health care (+$49.3B) and food services and accommodations (+$49.5B).

PDI (Detracted 0.87PP, down 5.28PP from 4Q):

* Fixed investment (+1.77PP, down 1.27PP from 4Q). Gains were about evenly split between equipment (+$53.6B) and residential investment (+$53.4B).

* Inventories (-2.64PP, down 4.01PP from 4Q). Inventories contracted by $150.2B.

NetX (Detracted 0.87PP, up 0.66PP from 4Q):

* Exports (down 2.14PP from 4Q). Exports rose by $95.2B.

* Imports (up 2.80PP from 4Q). Imports (recall that imports are inversely correlated with GDP) increased by $138.5B.

GCE (Contributed 1.12PP, up 1.26PP from 4Q), led by $62.4B in federal nondefense expenditures, and $55.4B in state and local expenditures.

Annualized growth in the BEA’s real final sales of domestic product, which excludes the value of inventories) was +9.04% (up 6.09PP from 4Q).

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Consumer Metric Institute’s Rick Davis was quite upbeat about the report, saying the 1Q data “clearly shows that the economy has not only stabilized relative to the free-fall experienced during 2Q2020, it has moved onward to modest year-over-year growth. Consumer spending on goods and commercial fixed investments have bounced back nicely, although consumer spending on services and exports remain in contraction.

“This is clearly a good report for the economy, and when coupled with vaccines-for-all and wide spread state and local economic re-openings, it should give households cause to further ramp up spending over the next couple of quarters. The current extreme savings rate certainly provides households the resources to do exactly that,” Davis concluded.

We agree that, on its face, the GDP report is positive news. However, when one realized that 34% of household income came from the government in 1Q, it prompts the question: “For how long can the good times roll?”

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.

March 2021 Residential Sales, Inventory and Prices

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Sales of new single-family houses in March 2021 were at a seasonally adjusted annual rate (SAAR) of 1,021,000 units (887,000 expected). This is 20.7% (±23.7%)* above the revised February rate of 846,000 and is 66.8% (±36.7%) above the March 2020 estimate of 612,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was +64.4%. For longer-term perspectives, NSA sales were 26.5% below the “housing bubble” peak but 85.5% above the long-term, pre-2000 average.

The median sales price of new houses sold in March fell ($15,100 or -4.4% MoM) to $330,800; meanwhile, the average sales price rose to $397,800 ($3,500 or +0.9% MoM). Starter homes (defined here as those priced below $200,000) comprised 3.5% 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 less than 0.5% of sales, down from 1.7% 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 March, single-unit completions increased by 55,000 units (+5.3%). Although sales jumped (175,000 units; +20.7%) faster than completions, inventory for sale was stable in absolute terms but fell in months-of-inventory (-0.8 month) terms. 

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Existing home sales retreated further in March (230,000 units or -3.7%), to a SAAR of 6.01 million units (6.205 million expected). Inventory of existing homes for sale expanded in absolute (40,000 units) and months-of-inventory (0.1 month) terms. Because resales fell while new-home sales rose, the share of total sales comprised of new homes jumped to 14.5%. The median price of previously owned homes sold in March advanced to $329,000 ($18,400 or +5.9% MoM).

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Housing affordability dropped by 14.3 percentage points as the median price of existing homes for sale in February rose by $9,100 (+3.0% MoM; +16.2 YoY), to $317,100. 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% (+12.0% YoY).

“Strong home price gains continued in February 2021,” said Craig Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P DJI. “The National Composite Index marked its ninth month of accelerating prices with a 12.0% gain from year-ago levels, up from 11.2% in January. This acceleration is also reflected in the 10- and 20-City Composites (up 11.7% and 11.9%, respectively). The market’s strength continues to be broadly-based: all 20 cities rose, and 19 cities gained more in the 12 months ended in February than they had gained in the 12 months ended in January.

“More than 30 years of S&P CoreLogic Case-Shiller data help us to put February’s results into historical context. The National Composite’s 12.0% gain is the highest recorded since February 2006, exactly 15 years ago, and lies comfortably in the top decile of historical performance. Housing’s strength is reflected across all 20 cities; February’s price gains in every city are above that city’s median level, and rank in the top quartile of all reports in 18 cities.

