4Q2021 Gross Domestic Product: First (“Advance”) Estimate

Click image for larger version

The Bureau of Economic Analysis (BEA) pegged its advance (first) estimate of 4Q2021 U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate (SAAR) of +6.89% (+5.7% expected), up 4.58 percentage points (PP) from 3Q2021’s +2.31%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 4Q2021 was 5.5% higher than in 4Q2020; that growth rate was slightly faster (+0.6PP) than 3Q2021’s +4.9% relative to 3Q2020. Total GDP was $603.7 billion (chained 2012 dollars) above its prior 4Q2019 peak.

Two groupings of GDP components -- personal consumption expenditures (PCE) and private domestic investment (PDI) -- were the drivers behind the 4Q expansion. Government consumption expenditures (GCE) detracted from the headline, while net exports (NetX) were neutral.

As for details --

PCE (Contributed 2.25PP to the headline, up 0.90PP from 3Q):

* Goods. Spending on non-durable goods (+$91.3 billion, nominal) was nearly 60% higher than on durable goods (+$57.7B), led by gasoline and other energy goods (+$46.1B).

* Services. Gains (+$233.8B) were broad-based and led by health care (+$55.3B).

PDI (Added 5.15PP, up 3.10PP from 3Q):

* Fixed investment (+$94.2B) was led by intellectual property products (+$35.3B)

* Inventories (+4.90PP, up 2.70PP from 3Q). Nonfarm inventories soared by +$286.0B.

NetX (Contributed 0.00PP, up 1.26PP from 3Q):

* Exports (+3.02PP from 3Q). Goods exports rose by $128.5B.

* Imports (-1.75PP from 3Q). Goods imports rose $168.2B.

GCE (Detracted 0.51PP, down 0.68PP from 3Q). Although GCE fell on a QoQ percentage basis, the category saw gains in absolute terms -- primarily in state and local consumption expenditures (+$33.9B)

Annualized growth in the BEA’s real final sales of domestic product, which excludes the value of inventories, was +1.99% (up +1.88PP from 3Q).

Click image for larger version

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

“Unfortunately, over 70% of the headline number (4.90PP) came from growing inventories, while arguably another 25% came from underestimated inflation. The growth rate for consumer spending on goods was a meager 0.13%, and spending on consumer services was reported to be a modest 2.12%, down 1.45PP from the prior quarter.”

-- US economic growth in 4Q2021 is materially misrepresented by the headline number.

-- The BEA's own “bottom line” number (“Real Final Sales”) is less than a third of the headline at 1.99%.

-- Even the BEA's more reasonable “bottom line” number is significantly boosted by under-recognized inflation.

-- Since inventories are a long-term zero-sum number, what they give to the headline this quarter will certainly be taken away in future quarters. Companies overbought stock for what turned out to be a disappointing holiday season, by either overreacting to “supply chain” concerns or badly misreading household spending plans -- or both, since the heavy media coverage of the supply chain issues and lower household spending plans are likely related.

-- Household savings rates have moderated, with the moderation coming primarily from the reported lower disposable incomes.

“Every now and then the BEA's headline number wildly misrepresents the state of the economy. This is one of those times. Politicians will gladly cite the headline as proof of a healthy and growing economy. The truth is far murkier,” 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 2021 Residential Sales, Inventory and Prices

Click image for larger view

Click image for larger view

Sales of new single-family houses in December 2021 were at a seasonally adjusted annual rate (SAAR) of 811,000 units (760,000 expected).  This is 11.9% (±20.3%)* above the revised November rate of 725,000 (originally 744,000 units), but 14.0% (±16.6%)* below the December 2020 SAAR of 943,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was -9.5%. For longer-term perspectives, NSA sales were 41.6% below the “housing bubble” peak but 9.0% above the long-term, pre-2000 average.

An estimated 762,000 new homes were sold in 2021. This is 7.3% (±5.1%) below the 2020 SAAR of 822,000 (-7.1% YoY NSA).

The median sales price of new houses sold in December 2021 fell by 9.2% (-$38,400), to $377,700.  The average sales price retreated by 4.6% (-$22,000), to $457,300. Homes priced at/above $750,000 were 7.0% of sales, more than double the year-earlier 3.2%. 

