May 2023 ISM and S&P Global Surveys

Click image for larger version

The Institute for Supply Management‘s (ISM) monthly sentiment survey of U.S. manufacturers reflected faster contraction in the sector during May. The PMI registered 46.9%, down 0.2 percentage point (PP) from April’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. Subindexes with the largest changes included prices paid (-9.0PP), and order backlog (-5.6PP). 

Click image for larger version

Concurrent activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- narrowly avoided falling into contraction (-1.6PP, to 50.3%). Inventory sentiment (+12.1PP; i.e., more companies consider their inventories to be too high), inventories (+11.1PP) and order backlog (-8.9PP) exhibited the largest changes.

Click image for larger version

Of the industries we track, only Construction expanded. Respondent comments included the following --

Construction. “Overall slowing growth and market conditions dragging on some construction sectors.”

 

Changes in S&P Global‘s survey headline results were mixed relative to ISM’s. Both manufacturing headline indexes contracted faster; S&P’s services report pushed higher into expansion whereas ISM’s nearly crossed the line into contraction. Details from S&P Global’s surveys follow --

Manufacturing. Renewed decline in manufacturing sector conditions as weak demand drags on performance.

Key findings:
* New orders fall at solid pace...
* ...but output supported by further decline in backlogs of work
* Input costs drop for the first time in three years

 

Services. Strongest upturn in business activity for over a year as demand conditions improve.

Key findings:
* Sharpest rise in new business since April 2022
* Cost pressures soften but remain marked
* Solid upturn in employment

 

Commentary by Chris Williamson, S&P Global’s chief business economist --

Manufacturing. “May saw a renewed deterioration of business conditions in the US manufacturing economy which will add to concerns about broader economic health and recession risks.

“Although a record improvement in supplier delivery performance helped manufacturers fulfil back orders in May, generating a third successive monthly rise in output, the overall rate of production growth remained disappointingly meagre thanks to a further drop in new order inflows.

“Unless demand picks up, production growth will move into decline seen as it is clearly unsustainable to rely solely on backlogs of orders, which are now being depleted at the fastest rate for three years. Hence companies are cutting back sharply on their input buying and seeking to minimize inventory, tightening their belts for tough times ahead.

“All of this is of course disinflationary, with manufacturers and their supply chains having seen pricing power shift rapidly from the seller to the buyer over the course of the past year, resulting in a dramatic cooling of industrial price pressures.

“We are likely to see further downward pressure on both output and prices for goods in the coming months, thanks to the demand environment which has been hit by higher interest rates, the increased cost of living, economic uncertainty and a post-pandemic shift in spend from goods to services.

“The one area of resilience is the labor market, as firms continued to take on more staff to fill long-empty vacancies, though we should bear in mind that employment is typically a lagging indicator. It does nevertheless point to some upward pressure on wages.”

 

Services. “The US continued to see a two-speed economy in May, with the sluggishness of the manufacturing sector contrasting with a resurgent service sector. Businesses in sectors such as travel, tourism, recreation and leisure are enjoying a mini post-pandemic boom as spending is switched from goods to services.

“The survey data are indicative of GDP growing at an annualized rate of just over 2%, and an upturn in business expectations points to growth remaining robust as we head further into the summer.

“However, just as demand has moved from goods to services, so have inflationary pressures. While goods price inflation has fallen dramatically in May to register only a marginal increase, prices charged for services continue to rise sharply. Although down considerably on last year's peaks, service sector inflation remains higher than any time in the survey's 10-year history prior to the pandemic, bolstered by a combination of surging demand and a lack of operating capacity, the latter in part driven by labor shortages.

“However, while rejuvenated service providers will make hay in the summer season, the weakness of manufacturing raises concerns about the economy's resilience later in the year, when the headwind of higher interest rates and the increased cost of living is likely to exert a greater toll on spending.”

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.

