1Q2023 Gross Domestic Product: Third Estimate

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In its third estimate of 1Q2023 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) fine-tuned the growth rate of the U.S. economy to a seasonally adjusted and annualized rate (SAAR) of +2.00% (+1.4% expected), up 0.73 percentage point (PP) from the second estimate (“1Qv2”) but -0.56PP from 4Q2022.

Once again, three groupings of GDP components -- personal consumption expenditures (PCE), net exports (NetX), and government consumption expenditures (GCE) -- contributed positively to the headline. Private domestic investment (PDI) detracted from it. The updated headline estimate primarily reflected upward revisions to exports and consumer spending that were partly offset by downward revisions to nonresidential fixed investment and federal government spending. Imports, which are a subtraction in the calculation of GDP, were revised down -- resulting in a positive contribution to the headline.

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As for details (all relative to 1Qv2):

PCE. The upward revision to consumer spending (+$13.8 billion, chained 2012 dollars) was led by services (+16.1B) -- especially health care (+$12.4B). Downward revisions to spending on goods (-$4.0B) were widespread but most concentrated among nondurables (-$3.3B).

PDI. Downward revisions to PDI (-$4.2B) were led by information processing equipment (-$8.6B). intellectual property products (-$6.8B) and the change in nonfarm private inventories (-$3.4B) compounded the decline but were partially offset by an upward revision in nonresidential structures (+$4.9B) and residential fixed investment (+$2.1B).

NetX. Exports were revised higher (+$16.2B) -- somewhat evenly split between goods (+$8.5B) and services (+$7.3B). Imports were revised lower (-$18.8B) -- especially goods (-$19.5B). The net effect was a dramatic increase in this category’s positive contribution to the headline.

GCE. Revisions to this category (-$1.7B) were dominated by federal national defense (-$6.0B) and partially offset by state and local gross expenditures (+$2.9B).

In light of the downward revision to private inventories, growth in real final sales of domestic product bumped higher, to +4.14% (+0.77PP from 1Qv2 and 3.05PP above 1Q).

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“About a month from now, the BEA will release its first estimate (the ‘advance’ estimate) of 2Q GDP growth,” wrote analyst Wolf Richter. “And the figures we’ve seen so far for 2Q give no indication of any kind of recessionary decline. On the contrary. And so this modern-day absurd play, ‘Waiting for the Recession,’ will drag on for a while longer. And that makes sense, with these trillions of dollars that were printed and handed out during the pandemic still floating around out there at every level, and still getting spent, and still fueling inflation.”

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 2023 Residential Sales, Inventory and Prices

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Sales of new single-family houses in May 2023 were at a seasonally adjusted annual rate (SAAR) of 763,000 units (667,000 expected). This is 12.2% (±12.8%)* above the revised April rate of 680,000 (originally 683,000 units) and 20.0% (±15.5%) above the May 2022 SAAR of 636,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was +25.9%. For longer-term perspectives, NSA sales were 45.1% below the “housing bubble” peak but 39.6% above the long-term, pre-2000 average.

The median sales price of new houses sold in May was $416,300 (+3.5%, or $13,900). The average sales price was $487,300 (-1.7%, or -$8,300). Homes priced at/above $750,000 comprised 11.0% of sales, down from the year-earlier 15.5%.

* 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 May, single-unit completions rose by 38,000 units (+3.9%). Sales rose (83,000 units, or +12.2%), resulting in inventory for sale shrinking in both absolute (-4,000 units) and months-of-inventory (-0.6 month) terms. 

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Existing home sales broke off their earlier decline, rising (+0.2% or 10,000 units) in May to a SAAR of 4.30 million units (4.25 million expected). Inventory of existing homes for sale expanded in both absolute (+40,000 units) and months-of-inventory (+0.1 month) terms. Because resales advanced at a slower pace than new-home sales, the share of total sales comprised of new homes increased to 15.1%. The median price of previously owned homes sold in May rose to $396,100 (+2.6% or $10,200).

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Housing affordability dipped (-1.7 index points) as the median price of existing homes for sale in April rose by $13,800 (+3.6% MoM; -2.1 YoY) to $393,300. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices was unchanged at a not-seasonally adjusted monthly change of +1.3% (-0.2% YoY).

“The U.S. housing market continued to strengthen in April 2023,” said Craig Lazzara, Managing Director at S&P DJI. “Home prices peaked in June 2022, declined until January 2023, and then began to recover. The National Composite rose by 1.3% in April (repeating March’s performance), and now stands only 2.4% below its June 2022 peak. Our 10- and 20-City Composites both gained 1.7% in April.

