2Q2023 Gross Domestic Product: First (“Advance”) Estimate

Click image for larger version

The Bureau of Economic Analysis (BEA) pegged its advance (first) estimate of 2Q2023 U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate (SAAR) of +2.41% (+1.5% expected), up 0.42 percentage points (PP) from 1Q2023’s +2.00%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 2Q2023 was 2.56% higher than in 2Q2022; that growth rate was faster (+0.76PP) than 1Q2023’s +1.80% relative to 1Q2022.

Three of the four groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), and government consumption expenditures (GCE) -- contributed positively to the 2Q percent-change headline. Net exports (NetX) detracted from it.

Click image for larger version

As for details (billions of chained 2012 dollars; all comparisons to 1Q2023) --

PCE (+$58.4B):

* Goods. Spending on durable goods rose (+$2.1B), led by recreational goods and vehicles (+$22.2B), but partially offset by motor vehicles and parts (-$12.1B). Growth in spending on nondurable goods showed more momentum (+$7.7B), led by gasoline and other energy goods (+$13.7B); Clothing and footwear dropped (-$7.6B).

* Services. Gains (+$46.5B) were led by housing and utilities (+$17.1B) and closely followed by health care (+$16.9B).

PDI (+$50.1B):

* Fixed investment. This increase (+42.5B) was concentrated in equipment (+$32.4B) -- especially transportation equipment (+$29.1B). Residential investment declined (-$6.0B).

* Inventories. Farm inventories expanded (+$6.3B); nonfarm: +$0.5B.

NetX (+$2.9B):

* Exports. Goods exports slumped by $83.4B; services: +$3.3B.

* Imports. Goods imports fell by $68.22B; services: -$9.7B. Recall that the net change in imports is inversely related to the change in the GDP headline.

Also note that, although NetX was positive on an absolute-dollar basis, the rate of change decelerated (hence the negative QoQ % change).

GCE (+22.2B): State and local consumption expenditures (+$11.0B) led this category, followed by state and local gross investment (+$7.4B); federal defense gross investment: +$4.1B).

Annualized growth in the BEA’s real final sales of domestic product, which excludes the value of inventories, was +2.28% (down 1.86PP from 1Q).

Click image for larger version

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

-- The consumer spending growth rate softened significantly, contributing only 1.11PP to the headline number. This was down 1.67PP from 1Q.

-- The lower growth rate in consumer spending was consistent with the continued erosion of the household savings rate, indicating that households are finding their budgets tighter than they might like. Although inflation has moderated, household incomes still have some catching up to do.

-- The BEA’s own “bottom line” (real final sales of domestic product) essentially halved from the prior quarter.

“At face value this was a good report, since once again the headline number falls into the ‘Goldilocks’ zone,” 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 2023 Residential Sales, Inventory and Prices

Click image for larger view

Click image for larger view

Sales of new single-family houses in June 2023 were at a seasonally adjusted annual rate (SAAR) of 697,000 units (727,000 expected). This is 2.5% (±12.7%)* below the revised May rate of 715,000 (originally 763,000 units), but is 23.8% (±22.5%) above the June 2022 SAAR of 563,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was +25.0%. For longer-term perspectives, NSA sales were 49.8% below the “housing bubble” peak but 14.8% above the long-term, pre-2000 average.

The median sales price of new houses sold in June 2023 was $415,400 (-0.5%, or $1,900). The average sales price was $494,700 (+1.2%, or $6,000). Homes priced at/above $750,000 comprised 11.7% of sales, up from the year-earlier 6.3%.

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

Click image for larger view

As mentioned in our post about housing permits, starts and completions in June, single-unit completions dipped by 28,000 units (-2.8%). Sales also slipped (18,000 units, or -2.5%), resulting in inventory for sale expanding in both absolute (+3,000 units) and months-of-inventory (+0.2 month) terms. 