“These data remain consistent with the hypothesis that COVID has encouraged potential buyers to move from urban apartments to suburban homes. This demand may represent buyers who accelerated purchases that would have happened anyway over the next several years. Alternatively, there may have been a secular change in preferences, leading to a permanent shift in the demand curve for housing. Future data will be required to analyze this question.

“Phoenix’s 17.4% increase led all cities for the 21st consecutive month, with San Diego (+17.0%) and Seattle (+15.4%) close behind. Although prices were strongest in the West (+13.0%) and Southwest (+12.9%), every region logged double-digit 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.

February 2021 International Trade (Softwood Lumber)

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Softwood lumber exports edged down (3 MMBF or -3.4%) in February, and imports fell (158 MMBF or -12.2%). Exports were 17 MMBF (-16.1%) below year-earlier levels; imports were 67 MMBF (+6.3%) higher. As a result, the year-over-year (YoY) net export deficit was 85 MMBF (+8.8%) larger. Also, the average net export deficit for the 12 months ending January 2021 was 8.7% 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 (50.7%; of which Canada: 30.6%; Mexico: 20.1%), Asia (15.3%; especially China: 4.3%; and Japan: 3.4%), and the Caribbean: 27.0% (especially the Dominican Republic: 10.3%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were -40.4% relative to the same months in 2020. Meanwhile, Canada was the source of most (89.1%) of softwood lumber imports into the United States. Imports from Canada were 16.2% higher YTD than the same months in 2020. Overall, YTD exports were down 14.3% compared to 2020; imports: +16.1%.

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U.S. softwood lumber export activity through the West Coast customs region represented 34.9% of the U.S. total; Gulf: 26.9%, and Eastern: 27.4%. Seattle (19.8% of the U.S. total) was the single most-active district, followed by Mobile (19.5%) and San Diego (12.7%). At the same time, Great Lakes customs region handled 57.9% of softwood lumber imports -- most notably the Duluth, MN district (21.6%) -- coming into the United States. 

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Southern yellow pine comprised 23.9% of all softwood lumber exports; Douglas-fir (15.1%) and treated lumber (13.6%) were also significant. Southern pine exports were down 29.3% YTD relative to 2020, while Doug-fir: +3.9%; and treated: -20.9%.

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.

March 2021 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in March were at a seasonally adjusted annual rate (SAAR) of 1,739,000 units (1.620 million expected). This is 19.4% (±13.7%) above the revised February estimate of 1,457,000 (originally 1.421 million units) and 37.0% (±15.2%) above the March 2020 SAAR of 1,269,000 units; the not-seasonally adjusted YoY change (shown in the table above) was 38.2%.

Single-family housing starts in March were at a rate of 1,238,000; this is 15.3% (±17.4%)* above the revised February figure of 1,074,000 units (+40.1% YoY). Multi-family: 501,000 units (+30.8% MoM; +33.4% 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 1,580,000. This is 16.6% (±14.0%) above the revised February estimate of 1,355,000 (originally 1.362 million units) and 23.4% (±13.7%) above the March 2020 SAAR of 1,280,000 units; the NSA comparison: +24.3% YoY.

Single-family housing completions in March were at a rate of 1,099,000; this is 5.3% (±11.7%)* above the revised February rate of 1,044,000 units (+22.3% YoY). Multi-family: 481,000 units (+54.7% MoM; +29.3% YoY).

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Total permits amounted to a SAAR of 1,766,000 units (1.750 million expected). This is 2.7% (±1.7%) above the revised February rate of 1,720,000 (originally 1.682 million units) and 30.2% (±1.8%) above the March 2020 SAAR of 1,356,000 units; the NSA comparison: +36.6% YoY.

Single-family permits were at a SAAR of 1,199,000; this is 4.6% (±1.9%) above the revised February figure of 1,146,000 units (+41.5% YoY). Multi-family: 567,000 units (-1.2% MoM; +26.3% YoY).

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Strong buyer demand pushed builder confidence up in April even as builders continued to grapple with rising lumber prices and supply chain issues and consumers faced higher home prices due to a lack inventory. The latest NAHB/Wells Fargo Housing Market Index (HMI) shows that builder confidence in the market for newly built single-family homes rose one point to 83 in April.

