March 2021 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) increased 1.4% in March (+2.8% expected). The gain in March followed a drop of 2.6% in February, which largely resulted from widespread outages related to severe winter weather in the south central region of the country. For 1Q2021 as a whole, total IP rose 2.5% at an annual rate. In March, manufacturing production and mining output increased 2.7% and 5.7%, respectively. The output of utilities dropped 11.4%, as the demand for heating fell because of a swing in temperatures from an unseasonably cold February to an unseasonably warm March.

At 105.6% of its 2012 average, total IP in March was 1.0% higher YoY, but 3.4% below its pre-pandemic (February 2020) level. 

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Industry Groups

Manufacturing output increased 2.7% in March, following a decline of 3.7% in February (NAICS manufacturing: +2.8% MoM; +3.4% YoY). For 1Q, factory output advanced 1.9% at an annual rate. In March, the indexes for durable and nondurable manufacturing increased 3.0% and 2.6%, respectively, while the index for other manufacturing (publishing and logging) was unchanged. All major categories of durables registered increases, most of which were between 2% and 3% (wood products: +2.4%). The output of motor vehicles and parts rose 2.8% in March after falling 10% in February. Shortages of semiconductors held down vehicle production in both months, while cold weather also curbed production in February.

Among nondurables, all major industry categories recorded gains except plastics and rubber products. The petroleum and coal products industry and the chemicals industry registered gains of 5.7% and 4.1%, respectively, after posting declines in February because of severe weather. The recovery in chemicals was incomplete in March, however, as some factories remained offline because of weather-related damage sustained during February. The indexes for all other nondurable goods industries increased between 0.9% and 3.0% in March (paper: +0.9%).

The drop of 11.4% for utilities in March was the largest in the history of this index (since 1972). Mining production increased 5.7%; oil and gas extraction accounted for most of the gain.

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Capacity utilization (CU) for the industrial sector increased 1.0 percentage point (PP) in March to 74.4%, a rate that is 5.2PP below its long-run (1972–2020) average.

Manufacturing CU increased 1.9PP in March to 73.8% (NAICS manufacturing: +2.8% MoM, to 74.4%; wood products: +2.3%; paper products: +0.8%). The operating rate for mining increased 4.5PP to 82.2%, while the operating rate for utilities decreased 9.0PP to 68.8%; both rates remained below their long-run averages.

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Capacity at the all-industries level was essentially unchanged MoM (-0.1 % YoY) at 141.9% of 2012 output. Manufacturing (NAICS basis) was also unchanged (-0.1% YoY) at 140.1%. Wood products: +0.1% (+0.3% YoY) to 170.1%; paper products: +0.1% (-0.5% YoY) at 109.0%.

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 2021 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 0.6% in March (+0.5% expected). The March one-month increase was the largest rise since a 0.6% increase in August 2012. The gasoline index continued to increase, rising 9.1% in March and accounting for nearly half of the seasonally adjusted increase in the all-items index. The natural gas index also rose, contributing to a 5.0% increase in the energy index over the month. The food index rose 0.1% in March, with the food at home index and the food away from home index both also rising 0.1%.

The index for all items less food and energy rose 0.3% in March. The shelter index increased in March as did the motor vehicle insurance index, the recreation index, and the household furnishings and operations index. Indexes which decreased over the month include apparel and education.

The all-items index rose 2.6% for the 12 months ending March, a much larger increase than the 1.7% reported for the period ending in February. The index for all items less food and energy rose 1.6% over the last 12 months, after increasing 1.3% over the 12 month period ending in February. The food index rose 3.5% over the last 12 months, while the energy index increased 13.2% over that period.

Producer Price Index

The Producer Price Index for final demand (PPI-FD) increased 1.0% in March (+0.5% expected). Final-demand prices rose 0.5% in February and 1.3% in January. In March, almost 60% of the increase in the index for final demand can be traced to a 1.7% advance in prices for final-demand goods. The index for final-demand services moved up 0.7%.

The final-demand index moved up 4.2% for the 12 months ended in March, the largest advance since rising 4.5% for the 12 months ended September 2011. Prices for final demand less foods, energy, and trade services rose 0.6% in March following an increase of 0.2% in February. For the 12 months ended in March, the index for final demand less foods, energy, and trade services moved up 3.1%, the largest advance since climbing 3.1% for the 12 months ended September 2018.

