July 2015 Currency Exchange Rates

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In July the monthly average value of the U.S. dollar appreciated against two of the three major currencies we track: 4.0% against Canada’s loonie and 2.1% against the euro. The greenback lost ground (-0.3%) relative to the yen. On a trade-weighted index basis, the dollar strengthened by 1.7% 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.

June 2015 Construction Spending

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Overall construction spending in the United States during June 2015 was estimated at a seasonally adjusted annual rate of $1,064.6 billion, 0.1% (±1.5%)* above the revised May estimate of $1,063.5 billion. The markets had been expecting a 0.6% increase. The June figure is 12.0% (±2.1%) above the June 2014 estimate of $950.3 billion.

During the first 6 months of this year, construction spending amounted to $482.7 billion, 8.0% (±1.5%) above the $446.8 billion for the same period in 2014.

Spending on private construction was $766.4 billion in June, 0.5% (±0.8%)* below the revised May estimate of $770.0 billion. Residential construction was $371.6 billion, 0.4% (±1.3%)* above the revised May estimate of $370.0 billion. Nonresidential construction was $394.8 billion, 1.3% (±0.8%) below the revised May estimate of $400.0 billion.

Public construction spending was $298.2 billion, 1.6% (±2.6%)* above the revised May estimate of $293.5 billion. Educational construction was $67.2 billion, 0.2% (±5.1%)* above the revised May estimate of $67.1 billion. Highway construction was $90.9 billion, 1.2% (±6.3%)* above the revised May estimate of $89.8 billion.

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

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Click here for a discussion of June’s new residential permits, starts and completions. Click here for a discussion of new and existing home sales, inventories and prices.

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.

2Q2015 Gross Domestic Product: First (Advance) Estimate

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The Bureau of Economic Analysis (BEA) estimated 2Q2015 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of 2.32%, up 1.68 percentage points from 1Q2015’s revised +0.64% (2.49 percentage points higher than the -0.17% reported for 1Q in July). All groupings of GDP components contributed to 2Q growth: Personal consumption expenditures (PCE), private domestic investment (PDI), net exports (NetX), and government consumption expenditures (GCE). 

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The revision to 1Q's “final” estimate was accompanied by revisions to all quarters back through 2012. On average the revisions trimmed 0.22 percentage point from previously reported growth rates. However, several quarters were more materially revised -- with 3Q2012 slashed by nearly 2.0% and 1.5% from 3Q2013. Output for 1Q2014, on the other hand, was upgraded to -0.9% instead of -2.1%. The prior figure represented the worst contraction on record outside of a recession; now the new number is not even the worst quarterly contraction of the expansion (that “honor” falls to 1Q2011’s -1.5%). Overall, though, “the economic expansion -- already the worst on record since World War II -- is weaker than previously thought,” The Wall Street Journal observed.

In 2Q, nearly all major categories of economic activity had positive contributions to the headline number -- consumer goods: +1.04%; consumer services: +0.95%; exports: +0.67%; imports: -0.54%; fixed investment: +0.14% (the weakest since 2Q2012); governmental spending: +0.14%; inventories: -0.08%. Real final sales of domestic product (the BEA’s “bottom-line” metric for the economy’s health, and which excludes inventories) was estimated at a +2.40% growth rate.

Real annualized per capita disposable income was reported to be $37,846, or $364 per year less than 1Q’s $38,210 -- which itself was revised downward by $437 (over 1%). Meanwhile, the household savings rate plunged to 4.8% -- down 0.7% from 1Q’s 5.5%; this implies consumers dipped into savings to maintain their current level of activity.

For this report the BEA assumed an annualized deflator of 2.04%. Concurrent inflation, recorded by Bureau of Labor Statistics in its CPI-U index, was 3.52%. Underestimating inflation results in an overstatement of actual growth rates; if the BEA's nominal data was deflated using CPI-U inflation information the headline number would show a more modest +0.89% growth rate.

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 2015 Residential Sales, Inventory and Prices

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Sales of new single-family homes declined in June (-35,000 units or 6.8%), to a seasonally adjusted and annualized rate (SAAR) of 482,000 (well below the 550,000 expected). Sales in June were 18.4% above year-earlier levels; year-to-date (YTD), sales were 20.3% above the same months in 2014.