Click image for larger view

Existing home sales fell (-3.3% or 140,000 units) in June to a SAAR of 4.16 million units (4.23 million expected). The inventory of existing homes for sale was unchanged in absolute terms but months-of-inventory expanded (+0.1 month). Because resales retreated by a greater proportion than new-home sales, the share of total sales comprised of new homes increased to 14.4%. The median price of previously owned homes sold in June rose to $410,200 (+3,5% or $13,800).

Click image for larger view

Housing affordability dipped (-3.2 index points) as the median price of existing homes for sale in May rose by $10,900 (+2.8% MoM; -3.4 YoY) to $401,100. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices decelerated to a not-seasonally adjusted monthly change of +1.2% (-0.5% YoY).

“The rally in U.S. home prices continued in May 2023,” said Craig Lazzara, Managing Director at S&P DJI. “Our National Composite rose by 1.2% in May, and now stands only 1.0% below its June 2022 peak. The 10- and 20-City Composites also rose in May, in both cases by 1.5%.

“The ongoing recovery in home prices is broadly based. Before seasonal adjustment, prices rose in all 20 cities in May (as they had also done in March and April). Seasonally adjusted data showed rising prices in 19 cities in May, repeating April’s performance. (The outlier is Phoenix, down 0.1% in both months.) On a trailing 12-month basis, the National Composite is 0.5% below its May 2022 level, with the 10- and 20-City Composites also negative on a year-over-year basis.

“Regional differences continue to be striking. This month’s league table shows the Revenge of the Rust Belt, as Chicago (+4.6%), Cleveland (+3.9%), and New York (+3.5%) were the top performers. If this seems like an unusual occurrence to you, it seems that way to me too. It’s been five years to the month since a cold-weather city held the top spot (and that was Seattle, which isn’t all that cold). Since May 2018, the top-ranked cities have been Las Vegas (12 months), Phoenix (33 months), Tampa (5 months), and Miami (9 months).

“At the other end of the scale, the worst performers continue to cluster near the Pacific coast, with Seattle (-11.3%) and San Francisco (-11.0%) at the bottom. This month the Midwest (+2.7%) unseated the Southeast (+2.1%) as the country’s strongest region. The West (-6.9%) remains weakest.

“Home prices in the U.S. began to fall after June 2022, and May’s data bolster the case that the final month of the decline was January 2023. Granted, the last four months’ price gains could be truncated by increases in mortgage rates or by general economic weakness. But the breadth and strength of May’s report are consistent with an optimistic view of future months.”

Click image for larger view

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

June 2023 Residential Permits, Starts and Completions

Click image for larger view

Click image for larger view

Builders started construction of privately-owned housing units in June at a seasonally adjusted annual rate (SAAR) of 1,434,000 units (1.480 million expected). This is 8.0% (±10.3%)* below the revised May estimate of 1,559,000 (originally 1.631 million units) and 8.1% (±9.2%)* below the June 2022 SAAR of 1,561,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -7.7%.

Single-family housing starts in June were at a SAAR of 935,000; this is 7.0% (±11.7%)* below the revised May figure of 1,005,000 units (-6.7% YoY). Multi-family: 499,000 units (-9.9% MoM; -9.6% YoY).

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

Click image for larger view

Click image for larger view

Total completions were at a SAAR of 1,468,000. This is 3.3% (±9.7%)* below the revised May estimate of 1,518,000 (originally 1.518 million units), but 5.5% (±11.0%)* above the June 2022 SAAR of 1,392,000 units; the NSA comparison: +4.4% YoY.

Single-family completions were at a SAAR of 986,000; this is 2.8% (±10.2%)* below the revised May rate of 1,014,000 units (-3.4% YoY). Multi-family: 482,000 units (-4.4% MoM; +24.1% YoY).

Click image for larger view

Click image for larger view

Total permits were at a SAAR of 1,440,000 units (1.483 million expected). This is 3.7% below the revised May rate of 1,496,000 (originally 1.491 million units) and 15.3% below the June 2022 SAAR of 1,701,000 units; the NSA comparison: -15.9% YoY.