“Despite strong buyer traffic, builders continue to face challenges to add much needed housing supply to the market,” said NAHB Chairman Chuck Fowke. “The supply chain for residential construction is tight, particularly regarding the cost and availability of lumber, appliances, and other building materials. Though builders are seeking to keep home prices affordable in a market in need of more inventory, policymakers must find ways to increase the supply of building materials as the economy runs hot in 2021.”

“While mortgage interest rates have trended higher since February and home prices continue to outstrip inflation, housing demand appears to be unwavering for now as buyer traffic reached its highest level since November,” said NAHB Chief Economist Robert Dietz. “NAHB’s forecast is for ongoing growth in single-family construction in 2021, albeit at a lower growth rate than realized in 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.

March 2021 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) increased 1.4% in March (+2.8% expected). The gain in March followed a drop of 2.6% in February, which largely resulted from widespread outages related to severe winter weather in the south central region of the country. For 1Q2021 as a whole, total IP rose 2.5% at an annual rate. In March, manufacturing production and mining output increased 2.7% and 5.7%, respectively. The output of utilities dropped 11.4%, as the demand for heating fell because of a swing in temperatures from an unseasonably cold February to an unseasonably warm March.

At 105.6% of its 2012 average, total IP in March was 1.0% higher YoY, but 3.4% below its pre-pandemic (February 2020) level. 

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Industry Groups

Manufacturing output increased 2.7% in March, following a decline of 3.7% in February (NAICS manufacturing: +2.8% MoM; +3.4% YoY). For 1Q, factory output advanced 1.9% at an annual rate. In March, the indexes for durable and nondurable manufacturing increased 3.0% and 2.6%, respectively, while the index for other manufacturing (publishing and logging) was unchanged. All major categories of durables registered increases, most of which were between 2% and 3% (wood products: +2.4%). The output of motor vehicles and parts rose 2.8% in March after falling 10% in February. Shortages of semiconductors held down vehicle production in both months, while cold weather also curbed production in February.

Among nondurables, all major industry categories recorded gains except plastics and rubber products. The petroleum and coal products industry and the chemicals industry registered gains of 5.7% and 4.1%, respectively, after posting declines in February because of severe weather. The recovery in chemicals was incomplete in March, however, as some factories remained offline because of weather-related damage sustained during February. The indexes for all other nondurable goods industries increased between 0.9% and 3.0% in March (paper: +0.9%).

The drop of 11.4% for utilities in March was the largest in the history of this index (since 1972). Mining production increased 5.7%; oil and gas extraction accounted for most of the gain.

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Capacity utilization (CU) for the industrial sector increased 1.0 percentage point (PP) in March to 74.4%, a rate that is 5.2PP below its long-run (1972–2020) average.

Manufacturing CU increased 1.9PP in March to 73.8% (NAICS manufacturing: +2.8% MoM, to 74.4%; wood products: +2.3%; paper products: +0.8%). The operating rate for mining increased 4.5PP to 82.2%, while the operating rate for utilities decreased 9.0PP to 68.8%; both rates remained below their long-run averages.

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Capacity at the all-industries level was essentially unchanged MoM (-0.1 % YoY) at 141.9% of 2012 output. Manufacturing (NAICS basis) was also unchanged (-0.1% YoY) at 140.1%. Wood products: +0.1% (+0.3% YoY) to 170.1%; paper products: +0.1% (-0.5% YoY) at 109.0%.

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.

March 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 0.6% in March (+0.5% expected). The March one-month increase was the largest rise since a 0.6% increase in August 2012. The gasoline index continued to increase, rising 9.1% in March and accounting for nearly half of the seasonally adjusted increase in the all-items index. The natural gas index also rose, contributing to a 5.0% increase in the energy index over the month. The food index rose 0.1% in March, with the food at home index and the food away from home index both also rising 0.1%.

The index for all items less food and energy rose 0.3% in March. The shelter index increased in March as did the motor vehicle insurance index, the recreation index, and the household furnishings and operations index. Indexes which decreased over the month include apparel and education.

The all-items index rose 2.6% for the 12 months ending March, a much larger increase than the 1.7% reported for the period ending in February. The index for all items less food and energy rose 1.6% over the last 12 months, after increasing 1.3% over the 12 month period ending in February. The food index rose 3.5% over the last 12 months, while the energy index increased 13.2% over that period.

