December 2012 Personal Income and Outlays, Retail Sales and Consumer Debt

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Bureau of Economic Analysis (BEA) data showed that personal income increased $352.4 billion (2.6 percent) and disposable personal income (DPI) increased $331.3 billion (2.7 percent) in December. Personal consumption expenditures (PCE) increased $22.6 billion (0.2 percent). Real (inflation-adjusted) DPI increased 2.8 percent while real PCE increased 0.2 percent. 

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The BEA indicated that the jump in personal income during November and December “was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments.” Excluding those special factors, DPI increased by a much more modest $44.1 billion (0.4 percent) in December following an increase of $66.5 billion (0.6 percent) in November.

In other words, as Zerohedge.com put it, “it was all a forward pull in comp in December to avoid the tax hikes from the January 1 Fiscal Cliff. Sure enough, of the $352 billion increase in personal income, some $268 billion, or 76% was due to Personal Dividend Income which exploded by some 34.3% to $1.05 trillion as companies ‘dividended’ income like crazy to avoid what they expected would be a huge increase in the dividend income tax.” 

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The Census Bureau reported that consumers increased retail spending by 0.5 percent (seasonally adjusted) during December as higher auto sales overcame the drag from gas stations. On an unadjusted basis, sales rose 12.7 percent between November and December, led by general merchandise stores. 

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Total consumer debt outstanding (CDO) rose by a seasonally adjusted $14.595 billion (6.3 percent annualized) in December. Revolving (mostly credit card) debt decreased by $3.6 billion (-5.1 percent annualized), while non-revolving debt (mainly student and auto loans) increased by a record $18.2 billion (11.4 percent annualized). Federal student loans comprised approximately half of December’s increase in non-revolving debt. 

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Total CDO jumped by $150.8 billion (5.7 percent) during 2012, of which $148.3 billion (98 percent) was comprised of non-revolving loans; federal student loans increased by $109.4 billion (nearly three-quarters of the total CDO increase).

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.

January 2013 ISM Reports

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Manufacturing expanded notably in January, with the Institute for Supply Management’s (ISM) PMI registering 53.1 percent, an increase of 2.9 percentage points from December's seasonally adjusted reading of 50.2 percent (50 percent is the breakpoint between contraction and expansion). “Manufacturing is starting out the year on a positive note,” observed Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee, “with all five…component indexes -- new orders, production, employment, supplier deliveries and inventories -- registering above 50 percent in January.” Respondent quotes were less optimistic than might be expected from the PMI headline, however. For example, one Wood Products respondent said, "The general theme developing in our industry is that we can move suitable volumes. However, profit margin is elusive." 

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The service sector slipped slightly in January. The non-manufacturing index (now known simply as the “NMI”) registered 55.2 percent, 0.5 percentage point lower than December’s 55.7 percent. “Respondents' comments are mixed about the economy and business conditions,” said Anthony Nieves, chair of ISM’s Non-manufacturing Business Survey Committee; “however, the majority of respondents are optimistic about the overall direction.” Comments from a couple of relevant industries illustrate Nieves’ claim: "Business is good, but we find ourselves in a very competitive environment," said one Construction respondent. “No change in business levels since prior month,” wrote a Real Estate, Rental & Leasing respondent, “but optimism growing that commercial and industrial construction will experience growth in 2013.” 

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Wood Products reported slower activity, with a majority of respondents indicating fewer new or backlogged orders, higher input prices and lower production. Paper Products was unchanged overall. Real Estate expanded, but the contributing change was limited to larger order backlogs. Construction exhibited growth in new and export orders, and employment. Ag & Forestry mimicked Construction, but also reported new export orders.

Prices increased for a variety of commodities, including diesel and gasoline; pine, spruce and treated lumber; corrugated boxes/packaging; and caustic soda. Paper was the only relevant commodity down in price. No relevant commodities were in short supply.

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

December 2012 Manufacturers’ Shipments, Inventories and New Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments increased $1.8 billion or 0.4 percent to $484.9 billion in December.