“The ongoing recovery in home prices is broadly based. Before seasonal adjustments, prices rose in all 20 cities in April (as they had also done in March). Seasonally adjusted data showed rising prices in 19 cities in April (versus 14 in March).

“On a trailing 12-month basis, the National Composite is 0.2% below its April 2022 level, with the 10-and 20-City Composites also negative on a year-over-year basis, but regional differences continue to be striking. Miami’s 5.2% gain made it the best-performing city for the ninth consecutive month, but in April Chicago toddled into second place with a 4.1% gain. Atlanta (+3.5%) and Charlotte (+3.4%) round out the top four. The next three positions are occupied by New York, Cleveland, and then perennial medalist Tampa, indicating a remarkable diversity among the top performers. At the other end of the scale, however, the worst eight performers are all in the Mountain or Pacific time zones, with Seattle (-12.4%) and San Francisco (-11.1%) at the bottom. The Southeast (+3.6%) continues as the country’s strongest region, while the West (-6.9%) remains the weakest.

“If I were trying to make a case that the decline in home prices that began in June 2022 had definitively ended in January 2023, April’s data would bolster my argument. Whether we see further support for that view in coming months will depend on how well the market navigates the challenges posed by current mortgage rates and the continuing possibility of economic weakness.”

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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 2023 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in May at a seasonally adjusted annual rate (SAAR) of 1,631,000 units (1.405 million expected). This is 21.7% (±14.8%) above the revised April estimate of 1,340,000 (originally 1.401 million units) and 5.7% (±10.8%)* above the May 2022 SAAR of 1,543,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +7.5%.

Single-family housing starts in May were at a SAAR of 997,000; this is 18.5% (±14.1%) above the revised April figure of 841,000 units (-5.0% YoY). Multi-family: 634,000 units (+27.1% MoM; +35.1% 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 1,518,000. This is 9.5% (±12.3%)* above the revised April estimate of 1,386,000 (originally 1.375 million units) and 5.0% (±13.0%)* above the May 2022 SAAR of 1,446,000 units; the NSA comparison: +5.3% YoY.

Single-family completions were at a SAAR of 1,009,000; this is 3.9% (±13.9%)* above the revised April rate of 971,000 units (-3.3% YoY). Multi-family: 509,000 units (+22.7% MoM; +27.5% YoY).

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Total permits were at a SAAR of 1,491,000 units (1.433 million expected). This is 5.2% above the revised April rate of 1,417,000 (originally 1.416 million units) but 12.7% below the May 2022 SAAR of 1,708,000 units; the NSA comparison: -8.5% YoY.

Single-family permits were at a SAAR of 897,000; this is 4.8% above the revised April figure of 856,000 units (-8.6% YoY). Multi-family: 594,000 units (+5.9% MoM; -8.5% YoY).

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Press release from NAHB’s Robert Dietz:

“Solid demand, a lack of existing inventory and improving supply chain efficiency helped shift builder confidence into positive territory for the first time in 11 months.

“Builder confidence in the market for newly built single-family homes in June rose five points to 55, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This marks the sixth straight month that builder confidence has increased and is the first time that sentiment levels have surpassed the midpoint of 50 since July 2022.

“A bottom is forming for single-family home building as builder sentiment continues to gradually rise from the beginning of the year. This month marks the first time in a year that both the current and future sales components of the HMI have exceeded 60, as some buyers adjust to a new normal in terms of interest rates. The Federal Reserve nearing the end of its tightening cycle is also good news for future market conditions in terms of mortgage rates and the cost of financing for builder and developer loans. Nonetheless, access for these loans has become more difficult to obtain over the last year, which will ultimately result in lower lot supplies as the industry tries to expand off cycle lows.

“Housing is critical for the inflation outlook and the future of monetary policy. Shelter cost growth is now the leading source of inflation, and such costs can only be tamed by building more affordable, attainable housing – for-sale, for-rent, multifamily and single-family. By addressing supply chain issues, the skilled labor shortage, and reducing or eliminating inefficient regulatory policies such as exclusionary zoning, policymakers can play an important and much-needed role in the fight against inflation.

“In another sign of gradual optimism for the state of demand for single-family homes, the June HMI survey shows that overall, builders are gradually pulling back on sales incentives:

• 25% of builders reduced home prices to bolster sales in June.  The share was 27% in May and 30% in April.  It has declined steadily since peaking at 36% in November 2022.
• The average price reduction was 7% in June, below the 8% rate in December 2022.
• 56% of builders offered incentives to buyers in June, slightly more than in May (54%), but fewer than in December 2022 (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.

