2Q2022 Gross Domestic Product: First (“Advance”) Estimate

 

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The Bureau of Economic Analysis (BEA) pegged its advance (first) estimate of 2Q2022 U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate (SAAR) of -0.93% (+0.5% expected), up 0.64 percentage point (PP) from 1Q2022’s -1.57%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 2Q2022 was 1.6% higher than in 2Q2021; that growth rate was slower (-1.9PP) than 1Q2022’s +3.5% relative to 1Q2021.

Two groupings of GDP components -- personal consumption expenditures (PCE) and net exports (NetX) -- contributed positively to the 2Q headline. However, that combination was more than offset by private domestic investment (PDI) and government consumption expenditures (GCE). 

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As for details (all comparisons to 1Q2022) --

PCE (Contributed 0.70PP to the headline, down 0.54PP from 1Q):

* Goods. Spending on non-durable goods rose (+$81.7 billion, nominal), led by gasoline and other energy goods (+$56.0B). Spending on durable goods fell (-$6.6B), dominated by recreational goods and vehicles (-$10.4B).

* Services. Gains (+$255.3B) were broad-based, led by housing and utilities (+$62.6B) and food services and accommodations (+$59.1B).

PDI (Subtracted 2.73PP, down 3.66PP from 1Q):

* Fixed investment. Gains in this category (+$57.9B) were led by intellectual property products (+$43.2B); residential investment fell (-$6.4B).

* Inventories. Nonfarm inventories shrank by $118.5B; farm: -$0.7B.

NetX (Added 1.43PP, up 4.66PP from 1Q):

* Exports. Goods exports rose by $191.7B; services: +$55.4B.

* Imports. Goods imports rose $98.5B; services: +$48.9B.

GCE (Subtracted 0.33PP, up 0.18PP from 1Q). Although GCE fell on a QoQ percentage basis, the category saw gains in absolute terms -- primarily in state and local consumption expenditures (+$85.0B)

Annualized growth in the BEA’s real final sales of domestic product, which excludes the value of inventories, was +1.08% (up 2.30PP from 1Q).

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

-- Consumer spending on goods moved deeper into contraction, with the growth rate for all consumer spending declining by about a half percent.

-- Commercial spending on fixed investment also began to contract, primary due to weakening residential construction.

-- Real household income and savings rates continued to shrink. The consumer is in no position to quickly reverse the course of the headline number.

-- The BEA continues to under-recognize inflation. The headline number would have been contracting at a far more dramatic -3.18% rate if the BEA had used inflation data from the Bureau of Labor Statistics (BLS). [Ed note: CMI uses end-of-quarter CPI values in its estimation of GDP change; substituting quarterly average CPI values (which we believe more completely encompasses conditions during the respective quarters) yields a less-dire -2.43%.]

“At face value this is the second consecutive quarter that the headline number indicated economic contraction,” Davis wrote. “However, the National Bureau of Economic Research (NBER) is the official arbiter of recessions in the US, and they are not especially timely in making their calls. Meanwhile, politicians (and even the FED) will be busy spinning other (currently more favorable) definitions of recessions, including unemployment rates.

“Our own go-to source of wisdom, Douglas Adams, once wrote: ‘If it looks like a duck, and quacks like a duck, we have at least to consider the possibility that we have a small aquatic bird of the family Anatidae on our hands.’ We couldn't agree more,” 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

June 2022 Residential Sales, Inventory and Prices

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Sales of new single-family houses in June 2022 were at a seasonally adjusted annual rate (SAAR) of 590,000 units (664,000 expected). This is 8.1% (±15.0%)* below the revised May rate of 642,000 (originally 696,000 units) and 17.4% (±11.6%) below the June 2021 SAAR of 714,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was -8.1%. For longer-term perspectives, NSA sales were 57.5% below the “housing bubble” peak and 6.3% below the long-term, pre-2000 average.

The median sales price of new houses sold in June slumped (-9.5% or $42,100) to $402,400. The average sales price also tumbled (-11.1% or $57,200) to $456,800. Homes priced at/above $750,000 were 4.1% of sales, down from the year-earlier 6.6%.

* 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 June, single-unit completions fell by 43,000 units (-4.1%). Sales also retreated (52,000 units; -8.1%), resulting in inventory for sale expanding in absolute (+11,000 units) and months-of-inventory (+0.9 month) terms. 