April 2023 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

Click image for larger view

Click image for larger view

According to the U.S. Census Bureau, the value of manufactured-goods shipments in April decreased $2.5 billion or 0.4% to $572.3 billion. Durable goods shipments decreased $2.1 billion or 0.7% to $277.6 billion, led by transportation equipment. Meanwhile, nondurable goods shipments decreased $0.4 billion or 0.1% to $294.7 billion, led by food products. Shipments of wood products declined 1.3%; paper: -0.5%.

Click image for larger view

Inventories increased $4.2 billion or 0.5% to $856.7 billion. The inventories-to-shipments ratio was 1.50, up from 1.48 in March. Inventories of durable goods increased $5.1 billion or 1.0% to $521.8 billion, led by transportation equipment. Nondurable goods inventories decreased $1.0 billion or 0.3% to $334.9 billion, led by petroleum and coal products. Inventories of wood products shrank by 0.1%; paper: -0.1%.

Click image for larger view

New orders increased $2.6 billion or 0.4% to $577.5 billion. Excluding transportation, new orders slipped by $0.9 billion or 0.2% (-3.6% YoY). Durable goods orders increased $3.0 billion or 1.1% to $282.8 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- advanced by $0.9 billion or 1.3% (+1.0% YoY). New orders for nondurable goods decreased $0.4 billion or 0.1% to $294.7 billion.

Click image for larger view

Unfilled durable-goods orders increased $10.4 billion or 0.8% to $1,291.3 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.71, up from 6.60 in March. Real (inflation-adjusted) unfilled orders, which -- prior to the pandemic -- had been a good litmus test for potential sector growth, show a less-positive picture; in real terms, unfilled orders in June 2014 were back to 104% of their December 2008 peak. Real unfilled orders then jumped to 110% of the prior peak in February 2015, thanks to the largest-ever batch of aircraft orders. Real unfilled orders trended lower thereafter, although more-recent data exhibit an ongoing upturn.

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 2023 Employment Report

Click image for larger view

The Bureau of Labor Statistics’ (BLS) establishment survey showed nonfarm employers adding 339,000 jobs in May (190,000 expected). March and April employment changes were revised up by a combined 93,000 (March: +52,000; April: +41,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) jumped (+0.3 percentage points) to 3.7%, as the labor force expanded (+130,000) while the number of employed dropped (-310,000). 

Click image for larger view

Observations from the employment reports include:

* The two surveys diverged rather conspicuously, with the household survey providing a less upbeat view of employment.

* Goods-producing industries added 26,000 jobs; service providers: +313,000. Other industries with significant employment growth included professional and business services (+64,000), government (+56,000), health care (+52,400), construction (+25,000), transportation and warehousing (+24,200), and social assistance (+22,200). Total nonfarm employment (156.1 million) is now 3.7 million jobs above its pre-pandemic level in February 2020 (private sector: +3.9 million; public sector: -209,000). That said, employment is also perhaps 5.3 million below its potential if accounting for growth in the working-age population since January 2006.

Manufacturing lost 2,000 jobs. That result disagrees with the change in the Institute for Supply Management (ISM) manufacturing employment subindex, which pushed to 51.4 in May. Wood products manufacturing added 800 jobs (ISM was unchanged); paper manufacturing: -1,200 (ISM was unchanged); construction: +25,000 (ISM not yet published).

Click image for larger view

* The number of employment-age persons not in the labor force edged up (+45,000) to 99.8 million; that level is 4.6 million higher than in February 2020. Because the number of employed fell by 310,000, the employment-population ratio (EPR) ticked down to 60.3%, which is 0.8PP below its February 2020 level.