Shipments of durable goods increased $2.6 billion or 1.1 percent to $230.1 billion, led by primary metals. Nondurable goods shipments decreased $0.8 billion or 0.3 percent to $254.8 billion, led by beverage and tobacco products. Forest products shipments retreated by 0.1 percent (Wood) and 0.3 percent (Paper). 

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Data from the Association of American Railroads (AAR) and the American Trucking Associations’ (ATA) advance seasonally adjusted For-Hire Truck Tonnage Index help round out the picture on goods shipments. AAR reported a 3.9 percent decrease in not-seasonally adjusted rail shipments in December (relative to November), and a 4.2 percent drop from a year earlier; on a trend-line basis, total shipments were off 5.1 percent from a year earlier. Excluding coal carloads, year-over-year shipments were up 3.3 percent. Seasonal adjustments reversed the 3.9 percent November-to-December decrease, changing it to a 2.3 percent increase. Rail shipments of forest-related products were higher in December than a year earlier, thanks largely to a 16.3 percent jump in lumber and wood products shipments. The ATA’s advance index showed a 2.8 percent expansion in December. 

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Inventories increased $0.5 billion or 0.1 percent to $615.5 billion. The inventories-to-shipments ratio was 1.27, unchanged from November.

Inventories of durable goods decreased $0.1 billion to $374.5 billion, led by machinery. Nondurable goods inventories increased $0.6 billion or 0.2 percent to $241.0 billion, led by chemical products. Forest products inventories rose by 0.1 (Wood) and 0.4 (Paper) percent. 

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New orders for manufactured goods increased $8.6 billion or 1.8 percent to $484.8 billion. Excluding transportation, new orders increased 0.2 percent. New orders for durable goods increased $9.4 billion or 4.3 percent to $230.0 billion, led by transportation equipment, while nondurable goods orders decreased $0.8 billion or 0.3 percent to $254.8 billion.

While the Census Bureau’s estimates of new orders for manufactured goods in early 2012 recovered nearly to their previous peak in nominal terms, converting to real, inflation-adjusted terms reveals a quite different story. On that basis, new orders recouped only about half of the loss incurred since December 2007. More worrisome for the future is the observation that new orders appear to be “rolling over” and trending lower in real terms.

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.

January 2013 Employment Report

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According to the Bureau of Labor Statistics (BLS), non-farm payroll employment rose by a modest 157,000 in January. The unemployment rate was 7.9 percent, unchanged from the upwardly revised December estimate. All private supersectors reported some growth in January; government employment, by contrast, contracted at the federal and local levels. As part of the BLS’s annual benchmarking process, which showed 335,000 more jobs than initially estimated for all 2012, the change in total non-farm payroll employment for November was revised from +161,000 to +247,000, and the change for December was revised from +155,000 to +196,000. 

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Despite the upbeat revelation that more people were employed during 2012, other aspects of the employment report were still dismal. For example, the ratio of employed persons to the entire population remained mired in the range seen since late 2009, which means employment gains have barely kept pace with population growth. Also, the number of people not in the labor force jumped by 169,000 (to a new all-time high of 89.0 million) in January. 

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The civilian labor force participation rate (the share of the population 16 years and older working or seeking work) held steady at 63.6 percent. At the same time, the annual percentage increase in average hourly earnings of production and non-supervisory employees extended recent gains when rising to 1.8 percent. Even so, with the price index for urban consumers rising at a 1.7 percent annual pace, wages are barely holding steady in real terms (i.e., wage increases just keeping up with price inflation). 

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Another 50,000 people found full-time jobs, but part-time employment reversed course and increased by a nearly identical 55,000. We suspect this reversal may be related to the ObamaCare requirement that firms with 50 or more employees provide health care benefits to everyone working 30 or more hours per week. 