Single-family permits were at a SAAR of 922,000; this is 2.2% above the revised May figure of 902,000 units (-2.3% YoY). Multi-family: 518,000 units (-12.8% MoM; -34.5% YoY).

Click image for larger view

Click image for larger view

Press release from NAHB’s Robert Dietz:

“Low existing inventory that is keeping demand solid for new homes helped to push builder confidence up in July even as the industry continues to grapple with rising mortgage rates, elevated construction costs and limited lot availability.

“Builder confidence in the market for newly built single-family homes in July posted a one-point gain to 56, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This is the seventh straight month that builder confidence has increased and marks the highest level since June of last year.

“The lack of resale inventory means prospective home buyers who have not been priced out of the market continue to seek out new construction in greater numbers. At the same time, builders are troubled over rising mortgage rates approaching 7% and continue to grapple with supply-side challenges, including ongoing scarcity of electrical transformer equipment and growing concerns about lot availability.

“Although builders continue to remain cautiously optimistic about market conditions, the quarter-point rise in mortgage rates over the past month is a stark reminder of the stop and start process the market will experience as the Federal Reserve nears the end of the ongoing tightening cycle.

“Given that shelter inflation accounts for roughly 40% of the Consumer Price Index, the best way to ease this largest source of inflationary pressure is to build additional for-rent and for-sale housing. There has been some commentary linking gains for housing construction with increased concerns for additional inflation, but this has the economics backwards. More housing supply is good news for future shelter inflation readings in the market. Furthermore, higher interest rates increase the cost of financing for building homes and developing lots.

“The July HMI survey also revealed that despite elevated interest rates, builders’ use of sales incentives has declined, as the market has firmed and resale inventory options remain limited. Only 22% of builders report cutting prices in July. This is down from 25% in June and 27% in May.”

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 2023 Industrial Production, Capacity Utilization and Capacity

Click image for larger version

Total industrial production (IP) declined 0.5% in June for a second consecutive month (0.0% expected) but advanced 0.7% at an annual rate for 2Q as a whole. Manufacturing output moved down 0.3% in June but rose 1.5% in 2Q. In June, the indexes for mining and utilities fell 0.2% and 2.6%, respectively. At 102.2% of its 2017 average, total IP in June was 0.4% below its year-earlier level. 

Click image for larger version

Market Groups

Most major market groups posted declines in June. The index for consumer durables fell 2.7%, led by notable decreases in the output of appliances, furniture, and carpeting (3.8%) and of automotive products (3.6%). The decrease of 0.9% in the index for consumer nondurables reflected declines in clothing (2.1%), energy (1.8%), and food and tobacco (1.3%). Within business equipment, an increase in the index for information processing was offset by decreases in the indexes for transit and for industrial and other. Defense and space equipment posted the only gain of 1.5% or greater among the market groups.

Click image for larger version

Industry Groups

Manufacturing output moved down 0.3% in June. For the second quarter, factory output moved up 1.5% at an annual rate, buttressed by a second-quarter jump of 36.7% in the production of motor vehicles and parts during the quarter. In June, the indexes for nondurable manufacturing and durable manufacturing fell 0.6% and 0.1%, respectively; the index for other manufacturing (publishing and logging) edged down 0.2%. Within nondurables, only chemicals recorded an increase, whereas decreases of at least 1% were recorded by most other industries (paper products: 0.0%). Notable declines occurred in the indexes for printing and support (2.5%) and petroleum and coal products (1.6%). The index for durable manufacturing, on the other hand, posted more mixed results in June, with declines in the output of motor vehicles and parts (3.0%) and of nonmetallic mineral products (1.2%) being mostly offset by gains elsewhere (wood products: +1.9%).