Meanwhile, the median price of new homes sold edged up by $1,300 (+0.5%) to $281,800. The average price of homes sold, on the other hand, dropped by $7,200 (-2.1%). Because sales decreased more quickly than single-family starts, the three-month average ratio of starts to sales rose to 1.39 -- below the average (1.41) since January 1995. 

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As mentioned in our post on June’s housing permits, starts and completions, single-unit completions fell by 2,000 units (-0.3%). Because the drop in sales exceeded the drop in completions, new-home inventory expanded in both absolute terms (7,000 units) and months of inventory (+0.6 month). 

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Existing home sales rose again in June (+170,000 units or 3.2%) to 5.49 million units (SAAR); that result was slightly above expectations of 5.40 million, and the fastest pace in eight years. Because sales of existing homes increased while new homes fell, the share of total sales comprised of new homes dropped to 8.1%. The median price of previously owned homes sold in June climbed by $7,500 (+3.3%) to a record-high $236,400. Inventory of existing homes expanded in absolute terms (+20,000 units) but months-of-inventory shrank (-0.1 month). 

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Housing affordability suffered in May, as the median price of existing homes for sale jumped by $10,300 (+4.7%) to $230,300 (within $600 of the record set back in July 2006). Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P/Case-Shiller Home Price indices posted a not-seasonally adjusted monthly change of +1.1% in April (+4.4% relative to a year earlier).

“As home prices continue rising, they are sending more upbeat signals than other housing market indicators,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Nationally, single family home price increases have settled into a steady 4-5% annual pace following the double-digit bubbly pattern of 2013. Over the next two years or so, the rate of home price increases is more likely to slow than to accelerate. Prices are increasing about twice as fast as inflation or wages. Moreover, other housing measures are less robust. Housing starts are only at about 1.2 million units annually, and only about half of total starts are single family homes. Sales of new homes are low compared to sales of existing homes.

“First time homebuyers are the weak spot in the market. First time buyers provide the demand and liquidity that supports trading up by current home owners. Without a boost in first timers, there is less housing market activity, fewer existing homes being put on the market, and more worry about inventory. Research at the Atlanta Federal Reserve Bank argues that one should not blame millennials for the absence of first time buyers. The age distribution of first time buyers has not changed much since 2000; if anything, the median age has dropped slightly. Other research at the New York Fed points to the size of mortgage down payments as a key factor. The difference between a 5% and 20% down payment, particularly for people who currently rent, has a huge impact on buyers’ willingness to buy a home. Mortgage rates are far less important to first time buyers than down payments.” 

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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.

June 2015 Consumer and Producer Price Indices (incl. Forest Products)

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The seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3% in June (+0.3% expected). The all-items increase was broad-based, with advances in the indexes for gasoline, shelter, and food. The energy index rose for the second straight month as the indexes for gasoline, electricity, and natural gas all increased. The food index posted its largest increase since September 2014, partly due to a sharp increase in the eggs index.

The index for all items less food and energy rose 0.2% in June. In addition to the rise in the shelter index, the indexes for recreation, airline fares, personal care, tobacco, and new vehicles were among the indexes that increased in June. These advances more than offset declines in the indexes for medical care, household furnishings and operations, used cars and trucks, and apparel. 

The all items index showed a 12-month increase for the first time since December, rising 0.1% for the 12 months ending June. Despite rising in May and June, the energy index has still declined 15.0% over the past year. However, the indexes for food and for all items less food and energy have both risen 1.8% over the past 12 months.

The seasonally adjusted Producer Price Index for final demand (PPI) advanced 0.4% in June (+0.3% expected). The final demand index moved down 0.7% for the 12 months ended in June, the fifth straight YoY decrease.

Nearly two-thirds of June’s increase in the final demand index can be attributed to prices for final demand goods, which rose 0.7%. The index for final demand services advanced 0.3%.

Final demand goods:  The index for final demand goods moved up 0.7% in June after rising 1.3% a month earlier. Almost 60% of the broad-based advance in June is attributable to prices for final demand energy, which climbed 2.4%. The indexes for final demand goods less foods and energy and for final demand foods increased 0.4% and 0.6%, respectively.

Product detail:  Thirty percent of the June advance in prices for final demand goods can be traced to the gasoline index, which rose 4.3%. Prices for chicken eggs, pharmaceutical preparations, residential electric power, residential natural gas, and cigarettes also moved higher. In contrast, the index for fresh and dry vegetables fell 6.0%. Prices for liquefied petroleum gas and electronic computers also decreased. (See table 4.)

