November 2015 Currency Exchange Rates

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In November the monthly average value of the U.S. dollar appreciated “across the board” against the three major currencies we track: 1.6% against Canada’s “loonie,” 4.6% against the euro and 2.1% against the yen. On a trade-weighted index basis, the dollar strengthened by 1.5% 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.

October 2015 Residential Sales, Inventory and Prices

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Sales of new single-family homes clawed back some of the ground lost in September (-66,000 units), rising by 48,000 units (+10.7%) in October to a seasonally adjusted and annualized rate (SAAR) of 495,000 units -- near the 499,000 expected. Year-to-date (YTD), sales were 15.0% above the same months in 2014. For perspective, October sales were roughly 64% below the “bubble” peak and about 22% below the long-term, pre-2000 average.

Meanwhile, the median price of new homes sold slumped by $26,300 (-8.5%) from September’s all-time nominal high (upwardly revised from $296,900 to $307,800), to $281,000 in October. The average price of homes sold, by contrast, slipped by just $3,600 (-1.0%) -- to $366,000 -- implying that a significant proportion of total sales were high-end homes. The proportion of “starter” homes (those priced below $200,000) is the lowest (19.5%) of any October on record (going back to 2002); in the past starter homes comprised as much as a 61% share of total sales. Because sales increased while single-family starts decreased, the three-month average ratio of starts to sales fell to 1.51 -- above the average (1.41) since January 1995. 

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As mentioned in our post about housing permits, starts and completions in October, single-unit completions edged down by 3,000 units (-0.5%). Despite the divergence between completions and sales, new-home inventory expanded in absolute terms (+3,000 units) but shrank in months-of-inventory (-0.5 month) terms. 

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Existing home sales retreated in October (-190,000 units or 3.4%) to 5.36 million units (SAAR); that result was below expectations of 5.40 million. Inventory of existing homes contracted in absolute (-50,000 units) terms but expanded in months-of-inventory terms (+0.1 month). Because sales of new homes rose while existing homes fell, the share of total sales comprised of new homes increased to 8.5%. The median price of previously owned homes sold in October declined for a fourth month (-$2,100 or 1.0%), to $219,600. 

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Housing affordability improved again in September, as the median price of existing homes for sale retreated by $6,500 (-2.8%) to $223,500. 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 +0.2% (+4.8% compared to a year earlier).

“Home prices and housing continue to show strength with home prices rising at more than double the rate of inflation,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The general economy appeared to slow slightly earlier in the fall, but is now showing renewed strength. With unemployment at 5% and hints of higher inflation in the CPI, most analysts expect the Federal Reserve to raise its Fed Funds target range to 25 to 50 basis points, the first increase since 2006. While this will make news, it is not likely to push mortgage rates far above the recent level of 4% on 30-year conventional loans. In the last year, mortgage rates have moved in a narrow range as home prices have risen; it will take much more from the Fed to slow home price gains. 

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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.

3Q2015 Gross Domestic Product: Second (Preliminary) Estimate

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In its second (“preliminary”) estimate of 3Q2015 U.S. gross domestic product (GDP), the Bureau of Economic Analysis (BEA) reported that the economy was growing at a seasonally adjusted and annualized rate of 2.07%, up from the original 1.49% rate reported in October, but still significantly slower than 2Q’s 3.92%. The consensus among economists was for a growth rate of +2.1%. A better metric involves comparing growth to the same quarter one year ago. For 3Q2015, the year-over-year growth was 2.17% -- down from 2Q's 2.72% YoY growth.

Groupings of GDP components show that personal consumption expenditures (PCE) and government consumption expenditures (GCE) contributed to 3Q growth whereas private domestic investment (PDI) and net exports (NetX) detracted from it. As the graph above also indicates, this report's headline number was buoyed almost entirely by a sharp revision in inventories (part of PDI). All of the other line items were either essentially unchanged or weaker. Although inventories were reported to have contracted at a 0.59% annualized rate, that is a 0.85 percentage point improvement from the -1.44% reported in the previous (advance) estimate. Because of the general weakness in the non-inventory line items, 3Q’s real final sales of domestic product (which excludes the impact of inventory changes) was trimmed 0.27 percentage point to a +2.66% growth rate.