Mining output inched down 0.2% in June and declined 1.1% at an annual rate in 2Q. Within mining, a drop of 2.8% in the index for oil and gas well drilling in June was nearly offset by a gain in oil and gas extraction. The output of utilities fell 2.6% in June and 2.0% in 2Q.

Click image for larger version

Capacity utilization (CU) stepped down to 78.9% in June, a rate that is 0.8 percentage point (PP) below its long-run (1972–2022) average.

Manufacturing CU edged down to 78.0% in June, a rate that is 0.2PP below its long-run (1972–2022) average (wood products: +1.8%; paper: +0.1%). The operating rate for mining ticked down 0.1PP to 91.6%, and the operating rate for utilities dropped 2.1PP to 68.5%. The rate for mining was 5.2PP above its long-run average, while the rate for utilities remained well below its long-run average.

Click image for larger version

Capacity at the all-industries level increased by 0.1% MoM (+1.6% YoY) to 129.6% of 2017 output. Manufacturing also edged up by 0.1% (+1.4% YoY) to 128.5%. Wood products: 0.0% (+1.2% YoY) at 120.0%; paper: -0.1% (-0.8% YoY) to 106.0%.

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

June 2023 Consumer and Producer Price Indices (incl. Forest Products)

Click image for larger version

Consumer Price Index

The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2% in June (+0.3% expected), after increasing 0.1% in May. The index for shelter was the largest contributor to the monthly all-items increase, accounting for over 70% of the increase, with the index for motor vehicle insurance also contributing. The food index increased 0.1% in June after increasing 0.2% the previous month. The index for food at home was unchanged over the month while the index for food away from home rose 0.4% in June. The energy index rose 0.6% in June as the major energy component indexes were mixed.

The index for all items less food and energy rose 0.2% in June, the smallest 1-month increase in that index since August 2021. Indexes which increased in June include shelter, motor vehicle insurance, apparel, recreation, and personal care. The indexes for airline fares, communication, used cars and trucks, and household furnishings and operations were among those that decreased over the month.

The all-items index increased 3.0% for the 12 months ending June; this was the smallest 12-month increase since the period ending March 2021. The index for all items less food and energy rose 4.8% over the last 12 months. The energy index decreased 16.7% for the 12 months ending June, and the food index increased 5.7% over the last year.

Producer Price Index

The Producer Price Index for final demand (PPI-FD) increased 0.1% in June (+0.2% expected). Final demand prices declined 0.4% in May and edged up 0.1% in April. On an unadjusted basis, the index for final demand advanced 0.1% for the 12 months ended in June.

In June, the increase in final demand prices can be traced to a 0.2% rise in the index for final demand services. Prices for final demand goods were unchanged.

The index for final demand less foods, energy, and trade services moved up 0.1% in June after no change in May. For the 12 months ended in June, prices for final demand less foods, energy, and trade services advanced 2.6%.

Final Demand

Final demand services: The index for final demand services increased 0.2% in June, the same as in May. Leading the June advance, prices for final demand services less trade, transportation, and warehousing moved up 0.3%. Margins for final demand trade services rose 0.2%. (Trade indexes measure changes in margins received by wholesalers and retailers.) In contrast, the index for final demand transportation and warehousing services decreased 0.9%.

Product detail: A 5.4% advance in the index for deposit services (partial) was a major factor in the June increase in prices for final demand services. The indexes for food and alcohol retailing, traveler accommodation services, insurance, hospital inpatient care, and airline passenger services also moved higher. Conversely, prices for truck transportation of freight declined 2.1%. The indexes for food and alcohol wholesaling and for residential real estate loans (partial) also fell.

Final demand goods: Prices for final demand goods were unchanged in June after decreasing 1.6% in May. In June, a 0.7% rise in the index for final demand energy offset falling prices for final demand goods less foods and energy and for final demand foods, which declined 0.2% and 0.1%, respectively.

