1Q2023 Gross Domestic Product: First (“Advance”) Estimate

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The Bureau of Economic Analysis (BEA) pegged its advance (first) estimate of 1Q2023 U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate (SAAR) of +1.06% (+2.0% expected), down 1.50 percentage points (PP) from 4Q2022’s +2.56%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 1Q2023 was 1.56% higher than in 1Q2022; that growth rate was slightly faster (+0.68PP) than 4Q2022’s +0.88% relative to 4Q2021.

Three of the four groupings of GDP components -- personal consumption expenditures (PCE), net exports (NetX), and government consumption expenditures (GCE) -- contributed positively to the 1Q headline. Private domestic investment (PDI) detracted from it.

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As for details (all comparisons to 4Q2022) --

PCE:

* Goods. Spending on durable goods jumped (+$89.4 billion, chained 2012 dollars), led by motor vehicles and parts (+$55.4B) and recreational goods and vehicles (+$14.8B). Spending on non-durable goods edged up (+$7.1B), led by other nondurable goods (+$7.8B).

* Services. Gains (+$50.4B) were led by health care (+$32.6B) and food services and accommodations (+$11.0B).

PDI:

* Fixed investment. This decline (-$3.7B) was led by a broad-based retreat in equipment (-$24.0B), followed by residential investment (-$6.1B), but largely offset by expenditures on nonresidential structures (+$12.2B) and intellectual property products (+$12.0B).

* Inventories. Nonfarm inventories shrank by $142.1B; farm: +$7.8B.

NetX:

* Exports. Goods exports rose by $45.0B; services: -$10.3B.

* Imports. Goods imports rose by $29.6B; services: -$0.3B. Recall that the net change in imports is inversely related to the change in the GDP headline.

GCE: State and local consumption expenditures (+$13.5B) led this category, followed by federal nondefense consumption expenditures (+$11.8B).

Annualized growth in the BEA’s real final sales of domestic product, which excludes the value of inventories, was +3.32% (up 2.23PP from 4Q).

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

-- This report is not nearly as bad as the headline number might indicate, having suffered materially from inventory drawdowns.

-- Consumer spending on both goods and services improved to a respectable growth rate.

-- Three quarters of the contraction in spending for commercial/private fixed investment essentially stopped, and governmental spending remained robust.

-- Perhaps most significantly, household disposable income saw enough of an increase that savings rates took a noticeable upturn.

“Except for the modest headline number, this was not the ‘start of a downturn’ report that many had expected,” Davis concluded, adding, “In fact, consumer spending on goods showed surprising strength after suffering through four consecutive quarters of contraction. That noted, we will eagerly await the next round of BEA annual adjustments three months hence.”

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 2023 Residential Sales, Inventory and Prices

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Sales of new single-family houses in March 2023 were at a seasonally adjusted annual rate (SAAR) of 683,000 units (634,000 expected). This is 9.6 percent (±15.2 percent)* above the revised February rate of 623,000 (originally 640,000 units), but 3.4 percent (±12.7 percent)* below the March 2022 SAAR of 707,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was -2.9%. For longer-term perspectives, NSA sales were 50.8% below the “housing bubble” peak and 26.2% above the long-term, pre-2000 average.

The median sales price of new houses sold in March 2023 was $449,800 (+3.8%, or $16,600). The average sales price was $562,400 (+12.1%, or $60,600). Homes priced at/above $750,000 comprised 12.1% of sales, up from the year-earlier 11.8%.

* 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 climbed by 25,000 units (+2.4%). Sales also rose (60,000 units, or +9.6%), resulting in inventory for sale shrinking in both absolute (-2,000 units) and months-of-inventory (-0.4 month) terms. 

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Existing home sales resumed their decline when sliding (-2.4% or 110,000 units) in March to a SAAR of 4.44 million units (4.5 million expected). Inventory of existing homes for sale expanded in absolute terms (+10,000 units) but was unchanged in months-of-inventory terms. Because resales retreated while new-home sales advanced, the share of total sales comprised of new homes increased to 13.3%. The median price of previously owned homes sold in March rose to $375,700 (+3.3% or $12,100).

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Housing affordability slipped (-0.3 index point) as the median price of existing homes for sale in February rose by $2,100 (+0.6% MoM; -0.7 YoY) to $367,500. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices poked higher at a not-seasonally adjusted monthly change of +0.2% (+2.0% YoY).