* 90% confidence interval includes zero. The Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different from zero.

Click image for larger view

As mentioned in our post about housing permits, starts and completions in December, single-unit completions rose by 37,000 units (+3.9%). Sales advanced (86,000 units; +11.9%), with inventory for sale expanding in absolute terms (6,000 units) but contracting (-0.6 month) in months-of-inventory terms. 

Click image for larger view

Existing home sales fell in December (300,000 units or -4.6%), to a SAAR of 6.18 million units (6.40 million expected). Inventory of existing homes for sale contracted in absolute (-200,000 units) and months-of-inventory (-0.3 month) terms. Because resales declined while new-home sales increased, the share of total sales comprised of new homes jumped to 11.6%. The median price of previously owned homes sold in December rose to $358,000 ($3,600 or +1.0% MoM).

Click image for larger view

Housing affordability fell as the median price of existing homes for sale in November advanced by $3,100 (-0.9% MoM; +14.9 YoY), to $362,600. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices rose at a not-seasonally adjusted monthly change of +0.9% (+18.8% YoY).

“For the past several months, home prices have been rising at a very high, but decelerating, rate. That trend continued in November 2021,” said Craig J. Lazzara, Managing Director at S&P DJI. “The National Composite Index rose 18.8% from year-ago levels, and the 10- and 20-City Composites gained 16.8% and 18.3%, respectively. In all three cases, November’s gains were less than October’s. Despite this deceleration, it’s important to remember that November’s 18.8% gain was the sixth-highest reading in the 34 years covered by our data (the top five were the months immediately preceding November).

“We continue to see very strong growth at the city level. All 20 cities saw price increases in the year ended November 2021, and prices in 19 cities are at their all-time highs. November’s price increase ranked in the top quintile of historical experience for 19 cities, and in the top decile for 16 of them.

“Phoenix’s 32.2% increase led all cities for the 30th consecutive month. Tampa (+29.0%) and Miami (+26.6%) continued in second and third place in November, narrowly edging out Las Vegas, Dallas, and San Diego. Prices were strongest in the South and Southeast (both +25.0%), but every region continued to log impressive gains.

“We have previously suggested that the strength in the U.S. housing market is being driven in part by a change in locational preferences as households react to the COVID pandemic. More data will be required to understand whether this demand surge represents an acceleration of purchases that would have occurred over the next several years or reflects a more permanent secular change. In the short term, meanwhile, we should soon begin to see the impact of increasing mortgage rates on home prices.”

Click image for larger view

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 2021 Residential Permits, Starts and Completions

Click image for larger view

Click image for larger view

Builders started construction of privately-owned housing units in December at a seasonally adjusted annual rate (SAAR) of 1,702,000 units (1.650 million expected).  This is 1.4% (±10.1%)* above the revised November estimate of 1,678,000 (originally 1.679 million units) and 2.5% (±13.8%)* above the December 2020 SAAR of 1,661,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +4.5%. 

Single-family housing starts were at a SAAR of 1,172,000; this is 2.3% (±9.8%)* below the revised November figure of 1,199,000 units (-9.7% YoY). Multi-family: 530,000 units (+10.6% MoM; +54.7% YoY).

An estimated 1,595,100 housing units were started in 2021. This is 15.6% (±4.0%) above the 2020 figure of 1,379,600.

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

Click image for larger view

Click image for larger view

Total completions were at a SAAR of 1,295,000 units.  This is 8.7% (±14.5%)* below the revised November estimate of 1,418,000 (originally 1.282 million units) and 6.6% (±10.4%)* below the December 2020 SAAR of 1,386,000 units; the NSA comparison: -5.7% YoY. 

Single-family completions were at a SAAR of 990,000; this is 3.9% (±13.3%)* above the revised November rate of 953,000 units (+4.2% YoY). Multi-family: 305,000 units (-34.4% MoM; -29.6% YoY).

An estimated 1,337,800 housing units were completed in 2021. This is 4.0% (±3.2%)* above the 2020 figure of 1,286,900.