Product detail: Within the index for final demand goods in June, prices for gasoline rose 3.4%. The indexes for electric power; beef and veal; chicken eggs; and medical, surgical, and personal aid devices also moved higher. In contrast, prices for iron and steel scrap dropped 10.8%. The indexes for diesel fuel, oilseeds, industrial chemicals, and residual fuels also decreased.

Click image for larger version

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

Click image for larger version

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.

May 2023 International Trade (Softwood Lumber)

Click image for larger view

With May exports of goods and services at $247.1 billion (-0.8% MoM; -3.2% YoY) and imports at $316.1 billion (-2.3% MoM; -6.8% YoY), the net trade deficit was $69.0 billion (-7.3% MoM; -18.0% YoY). 

Click image for larger view

Click image for larger view

Softwood lumber exports edged up (9 MMBF or +7.6%) in May, along with imports (62 MMBF or +4.2%). Exports were 1 MMBF (+1.2%) above year-earlier levels; imports: 116 MMBF (-8.2%) lower. As a result, the year-over-year (YoY) net export deficit was 118 MMBF (-9.1%) smaller. Also, the average net export deficit for the 12 months ending May 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).

Click image for larger view

North America (57.5% of total softwood lumber exports; of which Mexico: 37.4%; Canada: 20.1%), Asia (15.5%; especially China: 3.6%), and the Caribbean (21.7%; especially the Dominican Republic: 10.5%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were 104.9% higher than the same month of the prior year. Meanwhile, Canada was the source of most (84.9%) softwood lumber imports into the United States. Imports from Canada were 7.2% lower YTD/YTD. Overall, YTD exports were up 1.7% compared to the prior year; imports: -4.4%.

Click image for larger view

Click image for larger view

U.S. softwood lumber export activity through the West Coast customs region represented 33.6% of the U.S. total; Gulf: 40.2%, and Eastern: 17.9%. Seattle (14.2% of the U.S. total), Mobile (19.9%), San Diego (17.1%) and Laredo (14.9%) were the most active districts. At the same time, the Great Lakes customs region handled 56.8% of softwood lumber imports -- most notably the Duluth, MN district (18.1%) -- coming into the United States. The Eastern region comprised 20.7% of imports, but that volume was distributed among the districts.

Click image for larger view

Click image for larger view

Southern yellow pine comprised 23.7% of all softwood lumber exports; Douglas-fir (14.2%), treated lumber (14.3%), other pine (11.5%) and finger-jointed (9.0%) 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.

June 2023 Employment Report

Click image for larger view

The Bureau of Labor Statistics’ (BLS) establishment survey showed nonfarm employers adding 209,000 jobs in June (213,000 expected) -- the first “miss” relative to expectations since April 2022. April and May 2023 employment changes were revised down by a combined 110,000 (April: -77,000; May: -33,000); in fact, employment gains have now been revised lower for every historical month in 2023. Meanwhile, the unemployment rate (based upon the BLS’s household survey) slipped (-0.1 percentage point) to 3.6%, as the change in the number of employed (+273,000) was nearly double the expansion of the labor force (+133,000). 

Click image for larger view

Observations from the employment reports include:

* For a change, the two surveys were directionally consistent, and the jobs gains were reasonably close to the change in employed workers.

* Goods-producing industries added 29,000 jobs; service providers: +180,000. Industries with significant employment growth included government (+60,000), health care (+41,000), social assistance (+24,000), and construction (+23,000). Total nonfarm employment (156.4 million) is now 3.8 million jobs above its pre-pandemic level in February 2020 (private sector: +4.0 million; public sector: -161,000). 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 gained 7,000 jobs. That result disagrees with the change in the Institute for Supply Management (ISM) manufacturing employment subindex, which contracted to 48.1 in June. Wood products manufacturing added 400 jobs (ISM was unchanged); paper manufacturing: -600 (ISM was unchanged); construction: +23,000 (ISM rose).

