May 2016 International Trade (General)

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The goods and services deficit was $41.1 billion in May, up $3.8 billion from $37.4 billion in April, revised. May exports were $182.4 billion, $0.3 billion less than April exports. May imports were $223.5 billion, $3.4 billion more than April imports.

The May increase in the goods and services deficit reflected an increase in the goods deficit of $3.7 billion to $62.2 billion and a decrease in the services surplus of $0.1 billion to $21.1 billion.

Year-to-date, the goods and services deficit decreased $7.2 billion, or 3.5 percent, from the same period in 2015. Exports decreased $47.2 billion or 4.9 percent. Imports decreased $54.3 billion or 4.7 percent.

Goods by Selected Countries and Areas: Monthly

The May figures show surpluses, in billions of dollars, with South and Central America ($2.9), Hong Kong ($1.9), Singapore ($0.5), and Brazil ($0.5). Deficits were recorded, in billions of dollars, with China ($28.3), European Union ($11.9), Germany ($5.5), Mexico ($5.5), Japan ($5.0), Italy ($2.6), India ($2.1), South Korea ($2.0), Taiwan ($1.2), France ($1.1), Canada ($0.9), OPEC ($0.4), United Kingdom ($0.3), and Saudi Arabia ($0.2).
* The deficit with China increased $1.7 billion to $28.3 billion in May. Exports decreased $0.1 billion to $9.3 billion and imports increased $1.6 billion to $37.6 billion.
* The balance with the United Kingdom shifted from a surplus of $0.7 billion to a deficit of $0.3 billion in May. Exports decreased $1.2 billion to $4.0 billion and imports decreased $0.2 billion to $4.3 billion.
* The deficit with Japan decreased $0.9 billion to $5.0 billion in May. Exports increased $0.6 billion to $5.4 billion and imports decreased $0.3 billion to $10.4 billion. 

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On a global scale, data compiled by the Netherlands Bureau for Economic Policy Analysis showed that world trade volume increased 0.6% in April (+1.4% year-over-year) while prices rose by 1.8% (-5.3% YoY). April’s price index was 22.1% below the August 2011 peak; price index changes are almost perfectly correlated with changes in the value of the U.S. dollar.

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 2016 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment “roared back” in June -- rising by 287,000 jobs, significantly more than even the upper end of expectations (+235,000; consensus: 180,000). Combined April and May employment gains were trimmed by 6,000 (April: +21,000; May: -27,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) rose 0.2 percentage point (to 4.9%) as only a fraction of those who entered/returned to the labor force (+414,000) found employment (+67,000). 

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Observations from the employment reports include:

* This disparity in job gains between the establishment (+287,000) and household (+67,000) surveys was notable.

* Manufacturing gained 14,000 jobs in June. That result is broadly consistent with the behavior of the Institute for Supply Management’s manufacturing employment sub-index, which expanded for the first time in seven months. Wood Products gained 2,100 jobs, but Paper and Paper Products employment dropped by 400.

* Mining and logging shed 5,000 jobs, with 3,500 coming from support activities for mining and another 2,200 from oil and gas extraction. Construction employment was unchanged.

* Over 70% (185,900) of May’s private-sector job growth occurred in the sectors typically associated with the lowest-paid jobs -- Retail Trade: +29,900; Professional & Business Services: +38,000 (of which Temp Help comprised 15,200); Education & Health Services: +59,000; and Leisure & Hospitality: +59,000. This is a persistent issue, as we have repeatedly highlighted: There are 1.450 million fewer manufacturing jobs today than at the start of the Great Recession in December 2007, but 1.653 million more Food Services & Drinking Places (i.e., wait staff and bartender) jobs. In fact, Manufacturing has gained only 2,000 jobs since 2014 while FS&D jobs have expanded by 465,200. 

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* The employment-population ratio edged down to 59.6 %; 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 fell by 191,000 to over 94.5 million. 

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* As a result of new and/or re-entrants to the labor force, the labor force participation rate (LFPR) also ticked up to 62.7%, comparable to levels seen in 1978. Average hourly earnings of all private employees increased by $0.02 (to $25.61), resulting in a 2.6% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.04, to $21.51 (+2.4% 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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* Full-time jobs jumped by 451,000 while those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- fell by 587,000. There are now 1.7 million more full-time jobs than the pre-recession high; for perspective, however, the non-institutional, working-age civilian population has risen by 20.2 million). PTER employment, by contrast, stopped declining in October 2015 and in June once again fell below 6 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 June decreased by $5.3 billion, to $180.6 billion -- the highest amount on record for that calendar month, although barely higher than June 2015. 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 June was 4.2% 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.

