June 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 0.1% in June (+0.0% expected), the same increase as in May. Increases in the indexes for shelter, apparel, and used cars and trucks more than offset declines in energy indexes to result in the seasonally adjusted all-items monthly increase in June. The energy index fell 2.3% as all of the major energy component indexes declined. The food index was unchanged as the index for food away from home rose but the index for food at home declined.

The index for all items less food and energy rose 0.3 in June, its largest monthly increase since January 2018. Along with the indexes for shelter, used cars and trucks, and apparel, the indexes for household furnishings and operations, medical care, and motor vehicle insurance were among the indexes that increased in June. The indexes for recreation, airline fares, and personal care all declined in June.

The all-items index increased 1.6% for the 12 months ending June, a smaller increase than the 1.8% rise for the period ending May. The index for all items less food and energy rose 2.1% over the last 12 months, and the food index increased 1.9%. The energy index, in contrast, declined 3.4% over the last 12 months.   

Producer Price Index

The Producer Price Index for final demand (PPI-FD) advanced 0.1% in June (+0.1% expected). Final demand prices moved up 0.1% in May and 0.2% in April. The rise is attributable to a 0.4% increase in the index for final demand services. Conversely, prices for final demand goods fell 0.4%. The index for final demand less foods, energy, and trade services was unchanged in June following advances of 0.4% in both April and May.

The final demand index rose 1.7% for the 12 months ended in June, the lowest rate of increase since advancing 1.7% in January 2017. Prices for final demand less foods, energy, and trade services climbed 2.1% YoY.

Final Demand

Final demand services: The index for final demand services rose 0.4% in June, the largest increase since climbing 0.8% in October 2018. Most of the June advance is attributable to margins for final demand trade services, which moved up 1.3%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand transportation and warehousing services rose 0.3%, while the index for final demand services less trade, transportation, and warehousing was unchanged.

Product detail: Over a quarter of the June increase in prices for final demand services can be traced to margins for fuels and lubricants retailing, which jumped 12.2%. The indexes for health, beauty, and optical goods retailing; apparel, footwear, and accessories retailing; machinery, equipment, parts, and supplies wholesaling; loan services (partial); and truck transportation of freight also moved higher. In contrast, prices for traveler accommodation services fell 4.0%. The indexes for jewelry retailing and airline passenger services also declined.

Final demand goods: Prices for final demand goods moved down 0.4% in June, the largest decrease since falling 0.6% in January. The June decline is attributable to a 3.1% drop in the index for final demand energy. Conversely, prices for final demand foods climbed 0.6%. The index for final demand goods less foods and energy was unchanged.

Product detail: Nearly 60% of the June decrease in the index for final demand goods can be traced to a 5.0% decline in prices for gasoline. The indexes for diesel fuel, meats, liquefied petroleum gas, iron and steel scrap, and residual fuels also moved lower. In contrast, corn prices rose 19.9%. The indexes for ethanol and residential electric power also increased. 

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The not-seasonally adjusted price indexes we track were all down on both MoM and YoY bases. 

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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 2019 International Trade (Softwood Lumber)

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Softwood lumber exports decreased (3 MMBF or -2.2%) in May; imports also fell (44 MMBF or -3.0%). Exports were 46 MMBF (-28.2%) below year-earlier levels; imports were unchanged (0.0%). As a result, the year-over-year (YoY) net export deficit was 46 MMBF (+3.7%) larger. Also, the average net export deficit for the 12 months ending May 2019 was 3.8% larger than the average of the same months a year earlier (the “YoY MA(12) % Chng” series shown in the graph above). 

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North America (44.2%; of which Canada: 26.3%; Mexico: 17.9%) and Asia (29.4%; especially China: 7.4%; and Japan: 7.6%) were the primary destinations for U.S. softwood lumber exports; the Caribbean ranked third with a 19.7% share. Year-to-date (YTD) exports to China were -64.8% relative to the same months in 2018. Meanwhile, Canada was the source of most (89.9%) of softwood lumber imports into the United States. Imports from Canada were 0.4% lower YTD than the same months in 2018. Overall, YTD exports were down 26.5% compared to 2018; imports: +0.2%. 

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U.S. softwood lumber export activity through the West Coast customs region represented the largest proportion (36.9% of the U.S. total), followed by the Gulf (26.7%) and Eastern (25.8%) regions. Seattle (23.9% of the U.S. total) maintained the lead over Mobile (17.7%) as the single most-active district. At the same time, Great Lakes customs region handled 62.4% of softwood lumber imports -- most notably the Duluth, MN district (24.0%) -- coming into the United States. 

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Southern yellow pine comprised 24.2% of all softwood lumber exports, Douglas-fir (15.9%) and treated lumber (12.1%). Southern pine exports were down 46.6% YTD relative to 2018, while treated: -28.9%; Doug-fir: -5.5%.

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 2019 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm payroll employment rising by 224,000 jobs in June (+165,000 expected). Also, combined April and May employment gains were revised down by 11,000 (April: -8,000; May: -3,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) ticked up to 3.7% as expansion of the labor force (+335,000) exceeded growth in the number of employed persons (+247,000). 