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Existing home sales retreated for a fifth month in June (290,000 units or -5.4%) to a SAAR of 5.12 million units (5.395 million expected). Inventory of existing homes for sale expanded in both absolute (+111,000 units) and months-of-inventory (+0.4 month) terms. Because resales retreated at a slower rate than new-home sales, the share of total sales comprised of new homes slipped to 10.3%. The median price of previously owned homes sold in June advanced to a record $416,000 ($7,600 or +1.9% MoM).

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Housing affordability dropped (5.6 index points) as the median price of existing homes for sale in May rose by $12,500 (+3.1% MoM; +14.6 YoY) to $414,200. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices rose at a not-seasonally adjusted monthly change of +1.9% (+19.7% YoY).

“Housing data for May 2022 continued strong, as price gains decelerated slightly from very high levels,” said Craig Lazzara, Managing Director at S&P DJI. “The National Composite Index rose by 19.7% for the 12 months ended May, down from April’s 20.6% year-over-year gain. We see a similar pattern in the 10-City Composite (up 19.0% in May vs. 19.6% in April) and in the 20-City Composite (+20.5% vs. +21.2%). Despite this deceleration, growth rates are still extremely robust, with all three composites at or above the 98th percentile historically.

“The market’s strength continues to be broadly based, as all 20 cities recorded double-digit price increases for the 12 months ended in May. May’s gains ranked in the top quintile of historical experience for 19 cities, and in the top decile for 17 of them. However, at the city level we also see evidence of deceleration. Price gains for May exceeded those for April in only four cities. As recently as February of this year, all 20 cities were accelerating.

“Tampa (+36.1%) was the fastest growing city for the third consecutive month, with Miami (+34.0%) in second place. In May, Dallas fought its way into the top three with a gain of 30.8%. Prices continued strongest in the South and Southeast, both of which recorded 30.7% gains year-over-year.

“We’ve noted previously that mortgage financing has become more expensive as the Federal Reserve ratchets up interest rates, a process that was ongoing as our May data were gathered. Accordingly, a more-challenging macroeconomic environment may not support extraordinary home price growth for much longer.”

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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.

June 2022 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in June at a seasonally adjusted annual rate (SAAR) of 1,559,000 units (1.588 million expected). This is 2.0% (±9.0%)* below the revised May estimate of 1,591,000 (originally 1.549 million units) and 6.3% (±10.2%)* below the June 2021 SAAR of 1,664,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -7.5%. 

Single-family housing starts in June were at a SAAR of 982,000; this is 8.1% (±12.2%)* below the revised May figure of 1,068,000 units (-16.3% YoY). Multi-family: 577,000 units (+10.3% MoM; +15.7% 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 1,365,000 units.  This is 4.6% (±11.7%)* below the revised May estimate of 1,431,000 (originally 1.465 million units), but 4.6% (±13.4%)* above the June 2021 SAAR of 1,305,000 units; the NSA comparison: +2.9% YoY. 

Single-family housing completions were at a SAAR of 996,000; this is 4.1% (±11.1%)* below the revised May rate of 1,039,000 units (+6.4% YoY). Multi-family: 369,000 units (-5.9% MoM; -5.1% YoY).

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Total permits were at a SAAR of 1,685,000 units (1.666 million expected).  This is 0.6% below the revised May rate of 1,695,000 (originally 1.695 million units) but 1.4% above the June 2021 SAAR of 1,661,000 units; the NSA comparison: -0.6% YoY. 

Single-family permits were at a SAAR of 967,000 units; this is 8.0% below the revised May figure of 1,051,000 units (-13.9% YoY). Multi-family: 718,000 units (+11.5% MoM; +26.9% YoY).

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Builder confidence plunged in July as high inflation and increased interest rates stalled the housing market by dramatically slowing sales and buyer traffic. In a further sign of a weakening housing market, builder confidence in the market for newly built single-family homes posted its seventh straight monthly decline in July, falling 12 points to 55, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This marks the lowest HMI reading since May 2020 and the largest single-month drop in the history of the HMI, except for the 42-point drop in April 2020.

“Production bottlenecks, rising home building costs and high inflation are causing many builders to halt construction because the cost of land, construction and financing exceeds the market value of the home,” said NAHB Chairman Jerry Konter. “In another sign of a softening market, 13% of builders in the HMI survey reported reducing home prices in the past month to bolster sales and/or limit cancellations.”

