February 2019 Consumer and Producer Price Indices (incl. Forest Products)

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Consumer Price Index

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2% in February (+0.2% expected). The indexes for shelter and food increased, and the gasoline index rose after recent declines to result in the seasonally adjusted all items increase. The food index rose 0.4%, its largest monthly increase since May 2014, as both the food at home and food away from home indexes increased. The gasoline index rose 1.5% in February, following three consecutive monthly declines, resulting in the energy index rising 0.4% despite declines in the electricity and natural gas indexes.  

The index for all items less food and energy increased 0.1% in February after rising 0.2% in January. Along with the shelter index, the indexes for personal care, apparel, and education all increased. The indexes for recreation, medical care, used cars and trucks, and new vehicles all declined in February.

The all items index increased 1.5% for the 12 months ending February, a smaller increase than the 1.6% rise for the 12 months ending January. The index for all items less food and energy rose 2.1% over the last 12 months, a slightly smaller figure than the 2.2% increase for the period ending January. The food index rose 2.0% over the past year, its largest 12-month increase since the period ending April 2015. In contrast, the energy index declined 5.0% over the last 12 months.

Producer Price Index

The Producer Price Index for final demand edged up 0.1% in February (+0.2% expected). Final demand prices fell 0.1% in both January and December. On an unadjusted basis, the final demand index moved up 1.9% for the 12 months ended in February.

In February, the increase in the final demand index can be traced to a 0.4% rise in prices for 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 following a 0.2% advance in January. For the 12 months ended in February, prices for final demand less foods, energy, and trade services climbed 2.3%.

Final Demand

Final demand goods: The index for final demand goods increased 0.4% in February following three consecutive declines. Over 80% of the advance can be traced to prices for final demand energy, which rose 1.8%. The index for final demand goods less foods and energy edged up 0.1%. Conversely, prices for final demand foods fell 0.3%.

Product detail: Forty percent of the increase in the index for final demand goods is attributable to a 3.3% rise in gasoline prices. The indexes for diesel fuel, jet fuel, integrated microcircuits, residual fuels, and beef and veal also moved higher. In contrast, prices for fresh and dry vegetables declined 12.8%. The indexes for iron and steel scrap and for residential natural gas also decreased.

Final demand services: Prices for final demand services were unchanged in February following a 0.3% rise in January. In February, a 0.3% increase in the index for final demand services less trade, transportation, and warehousing offset a decline of 0.4% in margins for final demand trade services and a 1.3% decrease in the index for final demand transportation and warehousing services. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail: In February, prices for traveler accommodation services rose 5.3%. The indexes for machinery, equipment, parts, and supplies wholesaling; food retailing; portfolio management; and legal services also moved higher. Conversely, margins for fuels and lubricants retailing fell 10.5%. The indexes for apparel, jewelry, footwear, and accessories retailing; airline passenger services; health, beauty, and optical goods retailing; and nonresidential real estate services also declined. 

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The not-seasonally adjusted price indexes we track either were unchanged or advanced on a MoM basis, and were mixed YoY. 

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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 2019 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil gained for a second month when rising by $3.58 (+7.0%), to $54.95 per barrel in February. The increase occurred within the context of a stronger U.S. dollar, the lagged impacts of an 69,000 barrel-per-day (BPD) rise in the amount of oil supplied/demanded during December (to 20.5 million BPD), and stability in accumulated oil stocks (monthly average: 450 million barrels). 

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From the 4 March 2019 issue of Peak Oil Review:

“The struggle between lower crude output and the prospects for a global economic setback that could reduce the demand for oil continued last week.  Prices rose on bullish news early in the week and then fell to close only slightly higher for the week at $55.80 in New York and $65.07 in London.  Most analysts are predicting that oil prices will continue to rise as the case for lower production later this year seems stronger than the case for lower demand.

“For some time now analysts have been noting that for the last few years, global oil production outside of the US has been generally stagnant. While oil prices have varied during this period, they have not spiked due to the spectacular increase in US shale oil production.  In recent years the demand for oil has been increasing at about 1.5 million b/d each year which has been satisfied by US production.  Unless there is a global economic recession or a substantial increase in oil prices, demand for oil seems destined to continue increasing for the foreseeable future despite growing concerns about carbon emissions.

“Currently, there is no evidence that a spectacular jump in global oil production is in the offing and new oil discoveries remain well below the world’s annual oil consumption of some 36 billion barrels per year.