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Observations from the employment reports include:

* For a change, the establishment (+224,000 jobs) and household survey results (+247,000 employed) were in general agreement. Also, the BLS’s headline estimate may have been somewhat conservative; had average (since 2009) June CES (business birth/death model) and seasonal adjustments been used, job gains might have amounted to a far more robust +419,000.

* Manufacturing gained 17,000 jobs in June. That result is reasonably consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded at a faster pace in June. Wood Products employment rose by 800 jobs (ISM decreased); Paper and Paper Products: -900 (ISM increased); Construction: +21,000 (ISM increased). 

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* The number of employment-age persons not in the labor force (NILF) fell (-158,000) to 96.1 million. This metric seems to have leveled off since the latter half of 2018. Meanwhile, the employment-population ratio (EPR) was unchanged at 60.6%; roughly, then, for every five people being added to the population, three are employed. 

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* With absolute growth in the labor force nearly double that of the civilian population, the labor force participation rate edged up to 62.9%. Average hourly earnings of all private employees increased by $0.06, to $27.90, resulting in a 3.1% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.04, to $23.43 (+3.4% YoY). Because the average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours, average weekly earnings increased by $2.06, to $959.76 (+4.9% YoY). With the consumer price index running at an annual rate of 1.8% in May, workers appear to have gained -- by official metrics, at least -- purchasing power in June. 

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* Full-time jobs jumped by 453,000. Those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- slipped by 8,000. Those working part time for non-economic reasons rose by 158,000 while multiple-job holders spiked by 301,000. 

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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 June shrank by $9.6 billion, to $193.8 billion (-4.7% MoM, but +4.3% YoY). To reduce some of the monthly 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 7.5% 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 2019 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil dipped further in June, falling by $6.17 (-10.1%), to $54.66 per barrel. The decrease occurred within the context of a marginally weaker U.S. dollar, the lagged impacts of a 92,000 barrel-per-day (BPD) drop in the amount of oil supplied/demanded during April (to 20.1 million BPD), and little net change in accumulated oil stocks (June average: 476 million barrels). 

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From the 1 July 2019 issue of Peak Oil Review:

After a week of rampant speculation about what could happen at the G20 summit that would affect oil prices, the announcement on [29 June] that the US and China have agreed to keep the current tariffs in place for now and would resume trade negotiations left the situation about where it has been for months.  President Putin announced that Russia and its friends would join Saudi Arabia in extending the OPEC production cut for another six to nine months eliminating the drama from the formal OPEC+ meeting that will take place early this week.  Oil prices were up a bit for the week settling at $64.74 in London and $58.47 in New York.

Although an end to the US-China trade dispute is nowhere in sight, the G20 announcements suggest that the situation is under control at the minute and that tariffs which could lead to an economic recession are on hold.  Likewise, the extension of the OPEC+ agreement until next year should prevent another 1 million b/d of crude being dumped on the market forcing prices down.  On Sunday, an editorial in the official China Daily warned while there was now a better likelihood of reaching an agreement, there's no guarantee there would be one.  "Things are still very much up in the air."

US Shale Oil Production: US crude oil output in April rose to a new monthly record of 12.16 million b/d, according to the EIA's Petroleum Supply Monthly which was released on Friday. 

There are numerous reports that most shale oil drillers, except perhaps for the major oil companies, are cutting back on opening new wells to mollify their financial backers.  It seems unlikely that the shale oil industry will be able to increase production by 83 thousand b/d in June and 70 thousand in July as projected by the EIA.

A recent survey by the Dallas Federal Reserve reveals that oil industry executives are unusually pessimistic about the prospects for the future.  A combination of low oil prices, increasing costs, and the lack of investor willingness to fund losing firms suggest that the era of rapid increases in shale oil production may be coming to a close. 

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Selected highlights from the 28 June 2019 issue of OilPrice.com’s Oil & Energy Insider include:

U.S. to assemble naval watch in Persian Gulf. The U.S. is hoping to enlist other nations in an effort to keep an eye on the Persian Gulf, according to the Wall Street Journal. The U.S. would contribute ships and aircraft but operational control would be headed by another nation. The plan aims to present deterrence to Iran, securing oil shipment lanes through the Strait of Hormuz.

Philadelphia refinery set to close. Philadelphia Energy Solutions may permanently shut down its damaged refinery, decimated from a series of explosions last week. PES may try to sell the complex as well.

Drillers use gas for electricity. Permian drillers are beginning to use some of their surplus gas to power their operations, a practice that will save on costs, reduce flaring and emissions, according to Bloomberg.

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 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in June the rate of expansion in U.S. manufacturing decelerated to its slowest since September 2016. The PMI registered 51.7%, down 0.4 percentage point (PP) from the May 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 jump in production (+2.8PP) and drop in input prices (-5.3PP) were the most noteworthy sub-index changes. 

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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 decelerated further (-1.8PP) to 55.1%. Increases in the input prices (+3.5PP) and order backlog (+3.5PP) sub-indexes were noticeable. 