"Affordability is the greatest challenge facing the housing market,” said NAHB Chief Economist Robert Dietz. “Significant segments of the home buying population are priced out of the market. Policymakers must address supply-side issues to help builders produce more affordable housing.”

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.

June 2022 Industrial Production, Capacity Utilization and Capacity

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In the wake of annual revisions, total industrial production (IP) was shown to have moved down 0.2% in June (+0.1% expected) but advanced at an annual rate of 6.1% for 2Q as a whole. Manufacturing output declined 0.5% for a second consecutive month in June; even so, it rose at an annual rate of 4.2% in 2Q. In June, the index for mining advanced 1.7%, while the index for utilities fell 1.4%. At 104.4% of its 2017 average, total industrial production in June was 4.2% above its year-earlier level. 

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Industry Groups

Manufacturing output fell 0.5% in June, with decreases for durable and nondurable manufacturing of 0.3% and 0.8%, respectively. Within durable manufacturing, declines of more than 1% in primary metals, machinery, and motor vehicles and parts outweighed gains of more than 1% in miscellaneous manufacturing and in electrical equipment, appliances, and components (wood products: +0.7%). Within nondurable manufacturing, every group except for two posted a decline of at least 0.8%; apparel and leather recorded a gain of 2.5%, while chemicals registered a dip of 0.1% (paper: -0.8%). The index for other manufacturing (publishing and logging) moved down 0.2%.

The output of mining gained 1.7% in June and rose at an annual rate of 14.5% in 2Q; strength in the oil and gas sector has been the primary impetus for the recent gains in mining. The index for utilities fell 1.4% in June but grew at an annual rate of 5.1% in 2Q.

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Capacity utilization (CU) decreased 0.3 percentage point (PP) in June to 80.0%, a rate that is 0.4PP above its long-run (1972–2021) average.

Manufacturing CU fell 0.5PP in June to 79.3%, 1.1PP above its long-run average (wood products: +0.7%; paper: -0.7%). The operating rate for mining jumped 1.2PP to 88.0%, 5.3PP above its year-earlier level and 1.7PP above its long-run average. Conversely, the operating rate for utilities fell 1.2PP to 75.8%, 8.9PP below its long-run average.

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Capacity at the all-industries level increased by 0.2% MoM (+1.1% YoY) to 130.4% of 2017 output. Manufacturing edged up by 0.1% (+0.8% YoY) to 128.7%. Wood products: +0.1% (+1.6% YoY) to 126.2%; paper: -0.1% (-0.1% YoY) to 110.3%.

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.

June 2022 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 1.3% in June (+1.1% expected) after rising 1.0% in May. The increase was broad-based, with the indexes for gasoline, shelter, and food being the largest contributors. The energy index rose 7.5% over the month and contributed nearly half of the all-items increase, with the gasoline index rising 11.2% and the other major component indexes also rising. The food index rose 1.0% in June, as did the food at home index.

The index for all items less food and energy rose 0.7% in June, after increasing 0.6% in the preceding two months. While almost all major component indexes increased over the month, the largest contributors were the indexes for shelter, used cars and trucks, medical care, motor vehicle insurance, and new vehicles. The indexes for motor vehicle repair, apparel, household furnishings and operations, and recreation also increased in June. Among the few major component indexes to decline in June were lodging away from home and airline fares.

The all-items index increased 9.1% for the 12 months ending June, the largest 12-month increase since the period ending November 1981. The index for all items less food and energy rose 5.9% over the last 12 months. The energy index rose 41.6% over the last year, the largest 12-month increase since the period ending April 1980. The food index increased 10.4% for the 12-months ending June, the largest 12-month increase since the period ending February 1981.

 

Producer Price Index

The Producer Price Index for final demand (PPI-FD) increased 1.1% in June (+0.8% expected). This rise followed advances of 0.9% in May and 0.4% in April. Three-fourths of the advance in the index for final demand was due to a 2.4% rise in prices for final demand goods. The index for final demand services increased 0.4%.

Final demand prices moved up 11.3% for the 12 months ended in June, the largest increase since a record 11.6% jump in March 2022.Prices for final demand less foods, energy, and trade services moved up 0.3% in June after advancing 0.4% in both May and April. For the 12 months ended in June, the index for final demand less foods, energy, and trade services rose 6.4%.

Final Demand

Final demand goods: The index for final demand goods moved up 2.4% in June, the sixth consecutive rise. Nearly 90% of the June increase can be traced to a 10.0% jump in prices for final demand energy. The indexes for final demand goods less foods and energy and for final demand foods advanced 0.5% and 0.1%, respectively.