“Home price trends moderated in February 2023,” said Craig Lazzara, Managing Director at S&P DJI. “The National Composite, which had declined for seven consecutive months, rose a modest 0.2% in February, and now stands 4.9% below its June 2022 peak. Our 10- and 20-City Composites performed similarly, with February gains of 0.3% and 0.2%; these Composites are currently 6.0% and 6.6% below their respective peaks. On a trailing 12-month basis, the National Composite is only 2.0% above its level in February 2022; the 10- and 20-City Composites are both up 0.4% on a year-over-year basis.

“The moderation we observed nationally is also apparent at a more granular level. Before seasonal adjustment, prices rose in 12 cities in February (versus in only one in January). Seasonally adjusted data showed nine cities with rising prices in February (versus five in January). With or without seasonal adjustment, most cities’ February results showed improvement relative to their January counterparts.

“February’s results were most interesting because of their stark regional differences. Miami’s 10.8% year-over-year gain made it the best-performing city for the seventh consecutive month. Tampa (+7.7%) and Atlanta (+6.6%) continued in second and third place, with Charlotte (+6.0%) close behind. Results were different in the Pacific and Mountain time zones. Last month, four West Coast cities (San Francisco, Seattle, San Diego, and Portland) were in negative year-over-year territory. In February they were joined by four of their western neighbors, as Las Vegas (-2.6%), Phoenix (-2.1%), Los Angeles (-1.3%), and Denver (-1.2%) all tipped into negative territory. It’s unsurprising that the Southeast (+7.8%) remains the country’s strongest region, while the West (-4.2%) continues as the weakest.

“The results released today pre-date the disruptions in the commercial banking industry which began in early March. Although forecasts are mixed, so far the Federal Reserve seems focused on its inflation-reduction targets, which suggests that interest rates may remain elevated, at least in the near-term. Mortgage financing and the prospect of economic weakness are therefore likely to remain a headwind for housing prices for at least the next several months.”

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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 2023 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in March at a seasonally adjusted annual rate (SAAR) of 1,420,000 units (1.400 million expected). This is 0.8% (±13.0%)* below the revised February estimate of 1,432,000 (originally 1.450 million units) and 17.2% (±9.1%) below the March 2022 SAAR of 1,716,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -17.0%.

Single-family housing starts in March were at a SAAR of 861,000; this is 2.7% (±14.4%)* above the revised February figure of 838,000 units (-26.8% YoY). Multi-family: 559,000 units (-5.9% MoM; +6.1% 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 1,542,000 units. This is 0.6% (±13.3%)* below the revised February estimate of 1,552,000 (originally 1.557 million units), but 12.9% (±18.6%)* above the March 2022 SAAR of 1,366,000 units; the NSA comparison: +13.3% YoY.

Single-family completions were at a SAAR of 1,050,000; this is 2.4% (±12.4%)* above the revised February rate of 1,025,000 units (+0.5% YoY). Multi-family: 492,000 units (-6.6% MoM; +58.9% YoY).

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Total permits were at a SAAR of 1,413,000 units (1.441 million expected). This is 8.8% below the revised February rate of 1,550,000 (originally 1.524 million units) and 24.8% below the March 2022 SAAR of 1,879,000 units; the NSA comparison: -23.2% YoY.

Single-family authorizations were at a SAAR of 818,000; this is 4.1% above the revised February figure of 786,000 units (-26.3% YoY). Multi-family: 595,000 units (-22.1% MoM; -17.9% YoY).

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Press release from NAHB’s Robert Dietz:

“Builders remained cautiously optimistic in April as limited resale inventory helped to increase demand in the new home market even as the industry continues to grapple with building material issues.

“Builder confidence in the market for newly built single-family homes in April rose one point to 45, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI).

“Currently, one-third of housing inventory is new construction, compared to historical norms of a little more than 10%. More buyers looking at new homes, along with the use of sales incentives, have supported new home sales since the start of 2023.

“While AD&C loan conditions are tight, there is not significant evidence thus far that pressure on the regional bank system has made this lending environment for builders and land developers worse. Builders note that additional declines in mortgage rates, to below 6%, will price-in further demand for housing. Nonetheless, the industry continues to be plagued by building material issues, including lack of access to electrical transformer equipment.

“The HMI survey shows that the share of builders reducing home prices continues trending down, as 30% said they reduced prices in April, compared to 31% in March and February, 35% in December and 36% in November. The average price reduction in April was 6%, the same as in February and March but lower than in December (8%). The share of builders using incentives to bolster sales has edged up from 57% in February, to 58% in March to now 59% in April, but it’s still lower than it was last December (62%).”