May 2023 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) edged down 0.2% in May (+0.1% expected) following two consecutive months of increases. In May, the index for manufacturing ticked up 0.1%, while the indexes for mining and utilities fell 0.4 and 1.8%, respectively. At 103.0% of its 2017 average, total IP in May was 0.2% above its year-earlier level. 

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Market Groups

Major market groups posted mixed results in May. Notable gains were recorded in the indexes for defense and space equipment (1.1%) and construction supplies (0.6%); most other major market groups recorded modest declines. Within business equipment, an increase of 2.1% in the transit component was more than offset by decreases of 3/4% in both the information processing and the industrial and other components.

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Industry Groups

Manufacturing output edged up 0.1% in May after a gain of nearly 1% in April; the index in May is 0.3% below its year-earlier level. The indexes for durable manufacturing and other manufacturing (publishing and logging) increased 0.3% and 0.2%, respectively, while the output of nondurable manufacturing moved down 0.1%. Within durables, aerospace and miscellaneous transportation equipment posted the largest gain of 2.5%, while computer and electronic products posted the largest loss of 0.8% (wood products: -0.3%). The index for motor vehicles and parts moved up 0.2% in May after jumping nearly 10% in April. Within nondurables, a gain of 1.7% in May in the index for petroleum and coal products was more than offset by declines in most other industries (paper products: +0.1%).

Mining output slid 0.4% in May, driven primarily by decreases in coal mining and support activities (in particular, oil and gas well drilling). The output of utilities declined 1.8% for a second consecutive month, as electric utilities fell in May, while natural gas utilities remained unchanged.

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Capacity utilization (CU) moved down to 79.6% in May, a rate that is 0.1 percentage point (PP) below its long-run (1972–2022) average.

Manufacturing CU remained at 78.4% in May, a rate that is 0.2PP above its long-run (1972–2022) average (wood products: -0.3%; paper: +0.2%). The operating rate for mining edged down 0.3PP to 92.2%, and the operating rate for utilities fell 1.5PP to 70.7%. The rate for mining was 5.8PP above its long-run average, while the rate for utilities remained well below its long-run average.

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Capacity at the all-industries level increased by 0.1% MoM (+1.5% YoY) to 129.4% of 2017 output. Manufacturing also edged up by 0.1% (+1.3% YoY) to 128.3%. Wood products: less than +0.1% (+1.3% YoY) to 120.0%; paper: -0.1% (-0.7% YoY) to 106.1%.

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 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 May (+0.2% expected), after increasing 0.4% in April. The index for shelter was the largest contributor to the monthly all-items increase, followed by an increase in the index for used cars and trucks. The food index increased 0.2% in May after being unchanged in the previous two months. The index for food at home rose 0.1% over the month while the index for food away from home rose 0.5%. The energy index, in contrast, declined 3.6% in May as the major energy component indexes fell.

The index for all items less food and energy rose 0.4% in May, as it did in April and March. Indexes which increased in May include shelter, used cars and trucks, motor vehicle insurance, apparel, and personal care. The index for household furnishings and operations and the index for airline fares were among those that decreased over the month.

The all-items index increased 4.0% for the 12 months ending May; this was the smallest 12-month increase since the period ending March 2021. The index for all items less food and energy rose 5.3% over the last 12 months. The energy index decreased 11.7% for the 12 months ending May, and the food index increased 6.7% over the last year.

Producer Price Index

The Producer Price Index for final demand (PPI-FD) declined 0.3% in May (-0.1% expected). Final demand prices rose 0.2% in April and fell 0.4% in March. On an unadjusted basis, the index for final demand moved up 1.1% for the 12 months ended in May.

In May, the decline in the final demand index can be traced to prices for final demand goods, which fell 1.6%. The index for final demand services increased 0.2%.

Prices for final demand less foods, energy, and trade services were unchanged in May after inching up 0.1% in April. For the 12 months ended in May, the index for final demand less foods, energy, and trade services increased 2.8%.

Final Demand

Final demand goods: Prices for final demand goods moved down 1.6% in May, the largest decrease since falling 1.6% in July 2022. Most of the May decline is attributable to the index for final demand energy, which dropped 6.8%. Prices for final demand foods moved down 1.3%. In contrast, the index for final demand goods less foods and energy increased 0.1%.