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Of the industries we track, only Wood Products and Ag & Forestry did not expand. Respondent comments included the following:

* Wood Products -- "Weather in various markets across the country has improved month over month, which has positively affected our daily output. If the trend continues, we will have to replenish [at] an increased month-over-month rate."

* Construction -- "New residential sales are off the typical pace by 10 to 15% year over year. Tariffs are working their way through the system, raising costs on finished materials. Wet weather has slowed construction and starts for the beginning of the season."

Relevant commodities:

* Priced higher -- Paper products.

* Priced lower -- Corrugated boxes; lumber products; and natural gas.

* Prices mixed -- Fuel (diesel and gasoline).

* In short supply -- Construction subcontractors; and labor (general, construction and professional).

IHS Markit’s June survey headlines were slightly more upbeat than those of ISM.

Manufacturing -- New orders return to growth in June

Key findings:

* Modest upturns in output and new business
* Employment expands at slowest rate since August 2016
* Inflationary pressures remain muted

Services -- Subdued growth of business activity continues in June

Key findings:

* Activity growth edges up from May's 39-month low
* New business growth quickens, but remains historically subdued
* Business confidence dips to three-year low

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

Manufacturing -- "U.S. manufacturers reported business conditions to have remained the toughest for nearly a decade in June. The past two months have seen the lowest readings since the height of the global financial crisis in 2009.

“The survey provides accurate advance indicators of comparable official data, and paints a worrying picture of marked declines in both output and jobs. The June survey sub-index readings are consistent with manufacturing output contracting at a quarterly rate of 0.7% and factory payrolls falling by 18,000.

“A major development in recent months has been the deteriorating performance of larger companies, where the last two months have seen the lowest PMI readings for a decade. After inventories rose sharply earlier in the year, large companies have moved to destocking in May and June amid a sharp slowing in new order inflows.

“Although business optimism about the future lifted slightly higher, it remained close to survey lows to indicate persistent low morale. Worries centered on signs of slowing demand both at home and internationally, weaker sales, and geopolitical uncertainty.

“Tariffs meanwhile continued to push up prices, but weak demand often limited the ability of firms to pass higher prices onto customers, suggesting overall inflationary pressures have weakened compared to earlier in the year."

Services -- “An improvement in service sector growth provides little cause for cheer, as the survey data still indicate a sharp slowing in the pace of economic growth in the second quarter. The PMI data for manufacturing and services collectively point to GDP expanding at an annualized rate of 1.5%.

"A major change since the first quarter has been a broadening-out of the slowdown beyond manufacturing, with the service sector growth now also reporting much weaker business activity and orders trends than earlier in the year.

"Hiring was hit as firms scaled back their expansion plans in the face of weaker than expected order inflows and gloomier prospects for the year ahead. Jobs growth was the weakest for over two years and future expectations across both services and manufacturing has slipped to the lowest seen since comparable data were first available in 2012.

"Trade wars and geopolitical concerns topped the list of companies’ worries about the year ahead, alongside forecasts of slower economic growth. Progress in U.S.-China trade talks could therefore be key to helping lift confidence in coming months."

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 2019 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments in May increased $0.4 billion or 0.1% to $504.3 billion. Durable goods shipments increased $0.9 billion or 0.3% to $254.2 billion led by machinery. Meanwhile, nondurable goods shipments decreased $0.5 billion or 0.2% to $250.1 billion, led by petroleum and coal products. Shipments of wood products were unchanged; paper: +0.6%. 

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Inventories increased $1.4 billion or 0.2% to $694.1 billion. The inventories-to-shipments ratio was 1.38, up from 1.37 in April. Inventories of durable goods increased $2.0 billion or 0.5% to $424.6 billion, led by transportation equipment. Nondurable goods inventories decreased $0.6 billion or 0.2% to $269.6 billion, led by petroleum and coal products. Inventories of wood products shrank by 0.2%; paper: +0.4%. 

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New orders decreased $3.6 billion or 0.7% to $493.6 billion. Excluding transportation, new orders inched up by 0.1% (+0.1% YoY). Durable goods orders decreased $3.1 billion or 1.3% to $243.5 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- rose by 0.5% (+1.0% YoY). New orders for nondurable goods decreased $0.5 billion or 0.2% to $250.1 billion.

As can be seen in the graph above, real (inflation-adjusted) new orders were essentially flat between early 2012 and mid-2014, recouping on average less than 70% of the losses incurred since the beginning of the Great Recession. The recovery in real new orders is back to just 49% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders decreased $6.3 billion or 0.5% to $1,171.1 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.64, down from 6.69 in April. Real unfilled orders, which had been a good litmus test for sector growth, show a less positive picture; in real terms, unfilled orders in June 2014 were back to 97% of their December 2008 peak. Real unfilled orders then jumped to 102% of the prior peak in July 2014, thanks to the largest-ever batch of aircraft orders. Since then, however, real unfilled orders have been going sideways-to-down.

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 2019 Currency Exchange Rates

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In June the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-1.3%), euro (-1.0%) and yen (-1.7%). On a trade-weighted index basis, the USD lost 0.4% 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.