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Consumer activity once again contributed the vast bulk of the headline number (2.05 percentage points), although that contribution was 0.14 percentage point less than in the previous 3Q estimate; health care was once more the single largest line item, comprising one-fifth of PCE. Fixed commercial investments and governmental spending were essentially unchanged, while exports and imports weakened materially from the previous estimate.

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 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 0.2% in October -- in line with expectations. The indexes for food, energy, and all items less food and energy all increased modestly in October. The food index, which increased 0.4% in September, rose 0.1% in October, with four of the six major grocery store food group indexes rising. The energy index, which declined in August and September, advanced 0.3% in October; major energy component indexes were mixed.

The index for all items less food and energy rose 0.2% in October, the same increase as in September. Advances in the indexes for shelter (rent: +0.3%; owners’ equivalent rent: +0.2%) and medical care (+0.8%) were the largest contributors to the increase. In contrast, the indexes for apparel, new vehicles, household furnishings and operations, and used cars and trucks all declined.

The all-items index rose 0.2% over the last 12 months. The 12-month change has been between negative 0.2% and positive 0.2% since January. The food index has increased 1.6% over the past year, and the index for all items less food and energy has risen 1.9%. The rise in housing costs has also been significant (rent: +3.7%; owners’ equivalent rent: +3.1%). These advances have been mostly offset by a 17.1% decline in the energy index.

The seasonally adjusted producer price index for final demand (PPI) decreased 0.4% (-0.2% expected) in October. Final demand prices moved down 0.5% in September and were unchanged in August. Roughly 70% of the October decrease in the final demand index can be traced to prices for final demand services, which moved down 0.3%. The index for final demand goods declined 0.4%.

Final demand services: The index for final demand services moved down 0.3% in October following a 0.4-percent decline in the prior month. Over 70% of the decrease in October can be traced to margins for final demand trade services, which dropped 0.7%. (Trade indexes measure changes in margins received by wholesalers and retailers.) The index for final demand services less trade, transportation, and warehousing edged down 0.1%. In contrast, prices for final demand transportation and warehousing services inched up 0.1%.

Product detail: Over half of the October decline in the index for final demand services is attributable to margins for fuels and lubricants retailing, which fell 15.8%. The indexes for apparel, jewelry, footwear, and accessories retailing; loan services (partial); portfolio management; wireless telecommunication services; and health, beauty, and optical goods retailing also declined. Conversely, prices for truck transportation of freight advanced 0.3%. The indexes for food retailing and deposit services (partial) also increased.

Final demand goods: The index for final demand goods moved down 0.4% in October, the fourth consecutive decrease. Leading the decline in October, the index for final demand goods less foods and energy fell 0.3%. Prices for final demand foods decreased 0.8%. The index for final demand energy was unchanged.

Product detail: Over one-third of the October decline in the final demand goods index is attributable to prices for light motor trucks, which fell 1.8%. The indexes for chicken eggs, iron and steel scrap, beef and veal, boxed meat, and electric power also moved lower. In contrast, gasoline prices rose 3.8%. The indexes for pharmaceutical preparations and corn also advanced. 

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Month-over-month changes in the not-seasonally adjusted price indexes we track were mixed in October, but all fell on a year-over-year basis. 

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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.

October 2015 Residential Permits, Starts and Completions

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Total housing starts retreated in October to a seasonally adjusted and annualized rate (SAAR) of 1.060 million units (1.162 million expected), 131,000 units below (-11.0% ±13.5%*) September’s 1.191 million units (revised from 1.206 million). The decrease in total starts was split as follows -- single-family: -18,000 units (-2.4% ±9.9%*); the notoriously volatile multi-family component: -113,000 units (-25.1%).

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

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Total starts were 2.0% below their not-seasonally adjusted year-earlier level (single-family: +2.9%; multi-family: -10.4%); the reported seasonally adjusted YoY change in total starts was -1.8% ±11.2%*). Year-to-date (YTD) comparisons to 2014 were all in the +10% range. Despite the drop in starts, October marks the fifth consecutive month in which there were more than 500,000 multi-family units under construction in structures with five or more units, the longest streak since the mid-1970s. 

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Completions fell by 62,000 units (-6.0% ±15.8%*) in October, to 965,000 units SAAR. The decrease was overwhelmingly skewed to the multi-family component (-59,000 units or 15.4%); single-family completions edged down 3,000 units (-0.5% ±13.3%*). YTD, multi-unit completions in particular were still running well ahead relative to 2014. 