Final Demand

Final demand goods: Prices for final demand goods rose 1.7% in March, the largest increase since the index began in December 2009. Sixty percent of the broad-based advance in March is attributable to prices for final demand energy, which jumped 5.9%. The indexes for final demand goods less foods and energy and for final demand foods moved up 0.9% and 0.5%, respectively.

Product detail: Over one-fourth of the March increase in the index for final demand goods can be traced to an 8.8% jump in gasoline prices. The indexes for diesel fuel, residential electric power, industrial chemicals, steel mill products, and processed poultry also moved higher. In contrast, beef and veal prices fell 4.3%. The indexes for fresh and dry vegetables and for surgical and medical instruments also declined.

Final demand services: The index for final demand services rose 0.7% in March, the third consecutive advance. Nearly half of the broad-based increase in March is attributable to margins for final demand trade services, which moved up 1.0%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand services less trade, transportation, and warehousing and for final demand transportation and warehousing services advanced 0.4% and 1.5%, respectively.

Product detail: Over 40% of the March increase in prices for final demand services can be traced to margins for machinery and vehicle wholesaling, which jumped 6.7%. The indexes for apparel, jewelry, footwear, and accessories retailing; transportation of freight and mail; portfolio management; loan services (partial); and food retailing also moved higher. Conversely, margins for health, beauty, and optical goods retailing decreased 4.2%. The indexes for automobiles and automobile parts retailing and for traveler accommodation services also declined.

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The not-seasonally adjusted price indexes we track all rose 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.

March 2021 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose by $3.29 (+5.6%), to $62.33 per barrel in March. That increase occurred within the context of a stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 201,000 barrel-per-day (BPD) decrease in the amount of petroleum products demanded/supplied during January (to 18.6 million BPD, on par with volumes during/after the Great Recession), and a plateauing of accumulated oil stocks (March average: 501 million barrels).

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From the 5 April 2021 issue of The Energy Bulletin:

Shale Oil: Drilling expanded in the U.S. at its fastest pace since the start of the pandemic amid rising prices and an increasingly optimistic demand outlook. According to Baker Hughes, the total number of rigs drilling for oil across the country rose by 13 last week to 337, the largest jump since January 2020. Explorers are gaining confidence this year's 25% run-up in prices is here to stay after the U.S. benchmark crude, West Texas Intermediate, averaged more than $60 a barrel in March -- the first calendar month above that threshold since May 2019.

Optimism has also been buoyed by expectations that global crude supplies won't grow fast enough to satisfy demand as Covid-19 vaccinations proliferate and more economies reopen. Despite the recent jump, the oil rig count stands at about half of what it was when the pandemic started. Even the agreement by OPEC+ producers [to increase output] won't head off that tightening of supplies, according to Jeff Currie, Goldman Sachs Group Inc.'s head of commodities research.

Exxon Mobil and Chevron have scaled back activity dramatically in the Permian Basin, where just a year ago, the two companies were dominating in the high-desert oil field. The cautious approach of the two largest U.S. oil companies is a significant reason domestic oil production has been slow to rebound. Shale oil production now is about 11 million BPD, down sharply from the record of nearly 13 million hit in late 2019. Exxon and Chevron's share of drilling activity in the Permian Basin oil field in Texas and New Mexico dropped to less than 5% last month.

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Selected highlights from the 2 April 2021 issue of OilPrice.com’s Intelligence Report include:

Oil prices climbed on Thursday despite the surprise decision by OPEC+ to increase production, a decision that has been seen as promising for demand.

Oil prices rose despite OPEC+'s decision to increase production. In fact, rather than a bearish move, investors interpreted the decision as a vote of confidence in demand. "The [supply] deficit that we're already in is likely to accelerate," Jeff Currie, head of commodities research at Goldman Sachs Group Inc., said in a Bloomberg Television interview

OPEC+ agrees to gradually increase production. OPEC+ decided to add more than 2 million BPD over the next few months, betting on rising demand. The deal calls for a 350,000-BPD increase in May, followed by the same amount in June, and then by 450,000 BPD in July. At the same time, Saudi Arabia will ease its voluntary 1 million BPD cuts by July. OPEC+ surprised markets last time around by maintaining cuts, this time they surprised in the other direction after analysts expected no change.