Click image for larger view

* With the working-age civilian population growing by 175,000 and labor force expanding by 130,000, the labor force participation rate remained at 62.6%. Average hourly earnings of all private employees nudged up by $0.11 (to $33.44), and the year-over-year increase decelerated to +4.3% (+3.6% on a not-seasonally adjusted basis). Because the average workweek for all employees on private nonfarm payrolls shrank to 34.3 hours, average weekly earnings edged up (+$0.44) to $1,146.99 (+1.8% YoY). With the consumer price index running at an annual rate of +4.9% in April, the average worker is once again losing purchasing power. In fact, average hourly wages had lagged CPI since April 2021; average weekly wages since June 2021.

Click image for larger view

* Full-time jobs slipped (-23,000) to 134.5 million; there are now 3.7 million more full-time jobs than in February 2020. For perspective, however, the non-institutional working-age civilian population has risen by 7.0 million during that period. 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 164,000, while those working part time for non-economic reasons rose (+68,000); multiple-job holders: +55,000. 

Click image for larger view

For a “sanity test” of the job numbers, we consult employment withholding/FICA taxes published by the U.S. Treasury. Although “noisy” and highly seasonal, the data show the amount withheld in May rose by $18.0 billion, to $255.1 billion (+7.6% MoM; +3.4% 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 May was unchanged from 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.

April 2023 Construction Spending

Click image for larger view

Construction spending during April 2023 was estimated at a seasonally adjusted annual rate (SAAR) of $1,908.4 billion, 1.2% (±0.7%) above the revised March estimate of $1,885.0 billion (originally $1,834.7 billion); expectations were for +0.2%. The April figure is 7.2% (±1.2%) above the April 2022 SAAR of $1,780.9 billion; the not-seasonally adjusted YoY comparison (shown in the table below) is +6.1%.

During the first four months of this year, construction spending amounted to $566.7 billion, 6.1% (±1.0%) above the $533.9 billion for the same period in 2022.

Click image for larger view

Private Construction

Spending on private construction was at a SAAR of $1,500.7 billion, 1.3% (±0.3%) above the revised March estimate of $1,481.6 billion (originally $1,435.1 billion):
- Residential. $845.4 billion, +0.5% (±1.3%)* of which
- Home improvement. $357.5 billion, +1.7% (+0.8% YoY);
- Nonresidential. $655.3 billion, +2.4% (±0.3%).

Public Construction

Public construction spending was $407.7 billion, 1.1% (±1.2%)* above the revised March estimate of $403.4 billion (originally $399.6 billion):
- Educational. $88.3 billion, -0.1% (±1.8%)*;
- Highway. $124.7 billion, +1.3% (±3.5%)*.

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

Click image for larger view

Click here for a discussion of April’s new residential permits, starts and completions, and 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.

April 2023 Residential Sales, Inventory and Prices

Click image for larger view

Click image for larger view

Sales of new single-family houses in April 2023 were at a seasonally adjusted annual rate (SAAR) of 683,000 units (670,000 expected). This is 4.1% (±11.8%)* above the revised March rate of 656,000 (originally 683,000 units) and 11.8% (±15.1%)* above the April 2022 SAAR of 611,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was +10.7%. For longer-term perspectives, NSA sales were 50.8% below the “housing bubble” peak and 18.6% above the long-term, pre-2000 average.

The median sales price of new houses sold in April 2023 was $420,800 (-7.7%, or $35,000). The average sales price was $501,000 (-10.4%, or $58,200). Homes priced at/above $750,000 comprised 11.3% of sales, down from the year-earlier 14.3%.

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

Click image for larger view

As mentioned in our post about housing permits, starts and completions in April, single-unit completions fell by 68,000 units (-6.5%). Sales rose (27,000 units, or +4.1%), resulting in inventory for sale expanding in absolute terms (+1,000 units) but shrinking on months-of-inventory (-0.3 month) terms. 

Click image for larger view

Existing home sales extended their decline when sliding (-3.4% or 150,000 units) in April to a SAAR of 4.28 million units (4.295 million expected). Inventory of existing homes for sale expanded in both absolute (+70,000 units) and months-of-inventory (+0.3 month) terms. Because resales retreated while new-home sales advanced, the share of total sales comprised of new homes increased to 13.8%. The median price of previously owned homes sold in April rose to $388,800 (+3.6% or $13,400).