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We use the U.S. Treasury’s income and withholding tax data to “sanity test” the BLS’s non-farm employment report. In principle, revenue from withholding taxes should rise when more people are working and fall when job losses occur. As the figure above shows, the revenue data are very “noisy;” even year-over-year percentage changes are quite volatile, thus we show a three-month moving average in the year-over-year line to better identify ongoing trends. December’s outsized spike in taxes withheld was likely a result of year-end bonuses and moving payments forward in time to avoid the higher taxes that “kicked in” with the new year. Although taxes withheld in January declined relative to December, the data do not necessarily invalidate the BLS’s claim of job growth. 

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Employment is converging with the previous peak at a slower pace than all prior recessions going back to 1973; circles in the chart above indicate when previous recoveries reached their corresponding pre-recessionary employment highs. The economy still has 3.2 million fewer jobs than at the January 2008 peak. 

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The figure above presents a variety of forecasts related to when employment might return to the January 2008 peak (dashed line) or converge with the number of jobs that likely would exist had the recession not occurred (gray line). At January’s rate of job gains, it will take until October 2014 to recapture January 2008’s employment level (i.e., without adjusting for population growth).

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.

January 2013 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose faster in January, advancing by $6.44 (+7.3 percent) to $94.69 per barrel. That rise was concurrent with a slight weakening of the dollar, but occurred despite the lagged impacts of a drop in consumption of 118,000 barrels per day (BPD) -- to 18.6 million BPD -- during November, and a uptick in already-plentiful crude stocks.

The price spread between Brent crude (the predominant grade used in Europe) and WTI shrank in December (January Brent data was not yet available when this was written), to $21.24 per barrel. Brent and WTI prices had been essentially identical until the end of 2010. 

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Many analysts expected the above-normal crude stocks to drive near-term prices (including those of gasoline and diesel) lower, but that has not happened. Geopolitical tensions (e.g., the takeover of and hostage-taking at an Algerian natural gas plant by Islamist militants, and Israeli air strikes of military targets in Syria) have kept oil prices elevated; consumer confidence has suffered as a result.

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While traders pushed futures prices modestly higher, it is apparent they think the crude oil market is going through another transition. As a result, near-term contracts are in “contango” (each subsequent contract is priced higher than its predecessor) while latter contracts are in “backwardation” (each subsequent contract is priced lower than its predecessor). Our interpretation of this pattern is that traders anticipate tight oil markets through mid-year 2013, but loosening supplies thereafter.

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.

January 2013 Currency Exchange Rates

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In January the U.S. dollar depreciated by 1.0 percent (monthly average basis) against the euro, held steady relative to Canada’s loonie, and appreciated by 5.8 percent against the yen. On a trade-weighted index basis, the dollar weakened by 0.1 percent against a basket of 26 currencies. 

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Canada: The loonie held its ground against the greenback as the influence of real GDP growth (+0.3 percent) in November -- thanks primarily to manufacturing and mining, quarrying and oil and gas extraction -- was offset by a concurrent near-quadrupling of Canada’s trade deficit (to C$2 billion).

Europe: The currency markets were apparently convinced the Eurozone fiscal crisis is over by news that banks were starting to repay the emergency funding they received from the European Central Bank a year ago. That complacency seems misplaced, however, since the repayments (€3.5 billion) were less than 2 percent of what was expected (€220 billion).

Japan: Although industrial production figures for December may suggest Japan’s economy is pulling out of its latest downturn, the widening trade deficit justifies caution with such an interpretation. Moreover, market reactions to the fiscal and currency policies being executed by both the Japanese government and central bank contributed to the yen’s weakening during January.

China: Official 4Q2012 estimates showed the world’s second-largest economy grew by 7.9 percent, confirming -- at least in the mind of IHS Global Insight senior economist Xianfang Ren -- “that the worst is probably over for the economy and that China has avoided a hard landing.” The staff at Agora Financial share our skepticism; they reminded readers that Chinese politicians have admitted their country’s economic numbers are “manmade” and “for reference only.”

Looking forward, quantitative easing and other unorthodox measures that central banks are implementing -- despite earlier pledges not to undertake competitive currency devaluations -- threaten to set off currency wars. A surge in goods prices is among the more benign potential consequences of such actions.