Product detail: Sixty percent of the May decline in the index for final demand goods can be traced to a 13.8% drop in prices for gasoline. The indexes for diesel fuel, chicken eggs, jet fuel, fresh and dry vegetables, and iron and steel scrap also fell. Conversely, prices for tobacco products advanced 1.7%. The indexes for electric power and for beverages and beverage materials also increased.

Final demand services: The index for final demand services moved up 0.2% in May following a 0.3% advance in April. Leading the May increase, margins for final demand trade services rose 1.0%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand services less trade, transportation, and warehousing edged up 0.1%. In contrast, the index for final demand transportation and warehousing services declined 1.4%.

Product detail: Over 40% of the May increase in prices for final demand services can be attributed to margins for automobiles and automobile parts retailing, which rose 4.2%. The indexes for fuels and lubricants retailing; apparel, footwear, and accessories retailing; securities brokerage, dealing, investment advice, and related services; machinery and vehicle wholesaling; and food wholesaling also advanced. Conversely, prices for truck transportation of freight fell 2.1%. The indexes for portfolio management and for health, beauty, and optical goods retailing also decreased.

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The not-seasonally adjusted price indexes we track all declined on a MoM basis, and most also did so 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.

April 2023 International Trade (Softwood Lumber)

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With April exports of goods and services at $249.0 billion (-3.6% MoM; -1.5% YoY) and imports at $323.6 billion (+1.5% MoM; -4.5% YoY), the net trade deficit was $74.6 billion (+23.0% MoM; -13.3% YoY). 

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Softwood lumber exports slipped (8 MMBF or -6.7%) in April, along with imports (9 MMBF or -0.7%). Exports were 7 MMBF (+6.7%) above year-earlier levels; imports: 81 MMBF (-6.1%) lower. As a result, the year-over-year (YoY) net export deficit was 88 MMBF (-7.2%) smaller. Also, the average net export deficit for the 12 months ending April 2023 was 0.8% 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 (51.8% of total softwood lumber exports; of which Mexico: 30.2%; Canada: 21.6%), Asia (14.8%; especially China: 4.9%), and the Caribbean (25.7%; especially the Dominican Republic: 11.8%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were 112.1% higher than the same month of the prior year. Meanwhile, Canada was the source of most (84.7%) softwood lumber imports into the United States. Imports from Canada were 6.9% lower YTD/YTD. Overall, YTD exports were up 1.9% compared to the prior year; imports: -3.3%.

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U.S. softwood lumber export activity through the West Coast customs region represented 29.7% of the U.S. total; Gulf: 38.2%, and Eastern: 22.9%. Seattle (13.5% of the U.S. total), Mobile (21.7%), San Diego (13.5%) and Laredo (10.0%) were the most active districts. At the same time, the Great Lakes customs region handled 59.2% of softwood lumber imports -- most notably the Duluth, MN district (19.5%) -- coming into the United States. The Eastern region comprised 19.0% of imports, but that volume was distributed among the districts.

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Southern yellow pine comprised 22.7% of all softwood lumber exports; Douglas-fir (11.6%), treated lumber (13.1%), other pine (9.8%) and finger-jointed (8.6%) were also significant.

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 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 in May, by $7.87 (-9.9%) to $71.58/barrel. That retreat occurred within the context of a moderately stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of March’s increase of 0.452 million barrels per day (b/d) in the amount of petroleum products demanded/supplied (to 20.4 million b/d), and accumulated oil stocks that continued diverging downward from the top of the five-year average range (May 2023 average: 461 million barrels). 

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Selected highlights from the 2 June 2023 issue of OilPrice.com’s Oil & Energy Insider include:

“The lifting of the US debt ceiling, avoiding a government shutdown, has seen bullish sentiment return to the oil market, lifting Brent back above $75 per barrel and WTI above $71 per barrel,” wrote Michael Kern. “While rising U.S. crude inventories and the weak outlook of Chinese manufacturing are adding downward pressure to oil prices, the upcoming OPEC+ meeting this weekend might provide another boost for prices if the group decides to cut production.”

Europe Prepares 11th Russia Sanctions Package. The European Commission is expected to present its 11th package of Russia sanctions next week, targeting Chinese firms that shipped banned goods to Russia, banning Russian flows through the northern Druzhba pipeline and forbidding the transit of EU-bound goods through Russian territory.

Houston Refinery Shutdown Delayed. Buoyed by strong refinery margins, chemicals firm LyondellBasell said it would not shutter the 264,000 b/d Houston refinery by the end of this year and thanks to moderate maintenance spending it would extend operations till the end of the first quarter in 2025. 