Click image for larger view

Click image for larger view

Total permits were at a SAAR of 1,873,000 units (1.710 million expected).   This is 9.1% (±1.1%) above the revised November rate of 1,717,000 (originally 1.712 million units) and 6.5% (±1.7%) above the December 2020 SAAR of 1,758,000 units; the NSA comparison: +10.9% YoY.  Much of the outsized increase in permits comes from a 111.9% (+/- 3.8%) jump in permits issued in Philadelphia, PA.  Philadelphia enacted several real estate tax changes for residential projects permitted after December 31, 2021.

Single-family authorizations were at a SAAR of 1,128,000; this is 2.0% (±1.3%) above the revised November figure of 1,106,000 units (-8.2% YoY). Multi-family: 745,000 units (+21.9% MoM; +46.1% YoY). 

An estimated 1,724,700 housing units were authorized by building permits in 2021. This is 17.2% (±0.6%) above the 2020 figure of 1,471,100; the NSA comparison was 1.710 million units (+16.2% YoY).

Click image for larger view

Click image for larger view

Growing inflation concerns and ongoing supply chain disruptions snapped a four-month rise in home builder sentiment even as consumer demand remains robust. Builder confidence in the market for newly built single-family homes moved one point lower to 83 in January, according to the NAHB/Wells Fargo Housing Market Index (HMI). The HMI has hovered at the 83 or 84 level, the same rate as the spring of 2021, for the past three months.

“Higher material costs and lack of availability are adding weeks to typical single-family construction times,” said NAHB Chairman Chuck Fowke. “NAHB analysis indicates the aggregate cost of residential construction materials has increased almost 19% since December 2020. Policymakers need to take action to fix supply chains. Obtaining a new softwood lumber agreement with Canada and reducing tariffs is an excellent place to start.”

“The HMI data was collected during the first two weeks of January and do not fully reflect the recent jump in mortgage interest rates,” said NAHB Chief Economist Robert Dietz. “While lean existing home inventory and solid buyer demand are supporting the need for new construction, the combination of ongoing increases for building materials, worsening skilled labor shortages and higher mortgage rates point to declines for housing affordability in 2022.”

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 2021 Industrial Production, Capacity Utilization and Capacity

Click image for larger version

Total industrial production (IP) declined 0.1% in December (+0.3% expected). Losses of 0.3% for manufacturing and 1.5% for utilities were mostly offset by a gain of 2.0% for mining. For 4Q overall, total IP rose at an annual rate of 4.0%. At 101.9% of its 2017 average, total IP in December was 3.7% higher than at the end of 2020 and 0.6% above its pre-pandemic (February 2020) reading. 

Click image for larger version

Click image for larger version

Industry Groups

Manufacturing production declined 0.3% in December but was up 3.5% over the past 12 months (NAICS manufacturing: -0.3% MoM; +3.7% YoY); in 4Q, factory output rose nearly 5% at an annual rate. The index for motor vehicles and parts stepped down 1.3% in December and was about 6% lower than its year-earlier level. Excluding the motor vehicle sector, factory output dipped 0.2%, with similarly sized decreases for durables and nondurables. Within durables, miscellaneous manufacturing recorded the largest decrease (2.7%), while wood products and nonmetallic mineral products posted the largest increases (1.2% and 1.5%, respectively). Within nondurables, chemicals posted the largest gain (0.7%), but most other subcategories recorded losses of between 1 and 2% (paper: -1.2%). The output of other manufacturing (publishing and logging) decreased 0.8%.

The index for mining increased 2.0% in December, primarily reflecting gains in the oil and gas sector. Mining output rose more than 15% at an annual rate in the fourth quarter and has risen more than 10% from its level of a year earlier. Even so, the index for mining in December was about 6% below its pre-pandemic level.

The decrease of 1.5% in the index for utilities in December primarily resulted from a drop in the output of gas utilities, as warmer-than-normal temperatures reduced demand for heating.

Click image for larger version

Capacity utilization (CU) for the industrial sector edged down 0.1 percentage point (PP) in December to 76.5%, a rate that is 3.1PP below its long-run (1972–2020) average.