Shale output to erode. U.S. shale production is set to decline through at least 2022, according to BNEF. By the end of the year, the industry could lose another 485,000 BPD. "It could be a while before U.S. oil companies feel comfortable growing production again," BNEF analyst Tai Liu said in a note.

Europe lockdown to hit demand. Oil demand will take a hit from new lockdowns in Europe and slow vaccinations. Rystad Energy says it could prevent 1 million BPD of demand from coming back this year.

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 2021 Currency Exchange Rates

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In March the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-1.0%), but appreciated against the euro (+1.6%) and Japanese yen (+3.2%). On the broad trade-weighted index basis (goods and services), the USD strengthened by 1.2% 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.

March 2020 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey showed a jump in the proportion of U.S. manufacturers reporting expansion in March. The PMI registered 64.7%, the highest reading since December 1983, and up 3.9 percentage points (PP) from February’s 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. All but three of the sub-indexes posted higher readings, with employment (+5.2PP), production (+4.9PP) and slow deliveries (+4.6PP) being the most notable; the input prices sub-index remained quite elevated.

“The manufacturing economy continued its recovery in March,” observed Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. “However, Survey Committee Members reported that their companies and suppliers continue to struggle to meet increasing rates of demand due to coronavirus (COVID-19) impacts limiting availability of parts and materials. Extended lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are affecting all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.” 

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The services sector -- which accounts for 80% of the economy and 90% of employment -- showed soared to an all-time high of service-sector respondents reporting expansion (+8.4PP, to 63.7%). The most noteworthy changes in the sub-indexes included new orders (+15.3PP) and business activity (+13.9PP); the input prices sub-index also rose 2.2PP.

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Of the industries we track, only Wood Products did not expand. Respondents included the following:

Construction. “Residential new home construction demand continues to outpace supply. Building material delays, discontinuations and shortages are beginning to develop. Shipping delays at the L.A. and Long Beach ports have contributed to longer lead times. Cold weather in Texas has hurt several component manufacturers for building materials. We have encountered the ‘perfect storm’ for building material shortages and price increases.”

Real Estate. “Business is picking up as mandated restrictions seem to be easing and spring is right around the corner.”

 

Findings of IHS Markit’s March survey results were consistent with their ISM counterparts.

Manufacturing. March PMI at second-highest on record amid marked new order growth and supply chain disruptions.

Key findings:

* Output growth softens amid raw material shortages
* Unprecedented deterioration in vendor performance
* Costs and charges rise at historically elevated rates

 

Services. Fastest rise in business activity since July 2014 as new order growth reaches six-year high.

Key findings:

* Upturns in output and new orders accelerate to strong rates
* Price gauges hit highest on record amid supply chain disruptions
* Business optimism improves since February

 

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

Manufacturing. “March saw manufacturers struggle to cope with surging inflows of new orders. Although output continued to rise at a solid pace, capacity is being severely strained by the combination of soaring demand and supply chain disruptions:  supply chain delays and backlogs of uncompleted orders are growing at rates unprecedented in the survey’s 14-year history, meaning inventories of finished goods are falling at a  steep rate.

“Pricing power has risen accordingly as demand outstrips supply: raw material prices are increasing at the sharpest rate for a decade and factory gate selling prices have risen to a degree not seen since at least 2007.

“The fastest rates of increase for both new orders and prices was reported among producers of consumer goods, as the arrival of stimulus checks in the post added fuel to a marked upswing in demand as the economy continued to pull out of the malaise caused by the pandemic.

“With business expectations becoming even more optimistic in March, further strong production growth looks likely in the second quarter, but the big question will be whether rising price pressures also become more entrenched.

 

Services. “U.S. business activity is growing at the fastest rate for six-and-a-half years, setting the economy up for a strong start to 2021. Although consumer-facing sectors, notably hospitality, travel, and tourism, continue to be adversely affected by COVID-19 restrictions, and will be for some time to come, other parts of the economy are springing back into life. Financial services and business services are faring well, accompanying a strong manufacturing recovery. Even some hard hit consumer-facing sectors are enjoying some loosening of restrictions or adapting to life with the virus.

