February 2016 Construction Spending

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Construction spending during February 2016 was estimated at a seasonally adjusted annual rate (SAAR) of $1,144.0 billion, 0.5 percent (±1.6%)* below the revised January estimate of $1,150.1 billion (originally $1,140.8 billion); expectations were for a 0.2% increase. The February figure is 10.3 percent (±2.1%) above the February 2015 estimate of $1,037.5 billion.

During the first two months of this year, construction spending amounted to $157.1 billion, 11.2 percent (±1.8%) above the $141.3 billion for the same period in 2015.

PRIVATE CONSTRUCTION

Spending on private construction decreased by 0.1 percent (±1.0%)* --
- Residential construction: +0.9 percent (±1.3%)*
- Nonresidential construction: -1.3 percent (±1.0%)

PUBLIC CONSTRUCTION

Public construction spending fell by 1.7 percent (±3.1%)* --
- Educational construction: -4.2 percent (±2.6%)
- Highway construction: -2.1 percent (±11.5%)*

* 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 February’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.

March 2016 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment rose by 215,000 jobs in March -- slightly above expectations of +210,000. In addition, combined January and February employment gains were trimmed by 1,000 (January: -4,000; February: +3,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) ticked up to 5.0% as the expansion in the civilian labor force (+396,000) exceeded the change in the number of people with jobs (+246,000). 

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Observations from the employment reports include:

* Manufacturing lost 29,000 jobs in March. Those results are generally consistent with the behavior of the Institute for Supply Management’s manufacturing employment sub-index, which declined in eight of the 12 months ending in March, and has been in outright contraction during the most recent four months. Wood Products: -800 jobs; Paper and Paper Products employment was unchanged.

* Mining and logging shed 12,000 jobs, with 9,900 coming from support activities for mining and another 1,100 from oil and gas extraction. Construction added 37,000 jobs.

* Over 88% (171,700) of March’s private-sector job growth occurred in the sectors typically associated with the lowest-paid jobs -- Retail Trade: +47,700; Professional & Business Services: +33,000; Education & Health Services: +51,000; and Leisure & Hospitality: +40,000. This is a persistent issue, as we have repeatedly highlighted: There are 1.455 million fewer manufacturing jobs today than at the start of the Great Recession in December 2007, but 1.526 million more Food Services & Drinking Places (i.e., wait staff and bartender) jobs. 

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* The employment-population ratio edged up to 59.9%; roughly speaking, for every five people added to the population, three are employed. Meanwhile, the number of employment-age persons not in the labor force retreated by 206,000 to 93.5 million. 

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* The labor force participation rate (LFPR) also rose to 63.0%, comparable to levels seen in late 1977. Average hourly earnings of all private employees increased by $0.07 (to $25.43), resulting in a 2.3% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages were rose by $0.04, to $21.37 (also +2.3% YoY). With the CPI running at an official rate of +1.0% YoY, in theory wages are rising in real (inflation-adjusted) terms. The average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours. 

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* Finally, full-time jobs jumped by 241,000 while part-time jobs edged down by 35,000. Full-time jobs have been trending higher since December 2009, and are now 1.572 million above the pre-recession high (although, for perspective, the non-institutional, working-age civilian population has risen by an estimated 19.6 million during that time period). Part-time jobs, by contrast, have been stuck in a channel between roughly 27 and 28 million. 

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For a “sanity check” of the employment numbers, we consult employment withholding taxes published by the U.S. Treasury. Although highly seasonal, the data show the amount withheld in March increased by $9.3 billion, to $216.7 billion -- the highest amount on record for that calendar month. To reduce some of the 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 March were 3.8% above the year-earlier average, well off the peak of +13.8% set back in September 2013.

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.

February 2016 Residential Sales, Inventory and Prices

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Sales of new single-family houses in February 2016 were at a seasonally adjusted annual rate (SAAR) of 512,000 units, roughly in line with expectations of 510,000. That level of activity was 2.0% (±18.8%)* above the revised January rate of 502,000 units (originally 494,000), but 6.1% (±17.9%)* below the year-earlier SAAR of 545,000; the not-seasonally adjusted year-over-year comparison (shown in the table above) was -2.2%.

For a longer perspective, February’s sales were roughly 63% below the “bubble” peak and about 16% below the long-term, pre-2000 average. Because single-family starts increased more quickly than sales, the three-month average ratio of starts to sales rose to 1.52 -- above the average (1.41) since January 1995.