Manufacturing CU decreased 0.2PP in December to 77.0%, 1.5PP higher than its pre-pandemic level but still 1.2PP below its long-run average (NAICS manufacturing: -0.3%, to 77.2%; wood products: +1.2%; paper: -1.3%). The operating rates for mining and utilities increased to 79.1% and 71.0%, respectively, but both remained well below their long-run averages.

Click image for larger version

Capacity at the all-industries level increased by 0.1% MoM (+0.4% YoY) to 133.2% of 2017 output. NAICS manufacturing edged up less than 0.1% (+0.3% YoY) to 130.7%. Wood products: 0.0% (+0.3% YoY) at 123.2%; paper: +0.1% (+0.9% YoY) to 114.0%.

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.

December 2021 Consumer and Producer Price Indices (incl. Forest Products)

Click image for larger version

Consumer Price Index

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5% (+0.4% expected) in December after rising 0.8% in November. Increases in the indexes for shelter and for used cars and trucks were the largest contributors to the seasonally adjusted all-items increase. The food index also contributed, although it increased less than in recent months, rising 0.5% in December. The energy index declined in December, ending a long series of increases; it fell 0.4% as the indexes for gasoline and natural gas both decreased.

The index for all items less food and energy rose 0.6% in December following a 0.5% increase in November. This was the sixth time in the last 9 months it has increased at least 0.5%. Along with the indexes for shelter and for used cars and trucks, the indexes for household furnishings and operations, apparel, new vehicles, and medical care all increased in December. As in November, the indexes for motor vehicle insurance and recreation were among the few to decline over the month.

The all-items index rose 7.0% for the 12 months ending December, the largest 12-month increase since the period ending June 1982. The all items less food and energy index rose 5.5%, the largest 12-month change since the period ending February 1991. The energy index rose 29.3% over the last year, and the food index increased 6.3%.

Producer Price Index

The Producer Price Index for final demand (PPI-FD) increased 0.2% in December (+0.4% expected). This rise followed advances of 1.0% in November and 0.6% in October. On an unadjusted basis, final demand prices moved up 9.7% in 2021, the largest calendar-year increase since data were first calculated in 2010.

In December, the advance in the final demand index can be traced to a 0.5% increase in prices for final demand services. Conversely, the index for final demand goods decreased 0.4%.

Prices for final demand less foods, energy, and trade services rose 0.4% in December following a 0.8% increase in November. In 2021, the index for final demand less foods, energy, and trade services moved up 6.9%, following a 1.3% advance in 2020.

Final Demand

Final demand services: Prices for final demand services rose 0.5% in December following a 0.9% increase in November. Over half of the broad-based advance in December is attributable to margins for final demand trade services, which moved up 0.8%. (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 rose 0.2% and 1.7%, respectively.

Product detail: Over a quarter of the December increase in the index for final demand services can be attributed to margins for fuels and lubricants retailing, which rose 13.0%. The indexes for airline passenger services, food retailing, machinery and vehicle wholesaling, machinery and equipment parts and supplies wholesaling, and traveler accommodation services also moved higher. In contrast, margins for automobile and automobile parts retailing decreased 2.7%. The indexes for deposit services (partial) and for health, beauty, and optical goods retailing also declined.

Final demand goods: The index for final demand goods moved down 0.4% in December, the first decrease since falling 2.8% in April 2020. Leading the December decline, prices for final demand energy dropped 3.3%. The index for final demand foods fell 0.6%. Conversely, prices for final demand goods less foods and energy advanced 0.5%.

Product detail: A major factor in the December decrease in prices for final demand goods was the index for gasoline, which moved down 6.1%. Prices for meats, gas fuels, fresh and dry vegetables, diesel fuel, and primary basic organic chemicals also declined. In contrast, the index for ethanol increased 6.4%. Prices for residential electric power and for chicken eggs also moved higher.

Click image for larger version

With the exception of intermediate materials, the not-seasonally adjusted price indexes we track all advanced on both a MoM and YoY basis.