Click image for larger view

* The number of employment-age persons not in the labor force edged up (+50,000) to nearly 99.9 million; that level is 4.7 million higher than in February 2020. Although the number of employed rose by 273,000, the employment-population ratio (EPR) was unchanged at 60.3%, which is 0.8PP below its February 2020 level. 

Click image for larger view

* With the working-age civilian population growing by 183,000 and labor force expanding by 133,000, the labor force participation rate remained at 62.6%. Average hourly earnings of all private employees nudged up by $0.12 (to $33.58), and the year-over-year increase accelerated to +4.4%. Because the average workweek for all employees on private nonfarm payrolls expanded to 34.4 hours, average weekly earnings rose (+$7.47) to $1,155.15 (+3.8% YoY). With the consumer price index running at an annual rate of +4.0% in May, the average worker may have gained a marginal amount of purchasing power. Average hourly wages have generally lagged CPI since April 2021; average weekly wages since June 2021.

Click image for larger view

* Full-time jobs advanced (+382,000) to 134.9 million; there are now 4.1 million more full-time jobs than in February 2020. For perspective, however, the non-institutional working-age civilian population has risen by 7.2 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 -- jumped by 452,000, while those working part time for non-economic reasons fell (-597,000); multiple-job holders: +233,000. 

Click image for larger view

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 June dipped by $9.4 billion, to $245.7 billion (-3.7% MoM; +1.4% 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 June was down 0.7% 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.

June 2023 Monthly Average Crude Oil Price

Click image for larger view

The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil slipped further in June, by $1.33 (-1.9%) to $70.25/barrel. That retreat occurred within the context of a marginally weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of April’s decrease of 3,000 barrels per day (b/d) in the amount of petroleum products demanded/supplied (20.4 million b/d), and accumulated oil stocks that continued trending downward toward the midpoint of the five-year average range (June 2023 average: 459 million barrels). 

Click image for larger view

Selected highlights from the 30 June 2023 issue of OilPrice.com’s Oil & Energy Insider include:

“The almost 10-million-barrel US stock decline has provided a firm pricing floor for oil prices” during the last week of June, wrote OilPrice’s Michael Kern, “but the upside remains limited as a string of macroeconomic news -- most notably a still very robust U.S. labor market -- seem to be pushing the Federal Reserve to keep on hiking interest rates. As medium sour Mars is now trading a solid $1 per barrel above WTI, things look quite bleak for the U.S. benchmark as it is weak at a time when it historically should be showing strength, prime summer driving season.”

As OPEC Meets Again, Not Everyone Is Welcome. As OPEC members will be gathering in Vienna next week for a two-day deliberative forum called the OPEC Seminar, the organization has banned Thomson Reuters, Bloomberg, and the Wall Street Journal from attending the event.

Norway Approves $18 Billion Worth of New Investments. Norway’s government gave the green light for oil companies to develop 19 new oil and gas fields with investments exceeding $18.5 billion, with almost half of them being developed by Aker BP, a joint venture between BP and Aker ASA.

Click image for larger view

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

June 2023 ISM and S&P Global Surveys

Click image for larger version

The Institute for Supply Management‘s (ISM) monthly sentiment survey of U.S. manufacturers reflected faster contraction in the sector during June. The PMI registered 46.0%, down 0.9 percentage point (PP) from May’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 customer inventories (-5.2PP), production (-4.4PP), employment (-3.3PP), and new orders (+3.0PP). 

Click image for larger version

Concurrent activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- expanded more rapidly (+3.6PP, to 53.9%). Overall business activity (+7.7PP), inventory sentiment (-7.0PP), imports (+4.6PP), and employment (+3.9PP) exhibited the largest changes.

Click image for larger version

Of the industries we track, Real Estate and Construction expanded. Respondent comments included the following --

Real Estate. “Business remains higher than a year ago but is falling short of forecasts and projections.”

Paper Products. “Input costs for materials continue to decline. Demand is trending to about 2019 levels, accounting for inflation. The COVID-driven demand has moderated.”