Producer Price Index

The Producer Price Index for final demand (PPI-FD) increased 1.0% in March (+0.5% expected). Final-demand prices rose 0.5% in February and 1.3% in January. In March, almost 60% of the increase in the index for final demand can be traced to a 1.7% advance in prices for final-demand goods. The index for final-demand services moved up 0.7%.

The final-demand index moved up 4.2% for the 12 months ended in March, the largest advance since rising 4.5% for the 12 months ended September 2011. Prices for final demand less foods, energy, and trade services rose 0.6% in March following an increase of 0.2% in February. For the 12 months ended in March, the index for final demand less foods, energy, and trade services moved up 3.1%, the largest advance since climbing 3.1% for the 12 months ended September 2018.

Final Demand

Final demand goods: Prices for final demand goods rose 1.7% in March, the largest increase since the index began in December 2009. Sixty percent of the broad-based advance in March is attributable to prices for final demand energy, which jumped 5.9%. The indexes for final demand goods less foods and energy and for final demand foods moved up 0.9% and 0.5%, respectively.

Product detail: Over one-fourth of the March increase in the index for final demand goods can be traced to an 8.8% jump in gasoline prices. The indexes for diesel fuel, residential electric power, industrial chemicals, steel mill products, and processed poultry also moved higher. In contrast, beef and veal prices fell 4.3%. The indexes for fresh and dry vegetables and for surgical and medical instruments also declined.

Final demand services: The index for final demand services rose 0.7% in March, the third consecutive advance. Nearly half of the broad-based increase in March is attributable to margins for final demand trade services, which moved up 1.0%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand services less trade, transportation, and warehousing and for final demand transportation and warehousing services advanced 0.4% and 1.5%, respectively.

Product detail: Over 40% of the March increase in prices for final demand services can be traced to margins for machinery and vehicle wholesaling, which jumped 6.7%. The indexes for apparel, jewelry, footwear, and accessories retailing; transportation of freight and mail; portfolio management; loan services (partial); and food retailing also moved higher. Conversely, margins for health, beauty, and optical goods retailing decreased 4.2%. The indexes for automobiles and automobile parts retailing and for traveler accommodation services also declined.

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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.

March 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 $3.29 (+5.6%), to $62.33 per barrel in March. That increase occurred within the context of a stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 201,000 barrel-per-day (BPD) decrease in the amount of petroleum products demanded/supplied during January (to 18.6 million BPD, on par with volumes during/after the Great Recession), and a plateauing of accumulated oil stocks (March average: 501 million barrels).

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From the 5 April 2021 issue of The Energy Bulletin:

Shale Oil: Drilling expanded in the U.S. at its fastest pace since the start of the pandemic amid rising prices and an increasingly optimistic demand outlook. According to Baker Hughes, the total number of rigs drilling for oil across the country rose by 13 last week to 337, the largest jump since January 2020. Explorers are gaining confidence this year's 25% run-up in prices is here to stay after the U.S. benchmark crude, West Texas Intermediate, averaged more than $60 a barrel in March -- the first calendar month above that threshold since May 2019.

Optimism has also been buoyed by expectations that global crude supplies won't grow fast enough to satisfy demand as Covid-19 vaccinations proliferate and more economies reopen. Despite the recent jump, the oil rig count stands at about half of what it was when the pandemic started. Even the agreement by OPEC+ producers [to increase output] won't head off that tightening of supplies, according to Jeff Currie, Goldman Sachs Group Inc.'s head of commodities research.

Exxon Mobil and Chevron have scaled back activity dramatically in the Permian Basin, where just a year ago, the two companies were dominating in the high-desert oil field. The cautious approach of the two largest U.S. oil companies is a significant reason domestic oil production has been slow to rebound. Shale oil production now is about 11 million BPD, down sharply from the record of nearly 13 million hit in late 2019. Exxon and Chevron's share of drilling activity in the Permian Basin oil field in Texas and New Mexico dropped to less than 5% last month.

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Selected highlights from the 2 April 2021 issue of OilPrice.com’s Intelligence Report include:

Oil prices climbed on Thursday despite the surprise decision by OPEC+ to increase production, a decision that has been seen as promising for demand.