“Leaving aside the concerns about carbon emissions, the heart of the global oil availability issue in the immediate future seems to center on whether US shale oil production can keep growing. The government and the oil industry say that it can; qualified outside observers say it is highly unlikely that it will.  We are likely to be entering a period of considerable uncertainty and volatility of oil prices.” 

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Selected highlights from the 3 March 2019 issue of OilPrice.com’s Oil & Energy Insider include:

Wall Street unsatisfied with oil majors. Investors are souring on the oil majors, according to the Financial Times. The majors face both short- and long-term headwinds, including low oil prices stemming from abundant U.S. shale supply combined with the long-term fears of peak oil demand. “There’s just this hate for this commodity right now,” Bernstein analyst Bob Bracket told the FT. That could affect how the industry proceeds going forward. “The structural challenges the industry faces aren’t going to go away, so energy companies of all sizes need to clearly articulate how they will allocate investors’ capital and prioritize shareholder returns in a manner that rebuilds confidence,” Nick Stansbury of Legal & General Investment Management told the FT.

Oil prices up 25 percent so far this year. The oil market has seen its strongest start to a year in recorded history, with prices gaining more than 25% in two months. The increases, analysts say, are due to the Fed backing off interest rate hikes, combined with the OPEC+ cuts and turmoil in Venezuela and Iran.

Permian pipelines hit regulatory delay. Two Permian pipelines seen as critical to relieving the midstream bottleneck have seen some regulatory delays from the U.S. Federal Energy Regulatory Commission (FERC). The Cactus II pipeline (585,000 bpd of capacity) and the EPIC pipeline (550,000 bpd) are among two of at least 15 projects that are held up at FERC. Their operators still expect to put them into service on time later this year.

Fracking activity contracted in December. According to Rystad Energy, the average number of daily fracking jobs in the U.S. fell to 36 in December, a decline of 25 percent compared to the period between May and August. “There is no doubt that significant part of this decline was driven by seasonal weather and capital constraint factors. Yet we keep hearing about somewhat disappointing pace of post-winter recovery,” Rystad said in its report.

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 2019 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm payroll employment rising by a “meager” 20,000 jobs in February -- a mere fraction of the +178,000 expected. However, combined December 2018 and January 2019 employment gains were revised up by 12,000 (December: +5,000; January: +7,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) retreated to 3.8% as employment gains (+255,000) occurred in the midst of a shrinking civilian labor force (-45,000). 

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Observations from the employment reports include:

* Just as we were skeptical of January’s outsized jobs gains, which were confounded by a variety of statistical modifications (e.g., annual benchmarking, and updated seasonal adjustments and population estimates) and transitory events (i.e., the partial federal government shutdown), so too are we skeptical of this estimate. We have often been critical of the BLS’s seeming to “plump” the headline numbers with favorable adjustment factors, but February’s estimate seems to exhibit the opposite issue. Had average (since 2009) February CES (business birth/death model) and seasonal adjustments been used, job gains might have amounted to a more-respectable +143,000.

* With those caveats in mind, Manufacturing gained 4,000 jobs in February. That result is reasonably consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded -- albeit at a slower pace in February. Wood Products employment grew by 2,200 jobs (ISM declined); Paper and Paper Products: -100 (ISM was unchanged); Construction: -31,000 (ISM increased). 

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* The number of employment-age persons not in the labor force (NILF) expanded by 198,000 -- to 95.2 million. This metric has been trending lower since August as more potential workers conclude their prospects are improving and (re)enter the workforce. Meanwhile, the employment-population ratio (EPR) was stable at 60.7%; roughly, then, for every five people being added to the population, three are employed. 

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* Similarly, the labor force participation rate was unchanged at 63.2% -- comparable to levels seen in the late-1970s. Average hourly earnings of all private employees increased by $0.11, to $27.65, resulting in a 3.4% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.08, to $23.18 (+3.5% YoY). Although the average workweek for all employees on private nonfarm payrolls shrank by 0.1 hour (to 34.4 hours), average weekly earnings increased by $1.02, to $951.50 (+2.9% YoY). With the consumer price index running at an annual rate of 1.6% in January, workers are -- by official metrics, at least -- gaining purchasing power. 

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* Full-time jobs advanced by 322,000. Those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- slumped by 837,000; as was true last month, “this decline reflects, in part, the return of federal workers who were furloughed in January due to the partial government shutdown." Those working part time for non-economic reasons jumped by 204,000 while multiple-job holders retreated by 209,000. 