 

Changes in S&P Global‘s survey headline results were consistent with ISM’s. Details from S&P Global’s surveys follow --

Manufacturing. Renewed drop in output as demand dwindles, with price pressures dissipating in June.

Key findings:
* Sharper fall in new orders sparks decline in production
* Faster decrease in input costs, with selling prices little-changed
* Destocking at manufacturers intensifies

 

Services. Robust services growth accompanied by reignition of cost pressures in June.

Key findings:
* Steep rise in new orders drives activity growth
* Input cost inflation sharpest since January...
* ...but output charges increase at slowest rate for four months

 

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

Manufacturing. “The health of the U.S. manufacturing sector took a sharp turn for the worse in June, adding to concerns over the economy potentially slipping into recession in the second half of the year.

“Leading the darkening picture was a severe drop in demand for goods, with new orders slumping at a rate among the steepest since the global financial crisis of 2009. Companies report that customers have become increasingly reticent to spend amid the rising cost of living, higher interest rates, growing concerns about the economic outlook and a switch in spending to services.

“Exacerbating the downturn has been a continued focus on inventory reduction as manufacturers, their suppliers and their customers all seek to cut warehouse stocks in the face of weakening demand.

“In this environment, pricing power is fading rapidly. Prices charged for inputs by suppliers are now falling at a rate not seen since 2009 barring only the early pandemic lockdown months. Prices charged for goods leaving the factory gate meanwhile barely rose in June amid increasing reports of discounting, indicating a near-total collapse of inflationary pressures in the goods-producing sector.

“The focus now turns to the service sector, where inflationary pressures have been more stubborn in recent months amid resurgent post-pandemic demand. The big question is how long this service sector spending can be sustained in the face of headwinds from the cost of living and higher interest rates.”

 

Services. “June saw encouraging resilience of the U.S. services economy, which helped offset a renewed contraction of manufacturing output to ensure the overall pace of economic growth remained encouragingly solid. The surveys signal GDP growth of just under 2% for the second quarter as a whole, albeit with June seeing some loss of momentum.

“Demand for services has remained surprisingly buoyant in the face of headwinds from the increased cost of living and higher interest rates, with spending still being supported by a post-pandemic tailwind for spending by consumers in particular. Higher interest rates and recent market gains are also boosting demand for some financial services.

“The worry is that, although selling price inflation has cooled further, June saw increased cost growth in the service sector, which has been the main area of inflation concern in recent months. Higher wages in particular are driving costs up and could keep selling price inflation stubbornly elevated in the months ahead.”

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 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

Click image for larger view

Click image for larger view

According to the U.S. Census Bureau, the value of manufactured-goods shipments in May increased $1.6 billion or 0.3% to $572.6 billion. Durable goods shipments increased $5.1 billion or 1.8% to $283.0 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $3.5 billion or 1.2% to $289.6 billion, led by petroleum and coal products. Shipments of wood products increased 0.2%; paper: +0.1%.

Click image for larger view

Inventories decreased $1.7 billion or 0.2% to $853.8 billion. The inventories-to-shipments ratio was 1.49, down from 1.50 in April. Inventories of durable goods increased $1.3 billion or 0.2% to $523.0 billion, led by machinery. Nondurable goods inventories decreased $3.0 billion or 0.9% to $330.8 billion, led by petroleum and coal products. Inventories of wood products expanded by 0.1%; paper: -0.2%.

Click image for larger view

New orders increased $1.6 billion or 0.3% to $578.0 billion. Excluding transportation, new orders slid by $2.2 billion or 0.5% (-3.6% YoY). Durable goods orders increased $5.0 billion or 1.8% to $288.4 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- advanced by $0.5 billion or 0.7% (+3.1% YoY). New orders for nondurable goods decreased $3.5 billion or 1.2% to $289.6 billion.

Click image for larger view

Unfilled durable-goods orders increased $10.5 billion or 0.8% to $1,301.9 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.65, down from 6.71 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 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.