The median price of new houses sold in February jumped by $17,500 (+6.2%), to $301,400; interestingly, the average price tumbled by $14,500 (-4.0%), to $348,900. Although the decline in the average might lead one to conclude more starter homes (those priced below $200,000) were sold in February, in fact the proportion of such homes was the lowest (13.6%) of any February on record (going back to 2002); prior to the Great Recession starter homes comprised as much as a 61% share of total sales.

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

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As mentioned in our post about housing permits, starts and completions in February, single-unit completions advanced by 42,000 units (+6.1%). Because the absolute increase in completions exceeded that of sales, new-home inventory expanded in absolute terms (+4,000 units) but was unchanged at 5.6 months of inventory. 

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Existing home sales dropped in February (-390,000 units or 7.1%) to 5.08 million units (SAAR), well below expectations of 5.3 million. Inventory of existing homes expanded in both absolute (+60,000 units) and months-of-inventory (+0.4 month) terms. Because new home sales increased while existing sales declined, the share of total sales comprised of new homes jumped to 9.2%. The median price of previously owned homes sold in February fell by $2,900 (-1.4%), to $210,800. 

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Housing affordability improved in January as the median price of existing homes for sale fell by $9,900 (-4.4%; +8.3% YoY) to $215,000. 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 -0.4% (+5.4% YoY).

“Home prices continue to climb at more than twice the rate of inflation,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The low inventory of homes for sale -- currently about a five month supply -- means that would-be sellers seeking to trade-up are having a hard time finding a new, larger home. The recovery of the sale and construction of new homes has lagged the gains seen in existing home sales. This may be starting to change: starts of single family homes in February were the highest since November 2007. The single-family-home share of total housing starts was 70% in February, up from a low of 57% in June 2015, and approaching the 75-80% range seen before the housing crisis.

“While low inventories and short supply are boosting prices, financing continues to be a concern for some potential purchasers, particularly young adults and first time home buyers. The issue is availability of credit for people with substantial student or credit card debt. While rising home prices are certainly a factor deterring home purchases, individual financial positions are more important than local housing market conditions. One hopeful sign is that the home ownership rate, at 63.7% in 4Q2015, may be turning around. It is up slightly from 63.5% in 2Q2015 but far below the 2004 high of 69.1%.” 

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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.

4Q2015 Gross Domestic Product: Third (Final) Estimate

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In its third (“final”) estimate of 4Q2015 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) adjusted the rate at which the U.S. economy grew -- from a +1.00% seasonally adjusted and annualized rate (SAAR) posted in February, to +1.38%. That +0.38 percentage point revision was somewhat of a surprise, as expectations were for no change; also, the published estimate was outside the upper bound of the consensus range. Despite the upward revision, 4Q’s GDP growth rate was still 0.61% below that of 3Q. Moreover, 4Q2015’s year-over-year growth rate was +1.98%, slower than 3Q’s +2.15%.

Groupings of GDP components show that personal consumption expenditures (PCE) contributed to 4Q growth whereas private domestic investment (PDI) and net exports (NetX) detracted from it. Government consumption expenditures (GCE) was essentially neutral.

For this revision, the biggest upward change (relative to the report released in February) in nominal-dollar terms was in recreational services (+$10.0 billion). The biggest downward change was in health care services (-$7.3 billion); health care represents nearly 25% of all expenditures on services, however, nearly on par with housing and utilities as well as expenditures on non-durables goods (e.g., food, clothing, and gasoline). The change in inventories shrank by $3.7 billion (from +$90.6 to +$86.9 billion). Net exports exerted a slightly smaller drag on GDP growth. Overall, 4Q GDP was reported to have grown by an additional $16.4 billion compared to February’s estimate. 

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Consumer Metrics Institute summarized the GDP report as follows:

“At face value this report shows the U.S. to be the healthiest and fastest growing major developed economy -- which perhaps says much more about the global situation than it does about the domestic environment. Sadly, seven consecutive quarters of measurable growth and back-to-back quarters of slightly more than anemic growth (> +1%) does provide serious global bragging rights. And when ignoring inventories (which is highly recommended) that domestic growth becomes almost respectable at +1.60%.

