December 2014 Macro Pulse -- When Oil Runs Red

Among the developments this past month, one that dominated economic news headlines involved the precipitous drop in crude oil prices. As of December 12, the spot price for West Texas Intermediate crude had fallen to around $59 -- the lowest since 1H2009 and well below many producers’ cost of production. OPEC’s decision to maintain output levels seems to be having the desired effect of knocking out weak shale oil competitors: Permits for new U.S. wells dropped by nearly 40% in November, and numerous bankruptcies are inevitable in the highly leveraged shale oil sector. Oil producing countries are not necessarily “sitting pretty,” however. Many of them have high fiscal break-even costs (e.g., Saudi Arabia: $98/barrel; Venezuela: $161) because of prodigious welfare spending, and thus falling prices are “playing havoc” with their budgets.

Click here to read the rest of the December 2014 Macro Pulse recap.

The Macro Pulse blog is a commentary about recent economic developments affecting the forest products industry. The monthly Macro Pulse newsletter summarizes the previous 30 days of commentary available on this website.

October 2014 International Trade (Softwood Lumber)

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Softwood lumber exports increased by 15 MMBF (10.6%) in October while imports rose by 84 MMBF (7.7%). Exports were 28 MMBF (15.8%) below year-earlier levels; imports were 223 MMBF (23.4%) higher. 

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The rest of North America (i.e., Canada and Mexico) was once again the primary destination for U.S. softwood lumber exports in October (40.9%), although Asia (especially China) was fairly close behind (36.4%); Canada was also the largest single-country destination (20.9%). Year to date (YTD), exports to China were flat relative to the same period in 2013 (down from roughly 11% YTD-over-YTD in September). Meanwhile, Canada was the source of nearly all (95.9%) softwood lumber imports into the United States. Overall, YTD exports were up 1.2% compared to the same period in 2013, while imports were up 11.6%. 

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Nearly 43% of U.S. softwood lumber exports left the country through West Coast (primarily Seattle, WA with 27.6%) customs districts in October. At the same time, Great Lakes customs districts handled over 70% of the softwood lumber imports (especially Duluth, MN with 26.0%) coming into the United States. 

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Southern yellow pine comprised 24.9% of all softwood lumber exports in October, followed by Douglas-fir with 17.4%.

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

October 2014 International Trade (General)

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The goods and services deficit was $43.4 billion in October, down $0.2 billion from $43.6 billion in September. October exports were $197.5 billion, $2.3 billion more than September exports. October imports were $241.0 billion, $2.1 billion more than September imports.

The October decrease in the goods and services deficit reflected a decrease in the goods deficit of less than $0.1 billion to $62.7 billion and an increase in the services surplus of $0.1 billion to $19.2 billion.

Year-to-date, the goods and services deficit increased $20.5 billion, or 5.1%, from the same period in 2013. Exports increased $57.8 billion or 3.1%. Imports increased $78.3 billion or 3.4%. 

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On a global scale, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume decreased by 1.9% in September (from the prior month) while prices fell by 1.6%. It is interesting to compare those data points against shipping container counts (which are a good metric for gauging economic activity). “Export container counts continue to weaken,” wrote analyst Steven Hansen, “which is a warning that the global economy is slowing. Export three month rolling averages continue to decelerate -- being in negative territory year-over-year. This is a headwind for 4Q2014 GDP."

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.

October 2014 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments decreased $3.8 billion or 0.8% to $499.2 billion in October. Shipments of durable goods increased $0.1 billion or 0.1% to $246.5 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $3.9 billion or 1.5% to $252.7 billion, led by petroleum and coal products. Wood shipments fell by 0.6% while Paper increased 0.4%. 

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Inventories increased $0.5 billion or 0.1% to $655.6 billion (the highest level since the series was first published on a NAICS basis). The inventories-to-shipments ratio was 1.31, up from 1.30 in September.

Inventories of durable goods increased $1.8 billion or 0.5% to $406.6 billion, led by transportation equipment. Nondurable goods inventories decreased $1.3 billion or 0.5% to $249.0 billion, led by petroleum and coal products. Inventories of Wood and Paper expanded by 0.5 and 0.1%, respectively. 

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New orders decreased $3.3 billion or 0.7% to $496.6 billion. Excluding transportation, new orders decreased 1.4% -- the fifth drop in the last six months. Durable goods orders increased $0.6 billion or 0.3% to $243.8 billion, led by transportation equipment. New orders for nondurable goods decreased $3.9 billion or 1.5% to $252.7 billion.

Prior to July, as can be seen in the graph above, real (inflation-adjusted) new orders had been essentially flat since early 2012, recouping roughly 75% of the losses incurred since the beginning of the Great Recession. With July’s transportation-led spike now in the rearview mirror, new orders have dropped back to around 69% of their December 2007 high. 

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Unfilled durable-goods orders increased $4.9 billion or 0.4% to $1,174.2 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.73, up from 6.71 in September. Real unfilled orders, which had been a good litmus test for sector growth, show a much different picture; in real terms, unfilled orders in June were back to just 79% of their December 2008 peak. Real unfilled orders jumped to 102% of the prior peak in July, thanks to the largest-ever batch of aircraft orders, hence, this metric is likely to remain elevated for several years.

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.