Click image for larger version

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 2021 International Trade (Softwood Lumber)

Click image for larger view

Click image for larger view

Softwood lumber exports fell (22 MMBF or -14.6%) in November, along with imports (60 MMBF or -4.5%). Exports were 41 MMBF (45.4%) above year-earlier levels; imports were 108 MMBF (-7.8%) lower. As a result, the year-over-year (YoY) net export deficit was 148 MMBF (-11.5%) smaller. However, the average net export deficit for the 12 months ending November 2021 was 6.1% higher than the average of the same months a year earlier (the “YoY MA(12) % Chng” series shown in the graph above).

Click image for larger view

North America (55.1% of total exports; of which Mexico: 37.6%; Canada: 17.5%), Asia (21.4%; especially China: 6.3%; and Japan: 5.3%), and the Caribbean: 17.9% especially the Dominican Republic: 7.3%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were -16.2% relative to the same months in 2020. Meanwhile, Canada was the source of most (90.4%) softwood lumber imports into the United States. Imports from Canada were 6.2% higher YTD than the same months in 2020. Overall, YTD exports were up 29.8% compared to 2020; imports: +7.1%.

Click image for larger view

Click image for larger view

U.S. softwood lumber export activity through the West Coast customs region represented 30.6% of the U.S. total; Gulf: 42.2%, and Eastern: 21.7%. Mobile (16.9% of the U.S. total), Seattle (15.7%), Laredo (16.7%) and San Diego (12.3%) were among the most active districts. At the same time, Great Lakes customs region handled 64.2% of softwood lumber imports -- most notably the Duluth, MN district (23.6%) -- coming into the United States. 

Click image for larger view

Click image for larger view

Southern yellow pine comprised 24.9% of all softwood lumber exports; Douglas-fir (13.5%), treated lumber (12.7%), other pine (13.0%) and finger-jointed (13.6%) were also significant. Southern pine exports were up 16.5% YTD relative to 2020, while Doug-fir: +16.2%; and treated: +21.2%.

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

December 2021 Employment Report

Click image for larger view

The Bureau of Labor Statistics‘ (BLS) establishment survey showed non-farm employers added a disappointing 199,000 jobs in December (essentially half the 400,000 expected), and the smallest gain since December 2020. On a brighter note, October and November employment changes were revised up by a combined 141,000 (October: +102,000; November: +39,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) fell by 0.3 percentage point, to 3.9%, as the number of people who found work (+651,000) was greater than the drop in the number of unemployed and nearly quadruple the growth in the civilian labor force (+168,000). 

Click image for larger view

Observations from the employment reports include:

* The establishment (+199,000 jobs) and household surveys (+651,000 employed) were again poorly correlated. 

* Goods-producing industries added 54,000 jobs; service-providers: +145,000. Employment continued to trend up in leisure and hospitality (+53,000), professional and business services (+43,000), manufacturing (+26,000), construction (+22,000), and transportation and warehousing (+18,700). Public-sector employment declined (-12,000) primarily at the local level (-10,000).

As mentioned above, manufacturing added 26,000 jobs. That result is consistent with the change in the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded more rapidly in December. Wood Products employment rose by 1,300 (ISM fell); Paper and Paper Products: -1,500 (ISM fell); Construction: +22,000 (ISM rose).

Click image for larger view

* The number of employment-age persons not in the labor force dipped slightly (-60,000) to 99.8 million; that is 4.8 million higher than in February 2020. With the labor force expanding, the employment-population ratio (EPR) edged up to 59.5%, another pandemic high; even so, the EPR is 1.7PP below the February 2020 level. 

Click image for larger view

* Although the civilian labor force expanded by 168,000 in December, the labor force participation rate was unchanged at 61.9%. Average hourly earnings of all private employees increased by $0.19 (to $31.31), and the year-over-year increase decelerated to +4.7%. For all production and nonsupervisory employees (shown above), the tale was much the same: hourly wages rose by $0.18, to $26.61 (+5.8% YoY). Since the average workweek for all employees on private nonfarm payrolls was unchanged at 34.7 hours, average weekly earnings rose (+$6.60) to $1,086.46 (+4.9% YoY). With the consumer price index running at an annual rate of +6.8% in November, the average worker continues to lose purchasing power.