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 2023 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) rose 0.4% in March (+0.3% expected) and was little changed in 1Q, increasing at an annual rate of 0.2%. In March, manufacturing and mining output each fell 0.5%. The index for utilities jumped 8.4%, as the return to more seasonal weather after a mild February boosted the demand for heating. At 103.0% of its 2017 average, total IP in March was 0.5% above its year-earlier level. 

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Market Groups

The major market groups posted mixed results in March. Nondurable consumer goods, business supplies, and energy materials all recorded notable gains as a result of the jump in the output of utilities. Defense and space equipment posted the only other gain, increasing 0.8%. Construction supplies recorded the largest drop (1.8%), followed by business equipment (1.0%), durable consumer goods (0.9%), and non-energy materials (0.5%).

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Industry Groups

Manufacturing output (SIC definition) decreased 0.5% in March and was 1.1% below its year-earlier level (NAICS manufacturing: -0.5% MoM; -0.9% YoY). For 1Q, SIC manufacturing edged up 0.3% at an annual rate (NAICS: +0.5%). The indexes for durable manufacturing and nondurable manufacturing moved down 0.9% and 0.1% in March, respectively, while the index for other manufacturing (publishing and logging) fell 0.7%. Most durables industries posted losses; wood products posted the largest drop (-2.9%), followed by nonmetallic mineral products, which fell 2.6%. Within nondurables, gains of at least 1% were registered by apparel and leather and by petroleum and coal products (paper products: +0.8%); chemicals posted the largest loss, at 0.9%.

Mining output slipped 0.5% in March, with declines in the indexes for oil and gas extraction, other mining, and support activities. The output of utilities jumped 8.4%, with advances for both electric and natural gas utilities.

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Capacity utilization (CU) moved up to 79.8% in March, a rate that is 0.1 percentage point (PP) above its long-run (1972–2022) average.

Manufacturing CU (SIC definition) moved down 0.5PP in March to 78.1%, a rate that is 0.1PP below its long-run average (NAICS manufacturing: -0.6% MoM, to 78.2%; wood products: -3.0%; paper: +0.9%). The operating rate for mining fell 0.5PP to 91.1%, while the operating rate for utilities jumped 5.6PP to 75.3%. The rate for mining was 4.7PP above its long-run average, while the rate for utilities remained substantially below its long-run average.

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Capacity at the all-industries level increased by 0.1% MoM (+1.4% YoY) to 129.1% of 2017 output. NAICS manufacturing also edged up by 0.1% (+1.2% YoY) to 128.0%. Wood products: +0.1% (+1.4% YoY) to 119.9%; paper: -0.1% (-0.6% YoY) to 106.3%.

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.

February 2023 International Trade (Softwood Lumber)

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With February exports of goods and services at $251.2 billion (-2.7% MoM; +8.1% YoY) and imports at $321.7 billion (-1.5% MoM; +0.7% YoY), the net trade deficit was $70.5 billion (+2.7% MoM; -19.2% YoY). 

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Softwood lumber exports fell (2 MMBF or -2.1%) in February, along with imports (144 MMBF or -11.6%). Exports were 10 MMBF (-9.4%) below year-earlier levels; imports: 115 MMBF (-9.5%) lower. As a result, the year-over-year (YoY) net export deficit was 105 MMBF (-9.5%) smaller. Also, the average net export deficit for the 12 months ending February 2023 was 0.6% 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 (58.5% of total softwood lumber exports; of which Mexico: 34.7%; Canada: 23.9%), Asia (14.3%; especially China: 5.1%), and the Caribbean: 19.3% especially Jamaica: 7.6%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were 92.2% relative to the same month of the prior year. Meanwhile, Canada was the source of most (80.8%) softwood lumber imports into the United States. Imports from Canada were 7.0% lower YTD/YTD. Overall, YTD exports were down 4.5% compared to the prior year; imports: +2.1%.

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U.S. softwood lumber export activity through the West Coast customs region represented 34.7% of the U.S. total; Gulf: 37.2%, and Eastern: 18.7%. Seattle (15.2% of the U.S. total), Mobile (18.6%), San Diego (16.2%) and Laredo (12.6%) were the most active districts. At the same time, the Great Lakes customs region handled 56.4% of softwood lumber imports -- most notably the Duluth, MN district (18.4%) -- coming into the United States. The Eastern region comprised 22.5% of imports, but that volume was distributed among the districts.