Oil prices rose despite OPEC+'s decision to increase production. In fact, rather than a bearish move, investors interpreted the decision as a vote of confidence in demand. "The [supply] deficit that we're already in is likely to accelerate," Jeff Currie, head of commodities research at Goldman Sachs Group Inc., said in a Bloomberg Television interview

OPEC+ agrees to gradually increase production. OPEC+ decided to add more than 2 million BPD over the next few months, betting on rising demand. The deal calls for a 350,000-BPD increase in May, followed by the same amount in June, and then by 450,000 BPD in July. At the same time, Saudi Arabia will ease its voluntary 1 million BPD cuts by July. OPEC+ surprised markets last time around by maintaining cuts, this time they surprised in the other direction after analysts expected no change.

Shale output to erode. U.S. shale production is set to decline through at least 2022, according to BNEF. By the end of the year, the industry could lose another 485,000 BPD. "It could be a while before U.S. oil companies feel comfortable growing production again," BNEF analyst Tai Liu said in a note.

Europe lockdown to hit demand. Oil demand will take a hit from new lockdowns in Europe and slow vaccinations. Rystad Energy says it could prevent 1 million BPD of demand from coming back this year.

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.

March 2021 Currency Exchange Rates

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In March the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-1.0%), but appreciated against the euro (+1.6%) and Japanese yen (+3.2%). On the broad trade-weighted index basis (goods and services), the USD strengthened by 1.2% 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.

March 2020 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey showed a jump in the proportion of U.S. manufacturers reporting expansion in March. The PMI registered 64.7%, the highest reading since December 1983, and up 3.9 percentage points (PP) from February’s reading. (50% is the breakpoint between contraction and expansion.) ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. All but three of the sub-indexes posted higher readings, with employment (+5.2PP), production (+4.9PP) and slow deliveries (+4.6PP) being the most notable; the input prices sub-index remained quite elevated.

“The manufacturing economy continued its recovery in March,” observed Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. “However, Survey Committee Members reported that their companies and suppliers continue to struggle to meet increasing rates of demand due to coronavirus (COVID-19) impacts limiting availability of parts and materials. Extended lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are affecting all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.” 

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The services sector -- which accounts for 80% of the economy and 90% of employment -- showed soared to an all-time high of service-sector respondents reporting expansion (+8.4PP, to 63.7%). The most noteworthy changes in the sub-indexes included new orders (+15.3PP) and business activity (+13.9PP); the input prices sub-index also rose 2.2PP.

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Of the industries we track, only Wood Products did not expand. Respondents included the following:

Construction. “Residential new home construction demand continues to outpace supply. Building material delays, discontinuations and shortages are beginning to develop. Shipping delays at the L.A. and Long Beach ports have contributed to longer lead times. Cold weather in Texas has hurt several component manufacturers for building materials. We have encountered the ‘perfect storm’ for building material shortages and price increases.”

Real Estate. “Business is picking up as mandated restrictions seem to be easing and spring is right around the corner.”

 

Findings of IHS Markit’s March survey results were consistent with their ISM counterparts.

Manufacturing. March PMI at second-highest on record amid marked new order growth and supply chain disruptions.

Key findings:

* Output growth softens amid raw material shortages
* Unprecedented deterioration in vendor performance
* Costs and charges rise at historically elevated rates

 

Services. Fastest rise in business activity since July 2014 as new order growth reaches six-year high.

Key findings:

* Upturns in output and new orders accelerate to strong rates
* Price gauges hit highest on record amid supply chain disruptions
* Business optimism improves since February

 

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

Manufacturing. “March saw manufacturers struggle to cope with surging inflows of new orders. Although output continued to rise at a solid pace, capacity is being severely strained by the combination of soaring demand and supply chain disruptions:  supply chain delays and backlogs of uncompleted orders are growing at rates unprecedented in the survey’s 14-year history, meaning inventories of finished goods are falling at a  steep rate.

“Pricing power has risen accordingly as demand outstrips supply: raw material prices are increasing at the sharpest rate for a decade and factory gate selling prices have risen to a degree not seen since at least 2007.

“The fastest rates of increase for both new orders and prices was reported among producers of consumer goods, as the arrival of stimulus checks in the post added fuel to a marked upswing in demand as the economy continued to pull out of the malaise caused by the pandemic.

“With business expectations becoming even more optimistic in March, further strong production growth looks likely in the second quarter, but the big question will be whether rising price pressures also become more entrenched.