Click image for larger view

* Full-time jobs jumped (+803,000) to 130.2 million; nonetheless, there are now nearly 648,000 fewer full-time jobs than in February 2020. For perspective, the non-institutional, working-age civilian population has risen by over 2.5 million during that period. 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 -- retreated by 337,000, along with those working part time for non-economic reasons (-125,000); multiple-job holders rose by 330,000.

Click image for larger view

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 December leapt by $107.4 billion, to $351.1 billion (+44.1% MoM; +42.1% YoY); that amount is over 22% higher than the previous record set back in March 2020. 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 29.7% above the year-earlier average. There has been disagreement in the past between the jobs and withholding-tax reports, but this disparity is eye catching; either there was a wave of hiring after the employment survey week or else the BLS has grossly misestimated the strength of hiring.

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 2021 ISM and Markit Surveys

Click image for larger version

The Institute for Supply Management‘s (ISM) monthly sentiment survey ended the year on a less positive note, with a smaller proportion of U.S. manufacturers reporting expansion in December. The PMI registered 58.7%, a decrease of 2.4 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. The sub-indexes for input prices (-14.2PP), slow deliveries (-7.2PP), and customer inventories (+6.6PP) exhibited the largest changes. 

Click image for larger version

The services sector -- which accounts for 80% of the economy and 90% of employment -- slumped in December (-7.1PP, to 62.0%). The retreat was widespread, including business activity (-7.0PP), new orders (-8.2PP), slow deliveries (-11.8PP); also noteworthy, the input-price subindex hovered near its recent all-time high. 

Click image for larger version

Of the industries we track, Wood Products and Paper Products contracted while Real Estate and Construction expanded. Respondent comments included the following:

Construction. “The escalation in costs for materials, fuel, labor, lodging and the like continues to negatively impact margins in an unsustainable direction.”

 

IHS Markit‘s survey headline results loosely paralleled their ISM counterparts.

Manufacturing. Manufacturing production growth remains constrained by shortages in December

Key findings:

* Output expansion muted, as firms register slower upturn in new orders
* Rate of cost inflation remains marked despite easing to softest since June
* Backlogs of work rise at slowest pace for ten months

 

Services. Demand conditions strengthen in December, but labor shortages exacerbate cost pressures

Key findings:

* Output growth softens, but new order expansion regains momentum
* Labor shortages stymie pace of job creation
* Rate of cost inflation accelerates to series record high

 

Commentary by Siân Jones, Markit’s senior economist:

Manufacturing. “December saw another subdued increase in US manufacturing output as material shortages and supplier delays dragged on. Although some reprieve was seen as supply chains deteriorated to the smallest extent since May, the impact of substantially longer lead times for inputs thwarted firms’ ability to produce finished goods yet again.

“Adding to the sector’s challenges was an ebb in client demand from the highs seen earlier in 2021, with new orders rising at the slowest pace for a year, largely linked to a reluctance at customers to place orders before inventories were worked through. Alongside a slight pick-up in hiring, softer demand conditions contributed to the slowest rise in backlogs of work for ten months.

“While shortages remained significant, the end of the year brought with it some signs that cost pressures have eased. The uptick in input prices was the slowest for six months, and firms recorded softer increases in selling prices amid efforts to entice customer spending.”

 

Services. “Service sector business activity growth remained strong in December, supporting indications of a solid uptick in economic growth at the end of 2021. Although the expansion in output softened slightly, the flow of new orders picked up, with buoyant client demand rising at the fastest pace for five months.

“The service sector continued to aid overall growth, as the manufacturing sector saw output hampered again by material and labor shortages. The impact of the latter, however, had a burgeoning effect on service providers as job creation rose at only a marginal pace amid challenges keeping hold of staff and enticing new starters.

“Subsequently, soaring wage bills and increased transportation fees drove the rate of cost inflation up to a fresh series high.

“Business confidence strengthened at the end of the year to the highest since November 2020, as firms were hopeful of more favorable labor market and supply-chain conditions going into 2022. The swift spread of the Omicron variant does lace new downside risks into the economic outlook heading into 2022, however. Any additional headwinds or disruption faced by firms are likely to temper sentiment.”