Final demand services:  The index for final demand services moved up 0.3% in June following no change in May. Over half of the broad-based advance can be traced to a 0.2-percent increase in the index for final demand services less trade, transportation, and warehousing. Margins for final demand trade services rose 0.2%, and the index for final demand transportation and warehousing services advanced 0.6%. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail:  Thirty percent of the June increase in the index for final demand services can be attributed to prices for loan services (partial), which climbed 2.4%. The indexes for machinery and equipment wholesaling, fuels and lubricants retailing, truck transportation of freight, deposit services (partial), and portfolio management also moved higher. Conversely, margins for food and alcohol wholesaling declined 3.7%. The indexes for traveler accommodation services and passenger car rental also declined. 

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The price indexes we track were mixed on both month-over-month and year-over-year bases in May. Only Wood Fiber increased year-over-year. 

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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.

June 2015 Residential Permits, Starts and Completions

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Total housing starts jumped higher in June, to a seasonally adjusted and annualized rate (SAAR) of 1.174 million units (1.125 million expected) -- the fastest rate since November 2007 (ignoring April 2015, which was revised to 1.190 million). June's level was 105,000 units higher (+9.8%) than May’s 1.069 million units. The increase in total starts was split as follows -- single-family: -6,000 units (-0.9%); multi-family: +111,000 units (29.4%). Incidentally, the number of multi-family starts is the greatest since April 1988. 

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Total starts were 26.5% above their year-earlier level (single-family: +14.0%; multi-family: +55.3%). Not-seasonally adjusted year-to-date (YTD) comparisons to 2014 rose across all components relative to May’s results. It is too early to tell whether the YoY percentage change in total starts has broken off the downward trend present since 2013. 

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Completions fell by 70,000 units (-6.7%) in June, to 972,000 units SAAR. The decrease was greatest in the multi-family component (-68,000 units or 17.3%); single-family edged down by 2,000 units (-0.3%). Despite the monthly declines, YoY and YTD completions relative to 2014 were higher on a percentage basis in June than in May. 

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Total permits gained for a third month in June (+93,000 units or 7.4%), to 1.343 million SAAR (1.178 million expected). The multi-family component dominated again in June: +87,000 units (15.3%); single-family: +6,000 units (0.9%). At a SAAR of 656,000 units, multi-family permits were nearly double those of a year earlier and 13.9% higher than the previous record set back in June 2008. YTD total permits were 14.3% above the same months in 2014, driven by the multi-family component (+27.2%).

The latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) ticked up to 60 (+1 point) in July -- the highest level since November 2005. An index value above 50 means more builders feel the market is good than feel it is poor. “The fact that builder confidence has returned to levels not seen since 2005 shows that housing continues to improve at a steady pace,” said NAHB Chairman Tom Woods. “As we head into the second half of 2015, we should expect a continued recovery of the housing market.”

“This month’s reading is in line with recent data showing stronger sales in both the new and existing home markets as well as continued job growth,” said NAHB Chief Economist David Crowe. “However, builders still face a number of challenges, including shortages of lots and labor.” 

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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.

June 2015 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) increased 0.3% in June (+0.2% expected) but fell at an annualized rate of 1.4% during 2Q2015. In June, manufacturing output was unchanged: The output of motor vehicles and parts fell 3.7%, but production elsewhere in manufacturing rose 0.3%. The indexes for mining and utilities advanced 1.0% and 1.5%, respectively. At 105.7% of its 2007 average, total IP in June was 1.5% above its year-earlier level -- the weakest rate of growth since February 2010. Wood Products output fell by 1.7% (-1.0% YoY) but Paper rose 0.3% (+0.1% YoY). 

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Capacity utilization for the industrial sector increased 0.2% (-1.1% YoY) in June to 78.4%, a rate that is 1.7 percentage points below its long-run (1972–2014) average. Wood Products CU declined 2.0% (-5.5% YoY) to 67.2%; Paper rose by 0.4% (+2.3% YoY) to 84.4%. 

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Capacity at the all-industries and manufacturing levels moved higher -- all-industries: +0.1% (+2.6% YoY) to 134.8% of 2007 output; Manufacturing: +0.1% (+2.1% YoY) to 132.9%. Wood Products extended the upward trend that has been ongoing since July 2013 when increasing by 0.3% (+4.7% YoY) to 119.1%. Paper once again contracted by 0.1% (-2.1% YoY) to 98.3% -- another new low.

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.