Click image for larger view

Housing affordability slid (-5.2 index points) as the median price of existing homes for sale in March rose by $11,900 (+3.2% MoM; -1.4 YoY) to $380,000. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices accelerated to a not-seasonally adjusted monthly change of +1.3% (+0.7% YoY).

“The modest increases in home prices we saw a month ago accelerated in March 2023,” said Craig Lazzara, Managing Director at S&P DJI. “The National Composite rose by 1.3% in March, and now stands only 3.6% below its June 2022 peak. Our 10- and 20-City Composites performed similarly, with March gains of 1.6% and 1.5% respectively. On a trailing 12-month basis, the National Composite is only 0.7% above its level in March 2022, with the 10- and 20-City Composites modestly negative on a year-over-year basis.

“The acceleration we observed nationally was also apparent at a more granular level. Before seasonal adjustment, prices rose in all 20 cities in March (versus in 12 in February), and in all 20 price gains accelerated between February and March. Seasonally adjusted data showed 15 cities with rising prices in March (versus 11 in February), with acceleration in 14 cities.

“One of the most interesting aspects of our report continues to lie in its stark regional differences. Miami’s 7.7% year-over-year gain made it the best-performing city for the eighth consecutive month. Tampa (+4.8%) continued in second place, narrowly ahead of bronze medalist Charlotte (+4.7%). The farther west we look, the weaker prices are, with Seattle (-12.4%) now leading San Francisco (-11.2%) at the bottom of the league table. It’s unsurprising that the Southeast (+5.4%) remains the country’s strongest region, while the West (-6.2%) remains the weakest.

“Two months of increasing prices do not a definitive recovery make, but March’s results suggest that the decline in home prices that began in June 2022 may have come to an end. That said, the challenges posed by current mortgage rates and the continuing possibility of economic weakness are likely to remain a headwind for housing prices for at least the next several months.”

Click image for larger view

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.

1Q2023 Gross Domestic Product: Second Estimate

Click image for larger version

In its second estimate of 1Q2023 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) revised the growth of the U.S. economy to a seasonally adjusted and annualized rate (SAAR) of +1.27% (+1.1% expected), up 0.21 percentage point (PP) from the “advance” estimate (“1Qv1”) but -1.29PP from 4Q2022.

As with 1Qv1, two groupings of GDP components -- personal consumption expenditures (PCE) and government consumption expenditures (GCE) -- contributed positively to the headline; also, private domestic investment (PDI) detracted from it. However, whereas net exports (NetX) had also contributed positively to the 1Qv1 headline, it was neutral in 1Qv2. The 1Qv2 increase in real GDP “reflected increases in consumer spending, exports, federal government spending, state and local government spending, and nonresidential fixed investment that were partly offset by decreases in private inventory investment and residential fixed investment,” the BEA said. “Imports, which are a subtraction in the calculation of GDP, increased.”

Click image for larger version

As for details (all relative to 1Qv1):

PCE. Consumer spending was revised up by $2.1 billion (chained-2012 dollars), led by spending on services (+$3.8B) -- primarily health care (+$11.3B). That gain was partially offset by a -$2.1B revision to goods spending -- especially food and beverages (-$1.3B) and motor vehicles and parts (-$1.1B).

PDI. Fixed investment was revised up by $10.2B, led by software (+$7.4B); residential investment was trimmed by -$1.8B. Private inventories were boosted by +$8.5B -- especially nonfarm (+$8.0B).

NetX. Upward revisions to exports (+$2.1B) were more than offset by a boost to imports (+$9.6B).

GCE. Revisions to state and local gross investment (+$4.6B) dominated this category.

The BEA’s change in real final sales of domestic product -- which ignores inventories -- was revised to +3.37% (+0.05PP from 1Qv1), a level 2.28PP above the 4Q2022 estimate. 