June 2016 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil extended gains for a third month in June when rising by $2.06 (+4.4%), to $48.77 per barrel -- the highest price since July 2015. The price increase coincided with a slightly stronger U.S. dollar, the lagged impacts of a 352,000 barrel-per-day (BPD) decrease in the amount of oil supplied/demanded in April (to 19.3 million BPD), and a continued modest decline in accumulated oil stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI reversed in June -- i.e., WTI’s price was $0.42 per barrel higher than Brent. 

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Commentary from ASPO-USA’s Peak Oil Review editor Tom Whipple:

“In the wake of the Brexit vote, analysts are all over the board as to where prices will be by the end of the year. Some are talking about $85 a barrel while others are looking for a retreat to less than $30 again. Nearly all agree that the markets will "rebalance" with supply and demand coming together as demand increases and the supply continues to drop as the impact of the much lower investment levels during the last two years reduces supply.  For the next six months, however, there is uncertainty especially concerning the spate of unplanned outages that have taken place in the past few months. Oil worker strikes such as in France and Norway likely will be settled quickly, and Alberta tar sands production will soon be back to normal by the end of the summer. The outages in Libya, Nigeria, and Venezuela, however, are more uncertain and seem to be getting worse rather than better in the immediate future.” 

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News items from OilPrice Intelligence Report editor Evan Kelly:

Canada’s oil production to grow 42 percent by 2025. IHS Energy projects a 42 percent increase in Canadian oil sands production, bringing output up to 3.4 mb/d over the next decade. That would mean Canada’s oil sands, torn apart by fires in recent weeks, would add 1 mb/d in the coming years. However, most of those gains will come from projects that are already under construction and received final investment decisions before the collapse of oil prices. After 2018, when the backlog of these projects are completed, there will likely be no more greenfield projects in the pipeline. Any further gains will have to come from brownfield sites, IHS says.

New hiring in the Bakken. Oilfield service companies in the Bakken are beginning to hire again for completion services, a sign that oil producers could start to work through their backlog of drilled but uncompleted wells (DUCs). “We are starting to see a definite increase,” Cindy Sanford, a manager at the Williston office of Job Service North Dakota, told the Forum News Service. She said that companies are looking for workers for fracking crews and well completion. “It’s not as crazy as it was before, but we’re starting to see some activity.” If drillers are moving to complete old wells, that could bring new production online, a month after the Bakken reported a huge decline in output. It also suggests that companies can turn a profit at $50 per barrel, a threshold that could trigger well completions in other parts of the country.

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 2016 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that U.S. manufacturing’s pace of expansion quickened during June. The PMI registered 53.2%, an increase of 1.9 percentage point from the May reading of 51.3%. (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. With the exception of input prices, all sub-index values were higher in June than in May. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- also accelerated in June. The NMI registered 56.6%, a jump of 3.6 percentage points above the May reading. The only sub-indexes with lower June values were input prices and order backlogs. 

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Wood Products was unchanged while Paper Products expanded. All three service sectors we track reported expansion. “Business is strong in the private sector; bidding a lot of commercial buildings,” observed one Construction respondent.

Relevant commodities --
* Priced higher: Construction labor, all grades of diesel, gasoline, oil, corrugate and paper.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Construction labor.

ISM’s and Markit’s June surveys were in general agreement, with both of Markit’s surveys showing at least modest increases in activity.

Commenting on the data, Markit’s chief economist Chris Williamson said:

Manufacturing -- “Although the manufacturing PMI ticked higher in June, the latest reading rounds off the worst quarter for goods producers for six years.

“The lackluster performance of the manufacturing economy adds to signs from the flash services PMI surveys that the underlying pace of economic growth in the second quarter remained subdued after a disappointing start to the year.

“The upturn in the employment index suggests that firms may be expecting the recent bout of weak demand to be temporary, though hiring clearly remains subdued amid fragile business confidence.

“Producers are struggling in the face of the strong dollar, the energy sector decline and presidential election jitters. With companies craving certainty, heightened tensions between the UK and the European Union are likely to unsettle the global business environment further in coming months, and therefore risk dampening growth in the United States and export markets. The data flow in the next two months will therefore be critical to policymakers in gauging the appropriate outlook for interest rates.”