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For a “sanity check” of the employment numbers, we consult employment withholding taxes published by the U.S. Treasury. Although “noisy” and highly seasonal, the data show the amount withheld in February dropped by $1.6 billion, to $209.8 billion (-0.8% MoM, but +4.5% YoY). 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 February was 1.6% below the year-earlier average -- well off the peak of +13.8% set back in September 2013. Although a full year has now passed with the lower withholding rates from the Tax Cuts and Jobs Act of 2017, the return of workers affected by the partial federal government shutdown likely distorted amounts withheld in February.

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.

January 2019 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in January at a seasonally adjusted annual rate (SAAR) of 1,230,000 units (1.170 million expected). This is 18.6% (±26.6%)* above the revised December estimate of 1,037,000 (originally 1.078 million units), but 7.8% (±12.7%)* below the January 2018 SAAR of 1,334,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -9.8%.

Single-family housing starts were at a SAAR of 926,000; this is 25.1% (±29.0%)* above the revised December figure of 740,000 (+1.8% YoY). Multi-family starts: 304,000 units (+2.4% MoM; -31.9% YoY).

* 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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Completions in January were at a SAAR of 1,244,000. This is 27.6% (±13.5%) above the revised December estimate of 975,000 (originally 1.097 million units) and 2.1% (±12.2%)* above the January 2018 SAAR of 1,218,000 units; the NSA comparison: +3.3% YoY.

Single-family housing completions were at a SAAR of 914,000; this is 30.2% (±14.4%) above the revised December rate of 702,000 (+7.2% YoY). Multi-family completions: 330,000 units (+20.9% MoM; -6.2% YoY). 

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Total permits were at a SAAR of 1,345,000 units (1.280 million expected). This is 1.4% (±0.8%) above the revised December rate of 1,326,000 (originally 1.326 million units), but 1.5% (±1.0%) below the January 2018 rate of 1,366,000 units; the NSA comparison: +0.2% YoY.

Single-family permits were at a SAAR of 812,000; this is 2.1% (±1.0%) below the revised December figure of 829,000 (-7.1% YoY). Multi-family: 533,000 (+7.2% MoM; +13.2% YoY). 

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Builder confidence in the market for newly-built single-family homes rose four points to 62 in February, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

“Ongoing reduction in mortgage rates in recent weeks coupled with continued strength in the job market are helping to fuel builder sentiment,” said NAHB Chairman Randy Noel. “In the aftermath of the fall slowdown, many builders are reporting positive expectations for the spring selling season.”

February marked the second consecutive month in which all the HMI indices posted gains. The index measuring current sales conditions rose three points to 67, the component gauging expectations in the next six months increased five points to 68 and the metric charting buyer traffic moved up four points to 48.

“Builder confidence levels moved up in tandem with growing consumer confidence and falling interest rates,” said NAHB Chief Economist Robert Dietz. “The five-point jump on the six-month sales expectation for the HMI is due to mortgage interest rates dropping from about 5% in November to 4.4% this week. However, affordability remains a critical issue. Rising costs stemming from excessive regulations, a dearth of buildable lots, a persistent labor shortage and tariffs on lumber and other key building materials continue to make it increasingly difficult to produce housing at affordable price points.”

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 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in February the expansion in U.S. manufacturing decelerated. The PMI registered 54.2%, down 2.4 percentage points (PP) from the January reading. (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 drop-offs in new orders (-2.7PP), production (-5.7PP) and employment (-3.2PP) were particularly noteworthy. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- accelerated (+3.0PP) to 59.7%. Jumps in new orders (+7.5PP), order backlogs (+3.0PP) and export orders (+4.5PP) helped lift the NMI. 

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All of the industries we track expanded. Respondent comments included:

·     Paper Products -- "Strong domestics market. Slow export markets."

·     Construction -- "Still strong in all areas, due mostly to commercial construction activity."

Relevant commodities:

·     Priced higher – Paper and paper-based products; oil; and labor.

·     Priced lower -- Diesel.

·     Prices mixed -- None.

·     In short supply -- Construction subcontractors; and labor (general, construction and temporary).

IHS Markit’s February survey headlines generally paralleled those of ISM.