Shareholders of US Oil Reject Stronger Climate Mandates. Shareholders of ExxonMobil and Chevron overwhelmingly rejected demands from climate activists that they set medium-term goals for reducing carbon emissions as Scope 3 targets, in a blow to environmentalists.

European Major Wants Synthetic Gas in the US. Indicating that the US might be gaining the upper hand against Europe in landing green energy deals, French oil major TotalEnergies announced its plans to build a large-scale $2 billion synthetic gas plant in the country, expecting it to benefit from IRA credits.

Leaks Force Halt of Norway’s LNG Terminal. A gas leak has prompted Norway’s oil company Equinor to shut down the Hammerfest LNG plant, the country's only liquefied natural gas export terminal, only several weeks after a compressor failure halted production in early May.

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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 2023 Currency Exchange Rates

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In May, the monthly average value of the U.S. dollar (USD) appreciated against all currencies we track: Canada’s “loonie” (+0.2%), euro (+0.9%), and Japanese yen (+2.7%). On the broad trade-weighted index basis (goods and services) the USD strengthened by 0.4% 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 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 contraction in the sector during May. The PMI registered 46.9%, down 0.2 percentage point (PP) from April’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 prices paid (-9.0PP), and order backlog (-5.6PP). 

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Concurrent activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- narrowly avoided falling into contraction (-1.6PP, to 50.3%). Inventory sentiment (+12.1PP; i.e., more companies consider their inventories to be too high), inventories (+11.1PP) and order backlog (-8.9PP) exhibited the largest changes.

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Of the industries we track, only Construction expanded. Respondent comments included the following --

Construction. “Overall slowing growth and market conditions dragging on some construction sectors.”

 

Changes in S&P Global‘s survey headline results were mixed relative to ISM’s. Both manufacturing headline indexes contracted faster; S&P’s services report pushed higher into expansion whereas ISM’s nearly crossed the line into contraction. Details from S&P Global’s surveys follow --

Manufacturing. Renewed decline in manufacturing sector conditions as weak demand drags on performance.

Key findings:
* New orders fall at solid pace...
* ...but output supported by further decline in backlogs of work
* Input costs drop for the first time in three years

 

Services. Strongest upturn in business activity for over a year as demand conditions improve.

Key findings:
* Sharpest rise in new business since April 2022
* Cost pressures soften but remain marked
* Solid upturn in employment

 

Commentary by Chris Williamson, S&P Global’s chief business economist --

Manufacturing. “May saw a renewed deterioration of business conditions in the US manufacturing economy which will add to concerns about broader economic health and recession risks.

“Although a record improvement in supplier delivery performance helped manufacturers fulfil back orders in May, generating a third successive monthly rise in output, the overall rate of production growth remained disappointingly meagre thanks to a further drop in new order inflows.

“Unless demand picks up, production growth will move into decline seen as it is clearly unsustainable to rely solely on backlogs of orders, which are now being depleted at the fastest rate for three years. Hence companies are cutting back sharply on their input buying and seeking to minimize inventory, tightening their belts for tough times ahead.

“All of this is of course disinflationary, with manufacturers and their supply chains having seen pricing power shift rapidly from the seller to the buyer over the course of the past year, resulting in a dramatic cooling of industrial price pressures.

“We are likely to see further downward pressure on both output and prices for goods in the coming months, thanks to the demand environment which has been hit by higher interest rates, the increased cost of living, economic uncertainty and a post-pandemic shift in spend from goods to services.

“The one area of resilience is the labor market, as firms continued to take on more staff to fill long-empty vacancies, though we should bear in mind that employment is typically a lagging indicator. It does nevertheless point to some upward pressure on wages.”

 

Services. “The US continued to see a two-speed economy in May, with the sluggishness of the manufacturing sector contrasting with a resurgent service sector. Businesses in sectors such as travel, tourism, recreation and leisure are enjoying a mini post-pandemic boom as spending is switched from goods to services.

“The survey data are indicative of GDP growing at an annualized rate of just over 2%, and an upturn in business expectations points to growth remaining robust as we head further into the summer.

“However, just as demand has moved from goods to services, so have inflationary pressures. While goods price inflation has fallen dramatically in May to register only a marginal increase, prices charged for services continue to rise sharply. Although down considerably on last year's peaks, service sector inflation remains higher than any time in the survey's 10-year history prior to the pandemic, bolstered by a combination of surging demand and a lack of operating capacity, the latter in part driven by labor shortages.