Services -- “Rebound, what rebound? The final PMI numbers confirm the earlier flash PMI signal that the pace of U.S. economic growth remained subdued in the second quarter. While volatile official GDP numbers are widely expected to show a rebound from a lackluster start to the year, the PMIs suggest the underlying malaise has not gone away. The surveys point to an annualized pace of economic growth of just 1% in the second quarter.

“Service sector confidence has slumped to the lowest since 2009 alongside ongoing woes in the energy and manufacturing sectors, as well as worries about the outlook amid presidential election uncertainty.

“Hiring has also slowed, though remains surprisingly upbeat. The surveys signal non-farm payroll growth of 150,000 in June, suggesting many companies expect the slowdown to be short-lived.”

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 2016 Currency Exchange Rates

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In June the monthly average value of the U.S. dollar lost ground against two of the three major currencies we track. The greenback depreciated by 0.4% against Canada’s “loonie” and 3.2% against the yen, but gained 0.7% against the euro. On a trade-weighted index basis, the dollar strengthened by 0.3% 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.

May 2016 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments increased $0.2 billion or virtually unchanged to $456.5 billion in May. Shipments of durable goods decreased $0.6 billion or 0.2% to $231.6 billion, led by transportation equipment. Meanwhile, nondurable goods shipments increased $0.8 billion or 0.3% to $224.9 billion, led by petroleum and coal products. Shipments of both Wood (+0.1%) and Paper (+0.3%) rose. 

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Inventories decreased $0.8 billion or 0.1% to $619.7 billion. The inventories-to-shipments ratio was 1.36, unchanged from April. Inventories of durable goods decreased $1.1 billion or 0.3% to $382.6 billion, led by machinery. Nondurable goods inventories increased $0.3 billion or 0.1% to $237.1 billion, led by chemical products. Inventories of Wood expanded +0.5% while Paper contracted -0.3%. 

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New orders decreased $4.6 billion or 1.0% to $455.2 billion. Excluding transportation, new orders increased 0.1% (but -2.6% YoY -- the 19^th consecutive month of year-over-year contractions). Durable goods orders decreased $5.4 billion or 2.3% to $230.4 billion, led by transportation equipment. New orders for nondurable goods increased $0.8 billion or 0.3% to $224.9 billion. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- dropped by 0.4% (-2.9% YoY). Business investment spending has contracted on a YoY basis during all but two months since January 2015.

Prior to July 2014, as can be seen in the graph above, real (inflation-adjusted) new orders had been essentially flat since early 2012, recouping on average 70% of the losses incurred since the beginning of the Great Recession. With July 2014’s transportation-led spike gradually receding in the rearview mirror, the recovery in new orders is back to just 47% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders increased $1.7 billion or 0.2% to $1,138.9 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.90, down from 6.94 in April. 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 2014 were back to 97% of their December 2008 peak. Real unfilled orders jumped to 122% of the prior peak in July 2014, thanks to the largest-ever batch of aircraft orders. Since then, however, real unfilled orders have moved mostly sideways and are penetrating further below the January 2010-to-June 2014 trend 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.

May 2016 Construction Spending

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Construction spending during May 2016 was estimated at a seasonally adjusted annual rate (SAAR) of $1,143.3 billion, 0.8 percent (±1.3%)* below the revised April estimate of $1,152.4 billion; expectations were for a 0.6% increase. The May figure was 2.8 percent (±1.6%) above the May 2015 SAAR of $1,112.2 billion. The not-seasonally adjusted YoY change (shown in the above table) was +3.5%.

During the first five months of this year, construction spending amounted to $438.5 billion, 8.2 percent (±1.3%) above the $405.4 billion for the same period in 2015.

PRIVATE CONSTRUCTION

Spending on private construction was at a SAAR of $859.3 billion, 0.3 percent (±1.0%)* below the revised April estimate of $861.9 billion.
- Residential construction: $451.9 billion, nearly the same as (±1.3%)* the revised April estimate of $451.7 billion.
- Nonresidential construction: $407.4 billion, -0.7 percent (±1.0%)*.

PUBLIC CONSTRUCTION

Public construction spending was $284.0 billion, 2.3 percent (±2.6%)* below the revised April estimate of $290.5 billion.
- Educational construction: $66.8 billion, -5.4 percent (±3.5%).
- Highway construction: $88.9 billion, 0.2 percent (±8.1%)*.

* 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 May’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.