“All of which frames nicely the dilemma faced by the Fed's FOMC -- a stable economy that appears to be neither contracting nor remotely in danger of overheating. Arguably a Goldilocks growth rate -- albeit obtained via unprecedented and sustained monetary stimulus that by all rights should have stimulated far more.

“Given the domestic economic situation outlined above, we understand the Fed's hesitancy to raise rates. And we understand the delicacy of the global economic environment, which clearly has the economists at the Fed concerned. We also understand the Fed's pride when acting the part of senior member at the central banks club. We simply wonder why the Fed now believes that helping sustain the global economy is part and parcel of their charter and/or congressional mandate.”

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.

February 2016 Residential Permits, Starts and Completions

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Builders started 1.178 million residential units (SAAR) in February (1.146 million expected), 5.2 percent (±16.9%)* above the revised January estimate of 1.120 million (originally 1.099 million) and 30.9 percent (±16.3%) above the February 2015 SAAR of 900,000.

Virtually all of the MoM increase in total starts occurred in the single-family component: +55,000 units, to 822,000 units; that was 7.2 percent (±17.4%)* above the revised January figure of 767,000. Multi-family starts inched up by 3,000 units, to 356,000 (+0.8% MoM).

* 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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February’s SAAR was 30.9% (±16.3%) above the year-earlier SAAR of 900,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +31.0%. Single-family starts were 38.4% higher YoY, while the multi-family component was up 16.9%. 

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Completions fell by 44,000 units, or -4.2 percent (±9.5%)* to 1.016 million units, but that SAAR is 17.5 percent (±14.3%) above the year-earlier figure. The NSA comparison: +19.9% YoY.

All of the MoM decrease in completions occurred in the multi-family component (-86,000 units, or -23.5%), to 280,000 units; that was +10.9% YoY, however. Single-family completions rose by 42,000 units, or 6.1 percent (±12.7%)* to 736,000 units. That SAAR is 22.3% higher than the year-earlier level; the NSA comparison is +23.7% YoY. 

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Total permits in February fell by 37,000 units, or -3.1 percent (±0.8%) to 1.167 million; but that SAAR was 6.3 percent (±2.0%) above the year-earlier figure. The NSA comparison was +8.1% YoY.

Multi-family permits were responsible for the MoM drop; they fell by 40,000 units (-8.4%) to 436,000. Moreover, that was 8.5% below year-earlier levels. Single-family, by contrast, rose by 3,000 units, or +0.4 percent (±1.2%)* to 731,000; that was +21.1% YoY.

Builder confidence in the market for newly-built single-family homes was unchanged at 58 in March on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

“Confidence levels are hovering above the 50-point mid-range, indicating that the single-family market continues to make slow but steady progress,” said NAHB Chairman Ed Brady.  “However, builders continue to report problems regarding a shortage of lots and labor.”

“While builder sentiment has been relatively flat for the last few months, the March HMI reading correlates with NAHB’s forecast of a steady firming of the single-family sector in 2016,” said NAHB Chief Economist David Crowe. “Solid job growth, low mortgage rates and improving mortgage availability will help keep the housing market on a gradual upward trajectory in the coming months.” 

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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.

February 2016 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) decreased 0.5% in February (-0.2% expected) after increasing 0.8% in January. Sizable declines in the indexes for both utilities and mining in February outweighed a gain of 0.2% for manufacturing. The output of utilities dropped 4.0%, as unseasonably warm weather curbed the demand for heating. Mining production fell 1.4% and has decreased nearly 1.3% per month, on average, over the past six months. At 106.3% of its 2012 average, total IP in February was 1.0% below its year-earlier level.

Industry Groups

Manufacturing output rose 0.2% in February (0.0% expected), as an increase of 0.4% for durable manufacturing more than offset a decrease of 0.1% for nondurable manufacturing; the output of other manufacturing (publishing and logging) was unchanged. The indexes for most major durable goods industries either advanced or were little changed: Machinery, primary metals, and miscellaneous manufacturing registered the largest gains, nearly 1% each, while Wood Products recorded the only notable decrease (-1.2%). Within nondurables, decreases for food, beverage, and tobacco products; for textile and product mills; and for chemicals slightly outweighed gains of 2.5% or more for apparel and leather manufacturing and for petroleum and coal products, as well as smaller increases for other industries. Paper rose by 0.4%.