“However, while rejuvenated service providers will make hay in the summer season, the weakness of manufacturing raises concerns about the economy's resilience later in the year, when the headwind of higher interest rates and the increased cost of living is likely to exert a greater toll on spending.”

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.

April 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 April decreased $2.5 billion or 0.4% to $572.3 billion. Durable goods shipments decreased $2.1 billion or 0.7% to $277.6 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $0.4 billion or 0.1% to $294.7 billion, led by food products. Shipments of wood products declined 1.3%; paper: -0.5%.

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Inventories increased $4.2 billion or 0.5% to $856.7 billion. The inventories-to-shipments ratio was 1.50, up from 1.48 in March. Inventories of durable goods increased $5.1 billion or 1.0% to $521.8 billion, led by transportation equipment. Nondurable goods inventories decreased $1.0 billion or 0.3% to $334.9 billion, led by petroleum and coal products. Inventories of wood products shrank by 0.1%; paper: -0.1%.

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New orders increased $2.6 billion or 0.4% to $577.5 billion. Excluding transportation, new orders slipped by $0.9 billion or 0.2% (-3.6% YoY). Durable goods orders increased $3.0 billion or 1.1% to $282.8 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- advanced by $0.9 billion or 1.3% (+1.0% YoY). New orders for nondurable goods decreased $0.4 billion or 0.1% to $294.7 billion.

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Unfilled durable-goods orders increased $10.4 billion or 0.8% to $1,291.3 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.71, up from 6.60 in March. 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 104% of their December 2008 peak. Real unfilled orders then jumped to 110% of the prior peak in February 2015, thanks to the largest-ever batch of aircraft orders. Real unfilled orders trended lower thereafter, although more-recent data exhibit an ongoing 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.

May 2023 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed nonfarm employers adding 339,000 jobs in May (190,000 expected). March and April employment changes were revised up by a combined 93,000 (March: +52,000; April: +41,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) jumped (+0.3 percentage points) to 3.7%, as the labor force expanded (+130,000) while the number of employed dropped (-310,000). 

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Observations from the employment reports include:

* The two surveys diverged rather conspicuously, with the household survey providing a less upbeat view of employment.

* Goods-producing industries added 26,000 jobs; service providers: +313,000. Other industries with significant employment growth included professional and business services (+64,000), government (+56,000), health care (+52,400), construction (+25,000), transportation and warehousing (+24,200), and social assistance (+22,200). Total nonfarm employment (156.1 million) is now 3.7 million jobs above its pre-pandemic level in February 2020 (private sector: +3.9 million; public sector: -209,000). That said, employment is also perhaps 5.3 million below its potential if accounting for growth in the working-age population since January 2006.

Manufacturing lost 2,000 jobs. That result disagrees with the change in the Institute for Supply Management (ISM) manufacturing employment subindex, which pushed to 51.4 in May. Wood products manufacturing added 800 jobs (ISM was unchanged); paper manufacturing: -1,200 (ISM was unchanged); construction: +25,000 (ISM not yet published).

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* The number of employment-age persons not in the labor force edged up (+45,000) to 99.8 million; that level is 4.6 million higher than in February 2020. Because the number of employed fell by 310,000, the employment-population ratio (EPR) ticked down to 60.3%, which is 0.8PP below its February 2020 level.

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* With the working-age civilian population growing by 175,000 and labor force expanding by 130,000, the labor force participation rate remained at 62.6%. Average hourly earnings of all private employees nudged up by $0.11 (to $33.44), and the year-over-year increase decelerated to +4.3% (+3.6% on a not-seasonally adjusted basis). Because the average workweek for all employees on private nonfarm payrolls shrank to 34.3 hours, average weekly earnings edged up (+$0.44) to $1,146.99 (+1.8% YoY). With the consumer price index running at an annual rate of +4.9% in April, the average worker is once again losing purchasing power. In fact, average hourly wages had lagged CPI since April 2021; average weekly wages since June 2021.

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* Full-time jobs slipped (-23,000) to 134.5 million; there are now 3.7 million more full-time jobs than in February 2020. For perspective, however, the non-institutional working-age civilian population has risen by 7.0 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 -- fell by 164,000, while those working part time for non-economic reasons rose (+68,000); multiple-job holders: +55,000. 

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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 May rose by $18.0 billion, to $255.1 billion (+7.6% MoM; +3.4% 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 May was unchanged from 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.