Product detail: Over half of the June increase in the index for final demand goods is attributable to gasoline prices, which jumped 18.5%. The indexes for diesel fuel, electric power, residential natural gas, motor vehicles and equipment, and processed young chickens also moved higher. In contrast, prices for chicken eggs dropped 30.2%. The indexes for iron and steel scrap and for jet fuel also decreased.

Final demand services: The index for final demand services rose 0.4% in June after climbing 0.6% in May. Two-thirds of the broad-based advance in June can be traced to a 0.8% increase in margins for final demand trade services. (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 also moved higher, 0.1% and 0.8%, respectively.

Product detail: Over 30% of the June advance in the index for final demand services can be traced to margins for food and alcohol retailing, which rose 3.8%. The indexes for machinery and equipment wholesaling, outpatient care (partial), transportation of passengers (partial), guestroom rental, and hospital inpatient care also increased. Conversely, prices for portfolio management declined 2.7%. The indexes for automobile retailing (partial) and for long-distance motor carrying also moved lower.

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The not-seasonally adjusted price indexes we track were mixed both MoM and YoY.

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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.

May 2022 International Trade (Softwood Lumber)

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With May exports of goods and services at $255.9 billion (+1.2% MoM; +21.7% YoY) and imports at $341.4 billion (+0.6% MoM; +23.3% YoY), the net trade deficit was $85.5 billion (-1.3% MoM; +28.4% YoY).

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Softwood lumber exports rose (14 MMBF or +13.4%) in May, along with imports (12 MMBF or +11.4%). Exports were 12 MMBF (+11.4%) above year-earlier levels; imports were 133 MMBF (-8.6%) lower. As a result, the year-over-year (YoY) net export deficit was 145 MMBF (-10.1%) smaller. Also, the average net export deficit for the 12 months ending May 2022 was 7.9% below the average of the same months a year earlier (the “YoY MA(12) % Chng” series shown in the lumber-trade graph above).

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North America (58.0% of total softwood lumber exports; of which Mexico: 28.9%; Canada: 29.1%), Asia (13.0%; especially Japan: 4.0%), and the Caribbean: 22.3% especially the Dominican Republic: 5.0%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China (2.0% of U.S. total) were -44.4% relative to the same month of the prior year. Meanwhile, Canada was the source of most (85.0%) softwood lumber imports into the United States. Imports from Canada were 9.8% lower YTD/YTD. Overall, YTD exports were up 5.6% compared to the prior year; imports: -7.2%.

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U.S. softwood lumber export activity through the West Coast customs region represented 35.6% of the U.S. total; Gulf: 31.4%, and Eastern: 22.1%. Seattle (17.6% of the U.S. total), Mobile (16.3%), San Diego (14.0%) and Laredo (9.6%) were among the most active districts. At the same time, Great Lakes customs region handled 57.1% of softwood lumber imports -- most notably the Duluth, MN district (24.6%) -- coming into the United States.

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Southern yellow pine comprised 19.2% of all softwood lumber exports; Douglas-fir (17.2%), treated lumber (17.4%), other pine (9.2%) and finger-jointed (9.6%) were also significant. Southern pine exports were down 10.2% YTD/YTD, while Doug-fir: +27.4%; treated: +16.2%; and finger-jointed: +63.4%.

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.

June 2022 Employment Report

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The Bureau of Labor Statistics‘ (BLS) establishment survey showed nonfarm employers added 372,000 jobs in June, well in excess of the 270,000 expected. However, April and May employment changes were revised down by a combined 74,000 (April: -68,000; May: -6,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) was stable at 3.6%, as the change in the number of employed (-315,000) roughly matched the contraction of the civilian labor force (-353,000). Since the number of unemployed also shrank by 38,000 it appears the vast majority of people no longer working left the labor force entirely.

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Observations from the employment reports include:

* The correspondence between the establishment (+372,000 jobs) and household surveys (-315,000 employed) was poor.

* Goods-producing industries added 48,000 jobs; service-providers: +324,000. Notable job gains occurred in professional and business services (+74,000), leisure and hospitality (+67,000), and health care (+56,000). Losses were concentrated in credit intermediation and related activities -- e.g., banks, credit card firms and mortgage originators (-10,700), and the federal government (-13,000). Total nonfarm employment is down by 524,000 (-0.3%) from its pre-pandemic level in February 2020. Private-sector employment has recovered the net job losses due to the pandemic and is 140,000 higher than in February 2020, while government employment is 664,000 lower. Employment is also perhaps 8.1 million below its potential if accounting for growth in the working-age population since January 2006.