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Southern yellow pine comprised 21.1% of all softwood lumber exports; Douglas-fir (15.4%), treated lumber (16.4%), other pine (8.8%) and finger-jointed (11.4%) were also significant. Southern pine exports were up 26.0% YTD/YTD, while Doug-fir: -14.9%; treated: -13.7%; other pine: (+0.9%); and finger-jointed: -0.7%.

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 2023 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) rose 0.1% in March (+0.3% expected). The index for shelter was by far the largest contributor to the monthly all-items increase. This more than offset a decline in the energy index, which decreased 3.5% over the month as all major energy component indexes declined. The food index was unchanged in March with the food at home index falling 0.3%.

The index for all items less food and energy rose 0.4% in March, after rising 0.5% in February. Indexes which increased in March include shelter, motor vehicle insurance, airline fares, household furnishings and operations, and new vehicles. The index for medical care and the index for used cars and trucks were among those that decreased over the month.

The all-items index increased 5.0% for the 12 months ending March; this was the smallest 12-month increase since the period ending May 2021. The index for all items less food and energy rose 5.6% over the last 12 months. The energy index decreased 6.4% for the 12 months ending March, and the food index increased 8.5% over the last year.

Producer Price Index

The Producer Price Index for Final Demand (PPI-FD) declined 0.5% in March (+0.0% expected). Final demand prices were unchanged in February and increased 0.4% in January. On an unadjusted basis, the index for final demand advanced 2.7% for the 12 months ended in March.

In March, two-thirds of the decline in the index for final demand can be attributed to a 1.0% decrease in prices for final demand goods. The index for final demand services moved down 0.3%.

Prices for final demand less foods, energy, and trade services edged up 0.1% in March after rising 0.2% in February. For the 12 months ended in March, the index for final demand less foods, energy, and trade services increased 3.6%.

Final Demand

Final demand goods: Prices for final demand goods decreased 1.0% in March after falling 0.3% in February. The March decline is attributable to the index for final demand energy, which dropped 6.4%. In contrast, prices for final demand goods less foods and energy and for final demand foods advanced 0.3% and 0.6%, respectively.

Product detail: Eighty percent of the March decline in the index for final demand goods can be traced to an 11.7% drop in prices for gasoline. The indexes for diesel fuel, residential natural gas, jet fuel, electric power, and fresh and dry vegetables also fell. Conversely, prices for light motor trucks increased 0.7%. The indexes for chicken eggs and for meats also moved higher.

Final demand services: Prices for final demand services moved down 0.3% in March, the largest decline since falling 0.5% in April 2020. Leading the March decrease, margins for final demand trade services dropped 0.9%. (Trade indexes measure changes in margins received by wholesalers and retailers.) The index for final demand transportation and warehousing services fell 1.3%. In contrast, prices for final demand services less trade, transportation, and warehousing edged up 0.1%.

Product detail: A 7.3% drop in margins for machinery and vehicle wholesaling was a major factor in the March decrease in prices for final demand services. The indexes for truck transportation of freight, portfolio management, fuels and lubricants retailing, loan services (partial), and automobiles and automobile parts retailing also moved down. Conversely, prices for guestroom rental rose 4.6%. The indexes for food retailing and for transportation of passengers (partial) also advanced.

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The not-seasonally adjusted price indexes we track were either unchanged or fell on a MoM basis; they were mixed on a YoY basis.

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

March 2023 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed nonfarm employers adding 236,000 jobs in March (240,000 expected). January and February employment changes were revised down by a combined 17,000 (January: -32,000; February: +15,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) ticked lower, to 3.5%, as the number of workers who found employment (+577,000) exceeded growth of the labor force (+480,000). 

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Observations from the employment reports include:

* The two surveys were directionally consistent, but job gains were poorly aligned with the number of workers who found employment.

* Goods-producing industries lost 7,000 jobs; service providers: +243,000. Employment continued to trend up in leisure and hospitality (+72,000), government (+47,000), professional and business services (+39,000), and health care (+33,900). Total nonfarm employment (155.6 million) is now 3.2 million jobs above its pre-pandemic level in February 2020 (private sector: +3.5 million; public sector: -314,000). That said, employment is also perhaps 5.6 million below its potential if accounting for growth in the working-age population since January 2006.

Manufacturing lost 1,000 jobs. That result is consistent with the change in the Institute for Supply Management’s (ISM) manufacturing employment subindex, which contracted further in March. Wood products manufacturing was unchanged (ISM unchanged); paper manufacturing: +1,700 (ISM unchanged); construction: -9,000 (ISM rose).