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Total permits proved to be the silver lining in the October report, rising by 45,000 units (+4.1% ±1.5%) to 1.150 million SAAR. The multi-family component dominated the absolute increase: +28,000 units (+6.8%); single-family: +17,000 units (2.4% ±1.5%). YTD total permits were 9.8% above the same months in 2014, driven by the multi-family component (+15.3%).

The latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) slipped 3 percentage points (to 62) in November. (An HMI value above 50 means more builders feel the market is good than feel it is poor.) “Even with this month’s drop, builder confidence has remained in the 60s for six straight months -- a sign that the single-family housing market is making long-term headway,” said NAHB Chairman Tom Woods. “However, our members continue to voice concerns about the availability of lots and labor.”

“The November report is pullback from an unusually high October, and is more in line with the consistent, modest growth that we have seen throughout the year,” said NAHB Chief Economist David Crowe. “A firming economy, continued job creation and affordable mortgage rates should keep housing on an upward trajectory as we approach 2016.” 

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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.

October 2015 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) declined 0.2% in October (+0.1% expected) after decreasing the same amount in September. In October, the index for manufacturing moved up 0.4%, while the index for mining fell 1.5% and the index for utilities dropped 2.5%. For 3Q as a whole, total IP is now estimated to have increased at an annual rate of 2.6% instead of the previously reported +1.8%. At 107.2% of its 2012 average, total IP in October was 0.3% above its year-earlier level. Wood Products output jumped 1.9% (-0.4% YoY) while Paper edged up 0.1% (-0.9% YoY).

Manufacturing output increased 0.4% (+0.3% expected), as the output of durable goods advanced 0.5% and the production of nondurable goods rose 0.3%. Nearly all major categories of durable goods industries moved up, and gains of 1.0% or more were recorded by nonmetallic mineral products; electrical equipment, appliances, and components; and primary metals. Among nondurable goods industries, the index for textile and product mills gained 1.9% and the index for petroleum and coal products rose 1.3%, but the index for apparel and leather fell 2.6%. The output of other manufacturing (publishing and logging) fell 0.6% after having dropped a similar amount in each of the previous two months.

The decline of 1.5% in mining output in October reflected sizable reductions both in the indexes for crude oil extraction and for oil and gas well drilling and servicing. Mining output was 6.9% below its level of a year earlier. The index for utilities dropped 2.5%; a decrease for electric utilities was partly offset by an increase for natural gas utilities. 

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Capacity utilization (CU) for the industrial sector declined 0.2 percentage point (-0.3%) in October to 77.5%, a rate that is 2.6 percentage points below its long-run (1972–2014) average. Wood Products CU rose 1.7% (-2.8% YoY) to 69.9%; Paper nudged up 0.1% (-0.5% YoY) to 82.6%.

The capacity utilization rate for manufacturing rose 0.2 percentage point to 76.4%, a rate 2.1 percentage points below its long-run average. The capacity utilization rate for durable goods industries, at 76.2%, was 0.7 percentage point below its long-run average; the rate for nondurable goods industries, at 77.9%, was 2.5 percentage points below its long-run average. The operating rate for other manufacturing (publishing and logging) decreased 0.3 percentage point in October, to 60.2%. The utilization rate for mines fell 1.4 percentage points to 80.5%, and the rate for utilities decreased 2.1 percentage points to 77.8%. 

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Capacity at the all-industries and manufacturing levels moved higher -- All-industries: +0.1% (+1.5% YoY) to 138.3% of 2012 output; Manufacturing: +0.1% (+1.3% YoY) to 138.9%. Wood Products extended the upward trend that has been ongoing since November 2013 when increasing by 0.2% (+2.5% YoY) to 160.1%. Paper was unchanged (-0.4% YoY) at 116.9%.

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 2015 Macro Pulse -- Pushing on a String?

“Will they, won’t they? Should they, shouldn’t they?” are questions endlessly being bandied about on financial TV and radio shows, referring to a possible increase in the federal funds rate during the Federal Reserve Open Market Committee (FOMC) meeting in December. Because the FOMC left the rate unchanged in October, the talking heads have spun themselves into a tizzy speculating whether the next meeting will finally be “the one” in which the target rate is raised for the first time since July 2006.

So, what is our prognostication for the December FOMC meeting outcome? Click here to find out and to read the rest of the November 2015 Macro Pulse recap.

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