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 2021 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

Click image for larger view

Click image for larger view

According to the U.S. Census Bureau, the value of manufactured-goods shipments in November increased $3.5 billion or 0.7 percent to $527.0 billion. Durable goods shipments increased $1.8 billion or 0.7 percent to $263.6 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased $1.7 billion or 0.7 percent to $263.4 billion, led by petroleum and coal products. Shipments of wood products rose by 1.7%; paper: +0.3%.

Click image for larger view

Inventories increased $5.3 billion or 0.7 percent to $770.0 billion. The inventories-to-shipments ratio was 1.46, unchanged from October. Inventories of durable goods increased $3.1 billion or 0.7 percent to $469.9 billion, led by machinery. Nondurable goods inventories increased $2.2 billion or 0.7 percent to $300.2 billion, led by chemical products. Inventories of wood products expanded by 0.7%; paper: +0.5%.

Click image for larger view

New orders increased $8.4 billion or 1.6 percent to $531.8 billion. Excluding transportation, new orders rose by $3.4 billion or 0.8% (+16.3% YoY). Durable goods orders increased $6.7 billion or 2.6 percent to $268.4 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- decreased by $17 million or less than 0.1% (+12.8% YoY). New orders for nondurable goods increased $1.7 billion or 0.7 percent to $263.4 billion.

Click image for larger view

Unfilled durable-goods orders increased $9.1 billion or 0.7 percent to $1,260.1 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.78, up from 6.77 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 103% of their December 2008 peak. Real unfilled orders then jumped to 109% of the prior peak in July 2014, thanks to the largest-ever batch of aircraft orders. Except for the year-long run up during 2019, real unfilled orders have been trending lower since November 2014.

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 2021 Monthly Average Crude Oil Price

Click image for larger view

The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil dropped by $7.44 (-9.4%), to $71.71 per barrel in December. That decrease occurred within the context of a stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of October’s decrease of 332,000 barrels-per-day (BPD) in the amount of petroleum products demanded/supplied (to 19.9 million BPD, and a falloff in accumulated oil stocks (December average: 425 million barrels).

Click image for larger view

From the 4 January 2022 issue of The Energy Bulletin:

Oil: According to Gasbuddy, gasoline prices could rise to almost $3.80 per gallon before peaking this coming May. That’s considerably higher than what the federal government projects for prices at the pump. Earlier in December, the EIA forecast in its Short-Term Energy Outlook that the average retail price for gasoline would fall to $2.88.

OPEC:  The 23-nation alliance led by Saudi Arabia and Russia is likely to proceed with another modest monthly hike of 400,000 b/d as it restores production halted during the pandemic. Several national delegates also said they expect the boost -- due to take effect in February -- will go ahead. OPEC and its partners see global demand continuing to recover this year, taking only a mild hit from the omicron variant. Their confidence is being validated as heavy traffic across key Asian consuming countries and dwindling crude inventories in the US buoy international prices near $80 a barrel.

OPEC agreed to appoint Haitham al-Ghais, a former Kuwaiti governor to OPEC, as its new secretary-general, to succeed Nigeria’s Mohammad Barkindo. He will take over the role on Aug. 1st. The secretary general-elect said on Monday that global oil demand should return to its pre-pandemic levels by the end of 2022.

As the world races towards a greener tomorrow, OPEC+ officials have noted that the energy transition, if not managed well, could lead to underinvestment in oil and gas, which could mean even higher prices. OPEC+ did some surprising things in the past two years. First, it broke up at the start of the pandemic with its two leaders-Saudi Arabia and Russia-turning on each other because of differences of opinion on how the crisis needed to be handled. Then the two made up, and the group united around the deepest production cuts in the history of OPEC in response to the demand destruction caused by the pandemic, also unprecedented.