November 2014 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment posted the biggest gain since January 2012 when increasing in November by 321,000 jobs -- smashing MarketWatch’s consensus expectations of 235,000. Data for the prior two months was also revised up by a combined 44,000 jobs. Meanwhile, the unemployment rate (based upon the BLS’s household survey) was unchanged at 5.8%. This month’s report internals (i.e., the comparison between household and establishment survey data) were extremely inconsistent, however: The household survey showed seasonally adjusted employment growth of only 4,000 versus the headline establishment number of 321,000. The glaring disparity prompted one analyst to beg, “Will the real job situation please stand up?”

Hiring last month was broad-based but the biggest beneficiaries were retail, temporary services and transportation and warehousing. Those increases likely reflect seasonal hiring for the holiday season. In addition, manufacturers added 28,000 jobs, the most in a year, and education and health services 38,000. Professional and business services, a category that includes temps but also higher-paying jobs in fields such as accounting and engineering, added the most jobs in four years. Construction added 20,000 jobs; construction employment is up 231,000 from a year earlier. 

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Other internals of the report were mixed. For example, the employment-population ratio remained stable at 0.592, just one percentage point above the post-recession low. At the same time, the number of employment-age persons not in the labor force edged up by 69,000 (to 92.4 million), just shy of its recent peak of 92.6 million. 

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The labor force participation rate was unchanged at 62.8, near its multi-decade low. Average hourly earnings of all private employees rose by $0.09, resulting in a 2.1% year-over-year increase. For all production and nonsupervisory employees (pictured above), wages rose by $0.04/hour (+2.1% YOY). With the CPI running at an official annual rate of 1.7%, wages are technically keeping up with price inflation. 

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Finally, full-time jobs decreased while part-time jobs increased. 

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The U.S. recovery still has far to go to fully rebound from the Great Recession, given that many people without jobs have stopped looking and thus are no longer counted as unemployed. "At this rate, we won't return to pre-recession labor market health until October 2016 -- nearly nine years since the recession began," said Elise Gould, a senior economist at the Economic Policy Institute. We think Gould's prediction is too optimistic. The figure above presents a variety of forecasts related to when employment might converge with the number of jobs that likely would exist had the recession not occurred (gray line).

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.

November 2014 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil extended its retreat for a fifth month, tumbling $8.61 to $75.79 per barrel; that is the lowest price since October 2010. The price drop coincided with a strengthening U.S. dollar, the lagged impacts of a 237,000 barrel-per-day (BPD) decrease in the amount of oil supplied in September (to 19.0 million BPD), and a slower accumulation of crude oil stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI widened by $0.63 in November, to $3.65 per barrel. 

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OPEC’s decision to maintain production levels seems to be having the desired effect of knocking out shale oil producers: Permits for new U.S. wells dropped by nearly 40% in November. Oil producing countries are not necessarily “in the driver’s seat,” however; many of them have high fiscal break-even costs (e.g., Saudi Arabia: $98/barrel; Venezuela: $161) because of generous welfare spending, and thus falling prices are “playing havoc” with their budgets.

Given the present downward momentum in futures prices, we expect further erosion in spot oil prices. 

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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.

November 2014 ISM Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that economic activity in the U.S. manufacturing sector expanded at roughly the same pace in November as it had in October. The PMI edged down to 58.7%, a decrease of 0.3 percentage point from October’s 59.0% (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. The expansion was supported by increased new and backlogged orders, imports and exports, and slower supplier delivery times (implying suppliers may be having difficulty keeping up with orders).

Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee said comments from the respondent panel “are upbeat about strong demand and new orders, with some expressing concerns about West Coast port slowdowns and the threat of a potential dock strike.” 

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Wood Products was unchanged again in November, as increased export orders were offset by declines in backlogged orders; the “market has remained strong going into year-end,” one respondent indicated, however. Paper Products’ expansion, by contrast, exhibited widespread support among the sub-indices. 

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- quickened in November, nearly recapturing the high set back in August. The NMI registered 59.3%, 2.2 percentage points above October’s 57.1%; only the employment and imports sub-indices were lower in November than in October. “Comments from the majority of respondents indicate that business conditions are on track for continued growth,” said Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee. “The respondents have also stated that there is some strain on capacity due to the month-over-month increase in activity.” 

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Two of the three service industries we track (Construction and Ag & Forestry) reported expansion in November. Apparently the increases in imports and backlogged orders were not enough to move Real Estate’s overall activity “meter.”

Paper products was the only relevant commodity up in price. Some respondents indicated paying more for gasoline, others less. Lumber and diesel were down in price. No relevant commodities were in short supply.

It is interesting to note that while ISM’s PMI and Markit’s U.S. Manufacturing PMI paralleled each other in November (i.e., both showed slower expansion), ISM’s NMI and Markit’s U.S. Services PMI moved in opposite directions (i.e., ISM expanded more quickly, Markit more slowly).

Although ISM’s reports are useful as attitudinal barometers, they should not be substituted for “hard” data. For example, ISM has reported Paper Products expanded during 22 of the past 24 months. That does not square with Federal Reserve data, which shows paper industrial production 2.1% and capacity 3.6% lower than in November 2012. ISM’s results for Wood Products (expansion during 16 of 24 months) are consistent with Fed data (IP: +17.0%; capacity: +4.0%), however.

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.