Manufacturing added 29,000 jobs. That result is at odds with the change in the Institute for Supply Management’s (ISM) manufacturing employment subindex, which fell further into contraction in June. Wood products employment retreated by 1,200 (ISM was unchanged); paper and paper products: +1,200 (ISM decreased); construction: +13,000 (ISM increased).

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* The number of employment-age persons not in the labor force jumped (+510,000) to 99.8 million; that level is 4.8 million higher than in February 2020. With the labor force contracting, the employment-population ratio (EPR) edged down to 59.9%; also, the EPR is 1.3PP below the February 2020 level. 

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* Because the civilian labor force shrank by 353,000 in June, the labor force participation rate decreased fractionally to 62.2%. Average hourly earnings of all private employees increased by $0.10 (to $32.08), and the year-over-year increase decelerated to +5.1%. For all production and nonsupervisory employees (shown above), the tale was much the same: hourly wages rose by $0.13, to $27.45 (+6.4% YoY). Since the average workweek for all employees on private nonfarm payrolls held at 34.5 hours, average weekly earnings rose (+$3.45) to $1,106.76 (+4.2% YoY). With the consumer price index running at an annual rate of +8.6% in May, the average worker keeps losing purchasing power. In fact, average hourly wages have lagged CPI since April 2021; average weekly wages since June 2021.

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* Full-time jobs slipped (-152,000) to 132.6 million. Workers employed part time for economic reasons (shown in the graph above) -- e.g., slack work or business conditions, or could find only part-time work -- slumped by 707,000, while those working part time for non-economic reasons also fell (-204,000); multiple-job holders rose by 239,000.

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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 June decreased by $4.4 billion, to $242.3 billion (-1.8% MoM; +0.5% 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 June was 9.3% 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.

June 2022 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 $5.28 (+4.8%) to $114.84 per barrel in June. That increase occurred within the context of a marginally stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of April’s decrease of 555,000 barrels-per-day (BPD) in the amount of petroleum products demanded/supplied (to 20.0 million BPD), and accumulated oil stocks that have almost edged up to the bottom of the five-year-average range (June average: 417 million barrels). 

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Selected highlights from the 1 July 2022 issue of OilPrice.com’s Oil & Energy Insider include:

“As uncertainty builds around the supply capacity of OPEC+ and oil demand rages on despite expectations of demand destruction, bullish sentiment is building in oil markets,” wrote Tom Kool. “Now, to add to that bullish sentiment, another form of supply disruption is springing up around the world: strikes. Operations at France's Fos Refinery were halted by strikes and Norway's offshore production was heavily impacted by them as well. It seems the oil market is under siege from all sides, from fundamental tightness to underinvestment, disruptions related to the war in Ukraine, and now strikes.”

OPEC+ Summit Fails to Impress. OPEC+ agreed to maintain a 648,000 b/d increase in its production target for August, keeping its commitment unchanged despite increasing evidence that spare capacity within the oil group has thinned to its lowest level in years.

US Supreme Court Limits Federal Emission-Setting Powers. In a blow to US President Biden, the US Supreme Court ruled that the Environmental Protection Agency does not have authority to regulate greenhouse gas emissions from existing coal- and gas-fired power plants.

Iran Nuclear Deal Negotiations Fall Apart. According to US officials, as reported by Reuters, the odds of reviving the Iranian nuclear deal are even lower after the Doha talks held this week than before, describing the negotiations as "treading water."

Fossil Fuels Make Roaring EU Comeback. With Europe's statistics for 2021 published by Eurostat, fossil fuels have once again become the largest source of power generation in the European Union, driven largely by a 4% year-on-year increase in gas utilization despite its soaring price.

Libya Declares Force Majeure at Key Oil Ports. After the calls of Libya's National Oil Company were largely ignored, it declared force majeure at the Es Sider and Ras Lanuf ports due to ongoing protests, curbing potential export capacity to a mere 400,000 b/d, a third of the country's exports in February.

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For other oil-related headlines, see the 5 July 2022 edition of The Energy Bulletin Weekly.

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.