Shale Oil: Drillers in the biggest US fields are shouldering record costs at the same time that some banks are increasingly reluctant to loan money to the sector, according to the Federal Reserve Bank of Dallas. Equipment, leasing, and other input costs for oil explorers and the contractors they hire surged to an all-time high during the current quarter, the Dallas Fed said in a report released last week. Drillers also saw the universe of willing lenders shrink in the Eleventh Federal Reserve District. “The political pressure forcing available capital away from the energy industry is a problem for everyone,” an unidentified survey respondent said. “Banks view lending to the energy industry as having a ‘political risk.’ As a result, the capital availability has moved down-market, and it is drastically reducing the size and availability of commitments regardless of commodity prices.

Prognosis: The fast-spreading Omicron variant is clouding the outlook for oil markets after a rapid recovery in demand pushed prices to their highest levels in years. Oil marched higher for much of 2021. Orders increased as economies revved up, while producers in the Middle East and elsewhere kept millions of barrels of crude each day in the ground. As a result, the global benchmark, Brent crude prices, climbed over 50% to $77 a barrel.

Most US oil and gas firms expect to raise their capital expenditures during 2022. Yet, capital available to the industry is constantly shrinking as banks continue to shun the sector due to ESG pressures. Moreover, the Biden Administration, with its green agenda and anti-oil policies, is discouraging many in the shale patch from boosting capital budgets beyond the bare minimum.

Investment bank analysts seem to overwhelmingly expect higher prices because of strong demand and not-so-strong supply. This year will see even more robust oil demand than 2021, even with a temporary dip during the first quarter. Oil demand suffered a severe blow during 2020 when the coronavirus in China spread worldwide and started prompting lockdowns. Then the wave receded, and oil demand began to rebound, much faster than most expected. Despite the green transition, demand will continue to recover this year and those after it. Many forecasters, including BP, in 2020 argued that peak oil was already past us and what we had to look forward to was a more renewable energy mix. And then Covid-19 case numbers in critical markets began to decline, and oil demand rose.

According to analysts, more deep-water exploration and project sanctions in the US Gulf of Mexico could be in store for the E&P sector during 2022 assuming robust oil prices hold up. The roughly 12 deep-water US Gulf discoveries in 2021 could expand by a couple more this year, and several fields that have patiently waited out years of price volatility may finally be greenlighted, said a senior energy analyst for S&P Global Platts Analytics. “We could potentially see more finds and final investment decisions next year [2022].” US Gulf operators still have a healthy appetite for exploration, particularly as crude prices remain high.

Click image for larger view

Selected highlights from the 4 January 2022 issue of OilPrice.com‘s Intelligence Report include:

There has been a noticeable shift in sentiment in the oil market, with an increasing number of forecasts stating that demand destruction coming from the Omicron variant would not be as bad as previous variants due to the absence of widespread lockdowns. Sure enough, cases have been climbing in key areas, but governments are reluctant to repeat 2020/2021 policies again. Oil demand remained solid in December, essentially trending on par with November levels, whilst global manufacturing activity strengthened globally amidst easing supply chain bottlenecks. Thus, the bullish case for more OPEC+ crude is by no means paradoxical, especially when one considers all the supply-side disruptions in Libya and elsewhere. As a result, ICE Brent traded moved above the $80 per barrel threshold this week, whilst US benchmark WTI was hovering around $77.5 per barrel.

OPEC+ Agrees to Another Output Increase in February. The group of oil producers comprising OPEC and non-member participants including Russia agreed to extend the 400,000 b/d monthly supply increments into February 2022, arguing that overblown Omicron fears will not have a significant impact on global demand going forward.

EU Accused of Trying to Bury New Year’s Taxonomy Draft. Environmental groups unleashed an avalanche of criticism on the ‘sustainable finance taxonomy’ of the European Commission stipulating that both gas and nuclear are compatible with green objectives, arguing Brussels tried to bury it by issuing it on New Year’s Eve.

 

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 2021 Currency Exchange Rates

Click image for larger view

In December, the monthly average value of the U.S. dollar (USD) appreciated versus Canada’s “loonie” (+1.9%) and the euro (+1.0%) but depreciated against the Japanese yen (-0.1%). On the broad trade-weighted index basis (goods and services) the USD strengthened by 0.7% against a basket of 26 currencies. 

Click image for larger view

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.