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* The number of employment-age persons not in the labor force fell (-320,000) to 99.5 million; that level is 4.4 million higher than in February 2020. Because the number of employed rose by 577,000, the employment-population ratio (EPR) moved higher -- to 60.4%, which is still 0.7PP below its February 2020 level. 

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* With the working-age civilian population growing by 160,000 and labor force expanding by 480,000, the labor force participation rate inched up to 62.6%. Average hourly earnings of all private employees nudged up by $0.09 (to $33.18), and the year-over-year increase decelerated to +4.2%. Because the average workweek for all employees on private nonfarm payrolls shrank to 34.4 hours, average weekly earnings slipped (-$0.22) to $1,141.39 (+3.3% YoY). With the consumer price index running at an annual rate of +6.0% in February, 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 jumped (+1.16 million) to 134.3 million; there are now nearly 3.6 million more full-time jobs than in February 2020. For perspective, however, the non-institutional working-age civilian population has risen by over 6.6 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 -- inched up by 35,000, while those working part time for non-economic reasons fell (-423,000); multiple-job holders: +75,000. 

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For a “sanity test” of the job numbers, we consult employment withholding/FICA taxes published by the U.S. Treasury. Although “noisy” and highly seasonal, the data show the amount withheld in March rose by $55.0 billion, to $312.7 billion (+21.4% MoM; -2.8% 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 2.7% 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.

March 2023 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil fell further in March, by $3.55 (-4.6%) to $73.28 per barrel. That decrease occurred within the context of a moderately stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of January’s uptick of 0.048 million barrels-per-day (BPD) in the amount of petroleum products demanded/supplied (to 19.5 million BPD), and accumulated oil stocks that diverged downward from the top of the five-year average range (March 2023 average: 481 million barrels). 

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Selected highlights from the 31 March 2023 issue of OilPrice.com’s Oil & Energy Insider include:

“The ongoing tug-of-war over Kurdistan's oil exports continues to act as a major pricing upside for oil prices, with some 500,000 b/d of oil at risk of shut-ins after Iraq ordered a halt to all exports,” wrote editor Tom Kool. “The huge drop in US crude inventories, driven by stocks in the Gulf Coast, has buttressed the gradual return of ICE Brent to the $80 per barrel mark. New U.S. inflation data might derail that momentum today in a market that appears far more sensitive to sentiment than supply and demand fundamentals.”

Kurdish Oil Producers Cut Output After Pipeline Halt. Oil companies active in Iraqi Kurdistan have shut in or reduced production at several oilfields in the region after pipeline transportation to the Turkish port of Ceyhan was halted over the weekend, impacting Norwegian producer and Genel Energy.

Fed Drilling Survey Shows Drastic Drop. The US oil and gas activity survey published by the Federal Reserve Bank of Dallas indicates that activity stalled in Q1, with the index plummeting from 30.3 in the fourth quarter of 2022 to 2.1 currently amidst rising field costs, higher interest, and plunging gas prices.

California Approves Regulatory Cap on Refining Profits. The governor of California Gavin Newsom signed into law state legislation that caps gross gasoline refining profit margins and levies penalties for exceeding it, with Chevron warning the measure will make fuel "less affordable".

Brussels Seeks End to Russian LNG. Several EU energy ministers suggested new gas market rules within the union should provide governments with the option to temporarily stop Russian gas exporters from bidding for LNG import capacity, a way to ban Russian LNG without a unanimous vote.

Majors Dominate Latest GoM Lease Sale. The first oil leasing round since late 2021 and presumably the last one under President Biden, this week's Lease Sale 259 in the Gulf of Mexico saw US majors Chevron and ExxonMobil take center stage as they won 75 and 69 offshore blocks, respectively.

US and Japan Sign EV Battery Strategic Deal. The US and Japan signed a trade deal on EV battery metals that will grant Japanese carmakers access to a $7,500 tax credit as per the IRA legislation, as the two countries see increased cooperation on the issue as they way forward to reduce dependence on China.

India Signs Up for More Russian Oil. India's state-controlled oil refiner IOC signed a term agreement with Russian oil major Rosneft to substantially increase oil deliveries into the South Asian country and diversify the oil grades delivered, securing India's spot as the leading buyer of Urals.