 

Services. “U.S. business activity is growing at the fastest rate for six-and-a-half years, setting the economy up for a strong start to 2021. Although consumer-facing sectors, notably hospitality, travel, and tourism, continue to be adversely affected by COVID-19 restrictions, and will be for some time to come, other parts of the economy are springing back into life. Financial services and business services are faring well, accompanying a strong manufacturing recovery. Even some hard hit consumer-facing sectors are enjoying some loosening of restrictions or adapting to life with the virus.

“A wide variety of costs are rising, however, putting additional pressure on companies across the board. Many materials prices are sharply higher, transport costs are increasing and wage pressures are building as firms struggle to hire suitable staff, resulting in the largest monthly rise in service sector costs since comparable data were first available in 2009.

“Some of these higher costs will inevitably prove transitory as pandemic-related disruptions to supply start to ease, but it remains unclear how long these price pressures will persist for due to uncertainties over the duration of social distancing requirements and the strength of demand over the coming months.”

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.

February 2021 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 February decreased $10.3 billion or 2.0% to $502.4 billion. Durable goods shipments decreased $9.4 billion or 3.6% to $250.8 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $0.9 billion or 0.4% to $251.6 billion, led by chemical products. Shipments of wood products dipped by 0.3%; paper: +0.2%.

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Inventories increased $5.5 billion or 0.8% to $702.4 billion. The inventories-to-shipments ratio was 1.40, up from 1.36 in January. Inventories of durable goods increased $2.8 billion or 0.7% to $427.3 billion, led by transportation equipment. Nondurable goods inventories increased $2.7 billion or 1.0% to $275.1 billion, led by petroleum and coal products. Inventories of wood products rose by 1.5%; paper: 0.0%.

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New orders decreased $4.1 billion or 0.8% to $505.7 billion. Excluding transportation, new orders slid by $2.5 billion or 0.6% (+2.2% YoY). Durable goods orders decreased $3.2 billion or 1.2% to $254.1 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- decreased by $0.7 billion or 0.9% (+8.5% YoY). New orders for nondurable goods decreased $0.9 billion or 0.4% to $251.6 billion.

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Unfilled durable-goods orders increased $8.5 billion or 0.8% to $1,082.3 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.29, up from 6.11 in January. 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.

March 2021 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm employers added 916,000 jobs in March (easily exceeding consensus expectations of +619,000). January and February employment changes were revised up by a combined 156,000 (January: +67,000; February: +89,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) edged down by 0.2 percentage point (to 6.0%) as the ranks of the employed swelled much faster (+609,000) than the civilian labor force (+347,000). 

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Observations from the employment reports include:

* The establishment (+916,000 jobs) and household surveys (+609,000 employed) were somewhat correlated. 

* Goods-producing industries added 183,000 jobs; service-providers: +733,000. Leisure and Hospitality (+280,000), Government (+136,000), Construction (+110,000) and Education and Health (+101,000) together represented over 68% of total job gains. Manufacturing expanded by 53,000 jobs. That result is consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded more quickly in March. Wood Products employment rose by 1,400 (ISM was unchanged); Paper and Paper Products: +400 (ISM increased); Construction: +110,000 (ISM not yet published).

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* The number of employment-age persons not in the labor force fell (263,000) to 100.4 million. As a result, the employment-population ratio (EPR) ticked up to 57.8%; i.e., nearly six in 10 of the employment-age population are presently employed. 

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* Because the civilian labor force expanded by 347,000 in March, the labor force participation rate ticked up to 61.5%. Meanwhile, average hourly earnings of all private employees fell by $0.04 to $29.96, resulting in a 4.2% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.02, to $25.21 (+4.4% YoY). Since the average workweek for all employees on private nonfarm payrolls expanded by 0.3 hour, average weekly earnings increased by $7.60, to $1,045.60 (+4.8% YoY). With the consumer price index running at an annual rate of +1.7% in February, 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 (+935,000) to 125.8 million. Workers employed part time for economic reasons (shown in the graph above) -- e.g., slack work or business conditions, or could find only part-time work -- fell by 262,000, whereas those working part time for non-economic reasons retreated by 203,000; multiple-job holders advanced by 139,000.

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For a “sanity test” of the job numbers, we consult employment withholding taxes published by the U.S. Treasury. Although “noisy” and highly seasonal, the data show the amount withheld in March shot up by $55.3 billion, to a record $286.6 billion (+23.9% MoM; +12.1% 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 March was 4.6% above the year-earlier average.

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