June 2022 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey for June 2022 reflected a smaller proportion of U.S. manufacturers reporting expansion. The PMI registered 53.0%, a decrease of 3.1 percentage points (PP). (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. Supply-chain bottlenecks may be subsiding, as the subindexes for slow deliveries (-8.4PP), new orders (-5.9PP), and order backlogs (-5.5PP) exhibited the largest changes. Input price increases decelerated slightly (-3.7PP) but remained significantly elevated.

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The services sector -- which accounts for 80% of the economy and 90% of employment -- grew more slowly in June (-0.6PP, to 55.3%). Order backlogs (+8.5PP), imports (-6.5PP), and inventories (-3.5PP) saw the largest changes. Service input-price increases also decelerated (-2.0PP).

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Of the industries we track, Wood Products and Paper Products contracted. Respondent comments included the following:

Construction. “[Interest] rate increases have slowed sales but have not helped with supply challenges yet.”

 

IHS Markit‘s survey headline results those of their ISM counterparts.

Manufacturing. PMI falls to near two-year low in June amid contraction in client demand.

Key findings:

* Output broadly flat as firms see fresh drop in new orders
* Inflationary pressures ease
* Future output expectations drop to lowest since October 2020

 

Services. New orders decline for first time since July 2020.

Key findings:

* Renewed contraction in new business
* Slower rise in activity, while business optimism drops
* Further sharp increase in input costs

 

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

Manufacturing. “The PMI survey has fallen in June to a level indicative of the manufacturing sector acting as a drag on GDP, with that drag set to intensify as we move through the summer. Forward-looking indicators such as business expectations, new order inflows, backlogs of work and purchasing of inputs have all deteriorated markedly to suggest an increased risk of an industrial downturn.

“Demand growth is cooling from households amid the cost-of-living crisis, and capital spending by companies is also showing signs of moderating due to tightening financial conditions and the gloomier outlook. However, most marked has been a steep drop in orders for inputs by manufacturers, which hints at an inventory correction.

“Some welcome news is that the drop in demand for inputs has brought some pressure off supply chains and calmed prices for a wide variety of goods, which should help alleviate broader inflationary pressures in coming months.”

 

Services. "June saw signs of a broad-based weakening of the economy with demand now falling in both the manufacturing and service sectors. While the survey data point to a stalling of GDP at the end of the second quarter, a downshifting in the forward-looking new orders index and drop in companies' future output expectations hints at falling economic activity as we head through the summer.

"Demand for goods and services from households is showing signs of moderating substantially due to the rising cost of living. Meanwhile, tighter financial conditions are starting to hit, and it was notable that the service sector slowdown was led by a steep drop in financial services activity.

"Meanwhile there was welcome news in terms of a marked easing in upward price pressures, but it's clear that price growth remains elevated despite coming off recent peaks, all of which points to a bout of stagflation in the near term."

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.

June 2022 Currency Exchange Rates

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In June, the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-0.4%), was unchanged against the euro, and appreciated relative to the Japanese yen (+4.0%). On the broad trade-weighted index basis (goods and services) the USD strengthened 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.

May 2022 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 May increased $9.9 billion or 1.8% to $544.4 billion. Durable goods shipments increased $3.6 billion or 1.4% to $268.5 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased $6.3 billion or 2.3% to $275.9 billion, led by petroleum and coal products. Shipments of wood products fell 0.2%; paper: +0.4%.

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Inventories increased $10.0 billion or 1.3% to $797.9 billion. The inventories-to-shipments ratio was 1.47, unchanged from April. Inventories of durable goods increased $2.8 billion or 0.6% to $482.8 billion, led by machinery. Nondurable goods inventories increased $7.2 billion or 2.3% to $315.1 billion, led by petroleum and coal products. Inventories of wood products expanded by 0.2%; paper: +0.4%.

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New orders increased $8.4 billion or 1.6% to $543.4 billion. Excluding transportation, new orders rose by $7.5 billion or 1.7% (+14.9% YoY). Durable goods orders increased $2.1 billion or 0.8% to $267.5 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- rose by $0.4 billion or 0.6% (+11.0% YoY). New orders for nondurable goods increased $6.3 billion or 2.3% to $275.9 billion.

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Unfilled durable-goods orders increased $3.9 billion or 0.4% to $1,110.0 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 5.98, down from 6.05 in April. Real (inflation-adjusted) unfilled orders, which -- prior to the pandemic -- had been a good litmus test for potential 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 110% of the prior peak in November 2014, thanks to the largest-ever batch of aircraft orders. However, 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.