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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 2023 ISM and S&P Global Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey of U.S. manufacturers reflected faster erosion in the sector during March 2023. The PMI registered 46.3%, down 1.4 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. Subindexes with the largest changes included new orders (-2.7PP), inventories (-2.6PP), and exports (-2.3PP). 

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Concurrent activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- expanded at a significantly slower pace (-3.9PP, to 51.2%). Exports (-18.0PP), new orders (-10.4PP), and imports (-9.0PP) exhibited the largest changes.

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Of the industries we track, Construction and Ag & Forestry expanded while the rest contracted. Respondent comments included the following:

Construction. “Sales continue to increase even as interest rates moderately increase. Most suppliers feel their supply chains are back to normal, with inventories climbing and delivery times improving. (We) fear this will have a detrimental effect in a six- to 12-month time frame.”

 

Changes in S&P Global‘s survey headline results were mixed relative to ISM’s. Both manufacturing reports showed contraction, and both services reports exhibited expansion; however, both S&P Global reports showed rising PMI values whereas both ISM reports exhibited falling PMIs. Details from S&P Global’s surveys follow --

Manufacturing. Manufacturing decline eases amid renewed rise in output in March.

Key findings:
* Fractional upturn in production as decline in new orders eases
* Greatest improvement in input delivery times on record
* Cost burdens rise at slowest rate since July 2020

 

Services. Renewed rise in service sector new orders, but selling price inflation quickens again.

Key findings:
* Fastest expansion in output since June 2022
* Return to new business growth
* Cost pressures ease, while output charges rise at sharper rate

 

Commentary by Siân Jones, S&P Global’s chief business economist:

Manufacturing. “The US manufacturing sector continued to signal concerning trends during March. Although output rose for the first time since last October, growth was fractional, and largely supported by ramping up production following an unprecedented reduction in supply chain pressures. The timely delivery of inputs allowed firms to work through backlogs, but sparse demand amid pressure on customer spending due to higher interest rates and inflation spoke to challenges ahead for goods producers if there is little change in domestic and international client appetite.

“Weak demand for inputs resulted in some relief for manufacturers as input cost inflation slowed again. A paucity of new orders sparked efforts to entice customers, however, as selling price inflation eased notably to the weakest since October 2020. Nonetheless, inflationary concerns weighed on business confidence once again amid pressure on margins.

“Encouragingly, firms were able to expand factory workforce capacity again, albeit at only a marginal pace, as skilled candidates for long-held vacancies were found.”

 

Services. “Business activity across the service sector expanded at a faster pace in March, as a return to new order growth offered a tonic to the US economy, which saw the fastest rise in private sector output since last June. Improvements in customer spending across the service economy counteracted another fall in manufacturing sales.

“Greater service sector demand and increased pressure on capacity spurred another round of job creation, with the rate of employment growth quickening slightly to a six-month high.

“Concerns regarding the impact of inflation and higher interest rates on customer spending remained apparent, however. Optimism at goods producers and service providers dipped since February amid elevated cost pressures. Nonetheless, selling price inflation accelerated again due to more accommodative demand conditions. A sharper rise in charges contrasted with the trend for input prices, which increased at the second slowest pace since October 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.

February 2023 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 $2.8 billion or 0.5 percent to $542.8 billion. Durable goods shipments decreased $1.6 billion or 0.6 percent to $274.7 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $1.2 billion or 0.4 percent to $268.1 billion, led by petroleum and coal products. Shipments of wood products slipped by 0.5%; paper: +0.1%.

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Inventories decreased $0.8 billion or 0.1 percent to $806.3 billion. The inventories-to-shipments ratio was 1.49, up from 1.48 in January. Inventories of durable goods increased $0.9 billion or 0.2 percent to $493.7 billion, led by transportation equipment. Nondurable goods inventories decreased $1.7 billion or 0.5 percent to $312.6 billion, led by petroleum and coal products. Inventories of wood products shrank by 0.7%; paper: +0.4%.

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New orders decreased $3.9 billion or 0.7 percent to $536.4 billion. Excluding transportation, new orders fell by $1.3 billion or 0.3% (+1.9% YoY). Durable goods orders decreased $2.7 billion or 1.0 percent to $268.4 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- retreated by $0.1 billion or 0.1% (+3.0% YoY). New orders for nondurable goods decreased $1.2 billion or 0.4 percent to $268.1 billion.

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Unfilled durable-goods orders decreased $1.1 billion or 0.1 percent to $1,155.6 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.10, up from 6.09 in January. 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. Real unfilled orders trended lower after November 2014, although more-recent data hint at a possible upturn.

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.