The large drop in mining in February resulted from decreases in crude oil extraction, coal mining, and oil and gas well drilling and servicing. Since late 2014, the index for oil and gas well drilling and servicing has fallen more than 60%. 

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Capacity utilization (CU) for the industrial sector decreased 0.4 percentage point in February to 76.7% (76.9% expected), a rate that is 3.3 percentage points below its long-run (1972–2015) average.

Manufacturing CU was unchanged in February at 76.1%, a rate that is 2.4 percentage points below its long-run average. The operating rate for durables edged up (Wood Products: -1.5%), while the rate for nondurables edged down (Paper: +0.4%); the utilization rate for other manufacturing (publishing and logging) was unchanged. The operating rate for mining moved down 1.0 percentage point, and the rate for utilities dropped more than 3 percentage points; the rates for both sectors were below their long-run averages by nearly 10 percentage points or more.   

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Capacity at the all-industries level was unchanged (+1.3% YoY) at 138.7% of 2012 output. Manufacturing edged up +0.1% (+1.4% YoY) to 139.5%. Wood Products extended the upward trend that has been ongoing since November 2013 when increasing by 0.3% (+2.6% YoY) to 161.7%. Paper was unchanged (-0.2% YoY) to 116.7%.

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.

February 2016 Consumer and Producer Price Indices (incl. Forest Products)

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Consumer Price Index

The seasonally adjusted consumer price index for all urban consumers (CPI-U) declined 0.2% in February (-0.3% expected). The energy index continued to decrease and was the major cause of the seasonally adjusted decline in the all items index, more than offsetting increases in the indexes for food (+0.2%) and for all items less food and energy. The gasoline index fell sharply, declining 13.0%, and the indexes for fuel oil and electricity also decreased, though the index for natural gas rose.

The index for all items less food and energy rose 0.3%. Increases in the indexes for shelter (rent: +0.3%; owner’s equivalent rent: +0.3%), apparel, and medical care (+0.5%) were the largest contributors to the rise, but almost all major components increased in February.

The all items index rose 1.0% over the last 12 months. The energy index fell 12.5% over the past year, with all of its major components declining. The food index advanced 0.9%, with the index for food at home declining but the food away from home index rising. The index for all items less food and energy rose 2.3%, its largest 12-month increase since May 2012. Shelter costs (rent: +3.7%; owner’s equivalent rent: +3.2%) contributed to the YoY rise, along with medical costs (+3.9%). 

Producer Price Index

The seasonally adjusted producer price index for final demand (PPI) fell 0.2% in February (in line with expectations), thanks primarily to a 0.6% decline in final demand goods. The index for final demand services was unchanged. The index for final demand less foods, energy, and trade services inched up 0.1% in February after increasing 0.2% in both January and December.

For the 12 months ended in February, prices for final demand less foods, energy, and trade services rose 0.9%, the largest 12-month advance since a 0.9% increase in July 2015. 

Final demand goods: The index for final demand goods fell 0.6% in February, the third consecutive decline. Most of the February decrease can be traced to prices for final demand energy, which dropped 3.4%. The index for final demand foods moved down 0.3%. In contrast, prices for final demand goods less foods and energy advanced 0.1%.

Product detail: Leading the February decline in prices for final demand goods, the gasoline index fell 15.1%. Prices for fresh and dry vegetables, diesel fuel, beef and veal, passenger cars, and industrial chemicals also moved lower. Conversely, the index for pharmaceutical preparations climbed 1.2%. Prices for home heating oil and eggs for fresh use also increased.

Final demand services: The index for final demand services was unchanged in February following three consecutive advances. In February, a 0.3-percent rise in prices for final demand services less trade, transportation, and warehousing offset a 0.4-percent decrease in the index for final demand trade services and a 0.7-percent drop in prices for final demand transportation and warehousing services. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail: Among final demand services in February, prices for securities brokerage, dealing, investment advice, and related services moved up 4.8%. The indexes for machinery, equipment, parts, and supplies wholesaling; food retailing; guestroom rental; and outpatient care (partial) also increased. In contrast, the index for apparel, footwear, and accessories retailing declined 6.0%. The indexes for fuels and lubricants retailing, portfolio management, truck transportation of freight, and deposit services (partial) also fell. 

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Month-over-month changes in most of the not-seasonally adjusted price indexes we track were negative in February, and 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.