“A wide variety of costs are rising, however, putting additional pressure on companies across the board. Many materials prices are sharply higher, transport costs are increasing and wage pressures are building as firms struggle to hire suitable staff, resulting in the largest monthly rise in service sector costs since comparable data were first available in 2009.

“Some of these higher costs will inevitably prove transitory as pandemic-related disruptions to supply start to ease, but it remains unclear how long these price pressures will persist for due to uncertainties over the duration of social distancing requirements and the strength of demand over the 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.

February 2021 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 February decreased $10.3 billion or 2.0% to $502.4 billion. Durable goods shipments decreased $9.4 billion or 3.6% to $250.8 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $0.9 billion or 0.4% to $251.6 billion, led by chemical products. Shipments of wood products dipped by 0.3%; paper: +0.2%.

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Inventories increased $5.5 billion or 0.8% to $702.4 billion. The inventories-to-shipments ratio was 1.40, up from 1.36 in January. Inventories of durable goods increased $2.8 billion or 0.7% to $427.3 billion, led by transportation equipment. Nondurable goods inventories increased $2.7 billion or 1.0% to $275.1 billion, led by petroleum and coal products. Inventories of wood products rose by 1.5%; paper: 0.0%.

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New orders decreased $4.1 billion or 0.8% to $505.7 billion. Excluding transportation, new orders slid by $2.5 billion or 0.6% (+2.2% YoY). Durable goods orders decreased $3.2 billion or 1.2% to $254.1 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- decreased by $0.7 billion or 0.9% (+8.5% YoY). New orders for nondurable goods decreased $0.9 billion or 0.4% to $251.6 billion.

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Unfilled durable-goods orders increased $8.5 billion or 0.8% to $1,082.3 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.29, up from 6.11 in January. Real unfilled orders, which had been a good litmus test for sector growth, show an even more-negative 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 trending lower.

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 2021 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm employers added 916,000 jobs in March (easily exceeding consensus expectations of +619,000). January and February employment changes were revised up by a combined 156,000 (January: +67,000; February: +89,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) edged down by 0.2 percentage point (to 6.0%) as the ranks of the employed swelled much faster (+609,000) than the civilian labor force (+347,000). 

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Observations from the employment reports include:

* The establishment (+916,000 jobs) and household surveys (+609,000 employed) were somewhat correlated. 

* Goods-producing industries added 183,000 jobs; service-providers: +733,000. Leisure and Hospitality (+280,000), Government (+136,000), Construction (+110,000) and Education and Health (+101,000) together represented over 68% of total job gains. Manufacturing expanded by 53,000 jobs. That result is consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded more quickly in March. Wood Products employment rose by 1,400 (ISM was unchanged); Paper and Paper Products: +400 (ISM increased); Construction: +110,000 (ISM not yet published).

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* The number of employment-age persons not in the labor force fell (263,000) to 100.4 million. As a result, the employment-population ratio (EPR) ticked up to 57.8%; i.e., nearly six in 10 of the employment-age population are presently employed. 

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* Because the civilian labor force expanded by 347,000 in March, the labor force participation rate ticked up to 61.5%. Meanwhile, average hourly earnings of all private employees fell by $0.04 to $29.96, resulting in a 4.2% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.02, to $25.21 (+4.4% YoY). Since the average workweek for all employees on private nonfarm payrolls expanded by 0.3 hour, average weekly earnings increased by $7.60, to $1,045.60 (+4.8% YoY). With the consumer price index running at an annual rate of +1.7% in February, whether consumers are keeping up with price inflation depends primarily upon whether or not they are working.

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* Full-time jobs jumped (+935,000) to 125.8 million. Workers employed part time for economic reasons (shown in the graph above) -- e.g., slack work or business conditions, or could find only part-time work -- fell by 262,000, whereas those working part time for non-economic reasons retreated by 203,000; multiple-job holders advanced by 139,000.

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For a “sanity test” of the job numbers, we consult employment withholding taxes published by the U.S. Treasury. Although “noisy” and highly seasonal, the data show the amount withheld in March shot up by $55.3 billion, to a record $286.6 billion (+23.9% MoM; +12.1% 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 March was 4.6% above the year-earlier average.

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.