Click image for larger version

Looking forward, many economists think a recession is inevitable by the end of the year. They view the seeming green shoots in April (e.g., April’s CFNAI) as a feint, pointing to softer consumer spending, waning business investment and the slumping housing and manufacturing industries.

“The march to recession continues, with some rest stops along the way,” said TS Lombard’s Steve Blitz.

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.

April 2023 Residential Permits, Starts and Completions

Click image for larger view

Click image for larger view

Builders started construction of privately-owned housing units in April at a seasonally adjusted annual rate (SAAR) of 1,401,000 units (1.405 million expected). This is 2.2% (±11.9%)* above the revised March estimate of 1,371,000 (originally 1.420 million units), but 22.3% (±8.7%) below the April 2022 SAAR of 1,803,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -22.6%.

Single-family housing starts in April were at a SAAR of 846,000; this is 1.6% (±12.3%)* above the revised March figure of 833,000 units (-28.2% YoY). Multi-family: 555,000 units (+3.2% MoM; -11.5% YoY).

* 90% confidence interval (CI) is not statistically different from zero. The Census Bureau does not publish CIs for the entire multi-unit category.

Click image for larger view

Click image for larger view

Total completions were at a SAAR of 1,375,000. This is 10.4% (±9.9%) below the revised March estimate of 1,534,000 (originally 1.542 million units), but 1.0% (±16.4%)* above the April 2022 SAAR of 1,361,000 units; the NSA comparison: +0.1% YoY.

Single-family completions were at a SAAR of 971,000; this is 6.5% (±11.0%)* below the revised March rate of 1,039,000 units (-5.9% YoY). Multi-family: 404,000 units (-18.4% MoM; +18.7% YoY).

Click image for larger view

Click image for larger view

Total permits were at a SAAR of 1,416,000 units (1.430 million expected). This is 1.5% below the revised March rate of 1,437,000 (originally 1.413 million units) and 21.1% below the April 2022 SAAR of 1,795,000 units; the NSA comparison: -26.5% YoY.

Single-family authorizations were at a SAAR of 855,000; this is 3.1% above the revised March figure of 829,000 units (-24.7% YoY). Multi-family: 561,000 units (-7.7% MoM; -29.4% YoY).

Click image for larger view

Click image for larger view

Press release from NAHB’s Robert Dietz:

“Limited existing inventory, which has put a renewed emphasis on new construction, resulted in a solid gain for builder confidence in May even as the industry continues to face several challenges, including building material supply chain disruptions and tightening credit conditions for construction loans.

“Builder confidence in the market for newly built single-family homes in May rose five points to 50, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This marks the fifth straight month that builder confidence has increased and is the first time that sentiment levels have reached the midpoint mark of 50 since July 2022.

“New home construction is taking on an increased role in the marketplace because many homeowners with loans well below current mortgage rates are electing to stay put, and this is keeping the supply of existing homes at a very low level. In March, 33% of homes listed for sale were new homes in various stages of construction. That share from 2000-2019 was a 12.7% average. With limited available housing inventory, new construction will continue to be a significant part of prospective buyers’ search in the quarters ahead.

“While this is fueling cautious optimism among builders, they continue to face ongoing challenges to meet a growing demand for new construction. These include shortages of transformers and other building materials and tightening credit conditions for residential real estate development and construction brought on by the actions of the Federal Reserve to raise interest rates.

“And with interest rates more than doubling from 2021, the HMI survey shows incentives have played a key role in attracting buyers in this new economic climate and that the use of these sales inducements are gradually slowing across the board:

• The share of builders reducing home prices dropped to 27% in May, down from 30% in April, 31% in Feb. and March, and 36% last November.
• The average price reduction remains at 6%, unchanged for the past four months.
• 54% offered some type of incentive to bolster sales in May, down from 59% in April and 62% last December.”

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.