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

December 2012 U.S. Construction

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Overall construction spending in the United States increased by 0.9 percent during December, to a seasonally adjusted and annualized rate (SAAR) of $885.0 billion. Gains in private construction more than offset the decline in the public category.

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Total housing starts rose in December, jumping to 954,000 units SAAR (+103,000 units or 12.1 percent relative to November). The increase was fairly evenly split in absolute terms between single- (+46,000 or 8.1 percent) and multi-family starts (+57,000 units or 20.3 percent), although the percentage changes were dramatically different.

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December’s “raw” total and single-family starts demonstrate that the headline numbers were essentially products of seasonal adjustment. Total unadjusted starts were at their lowest level since March 2012 (or February 2012 for single-family starts), whereas multi-family remained just off October’s peak and higher than any other (pre-2012) month since September 2008. Nonetheless, it is worth noting that December’s total starts were 44 percent higher than a year earlier.

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Sales of new single-family homes slipped (-29,000 units or 7.3 percent) to 369,000 (SAAR). The median price of new homes sold also rose by 1.3 percent, to $248,900. Although the change in single-unit starts (+46,000) exceeded that of sales (-29,000), the three-month average starts-to-sales ratio remained essentially unchanged at 1.5 in December.

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Single-unit completions advanced by 3.7 percent, while the inventory of new single-family homes nudged higher on both absolute (to 151,000 units) and months-of-sales (to 4.9 months) bases.

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Existing home sales retreated to 4.94 million units (-50,000 units or 1.0 percent, SAAR) in December. The share of total sales comprised of new homes ticked down to 7.0 percent. The median price of previously owned homes sold in December rose by $1,400 (0.8 percent), to $180,800.

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Housing affordability retreated slightly as the median price of existing homes for sale rose by $3,600 (+2.0 percent) in November. At the same time, however, Standard & Poor’s reported that the 10- and 20-City Composites in the S&P/Case-Shiller Home Price indices posted monthly declines of 0.2 and 0.1 percent, respectively, in November. Nonetheless, the Composites were, respectively, 4.5 and 5.5 percent higher relative to a year earlier.

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"The November monthly figures were stronger than October, with 10 cities seeing rising prices versus seven the month before,” said David Blitzer, chair of the Index Committee at S&P Dow Jones Indices. “Phoenix and San Francisco were both up 1.4% in November followed by Minneapolis up 1.0%. On the down side, Chicago was again amongst the weakest with a drop of 1.3% for November.

"Winter is usually a weak period for housing which explains why we now see about half the cities with falling month-to-month prices compared to 20 out of 20 seeing rising prices last summer. The better annual price changes also point to seasonal weakness rather than a reversal in the housing market. Further evidence that the weakness is seasonal is seen in the seasonally adjusted figures: only New York saw prices fall on a seasonally adjusted basis while Cleveland was flat.

Regional patterns are shifting as well. The Southwest -- Las Vegas and Phoenix -- are staging a strong comeback with the Southeast -- Miami and Tampa close behind. The Sunbelt, which bore the brunt of the housing collapse, is back in a leadership position. California is also doing well while the Northeast and industrial Midwest is lagging somewhat.

"Housing is clearly recovering. Prices are rising as are both new and existing home sales. Existing home sales in November were 5.0 million, highest since November 2009. New-home sales at 398,000 were the highest since June 2010. These figures confirm that housing is contributing to economic growth.

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With builders’ confidence in the residential market steady to gaining, the number of permits applied for in December nudged higher on a SAAR basis. Total permits rose to 903,000 units (+3,000 units or 0.3 percent) on the (albeit meager) strength of single-family units (+10,000 units or 1.8 percent, to 578,000 units); multi-family units fell, however, to 325,000 units (-7,000 units or 2.1 percent). The growth in total permits was a function of seasonal adjustment, since both the total (-2,300 units) and single-family (-3,700 units) estimates declined on a not-seasonally adjusted basis. Only the multi-family segment saw a modest uptick (+1,400 units). Still, total permits were 24 percent higher in December than a year earlier.

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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.