Manufacturing -- PMI dips to 18-month low in February

Key findings:

·     Operating conditions improve at slowest pace since August 2017

·     Rates of output and new order growth soften

·     Inflationary pressures ease

Services -- Business activity growth accelerates to seven-month high in February

Key findings:

·     Output increases at sharp rate

·     New business expansion also picks up pace

·     Faster rises in employment and backlogs highlight strain on capacity

Commentary by Chris Williamson, Markit’s chief business economist:

Manufacturing -- "The PMI indicates the U.S. manufacturing sector is growing at its weakest rate for one and a half years, with firms reporting a marked easing in production growth in February, linked to a similar slowdown in order book growth.

“The survey exhibits a strong advance correlation with comparable official data, and suggests that factory production and orders growth rates are close to stalling midway through 1Q, albeit in part representing some payback after a strong January. Export markets remained the principal drag on order books.

“Having seen demand grow faster than production through much of 2018, order book and output trends have come back into line in recent months, hinting at an alleviation of capacity constraints as demand cools. Backlogs of work barely rose as a result, and price pressures have likewise moderated, though tariffs were again reported to have pushed costs higher. Hiring has consequently also slowed.

“Worries regarding the impact of tariffs and trade wars, alongside wider political uncertainty, undermined business confidence, with expectations of future growth running at one of the most subdued levels seen for over two years and suggesting downside risks prevail for coming months."

Services -- “The U.S. PMI surveys tell a tale of two economies in February, with any slowdown story confined to the goods-producing sector. While manufacturing struggled, with the surveys consistent with a near stalling of factory output and order books, the service sector remained encouragingly resilient, enjoying its strongest burst of activity for seven months.

"With the size of the vast service sector overshadowing the manufacturing sector, the two surveys suggest the overall pace of economic growth accelerated in February. Having correctly indicated that the economy grew at a slower but still solid pace in 4Q (our model from the survey indicated 2.5% growth against an initial official estimate of 2.6%), the data for the first two months of 2019 point to a similar 2.6% annualized rate of expansion. In addition to signaling stronger economic growth, the surveys suggest hiring also remained encouragingly solid in February with a 250,000 non-farm payroll rise indicated, albeit predominantly driven by the service sector.

"The worry is that the manufacturing slowdown will spill over to the service sector, damping economic growth in coming months. Companies themselves certainly appear to have become more circumspect, with business optimism cooling in February amid worries over the impact of tariffs, trade wars, higher prices and rising interest rates.”

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 2018 Currency Exchange Rates

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In February the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-0.7%) but appreciated against the euro (+0.6%) and yen (+1.4%). On a trade-weighted index basis, the USD gained fractionally (+0.1%) 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.

December 2018 Construction Spending

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Construction spending during December 2018 was estimated at a seasonally adjusted annual rate (SAAR) of $1,292.7 billion, 0.6% (±1.0%)* below the revised November estimate of $1,300.6 billion (originally $1,299.9 billion); consensus expectations were for +0.6%. The December figure is 1.6% (±1.2%) above the December 2017 SAAR of $1,272.6 billion; the not-seasonally adjusted YoY change (shown in the table below) was +0.8%.

The value of construction in 2018 was $1,297.7 billion, 4.1% (±1.0%) above the $1,246.0 billion spent in 2017.

* 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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Private Construction

Spending on private construction in December was at a SAAR of $991.2 billion, 0.6% (±0.7%)* below the revised November estimate of $997.1 billion.
- Residential: $536.7 billion, 1.4% (±1.3%) below the revised November estimate of $544.2 billion.
- Nonresidential: $454.5 billion, 0.4% (±0.7%)* above the revised November estimate of $452.9 billion.

The value of private construction in 2018 was $995.6 billion, 3.4% (±1.2%) above the $962.8 billion spent in 2017.
- Residential: $542.3 billion, 3.3% (±2.1%) above the 2017 figure of $524.9 billion.
- Nonresidential: $453.4 billion, 3.5% (±1.2%) above the $437.8 billion in 2017.

Public Construction

Public construction spending in December was $301.5 billion, 0.6% (±1.6%)* below the revised November estimate of $303.5 billion.
- Educational: $77.5 billion, nearly the same as (±1.5%)* the revised November estimate of $77.5 billion.
- Highway: $89.1 billion, 0.9% (±4.3%)* below the revised November estimate of $89.9 billion.

The value of public construction in 2018 was $302.0 billion, 6.6% (±1.8%) above the $283.2 billion spent in 2017.
- Educational: $73.6 billion, 3.8% (±3.5%) above the 2017 figure of $71.0 billion.
- Highway: $92.6 billion, 4.2% (±3.9%) above the $88.9 billion in 2017.

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.